<PAGE>
FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-13371
PROSPECTUS
HUNGARIAN BROADCASTING CORP.
500,000 Units
----------------
Each unit (the "Units") consists of one share of Series A Convertible
Cumulative Redeemable Preferred Stock (the "Preferred Shares") and one Common
Stock Purchase Warrant (the "Warrants"). The components of the Units will not
be separately transferable until November 5, 1997 or such earlier date after
April 7, 1997 as J.W. Barclay & Co., Inc. (the "Underwriter") may determine
(the "Separation Date"). The Warrants are neither detachable nor separately
transferable until the Separation Date. Each Warrant entitles the holder to
purchase one share of Common Stock at a price of $6 per share after the
Separation Date until December 20, 2000. The Warrants may be redeemed by the
Company after the Separation Date under certain circumstances. Each Preferred
Share is convertible into two shares of Common Stock commencing on the
Separation Date and pays a cumulative annual dividend of $1.20 per share
payable on September 15 of each year.
Of the 500,000 Units offered hereby, 400,000 Units are being sold by the
Company and 100,000 are being sold by certain stockholders of the Company (the
"Selling Securityholders"). See "Selling Securityholders." The Company will
not receive any proceeds from the sale of the Units by the Selling
Securityholders.
(Continued on page 2)
----------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS."
----------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SECURITYHOLDERS(4)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Unit........................ $10.00 $1.00 $9.00 $9.00
- -----------------------------------------------------------------------------------------
Total(3)........................ $5,000,000 $500,000 $3,600,000 $900,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Does not reflect additional compensation to the Underwriter, including (a)
a nonaccountable expense allowance equal to 3% of the aggregate purchase
price of the Units; and (b) issuance of Unit Warrants to the Underwriter
entitling the Underwriter to purchase up to 50,000 Units from the Company,
for a period of five years commencing on the effective date of the
offering, at an exercise price equal to 165% of the public offering price
of the Units. The Company and the Underwriter have also agreed to
indemnify each other against certain civil liabilities including
liabilities under the Securities Act of 1933, (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
at $350,000 which includes the Underwriter's nonaccountable expense
allowance.
(3) The Company has granted an option to the Underwriter exercisable within 30
days after the date of this Prospectus, to purchase up to an additional
60,000 Units, on the same terms, solely to cover over-allotments, if any.
If the over allotment option is exercised in full, the total "Price to
Public," "Underwriting Discounts and Commissions", "Proceeds to Company",
and "Proceeds to Selling Securityholders" would be $5,600,000, $560,000,
$4,140,000 and $900,000, respectively. See "Underwriting."
(4) None of the expenses of the offering are payable by the Selling
Securityholders except their proportionate share of the Underwriter's
expense allowance ($30,000). See "Principal and Selling Securityholders."
----------------
The Units are being offered by the Underwriter on a "firm commitment" basis,
subject to prior sales, receipt and acceptance, the approval of certain legal
matters by counsel and certain other conditions. The Underwriter reserves the
right to reject orders in whole or in part. It is expected that delivery of
the certificates representing the Units will be made at the offices of J.W.
Barclay & Co., Inc., One Battery Park Plaza, New York, New York 10004 on or
about February 10, 1997.
J.W. BARCLAY & CO., INC.
The date of this Prospectus is February 5, 1997
<PAGE>
(Continued from Cover Page)
Dividends on the Preferred Shares may be paid in shares of Common Stock or
cash at the Company's option. For the foreseeable future, the Company expects
to make dividend payments in shares of Common Stock to the extent it may
legally do so. The Company has been operating at a loss since it commenced
operations. In the period ended June 30, 1995, the year ended June 30, 1996,
and the three month period ended September 30, 1996, the Company had losses of
$560,333, $4,149,682 and $1,096,529, respectively. Unless previously redeemed
by the Company, each Preferred Share is redeemable by the Company commencing on
the Separation Date on not less than 30 nor more than 60 days' written notice
to the registered holders, at $12 per share plus accumulated dividends,
provided the Company may not redeem any Preferred Share unless the closing
price of the Common Stock for 20 of the 30 trading days prior to the date of
the redemption notice is more than $10 as adjusted. See "Description of
Securities."
The Company's Common Stock and the Common Stock Purchase Warrants (the
"Warrants") are traded on the NASDAQ Small-Cap Market under the symbols HBCO
and HBCOW, respectively. There has been no market for the Units or the
Preferred Shares prior to the subject offering. It is expected that after this
offering, the Units will trade on the NASDAQ Small-Cap Market under the symbol
HBCOU, but there can be no assurance that a market will develop for the Units.
See "Underwriting." On January 31, 1997, the closing bid prices of the Common
Stock and Warrants, as reported by NASDAQ were $6.50 and $1.625, respectively.
See "Price Range of Securities."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS OFFERED
HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933 (the
"Act") with respect to the securities to which this Prospectus relates. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all of the information set forth in the Registration Statement.
For further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement, including the
exhibits thereto, which may be inspected without charge at the principal
office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the Offices of the Commission located at the Northeast Regional Office, 7
World Trade Center, New York, N.Y. 10048 and the Midwest Regional Office, 500
West Madison Street, Chicago, Il. 60661 and copies of which may be obtained
from the Public Reference Section of the Commission's principal office upon
payment of the prescribed fees.
The Company will provide without charge to any person who receives a copy of
this Prospectus, upon written or oral request of such person, a copy of any of
the information that is incorporated by reference in this Prospectus. Any such
request should be directed to the attention of Frank R. Cohen, Secretary,
Hungarian Broadcasting Corp. at 445 Park Avenue, New York, New York 10022,
telephone number: (212) 758-9870.
The Company furnishes its stockholders after the close of each fiscal year,
annual reports containing financial statements audited by its independent
certified public accountants. The Company also furnishes other reports as it
determines or as required by law.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance with
Section 12(g) thereunder, files reports, proxy statements, and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission, and copies of such materials can be obtained at
prescribed rates from the Public Reference Section of the Commission's
Washington Office.
The Commission maintains a Web Site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
companies such as the Company, that file documents electronically with the
Commission.
FORWARD-LOOKING STATEMENTS
This prospectus includes certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect
to the financial condition, results of operations and business of the company.
Such statements reflect significant assumptions and subjective judgments by
the Company's management concerning anticipated results. These assumptions and
judgments may or may not prove to be correct. Moreover, such forward-looking
statements are subject to risks and uncertainties that may cause actual
results to differ materially from those contemplated in such forward-looking
statements. For a discussion of such risks, see "Risk Factors." Investors are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Underwriter has not attempted to
verify the basis for any such statements independently and neither the
Underwriter nor the Company undertakes any obligation to release publicly any
revisions to these forward-looking statements to reflect events occurring or
circumstances arising after the date hereof or to reflect the occurrence of
unanticipated events.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this prospectus. Except as otherwise noted (i) the information in
this prospectus assumes that the Underwriter's over-allotment option will not
be exercised, and (ii) all statistical and financial information presented in
this Prospectus has been converted into United States Dollars using exchange
rates as of the dates of ending balance sheets. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Foreign
Currency." All references to $ or Dollars are to United States Dollars; all
references to "HUF" are to Hungarian Forints. As of December 31, 1996, the
Exchange Rate was HUF 164.93 to $1.
THE COMPANY
Hungarian Broadcasting Corp. ("HBC") was incorporated in the State of
Delaware on September 14, 1994 to acquire interests in companies that have
commercial broadcasting licenses to own, develop, expand and operate television
stations in Hungary.
HBC acquired an 80% equity interest in a film studio company known as DNTV
Kft. ("DNTV") as of May 30, 1995 and a 90% equity interest in a film studio
company known as VI-DOK Video es Filmgyarto Studio Kft. ("VI-DOK") as of June
16, 1995. Both DNTV and VI-DOK held studio licenses which permitted them to
produce films and other television programs. In April 1994 each studio was
granted a frequency license which permitted them to broadcast over-the-air on
Budapest Television Channel AM-micro A3 from July 1, 1994 through July 1, 2000
daily between 6 a.m. and 5 p.m. and between 7:30 p.m. and 6 a.m. by the
Hungarian Cultural Ministry (the "Ministry"). An unaffiliated studio company,
NAP TV Kft., received the license for broadcasting between 5 p.m. and 7:30 p.m.
on A3. Hereinafter, DNTV and VI-DOK will be sometimes referred to as the
"Licensees." Unless the context otherwise requires, when used herein, the term
"Company" shall include Hungarian Broadcasting Corp., the Delaware corporation,
and its Hungarian subsidiaries VI-DOK, DNTV and HBC, Kft. HBC Kft. is a wholly
owned subsidiary which administers the Company's operations in Hungary.
Broadcasting on A3 commenced in September 1994.
In September 1996 the Company began broadcasting via satellite to cable
television systems on a 24 hours per day basis. In October 1996, the Company
changed its broadcasting name to MSAT.
The two basic methods of television transmission in Hungary are over-the-air
(terrestrial) broadcasting, which can be either local or national in scope, and
satellite-to-cable broadcasting. In over-the-air broadcasting, the station
operator broadcasts its signal at an established frequency and power via one or
more land-based transmitters, each with a limited geographic range, directly to
homes and other receivers. Such signal can be picked up by home antennae as
well as by cable heads in the area. In satellite broadcasting, the programming
signal is transmitted to a satellite which redirects the signal to cable system
heads or other receivers.
MSAT's signal is carried over-the-air between the hours of 7:00 p.m. and 5:30
p.m. through a microwave network in an area with a radius of 50 miles and
currently reaches approximately 250,000 households. In addition, such signal
reaches approximately 300,000 households through cable networks in its
cachement (reach) area, which are paid an average $.05 per month per subscriber
for carrying the Company's signal. MSAT's satellite transmission can be
received throughout Hungary on a 24 hour per day basis. The Company estimates
that it currently reaches 700,000 households through its satellite
transmission. The Company does not pay cable operators who retransmit MSAT's
satellite signals to their subscribers.
Prior to April 1994, all radio and television broadcasting stations in
Hungary were owned and operated by the State. The State permitted commercial
advertising commencing in 1990 on State owned stations.
4
<PAGE>
Based on a report prepared by Saatchi & Saatchi/Zenith Media World Wide, TV
advertising expenditures in Hungary increased from $45 million in 1991 to $107
million in 1992, to $128 million in 1993, to $138 million in 1994, and to $157
million in 1995. Most of this television advertising money is spent on the
three state owned stations. The Company expects TV advertising expenditures to
continue to grow in Hungary as advertisers increasingly use television as an
integral part of their advertising strategy and as consumer oriented multi-
national companies market their products to satisfy the emerging demand for
basic goods as well as convenience products. The Company's operating results
are primarily dependent upon the sale of commercial advertising time.
In April 1996, the Company introduced new programming for the hours 7:30 p.m.
to 11 p.m. featuring American, United Kingdom and Australian syndicated series
that had been successful in prime time in their home countries. The Company
dubbed these programs into the Hungarian language. Generally, the audience
acceptance of these programs has been favorable and viewership has been high
and has increased over time.
MSAT transmits its signal from the Astra IE Satellite. At the end of 1996,
175 cable operators with a total of 700,000 household subscribers had installed
equipment enabling them to receive and broadcast the Company's signal. Over the
next year it is anticipated that Hungarian Broadcasting Corp. will increase its
distribution to approximately 1.8 million households, or 49% of all TV
households throughout Hungary.
Advertising billing is determined by the specific program ratings provided by
AGB-Hungaria Meter System, an independent audience rating service. As the
Company's distribution increases, its advertising rates should increase
proportionally, and as the coverage broadens, the station should be of
increasing interest to national and international advertisers. As a result of
conversations with advertisers and media buying groups together with booked
advertising and the improving trend of bookings, management of the Company
believes that it should begin generating positive cash flow on a monthly basis
prior to the end of fiscal 1997. However, since its inception, the Company has
run at a deficit in each month of its operations and should continue to run
deficits for the next few months, and there can be no assurance that the
Company can generate enough revenues to cover its expenses in the future.
The Company has entered into a ten year agreement with Nethold Electronic
Media B.V. ("Nethold"), a major provider of satellite transmission services
located in the Netherlands, to transmit the Company's broadcasting signal by
satellite for the distribution of its programs to cable systems and home
television sets that receive cable programs in Hungary.
Specific goals of the Company's operating strategy with respect to its
existing and proposed new markets include (i) utilizing regular and consistent
scheduling of programming, (ii) promoting programming effectively, (iii)
controlling station operating costs, and increasing advertising sales by
expanding, motivating and training the sales force using techniques widely
practiced in the commercial television industry in the United States.
The office of the Company in the United States is c/o Cohen & Cohen, 445 Park
Avenue, New York, NY 10022; Telephone number: (212) 758-9870. The office in
Hungary is 1118 Budapest, Kelenhegyi ut 39; Telephone number: (361) 372-1080.
5
<PAGE>
THE OFFERING(1)
Securities Offered by the Company and
by Selling Securityholders...........
400,000 Units offered by the Company
and 100,000 Units offered by Selling
Securityholders, each unit consists of
one Preferred Share and One Warrant.
The Underwriter has an option to
purchase up to 60,000 additional Units
to cover over-allotments. See
"Underwriting." The Preferred Shares
and the Warrants are not detachable or
separately transferable until November
5, 1997 or such earlier date after
April 7, 1997 as may be designated by
the Underwriter (the "Separation
Date"). See "Description of
Securities."
Rights of the Preferred Shares:
Dividends......................... Cumulative annual dividends of $1.20
are payable on September 15 of each
year beginning September 15, 1997.
Unpaid dividends will accumulate and be
payable prior to the payment of
dividends on the Common Stock. The
Company may, at its option, pay
dividends in shares of Common Stock, in
lieu of cash. Shares used for such
purpose will be valued at the average
closing bid price during the ten
trading days ending on the tenth day
before the dividend record date,
subject to certain conditions. For the
foreseeable future, the Company expects
to make dividend payments on the
Preferred Shares in shares of Common
Stock. See "Description of Securities."
Conversion Rights................. Unless previously redeemed, Preferred
Shares are convertible at any time at
the option of the holder, commencing on
the Separation Date at the rate of two
(2) shares of Common Stock for each
Preferred Share, subject to adjustment
under certain circumstances.
Redemption........................ The Preferred Shares are redeemable
beginning on the Separation Date on not
less than 30 nor more than 60 days'
written notice to registered holders at
the redemption price of $12 per share
plus accumulated dividends, provided
the Company may not redeem Preferred
Shares unless the closing price of the
Common Stock equals or exceeds $10.00
per share for 20 of the 30 consecutive
trading days prior to the date notice
of redemption is mailed.
Voting Rights..................... Preferred Shares will be entitled to
one vote per share voting together with
the Common Stock, as one class except
as otherwise provided by the Delaware
General Corporation Law or in
connection with
6
<PAGE>
certain other matters. See "Description
of Securities--Series A Convertible
Cumulative Preferred Stock."
Warrants:
Exercise Price.................... $6.00 per share subject to adjustment
in certain circumstances. See
"Description of Securities--Warrants."
The Warrants may be exercised at any
time commencing on the Separation Date.
Expiration Date................... December 20, 2000.
Redemption........................ Redeemable by the Company at any time
commencing on the earlier of the
Separation Date or April 20, 1997 at a
price of $.25 per Warrant, upon not
less than 30 days' prior written notice
to the holders of Warrants, provided
that the closing sale or bid price per
share of the Common Stock exceeds $8.50
per share on at least 20 of the 30
consecutive trading days ending within
15 days of the date on which the
Company mails notice of redemption. See
"Description of Securities--Warrants."
Common Stock Outstanding
Prior to Offering................. 2,583,600 shares of Common Stock.
After Offering(2)................. 2,583,600 shares of Common Stock.
Preferred Stock Outstanding:
Prior to the Offering............. 100,000 Preferred Shares.
After the Offering(3)............. 500,000 Preferred Shares.
Warrants Outstanding
Prior to the Offering............. 1,703,900 Warrants
After the Offering................ 2,103,900 Warrants
Use of Proceeds....................... The net proceeds of the offering will
be used to repay loans incurred to pay
programming and satellite costs and
other expenses, purchase broadcasting
and dubbing equipment and for working
capital (see "Use of Proceeds").
Risk Factors.......................... The securities offered hereby involve a
high degree of risk. See "Risk
Factors."
NASDAQ SmallCap Market Symbols:
Common Stock...................... HBCO
Warrants.......................... HBCOW
Units (Proposed).................. HBCOU
7
<PAGE>
- --------
(1) Unless otherwise indicated, all information in this Prospectus assumes that
no portion of the Over-allotment Option is exercised.
(2) Does not include an aggregate of 3,663,900 shares of Common Stock, reserved
as follows: (i) 350,000 shares reserved for outstanding options granted or
to be granted pursuant to the Company' Stock Option Plan; (ii) 1,703,900
shares reserved to cover exercise of outstanding Common Stock Purchase
Warrants; (iii) 100,000 shares reserved upon exercise of Underwriter's
Stock Warrants and 140,000 shares reserved upon exercise of Underwriter's
warrants, which were issued on December 20, 1995; (iv) 1,120,000 shares
issuable upon conversion of the Preferred Shares including shares issuable
on exercise of the over-allotment option and of outstanding Preferred
Shares; (v) 150,000 shares issuable upon conversion of the Preferred Shares
and exercise of the Warrants underlying the Underwriter's Unit Warrants;
and (vi) approximately 100,000 shares of Common Stock which may be issuable
upon payment of dividends on the Preferred Shares per year, assuming a
market price of $6 per share of Common Stock.
(3) Does not include 60,000 units reserved to cover Underwriter's Over-
Allotment Option.
8
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table summarizes certain selected consolidated financial data
derived from the financial statements of the Company, and is qualified in its
entirety by the more detailed consolidated financial statements included
elsewhere herein. The as adjusted balance sheet data gives effect to the sale
of the Units offered hereby after deducting the underwriting discount and
expenses of the offering but does not give effect to the application of the
proceeds.
OPERATING STATEMENT DATA
<TABLE>
<CAPTION>
THREE MONTHS
FOR THE PERIOD ENDED SEPTEMBER 30,
SEPTEMBER 14, 1994 (UNAUDITED)
(DATE OF INCEPTION) YEAR ENDED ----------------------
THROUGH JUNE 30, 1995 JUNE 30, 1996 1995 1996
--------------------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Operating revenues...... $ 72,043 $ 672,108 $ 207,837 $ 353,315
Operating expenses...... $ 560,393 $ 4,351,869 $ 931,881 $ 1,320,966
Net loss after minority
interest............... $(560,333) $(4,149,682) $(846,430) $(1,096,529)
Net loss per share...... $ (0.39) $ (2.01) $ (0.59) $ (0.42)
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
(UNAUDITED)
JUNE 30, 1996 --------------------------
ACTUAL ACTUAL AS ADJUSTED(1)
------------- ---------- --------------
<S> <C> <C> <C>
Current assets...................... $2,319,652 $1,387,691 $4,637,691
Current liabilities................. 2,269,757 2,078,573 2,078,573
Working capital..................... 49,895 (690,882) 2,559,118
Total assets........................ 4,252,051 3,386,878 6,636,878
Stockholders' equity................ 1,941,968 1,273,843 4,523,843
</TABLE>
- --------
(1) Adjusted for the Units to be sold by the Company in this offering.
9
<PAGE>
RISK FACTORS
Prospective investors should carefully consider, among other things, the
following factors concerning the business of the Company and this offering, as
well as all other information set forth elsewhere in this Prospectus.
1. Limited Operating History; Risks of New Industry. The Company was
incorporated in Delaware on September 14, 1994. The broadcast license under
which it operates in Budapest (MSAT) was originally awarded to two
unaffiliated Hungarian companies (the "Licensees") in April 1994 and
broadcasting commenced on MSAT in September 1994. The Company loaned funds
to the original Licensees to finance operating costs which included
programming costs, from November 1994 until it acquired majority interests
in the Licensees in May and June 1995. Commercial television supported by
advertising revenues represents a new industry in Hungary, the viability of
which is unproven, and there can be no assurance that the Company will be
successful in achieving its objectives. See "The Company."
2. Accumulated Deficit; Operating Losses. At September 30, 1996, the Company
had an accumulated deficit of $6,076,569 representing a consolidated net
loss for the period from its inception through September 30, 1996. The
consolidated loss was caused primarily by the costs involved in producing
live programming, purchasing programming and in operating costs and in
seeking customer identification. The Company's cash flow since inception
has been principally the result of equity and debt financing and not the
result of profitable operating activities by the Company. The Company's
ability to achieve profitability is dependent upon its ability to realize
revenues from advertising that exceed costs. See "Financial Statements."
3. Government Regulation. Broadcast operations in Hungary are subject to
extensive government regulation. Regulations govern the issuance, renewal,
transfer and ownership of station licenses, and the timing, content and
amount of commercial advertising permitted. There are also regulations
requiring that certain percentages of programming be produced or originated
in local markets. These regulations are substantially different from
regulations relating to television broadcast operations in the United
States. While the Company believes that it is in compliance in all material
respects with applicable laws, rules and regulations, there can be no
assurance that in fact it is in compliance, that it will be able to
continue to comply with all such laws, rules and regulations or that more
restrictive laws, rules, regulations or policies will not be adopted in the
future which could make compliance more difficult or expensive or otherwise
adversely affect the Company's business or prospects. See "The Company."
4. Uncertainty of License Renewals. The Company's licenses to operate over-
the-air Budapest Channel A3 have a six year term expiring in 2000. The
first commercial television broadcasting licenses in Hungary were granted
in 1994 and, as of the date of this prospectus, there are no rules or
regulations pertaining to the renewal or extension of licenses. While the
Company has been informally advised that its over-the-air licenses would be
renewed at the end of their present terms if the Company is in compliance
with applicable regulations, no statutory or regulatory presumption
presently exists for current broadcasting license holders and there can be
no assurance that the Company's licenses will be renewed upon expiration of
their respective initial terms. The failure of any such licenses to be
renewed would have a material adverse effect on the Company. See
"Business--General."
5. Business is Subject to Substantial Competition. The Company encounters, and
expects to continue to encounter, substantial competition in the television
broadcasting industry and from other media which compete for advertising
revenues. The Company believes that it will be able to compete effectively
against its existing and future competitors but there can be no assurance
that it will be able to continue to compete effectively. See "The Company."
6. Portion of Proceeds to be Used to Pay Loans Payable to President of the
Company and Two Officers of the Underwriter and to Purchase Programming
from an Affiliate of a Director of the Company. Of the net proceeds of the
offering, the sum of $200,000 plus interest is intended to be used to repay
a loan from the
10
<PAGE>
President of the Company made in November 1996 and $200,000 plus interest is
intended to be used to repay loans from two officers of the Underwriter
which were made in December 1996. It is also intended that $700,000 will be
used to purchase programming from a company owned by a director of the
Company. See "Use of Proceeds" and "Certain Transactions."
7. Risks Inherent in Foreign Investment. The Company has invested its resources
in operations in Hungary. Risks inherent in foreign operations include loss
of revenue, property and equipment from expropriation, governmental
royalties and fees and involuntary renegotiation of contracts with or
licenses from foreign governments. The Company is also exposed to the risk
of changes in foreign and domestic laws, regulations and policies that
govern operations of overseas-based companies. In addition, in the event the
Company achieves profitable operations in Hungary, it will be subject to a
40% tax on all profits earned in Hungary. See "Republic of Hungary."
8. Inflation and Local Currency Devaluation. The Hungarian economy has been
characterized by high rates of inflation and devaluation of the Hungarian
Forint against the U.S. Dollar and certain European currencies. In 1993,
1994, 1995 and 1996 the annual reported inflation rate in Hungary (measured
by the national consumer price index) was approximately 23%, 19%, 30% and
23%, respectively. The Hungarian Forint was devalued against the U.S. Dollar
in 1993, 1994, 1995 and 1996 by 14.2%, 15.9%, 26.7% and 18.0%, respectively.
In March 1995, an immediate 9% devaluation of the Hungarian Forint was
announced together with a new policy of daily or "crawling peg" devaluation.
This involved daily devaluations amounting to 1.9% monthly in the second
quarter of 1995 and 1.3% monthly during the second half of that year. During
1996 the monthly devaluation rate was established pursuant to governmental
decree at 1.2% for the year. The monthly rate is presently expected to be
further decreased, subject to Hungary's economic condition. The exchange
rate for the Hungarian Forint, as set by the National Bank of Hungary,
declined from 100.70 Forints per U.S. Dollar at December 31, 1993 to 164.93
Forints per U.S. Dollar at December 31, 1996. See "Republic of Hungary." The
Company believes that United States investors seek a return on investment
based upon the dollar value of the Hungarian operating results. Significant
inflation in Hungary or significant future devaluation of the Forint would
decrease the dollar value of the Company's investments.
9. Foreign Currency and Exchange Risks and Regulation. The Company is subject
to significant foreign exchange risk. There are currently no meaningful ways
to hedge currency risk in Hungary. Therefore, the Company's ability to limit
its exposure to currency fluctuations is significantly restricted.
Although the Forint has recently become exchangeable outside Hungary, there
is not yet a completely freely convertible exchange market in place for the
Forint. In addition, Hungarian law permits the repatriation of foreign
currency only for dividends to the extent of capital investment and
earnings, as determined under applicable Hungarian law. There can be no
assurances as to the future exchangeability or convertibility of Forints.
See "Republic of Hungary."
10. Additional Financing May be Required. The Company believes that the net
proceeds of this offering of approximately $3,250,000 will be sufficient to
satisfy its cash requirements for the coming 12 months. However, funds
generated from operations, as well as any proceeds realized from this
offering (including those allocated to working capital), may prove
insufficient for the Company's ongoing operational and debt service needs.
For example, on June 30, 1997, the Company is obligated to make payments
with respect to certain indebtedness incurred to persons who supplied
bridge financing in the amounts of $996,559 plus accrued interest. In the
event that the funds of the offering together with funds from operations
are insufficient to meet its obligations, the Company will be required to
seek additional equity capital through an additional public offering or
private offering of securities or bank financing to support its ongoing
operations and to satisfy its debt obligations. The Company has no current
arrangements for additional financing. No assurance can be given that such
additional financing, if required, will be available on terms that are
satisfactory to the Company, if they are available at all. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operation."
11
<PAGE>
11. Directors and Officers Liability Limited. The Company's Certificate of
Incorporation provides that directors (but not officers) of the Company
shall be relieved of liability for monetary damages to the Company or its
stockholders for any breaches of their fiduciary duty to the fullest
extent permitted by applicable law. In addition, the Company's Bylaws
provide that the Company shall indemnify any and all of its directors and
officers against expenses actually and necessarily incurred by them in
connection with the defense of any action in which they are made parties
by reason of being an officer or director except as to matters in which
the director or officer is adjudged to be liable for misconduct or
negligence in the performance of duty.
12. Uncertainty of Enforcement of Civil Liabilities and Judgments. Certain of
the directors and officers of the Company are non-residents of the United
States, and all or a substantial portion of the assets of such persons are
or may be located outside the United States. As a result, it may not be
possible for investors to effect service of process within the United
States upon such persons, or to enforce against them judgments obtained in
the United States courts, including judgments predicated upon the civil
liability provisions of the United States federal securities laws. There
is uncertainty as to whether the courts of Hungary or other foreign
countries would enforce either judgments of United States courts obtained
against such persons predicated upon the civil liability provisions of the
United States federal and state securities laws or liabilities against
such persons in any original actions brought in Hungary or other foreign
countries predicated upon the United States federal and state securities
laws.
13. Dependence on Key Personnel and Lack of Experience of Management. The
success of the Company is particularly dependent upon the active
involvement of Peter E. Klenner, President and Chief Executive Officer of
the Company. The loss of the services of Mr. Klenner could have a material
adverse effect on the Company. The Company has not obtained and does not
intend to obtain key-man life insurance on the life of Mr. Klenner or any
other officer of the Company. The Company has an employment agreement with
Mr. Klenner which expires December 20, 2000. See "Management--Employment
Agreements." None of the directors or officers of the Company has had
experience in operating a television broadcasting company other than
Justin Bodle, a director and consultant to the Company, who has 16 years
experience with broadcasting.
14. Possible Conflict of Interest with Affiliates. The Company has engaged in
certain transactions with companies in which directors of the Company are
also officers, directors or shareholders. Such transactions include
issuance of capital stock and the borrowing of money to finance the
operations of the Company and purchase of rights for television
programming. The Company maintains a policy of not entering into any
transactions with any officer, director or principal stockholder of the
Company or any of such persons affiliates unless such transaction is
approved by a resolution of at least a majority of the independent members
of the board of directors of the Company. The Company believes that all
transactions with such persons prior to the date of this offering were on
terms no less favorable to the Company than could be obtained from an
independent third party. Any transactions with such persons in the future
will be on terms no less favorable to the Company than could be obtained
from an independent third party. Failure of the Company and its management
to conduct the Company's business in its best interests may result in
liability to the Company and its management. See "Management" and "Certain
Transactions."
15. No Prior Public Market for Units or Preferred Shares; Determination of
Offering Price. Prior to the offering, there has been no public market for
the Units or the Preferred Shares, and there can be no assurance that an
active trading market will develop or continue after the completion of the
offering. The initial public offering price of the Units has been
determined by negotiations between the Company and the Underwriter and may
not be indicative of the market price for the Units after the offering.
Since December 20, 1995, the Common Stock and the Common Stock Purchase
Warrants have traded on the NASDAQ SmallCap Market.
16. Dividends. The Company has not previously paid any dividends on its
Common Stock and intends to follow a policy of retaining all of its cash
flow from operations, if any, to finance the development and
12
<PAGE>
expansion of its business. Since its formation, the Company's operations
have resulted in losses, and for the foreseeable future, the Company
expects to pay dividends on the Preferred Shares in Common Stock to the
extent legally permissible.
17. Necessity of Continuing Post-Effective Amendments to the Company's
Registration Statement and State Blue Sky Registration; Exercise of
Warrants. Although the Warrants will not knowingly be sold to purchasers
in jurisdictions in which the Warrants are not registered or otherwise
qualified for sale, purchasers may buy Warrants in the after-market or
may move to jurisdictions in which the Warrants and the Common Stock
underlying the Warrants are not so registered or qualified. In this
event, the Company would be unable to issue Common Stock to those persons
desiring to exercise their Warrants unless and until the Warrants and the
underlying Common Stock are qualified for sale in jurisdictions in which
such purchasers reside, or an exemption from such qualification exists in
such jurisdictions. There can be no assurance that the Company will be
able to effect any required qualification. Moreover, the Warrants will
not be exercisable unless the Company maintains a current Registration
Statement on file with the Commission through post-effective amendments
to the Registration Statement containing this Prospectus. Although the
Company has agreed to file appropriate post-effective amendments to the
Registration Statement containing this Prospectus, and to maintain a
current Registration Statement on file with the Commission relating to
the Warrants that are offered hereby, there can no assurance that such
will be accomplished or that the Warrants will continue to be so
registered. See "Description of Securities--Warrants."
18. Risk of Inclusion of Forward-Looking Statements. This Prospectus includes
certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to the financial
condition, results of operations and business of the Company. Such
statements reflect significant assumptions and subjective judgments by
the Company's management concerning anticipated results. These
assumptions and judgments may or may not prove to be correct. Moreover,
such forward-looking statements are subject to risks and uncertainties
that may cause actual results to differ materially from those
contemplated in such forward-looking statements. Investors are cautioned
not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Underwriter has not attempted to
verify the basis for any such statements independently and neither the
Underwriter nor the Company undertakes any obligation to release publicly
any revisions to these forward-looking statements to reflect events
occurring or circumstances arising after the date hereof or to reflect
the occurrence of unanticipated events.
19. Future Sales of Common Stock Could Have an Adverse Effect on the Market
Value. The Company has 2,583,600 shares of Common Stock outstanding as of
the date of this offering, of which 1,147,500 shares are not freely
transferable as being "restricted securities" as that term is defined
under Rule 144 under the Securities Act of 1933. In general, under Rule
144 as currently in effect, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company, who has owned
restricted shares of Common Stock beneficially for at least two years, is
entitled to sell, within any three-month period, a number of shares that
does not exceed the greater of 1% of the total number of outstanding
shares of the same class, or the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the sale, as
reported by all national securities exchanges on which the Common Stock is
traded and/or the automated quotation system of a registered securities
association. A person who has not been an affiliate of the Company for at
least the three months immediately preceding the sale and who has
beneficially owned shares of Common Stock for at least three years is
entitled to sell such shares under Rule 144 without regard to the volume
limitations described above. Of such 1,147,500 restricted shares, the
holders of 765,000 shares have entered into agreements not to sell or
transfer of such shares prior to two years from the date without the
consent of the Underwriter and 30,000 shares are subject to agreements not
to sell or transfer such shares prior to December 20, 1997 without the
consent of the Underwriter. Of the remaining 352,500 shares, holders of
152,500 will satisfy their holding period in July 1997 and holders of
200,000 will satisfy their holding period in August 1997. The possibility
that substantial amounts of Common Stock may be sold in the public market
may have an adverse effect on prevailing market prices for the Common
Stock and could impair the Company's ability to raise capital through the
sale of its equity securities. See "Description of Securities."
13
<PAGE>
20. Possible Delisting and Risk of Low-Priced Securities. The Common Stock
and Warrants are currently being quoted on the NASDAQ SmallCap Market
under the symbols "HBCO" and "HBCOW." The Units have been approved for
listing, subject to official notice of issuance, on the NASDAQ SmallCap
Market. New proposed NASDAQ maintenance rules may affect continued
listing on NASDAQ. If the Company is unable to satisfy the NASDAQ
SmallCap Market maintenance criteria in the future, its Units, Common
Stock and Warrants may be delisted from trading on the NASDAQ SmallCap
Market. If it did not qualify for such listing, trading, if any, would
thereafter be conducted in the over-the-counter market in the so-called
"pink sheets" or the "Electronic Bulletin Board" of the National
Association of Securities Dealers, Inc. ("NASD"), and consequently an
investor could find it more difficult to dispose of, or to obtain
accurate quotations as to the price of the Company's securities.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection
with trades in any stock defined as a penny stock. Commission regulations
generally define a penny stock to be an equity security that has a market
price of less than $5.00 per share, subject to certain exceptions. Such
exceptions include any equity security listed on NASDAQ and any equity
security issued by an issuer that has (i) net tangible assets of at least
$2,000,000, if such issuer has been in continuous operation for three
years, (ii) net tangible assets of at least $5,000,000, if such issuer has
been in continuous operation for less than three years, or (iii) average
annual revenue of at least $6,000,000, if such issuer has been in
continuous operation for less than three years. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny
stock market and the risks associated therewith.
In addition, if the Company's securities are not quoted on NASDAQ, or the
Company does not have $2,000,000 in net tangible assets, trading in the
Common Stock would be covered by Rule 15g-9 promulgated under the Exchange
Act for non-NASDAQ and non-exchange listed securities. Under such rule,
broker/dealers who recommend such securities to persons other than
established customers and accredited investors must make a special written
suitability determination for the purchaser and receive the purchaser's
written agreement to a transaction prior to sale. Securities also are
exempt from this rule if the market price is at least $5.00 per share.
If the Company's securities become subject to the regulations applicable to
penny stocks, the market liquidity for the Company's securities could be
severely affected. In such an event, the regulations on penny stocks could
limit the ability of broker/dealers to sell the Company's securities and
thus the ability of purchasers of the Company's securities to sell their
securities in the secondary market.
21. Regulatory and Tax Aspects of Dividends Paid in Common Stock; Loss of
Dividends Upon Conversion of Preferred Shares. The Dividends payable on
the Preferred Shares are cumulative and may be paid either in cash or in
shares of Common Stock or partly in cash and partly in shares of Common
Stock. The first dividend is scheduled to be paid on September 15, 1997.
Dividends on the Preferred Shares are payable, at the option of the
Company, in either cash or shares of Common Stock. The Company expects to
make dividend payments in shares of Common Stock for the foreseeable
future to the extent it may legally do so. The Company will be unable to
legally issue Common Stock as dividend payments on the Preferred Shares
unless it has sufficient authorized shares of Common Stock and has surplus
available for such purpose. Payment of dividends in shares of Common Stock
will create federal income tax liability, equivalent to the then current
market price of such Common Stock, to the recipient without the receipt by
such recipient of any cash to pay such tax liability.
For federal income tax purposes, distributions of Common Stock with respect
to Preferred Shares are treated as taxable distributions of property. The
fair market value of such shares of Common Stock distributed will be treated
as a taxable dividend (to the extent of the Company's current or accumulated
earnings and profits) or a taxable gain (if the excess of the fair market
value of such shares over the Company's current or accumulated earnings and
profit per share exceeds the shareholder's tax basis in his Preferred
Shares). The
14
<PAGE>
cash portion of the dividend, if any, may not be sufficient to pay the
total federal income tax payable on the cash portion of the dividend and on
shares of Common Stock treated as a taxable dividend or taxable gain.
22. Possible Negative Effects of Preferred Stock. The Company has authorized
5,000,000 shares of Preferred Stock, the designation, rights and
preferences of which (including voting, dividend, redemption and
liquidation rights) may be fixed by the Company's Board of Directors,
from time to time, without further action by the holders of Common Stock.
Shares of Preferred Stock could be issued in the future with such rights
and preferences as could make the possible takeover of the Company or the
removal of management of the Company more difficult or could otherwise
adversely impact the rights of holders of Common Stock. Further, under
current regulations, if any such Preferred Stock were issued by the
Company with such voting rights as had the effect of nullifying,
restricting or disparately reducing the per share voting rights of
holders of Common Stock, such issuance could result in the
disqualification of the Company's securities from listing on NASDAQ or on
a securities exchange.
23. Voting Rights of Preferred Shares. Until conversion, the Preferred Shares
will be entitled to one vote per share voting together with the Common
Stock as one class on all matters except as otherwise provided by
Delaware law and with respect to certain other matters including the
issuance of certain additional shares of Preferred Stock. Each Preferred
Share is convertible into two (2) shares of Common Stock, each of which
is entitled to one vote.
24. Pending Litigation. On January 3, 1996, the Company commenced an action
against Coleman and Company, Inc. ("Coleman") and Starr Securities, Inc.
("Starr") for breach of an underwriting agreement. On January 19, 1996,
Starr commenced an action against the Company and its former Chairman of
the Board for libel and defamation of character for stating that Starr
breached an underwriting agreement. Although management believes that the
Starr action lacks merit and that it has valid defenses to the action, if
Starr were to succeed in its claim and procure a final judgment against
the Company, the financial condition of the Company would be materially
adversely affected.
15
<PAGE>
PRICE RANGE OF SECURITIES
Effective December 20, 1995, the Company's Common Stock and certain Common
Stock Purchase Warrants commenced trading on NASDAQ Small-Cap Market under the
symbols HBCO and HBCOW respectively. Prior to December 20, 1995, there was no
established public trading market for the Company's Common Stock or Warrants.
The following table sets forth the range of high and low bid prices as
reported by NASDAQ. Bid quotations reflect interdealer prices without retail
mark-up, mark-down or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
-------------- -------------
HIGH LOW HIGH LOW
------- ------ ------ ------
<S> <C> <C> <C> <C>
1995
Fourth Quarter (December 20-31)................. $ 8.375 $5.500 $4.000 $1.000
1996
First Quarter................................... $11.850 $7.625 $5.750 $2.500
Second Quarter.................................. $11.250 $9.000 $5.125 $3.000
Third Quarter................................... $ 9.125 $5.375 $3.375 $1.500
Fourth Quarter ................................. $ 7.375 $4.000 $2.375 $0.750
</TABLE>
As of December 31, 1996, there were 65 holders of record of the 2,583,600
outstanding shares of Common Stock, twenty holders of the 1,703,900
outstanding Warrants and seven holders of Preferred Shares. As of December 31,
1996, the Company had an estimated 1,500 beneficial shareholders. The closing
bid prices of the Common Stock and Warrants on January 31, 1997 were 6 1/2 and
1 5/8 respectively. There is presently no market for the Units or the
Preferred Shares, and there can be no assurance that a public trading market
for the Units or the Preferred Shares, will develop after this offering. The
Underwriter has advised the Company that it intends to make a market for the
Units immediately after the public offering of these securities but may
discontinue these activities at any time.
The average daily trading volume of the Company's Common Stock and Common
Stock Purchase Warrants for the month of October 1996 was 1,571 shares and
7,710 warrants.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996, and adjusted to give effect to the sale of 400,000 Units
offered by the Company and the application of the proceeds therefrom as
described in "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
AS
ACTUAL ADJUSTED(1)
----------- -----------
<S> <C> <C>
Bridge Notes......................................... $ 996,559 $ 996,559
Stockholders' equity:
Common Stock, $.001 par value; 15,000,000 shares
authorized; 2,583,600 issued; as adjusted
2,583,600......................................... 2,583 2,583
Series A Convertible
Cumulative Redeemable Preferred Stock $.001 par
value, 5,000,000 shares authorized; issued
100,000 shares; as adjusted 500,000............. 100 500
Additional paid-in capital(1)...................... 7,143,429 10,393,029
Deficit............................................ (6,076,569) (6,076,569)
Currency translation adjustments................... 204,300 204,300
Total Stockholders' Equity......................... $ 1,273,843 $ 4,523,843
</TABLE>
- --------
(1) Unless otherwise indicated, all information in this Prospectus assumes
that no portion of the Over-allotment Option is exercised.
DIVIDEND POLICY
The Company has never paid any cash dividends on the Common Stock. The
Company anticipates that in the foreseeable future, earnings, if any, will be
retained for use in the business or for other corporate purposes, and it is
not anticipated that cash dividends will be paid either on the Preferred
Shares or Common Stock. Dividends on the Preferred Shares in the foreseeable
future are expected to be paid in Common Stock to the extent that the Company
is legally able to do so. The Company is dependent upon payment of dividends
from its Hungarian subsidiary companies as the source of cash for the payment
of dividends.
A Hungarian company is permitted to pay annual dividends out of profits,
determined on the basis of Hungarian accounting principles, following
recommendation of its Board of Directors and a declaration by the Annual
General Meeting which must be held in the first four months of each year.
Dividends are payable to foreign investors, such as the Company, in Forints,
which may be converted into U.S. Dollars at the official rate of exchange set
by the National Bank of Hungary.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units (after deduction
of underwriting discounts and commissions and other expenses of this offering)
are estimated to be approximately $3,250,000 (or $3,772,000 if the over-
allotment option is exercised in full). The Company intends to use such net
proceeds as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
APPLICATION OF NET PROCEEDS NET PROCEEDS NET PROCEEDS
--------------------------- ------------ -------------
<S> <C> <C>
Repayment of notes payable(1)....................... $ 862,750 27%
Purchase of studio and dubbing equipment............ 620,000 19%
Payment of satellite fees........................... 670,000 21%
Payment for programming ............................ 700,000 21%
Repayment of loans from officer (2) ................ 202,000 6%
Working capital and general corporate purposes...... 195,250 6%
---------- ---
Total............................................. $3,250,000 100%
========== ===
</TABLE>
17
<PAGE>
- --------
(1) Such notes payable evidence loans in the principal amount of $850,000 made
to the Company in December, 1996, the proceeds of which were used to pay
the costs of obtaining rights to programming ($350,000), satellite
expenses ($100,000) and various operational expenses ($400,000). Of such
loans, $200,000 was provided by two principals of the Underwriter. (See
"Certain Transactions").
(2) Loan made by Peter Klenner in November 1996. See "Certain Transactions."
The proceeds of such loan were used to pay for equipment rentals
($90,000), programming costs ($40,000), dubbing expenses ($31,000) and
various operational expenses.
Any additional net proceeds received from the exercise of the Underwriter's
over-allotment option will be added to working capital.
The Company is obligated to pay to the holders of Bridge Notes $996,559 plus
interest at June 30, 1997. The Company intends to pay this obligation out of
proceeds of its litigation against Coleman and Company, Inc. (see "Business-
Legal Proceedings") or out of broadcasting revenues. If funds are not
available from either of these sources, the Company will be required to seek
additional equity capital or bank financing to satisfy this obligation. The
Company has no current arrangement for additional financing. No assurance can
be given that such additional financing will be available if required.
Pending expenditure of the proceeds from the offering, the Company may make
temporary investments in interest bearing savings accounts, certificates of
deposit or short term United States government obligations. In the opinion of
management, the above proceeds should be sufficient for the Company's
operations together with internally generated funds to provide the Company's
working capital needs at least until March 31, 1998.
SELECTED FINANCIAL DATA
The financial information set forth below for the period ended June 30,
1995, for the year ended June 30, 1996 and for the three month periods ended
September 30, 1995 and September 30, 1996, respectively should be read in
conjunction with the Company's financial statements and accompanying notes
appearing elsewhere in this Prospectus.
OPERATING STATEMENT DATA
<TABLE>
<CAPTION>
FOR THE PERIOD THREE MONTHS ENDED
SEPTEMBER 14, 1994 SEPTEMBER 30,
(DATE OF INCEPTION) YEAR ENDED ----------------------
THROUGH JUNE 30, 1995 JUNE 30, 1996 1995 1996
--------------------- ------------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenues...... $ 72,043 $ 672,108 $ 207,837 $ 353,315
Operating expenses...... $ 560,393 $ 4,351,869 $ 931,881 $ 1,320,966
Net loss after minority
interest............... $(560,333) $(4,149,682) $(846,430) $(1,096,529)
Net loss per share...... $ (0.39) $ (2.01) $ (0.59) $ (0.42)
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF JUNE 30
-----------------------
1995 1996 SEPTEMBER 30, 1996
----------- ---------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets................ $ 471,033 $2,319,652 $1,387,691
Current liabilities........... 1,856,314 2,269,757 2,078,573
Working capital............... (1,385,281) 49,895 (690,882)
Total assets.................. 2,790,735 4,252,051 3,386,878
Stockholders' equity.......... 43,582 1,941,968 1,273,843
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company was organized in September 1994 and in October it commenced
exploring opportunities to own, operate and develop a regional private
commercial television station in Hungary. In November, it obtained a six month
option to acquire majority interests in DNTV and VI-DOK, two Hungarian
corporations (the "Licensees") that were granted licenses in March 1994 for a
six year term commencing July 1, 1994 to broadcast over Budapest Television
Channel AM-micro A3 ("A3"). The Licensees commenced their broadcasting on a
limited basis in September 1994, and increased their broadcasting to 21 1/2
hours per day in December, 1994. During the option period, the Company loaned
approximately $2,100,000 to the Licensees, which was used by the Licensees
principally to produce and purchase programming. During the option period, the
Company incurred significant costs in preparing business plans and developing
an advertising sales staff, a station management team and a program format. In
May and June 1995, the Company acquired majority interests in the two Licensee
companies by purchasing 80% of DNTV at a cost of $176,000 and 90% of VI-DOK at
a cost of $240,000 and assumed operational control of the two companies.
The Licensees broadcast only video music clips prior to June 1995 when the
Company assumed control. After changing to a civic events format in June 1995,
the Company returned to the video music clips format in October 1995 which was
less expensive to produce.
The Company's revenues are derived principally from the sale of television
advertising to national, international and local advertisers. Although the
Company's television broadcasting activities have begun only recently, the
experience of the television industry is that advertising sales tend to be
lowest during the third quarter of each calendar year, which includes the
summer holiday schedule (typically July and August), and highest during the
fourth quarter of each calendar year.
The primary expenses incurred in operating television stations are employee
salaries, programming costs, broadcast studio and transmission expenses and
selling, general and administrative expenses.
In Management's opinion, the Company emerged from the development stage
effective during the three months ended December 31, 1995.
On December 28, 1995 the Company received the proceeds from the sale of
shares and warrants in its initial public offering and determined to relaunch
its broadcasting as a Western style station. In April 1996, the Company
introduced new programming for the hours 7:30 p.m. to 11 p.m. featuring
American, United Kingdom and Australian syndicated series that had been
successful in prime time in their home countries. The Company dubbed these
programs into the Hungarian language. Generally, the audience acceptance of
these programs has been favorable and has increased over time.
On September 6, 1996, the Company began transmitting its signal from the
Astra IE Satellite. Over the next year it is anticipated that Hungarian
Broadcasting Corp. will increase its distribution to as many as 1.8 million
households throughout Hungary. In October 1996, the Company renamed its
broadcasting station "MSAT".
Advertising billing is determined by the program ratings provided by AGB-
Hungarian Meter System ("AGB"), an independent audience rating service.
Television advertising rates generally increase in proportion to any increase
in the number of households reached. Moreover, as coverage broadens, a station
is of increasing interest to national and international advertisers. Based
upon conversations with advertisers and media buying groups together with
booked advertising and the improving trend of bookings, management believes
that the Company should begin generating positive cash flow on a monthly basis
prior to the end of fiscal 1997.
However, since its inception, the Company has run at a deficit in each month
of its operations and is expected to continue to run deficits for the next few
months. There can be no assurance that the Company can generate enough
revenues to cover its expenses in the future.
RESULTS OF OPERATIONS
Three months ended September 30, 1996 compared to three months ended
September 30, 1995
19
<PAGE>
The Company's revenues increased by $145,478 to $353,315 in the three months
ended September 30, 1996 from $207,837 in the three months ended September 30,
1995. This increase is due to an increase in the amount of advertising. In the
earlier period the Company relied more on the sale of broadcast time to others
while currently most revenues result from advertising directly on Company
programming.
Operating costs and amortization expenses increased by $450,230 to $967,118
in the three months ended September 30, 1996 from $516,888 in the three months
ended September 30, 1995. These expenditures represent the costs associated
with the operation of the station, including amortization of programming
rights of $250,000 in the more recent period and amortization of the
broadcasting license costs of $105,763 and $96,292 in the three months ended
September 30, 1996 and the three months ended September 30, 1995,
respectively. The higher operating expenses in the 1996 quarter reflect the
more active programming effort since the station was relaunched in April 1996.
Selling, general and administrative expenses decreased by $61,145 to
$353,848 in the three months ended September 30, 1996 from $414,993 in the
three months ended September 30, 1995. The reduction is primarily a result of
operating out of a facility controlled by the Company in the more recent
period rather than renting facilities controlled by a third party in the
earlier period.
Net loss after minority interest increased by $250,099 to a loss of
$1,096,529 in the three months ended September 30, 1996 from a loss of
$846,430 in the three months ended September 30, 1995. The increase in net
loss primarily reflects the Company's greater programming expenditures. In the
quarter ended September 30, 1996, foreign exchange transactions losses
totalled $95,240.
Cash used in operating activities increased by $132,738 to $1,000,998 in the
three months ended September 30, 1996 from $868,260 in the three months ended
September 30, 1995. The additional cash used in the more recent period
reflects increased expenditures for programming.
Cash raised in financing activities was $314,564 and $903,726 in the three
month periods ending on September 30, 1996 and September 30, 1995,
respectively. The more recent period results from a private placement of
equity units while the earlier period includes the private placement of common
stock.
Accounts receivable increased by $217,360 as of September 30, 1996 from June
30, 1996 primarily due to the low level of sales prior to and immediately
after the relaunch of the station in April 1996 and the month-to- month
increases in sale through September 30, 1996.
Broadcasting, office and transportation equipment increased by $210,512 as
of September 30, 1996 from June 30, 1996 primarily because of equipment
purchases relating to planned satellite broadcasting.
Other liabilities declined $201,860 as of September 30, 1996 from June 30,
1996 as a result of payment of obligations and a reclassification of certain
liabilities.
Fiscal year ended June 30, 1996 compared to the period ended June 30, 1995
The period ended June 30, 1995 is limited to nine and one-half months as the
station began operations on September 15, 1994. Hungarian Broadcasting Corp.
began its operations in May 1995 when it acquired a predecessor company. A
second predecessor company was purchased in June 1995. The Company was in the
development stage through December 31, 1995 and operated at a low level prior
to the station's relaunch in April 1996. Accordingly, the results for fiscal
year 1996 are not comparable to the nine and one-half month period in 1995.
Recognizing the limitations presented above, revenues were $672,108 and
$72,043 for the fiscal year ended June 30, 1996 and the 9 1/2 month period
ending June 30, 1995, respectively.
Operating and selling, general and administrative expenses were $4,351,869
and $560,393 for the year ending June 30, 1996 and the period ended June 30,
1995, respectively.
Net loss after minority interest was $4,149,682 and $560,333 for the fiscal
year ended June 30, 1996 and the period ended June 30, 1995, respectively.
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Net cash used in operating activities was $3,033,645 and $115,998 for the
year ended June 30, 1996 and the period ended June 30, 1995, respectively.
Cash provided by financing activities was $5,052,270 and $2,703,785 for the
year ended June 30, 1996 and the period ended June 30, 1995, respectively. The
more recent period reflects the Company's initial public offering net of
repayment of debt while the earlier period reflects private placements of debt
and equity.
LIQUIDITY AND CAPITAL RESOURCES
From its inception through December 1, 1995, the Company sold 1,647,500
shares of Common Stock in a series of private transactions for proceeds of
$1,913,622, net of issuance costs and, in addition, issued promissory notes in
the aggregate amount of $2,120,000. On December 6, 1995, 220,000 shares owned
by three officers of the Registrant were contributed to the Company for no
consideration.
On December 20, 1995, the Company completed an initial public offering of
1,150,000 shares of its common stock at $5 per share and 1,610,000 redeemable
common stock purchase warrants at $.15 per warrant. Each warrant entitles the
holder to purchase one share of common stock at an exercise price of $6.00 per
share during the five-year period ending December 20, 2000. The warrants will
be redeemable, commencing April 20, 1997. The Company also issued to the
Underwriter warrants for the purchase of 100,000 shares of common stock at
$8.25 per share and 140,000 common stock purchase warrants at $0.225 per
warrant. The proceeds of the initial public offering amounted to approximately
$4,995,338, net of underwriting commission and expenses.
In September 1996, the Company sold 100,000 shares of Preferred Stock at
$4.50 per share for proceeds of $354,500 net of issuance costs. 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 the subject offering.
The Company believes that its existing cash balance, cash from future
operations and the net proceeds of this offering will be sufficient to fund
the Company's operations at least until December 31, 1997 including satellite
costs, repayment of the balance of the remaining Bridge Notes of $996,559 plus
interest and advance expenses incurred for the purchase or production of
programming and the dubbing of programming.
FOREIGN CURRENCY
The Company's broadcasting operations in Hungary incur both general revenues
and operating expenses in Forints. Asset and liability accounts are translated
from foreign currencies into U.S. Dollars at the period-end exchange rate;
income and expense accounts are translated at the average exchange rate for
the period. The resulting translation adjustments are reflected in a component
of shareholders' equity. Currency translation adjustments relating to
transactions of the Company and its subsidiaries in currencies other than the
functional currency of the entity involved are reflected in the operating
results of the Company.
The Company does not hedge against foreign currency exchange risks.
BUSINESS
INDUSTRY OVERVIEW
Private commercial television stations (those which derive the majority of
their revenues from the sale of advertising and are owned by entities other
than government entities) generally began broadcasting in the United States in
the 1940s, in parts of Western Europe in the 1950s, in Germany in the 1980s,
and in Scandinavia and Central Europe (including Hungary) in the 1990s.
Austrian television channels are still owned by the state. Commercial
television has become an important medium for advertisers in the more
developed advertising markets. For example, in 1994, television advertising
expenditures totaled $30.6 billion in the United States and an aggregate of
$18.3 billion in 16 countries of Western Europe.
An advertising industry has been developing in Hungary since 1991. Based on
a report published by Saatchi & Saatchi/Zenith Media World Wide, television
advertising expenditures increased from $45 million in 1991 to $107 million in
1992, $128 million in 1993, $138 million in 1994, and $157 million in 1995.
Members of the industry expect such increases to continue.
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The two basic methods of television transmission in use in Hungary are (i)
over-the-air television broadcasting, which can be either local or national in
scope (these operations are often referred to as "terrestrial" broadcast
operations) and (ii) satellite-to-cable broadcasting. In over-the-air
broadcasting, the station operator transmits its signal from a broadcasting
tower over a limited geographic range, where it can be received by household
antennas as well as cable network operators. In satellite-to-cable
broadcasting, the station operator transmits its programming signal to a
satellite which redirects the signal to either a ground based antenna which is
connected to a cable system or to a home television via a satellite dish
("direct-to-home"). While over-the-air broadcasters can typically be received
by virtually all of the television households in the geographic area reached
by their broadcast signals, satellite-to-cable broadcasters can only be
received by television households connected to a cable system or households
that have satellite dishes positioned to receive the broadcast signal.
Cable television growth in Hungary initially occurred in the most heavily
populated areas and has been extended to less populated areas. Households with
cable service in the most heavily populated areas in Hungary are sought after
by advertisers because these households tend to have higher disposable incomes
and greater access to advertised goods and services.
GENERAL
The Company was formed in September 1994 to acquire majority interests in
companies owning broadcasting licenses and become the operator of the licensed
broadcasting stations.
Hungary has three state owned and operated television channels--Magyar
Television I ("MTV 1"), which started broadcasting in 1957, and Magyar
Television 2 ("MTV 2"), which started broadcasting in 1972 and DUNA TV, which
started to broadcast via satellite in 1993. The signals of MTV 1, MTV 2 are
broadcast over-the-air (terrestrial) and are transmitted by Antenna Hungaria,
a state owned company which built, owns and operates a trunk network
consisting of 19 transmitter stations and 90 relay stations. In addition to
transmitting by satellite, DUNA TV transmits by terrestrial microwave
transmission. It is estimated that MTV 1 reaches over 96% of the households of
Hungary, MTV 2, approximately 80% and DUNA TV, approximately 49%. The signals
of MTV 1 and MTV 2, can be received by conventional home antennas. However, a
satellite dish is required to receive the satellite transmission of DUNA TV or
a dish type microwave antenna is required to receive its microwave
transmission.
In 1994, based on a decree enacted by the Hungarian Parliament in July 1993,
the Hungarian Ministry of Culture and Education made a tender offer open only
to holders of studio licenses for a license to broadcast over Channel A3 using
AM-Micro technology over an area of Budapest plus 30 km (18 miles). Fourteen
contenders applied for the license. The license was given to three of the
contenders as follows, each for the time period from July 1, 1994 to July 1,
2000.
VI-DOK: Mondays, Wednesdays, Fridays and Sundays from 6:00 a.m. to 5:00
p.m. and 7:30 p.m. to 6 a.m.
DNTV: Tuesdays, Thursdays and Saturdays from 6:00 a.m. to 5:00 p.m. and
7:30 p.m. to 6 a.m.
NAP TV: Daily from 5:00 p.m. to 7:30 p.m.
VI-DOK and DNTV had no prior television broadcasting experience. DNTV was
organized on February 14, 1994 and VI-DOK was organized on December 10, 1991.
The Ministry granted licenses to DNTV and to VI-DOK on March 29, 1994. VI-DOK
then organized Pest-Buda Televizio Kft ("Pest-Buda") on March 31, 1994 as a
vehicle from which to conduct the broadcasting operations under the license.
Between the date of grant and the commencement of broadcasting on A3 in
September 1994, DNTV and VI-DOK devoted their energies to seeking an equity
partner. The two companies started broadcasting in September 1994 as a music
channel using the broadcasting facilities of Land Studios rather than their
own studios to provide programming and technical personnel.
VI-DOK and DNTV, acting jointly thereafter sought an equity partner. In
November 1994, the Company commenced negotiations to acquire majority
interests in each of the two licensed companies. At the same time,
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the Company agreed to provide loans aggregating approximately $2,100,000 to
the Licensees to help finance their operating and programming costs (which
loans were to be deemed capital contributions in the event the acquisitions
were completed) until it could complete its due diligence in connection with
the acquisitions. The Company then recruited a management staff, a sales staff
and a station operating staff and completed its acquisition as to DNTV in May
1995, and in June 1995, as to VI-DOK. The Company acquired 90% and 80% of the
capital interests of VI-DOK and DNTV for $240,000 and $176,000, respectively,
from the existing owners of VI-DOK and DNTV and contributed the loans to the
capital of the two licensee companies as additional acquisition costs, and
assumed operational control in May 1995.
In September 1996, the Company added satellite-to-cable broadcasting, and
began broadcasting by satellite 24 hours per day, including the hours of 5:00
p.m. to 7:30 p.m. daily, to its cable networks. It still broadcasts 21 1/2
hours per day through its Am-Micro network. In October 1996, the Company
changed its broadcasting name to MSAT.
NATURE OF HUNGARIAN CORPORATIONS
The three subsidiaries of the Company were organized under the Hungarian Law
on Business Organizations as limited liability companies ("KFT"). Persons who
provide the capital own percentages of the companies in proportion to their
respective capital contributions. All the capital of HBC Kft., which was
formed on November 29, 1994, was provided by the Company. The Company, on May
30, 1995, purchased 80% of the ownership interest from each of the three
owners of DNTV and, on June 16, 1995, purchased 90% of the ownership interests
from each of the two owners of VI-DOK. The owners of each of the two companies
then held membership meetings to approve the transfer of the interests and to
appoint Peter E. Klenner and Imre Kovats as the managing directors of each
company. The ownership interests and the names of the managing directors are
registered by the Municipal Court of Budapest in a registry that is available
for public inspection. The Media Act of 1996 required that all broadcasting
companies be converted from limited liability companies (Kft's) to share
capital corporations, "Reszveny Tarsasag", (RT's) by the end of 1996. The
Company converted each of its subsidiaries to an RT in December 1996.
BROADCASTING OPERATIONS
The Company's over-the-air signal is broadcast on the AM Micro system, which
transmits over microwave frequencies and is a low cost system for consumers.
The receiving equipment is limited to a dish antenna (smaller than a
comparable satellite receiver) and a converter. The equipment costs average
$100 per receiver. However, equipment for one receiver can service four
households if they are located in the same building. Equipment for cable
networks costs $150 per receiver and for satellite antenna systems $300 per
receiver. A monthly fee of $1.00 is charged directly to households by Antenna
Hungaria for AM-Micro access. Cable systems charge between $4.00 and $10.00
per month depending upon the package of channels subscribed for.
At the present time, the Company's satellite transmission is conducted by
Nethold Central Europe B.V. ("Nethold") in accordance with a ten-year
agreement entered into in July, 1996. The Company sends its broadcasting
programs in electronic data form by satellite to Nethold's facilities in the
Netherlands. Nethold processes the data and then sends the Company's
broadcasts in digitally compressed, multiplexed and encrypted signals through
its uplink to a satellite which transmits the signal throughout Hungary. The
satellite presently being used is the Astra 1E Satellite. Approximately 175
cable networks currently receive and carry MSAT's broadcasts, including those
operated by Kable Com Kft, the Hungarian affiliate of HBO, which reach an
aggregate of approximately 350,000 households.
Under the agreement with Nethold, the Company pays it an annual fee of
$400,000 and in addition, it provides Nethold, free of charge, advertising
time equal in value to $300,000 per year based upon the Company's advertising
rates less a discount of 40%. The Company's transmission to Nethold is carried
on the Orion 1 satellite pursuant to an agreement with Orion Atlantic, L.P.,
at a monthly fee of $27,240. Such agreement is to
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continue for the operational life of the satellite, estimated to end in August
2005. In addition to such cost, the Company pays a maintenance fee for its
uplink equipment to BankNet, currently at a rate of $1,900 per month.
The Company expects to increase its reach by adding to the cable networks
carrying its broadcasts, and in this regard it intends to provide small cable
networks with decoders to enable them to receive and carry the Company's
broadcasts.
POPULATION REACH AND DEMOGRAPHICS
It is anticipated that 3,700,000 households in Hungary have television and
that of such total approximately 42%, or 1,550,000, are connected to some form
of cable network.
MSAT's over-the-air signal currently reaches approximately 250,000
households through the AM Microwave network and approximately 300,000
households through cable networks located in the Budapest area, which obtain
MSAT's broadcast from its over-the-air transmission. At present additional
cable companies with approximately 700,000 subscribers receive MSAT's
programming through its satellite transmission.
The Company has contacted cable companies that serve virtually all of the
cable customers in Hungary. Nearly all desire to carry MSAT's transmission,
and those who have not already done so, plan to install the necessary
downloading equipment. This cable universe plus customers of AM Micro should
expand MSAT's distribution to approximately 1.8 million television households
during 1997. This increase in distribution is expected to result in increases
in pricing for each individual advertisement.
The Company designs its program schedule to appeal to and attract viewers in
the 14 to 35 year old age group.
STRATEGY
The Company's strategy is to improve the operating results and market share
of MSAT. Specific elements of the Company's operating strategy include:
. Utilize Viewer-Oriented Scheduling--make it easier for viewers to find
the programs they prefer to watch by regular and consistent scheduling of
programming
. Promote Programs--advertise and promote its programming, both on MSAT and
in other media, to increase ratings and viewer identification
. Control Station Operating Costs--institute fundamental cost controls and
operating efficiencies
. Increase Advertising Sales--expand, motivate and train its sales force.
BROADCASTING FACILITIES
The Company entered into a five year lease as of July 1, 1996 for
approximately 12,000 square feet on four floors at 1118 Budapest, Kelenhegyi
ut 39, Hungary at a rental of $144,000 per year plus a 25% VAT fee and
maintenance fees. The Company is using the third floor for its executive
offices, the second floor for sales and other offices, the first floor as a
broadcast studio and offices for the production group, and the basement floor
for archives, a dubbing studio and post production editing. The basement floor
also houses the master control. Live broadcast signals are transmitted from
the broadcast studio by uplink facilities to the Nethold in the Netherlands.
PROGRAMMING
The Company's programming strategy is to broadcast cost-effective programs
that are capable of achieving high rating thresholds and targeted to the 14 to
35 year old television viewer audience. In addition, the Company believes that
its strategy of emphasizing programming in Hungarian will lead to an increase
in market share among key demographic groups and improve the image of the
station among advertisers and viewers.
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The Company's strategy in purchasing international programs for broadcasting
in Hungary is to acquire programs that were successful on United States,
United Kingdom or Australian prime time television. These programs are dubbed
into Hungarian by the Company and include television series, serials and soap
operas. Movies previously dubbed into Hungarian are also acquired. Popular
international programs currently broadcast by the Company include Beauty and
the Beast, Pacific Blue, LA Law, Murder One, Pacific Drive, Homicide, and The
Benny Hill Show. The Company also produces or plans to produce variety shows,
magazine format shows, talk shows and game shows.
The Company is currently the only television station in Hungary that
broadcasts a significant number of western style series in the Hungarian
language.
MSAT programming from 12:00 a.m. to 5:00 p.m. consists principally of
computerized music clips of Western and Hungarian recording artists plus
generally a movie in the afternoon. From 5:00 p.m. to 7:30 p.m., MSAT
broadcasts primarily music clips to its viewers who receive the Company's
signal via satellite. From 7:30 p.m. to 12:00 a.m., the programming features
acquired programming dubbed into Hungarian, locally produced shows and movies
dubbed into Hungarian. The key target audience of MSAT is the 14 to 35 age
group. Of the 168 hours of programming broadcast by the Company, approximately
90 hours (54%) is Hungarian production.
The Company receives video music clips directly from recording companies
such as Sony or EMI, or music publishing companies without charge to the
Company. If and when the Company broadcasts a composition, the Company pays a
royalty on the use of the composition to the Hungarian Association of Record
Producers ("HARP"). In the case of its own productions, the Company's staff
selects the program and oversees the production. The Company believes its
production programming staff of 25 persons together with approximately 62
professionals employed on an as needed basis is adequate to produce its
programming. The Company acquires rights to international sitcoms and other
series for a limited number of showings together with video-tapes and scripts
of the shows. The Company dubs the video-tapes into the Hungarian language.
The Company believes its part-time staff of 21 persons is adequate for this
activity.
From time to time, MSAT broadcasts a special sporting or cultural event and
replaces the regularly scheduled program with this event.
The Company is continually working on new ideas for programming and intends
to change its schedule from time to time to increase "audience flow," which
involves consecutively scheduling programs with similar audience demographics
so as to retain as many viewers as possible from one program to the next.
These scheduling practices are used widely in the United States and help build
viewer loyalty and overall market share. The Company also advertises and
promotes its programming on MSAT.
The Company has not and does not expect to conduct, or to expend any funds
on, research or development activities.
ADVERTISING SALES
Advertising sales to national, international and local advertisers is the
principal source of revenue for the Company. The Company has been able to
implement a number of sales practices that have been effectively used in the
United States market and in other more developed television broadcasting
markets. First, the Company has cooperated with other broadcasters to
implement accurate, independent rating surveys in each of its markets. Second,
the Company's sales efforts focus on educating the media buying market on how
to use television as an effective advertising medium.
In Hungary, AGB-Hungaria Meter System began providing ratings information
since 1993 on a national basis and has been providing rating information for
certain local areas including Budapest since 1996. The Company believes that
accurate ratings information accelerates the development of commercial
television markets because advertisers with more accurate ratings information
are more willing to allocate a greater percentage of their advertising budget
to television advertising.
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The Company employs an experienced advertising sales force under the
direction of a sales manager. The Company's executive vice president of sales
and marketing, Mr. Imre Kovats, supervises the sales force in each market.
COMPETITION
MSAT competes with MTV1 and MTV2, both government owned and operated
national television terrestrial stations, and with DUNA-TV, a government owned
and operated national television satellite station for audience and for
programming and advertising. The Company estimates that the three state-owned
stations received 95% of advertising revenues during the last year. The
Company also competes with TV3, a privately owned commercial station with an
AM-Micro license similar to that of the Company, and revenues similar to the
Company's. Its only other competitors are other localized stations in
Budapest, including NAP TV, that broadcast to parts of the Budapest area
sporadically and have insignificant audiences. The Company competes with other
stations primarily by being the only station operating on a 24 hour per day
basis and broadcasting western style programs in the Hungarian language.
The Hungarian Parliament enacted a Media Law on December 21, 1995 which
provided for the privatization through a tender process of one of the two
state owned TV channels (MTV 2) and the sale of a currently dormant frequency.
If it were to occur, such privatization could increase competition.
Competition for viewers also comes from foreign stations transmitting
through cable and satellite TV. These stations broadcast in either English,
German or French. Currently, none broadcast in Hungarian. The Company does not
consider such stations to be significant competitors.
MSAT also competes for revenues with other media, such as newspapers, radio
magazines, outdoor advertising, telephone directory advertising, and direct
mail.
REGULATION
The Company is required to be licensed to broadcast over-the-air in Hungary,
and it is licensed to do so. Its satellite transmission is not subject to
being licensed in Hungary since such transmission is conducted from a foreign
country.
Under the Media Act which was enacted in December 1995, the Company is
required to comply with a number of restrictions on programming and
advertising. The Company believes that it is currently complying with all the
restrictions provided for in the Act and that none of the restrictions has a
material adverse effect on its operations. These restrictions include that 30%
of broadcast time must be programming of Hungarian origin, which includes the
news, events, talk shows, and sports. If Hungary becomes a member of the
European Union, the Company will be subject to additional program content
regulation. The Company currently devotes approximately 54% of its
broadcasting time to programming of Hungarian origin. The Media Act also
provides rules and regulations pertaining to renewing or extending licenses.
There is no specific environmental regulation in Hungary to which the
Company is subject, and the Company has not expended and does not expect to
expend any funds on environmental compliance costs.
EMPLOYEES
As of December 31, 1996, the Company had three executive officers and a
central staff of 33 full-time employees, consisting of 25 in production and in
programming, four in sales and four in finance and administration. None of the
Company's employees are covered by a collective bargaining agreement. The
Company also employs from time to time, on an as-needed basis, additional
temporary personnel drawn from a pool of approximately 62 production
professionals, such as directors, camera or lighting operators, and engineers
and 21 dubbing and voice over professionals. The Company believes that its
relations with its employees are good.
LEGAL PROCEEDINGS
The Company filed a Registration Statement with the Securities and Exchange
Commission in 1995 for an initial public offering of 1,000,000 of its shares
of Common Stock at $7 per share, which Registration Statement
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became effective at 5:30 p.m. on Friday, November 17, 1995. On Monday,
November 20, 1995, the Company entered into a firm commitment underwriting
agreement with Coleman and Company, Inc. ("Coleman") for sale of 1,000,000 of
its shares at $7 per share. Starr Securities Inc. ("Starr") was named as a co-
underwriter in the Registration Statement and in the underwriting agreement.
Trading of the shares on NASDAQ commenced soon thereafter with a closing
scheduled for November 27, 1995. At the closing, Coleman advised the Company
that it did not have the funds to close, that it was unilaterally rescinding
the contract, and that it would request NASDAQ to cancel all trades made since
November 20, 1995.
On January 3, 1996, the Company commenced an action against Coleman and
Starr in the United States District Court of the Southern District of New York
for breach of contract demanding judgment of the full contract price of the
public offering together with such other compensatory and consequential
damages in an amount to be determined at trial.
On January 19, 1996, Starr commenced an action in the Supreme Court of New
York against the Company and its former Chairman of the Board, Robert Genova,
for libel and defamation of Starr's character, and for threatening to continue
to defame Starr's character by stating that Starr "walked away" from the
initial public offering deal and breached its contract with the Company unless
Starr made a bridge loan to or a private placement for the Company. The
Complaint further alleged that when Starr did not accede to the Company's
demands, the Company continued to vilify Starr in the financial community by
stating that Starr breached its contract with the Company and by commencing an
action in the U.S. District Court of the Southern District of New York on
January 3, 1996, falsely accusing Starr of breach of contract. Starr further
included a cause of action on the same facts for prima facie tort. The Company
had this action removed to the U.S. District Court, Southern District of New
York. Starr moved to remand both actions to the New York Supreme Court on the
ground of lack of diversity of citizenship, which motion was granted. The
Company then recommenced its action in the New York Supreme Court and
consolidated its action with the Starr proceeding. The Company believes its
action has merit and that it has valid defenses to the action brought by
Starr.
INVESTMENT CONSIDERATIONS--POLITICAL, ECONOMIC AND OTHER FACTORS REGARDING
HUNGARY
Investment in the Company involves certain special investment considerations
not usually associated with investing in securities of U.S. companies,
including risks related to (a) greater social, economic and political
uncertainty; (b) certain restrictions on foreign investment and repatriation
of capital; (c) exchange control regulations; (d) currency exchange rate
fluctuations, which may increase the costs associated with conversion of
investment principal and income from one currency to another; (e) higher rates
of inflation; and (f) greater governmental involvement in the economy.
The value of the Company's assets may be adversely affected by political,
economic and social factors, changes in the law or regulations of Hungary, and
the status of political and economic foreign relations of Hungary.
Developments in the region may also affect the value of the Company's assets.
In addition, the economy of Hungary may differ favorably or unfavorably from
the U.S. economy in such respects as the rate of growth of gross domestic
product, the rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments position. Actions of the government of
Hungary in the future may affect the local economy, which may affect private
sector companies, market conditions and general economic stability.
Until 1988, the economy of Hungary was tightly controlled by Communist
governments and composed almost exclusively of state-owned enterprises.
Accordingly, this country faces many challenges arising from decades of
Communist rule. Although Hungary has initiated a number of market-oriented
reforms, there can be no assurance that these reforms will persist. Hungary
lacks a recent history of operating in a market-oriented system.
Geography
Hungary is located in the Danubian Basin in East Central Europe. In terms of
square kilometers, Hungary ranks 18th amongst the European countries, with a
territory of about 93,033 square km (36,296 square miles, about the size of
the state of Indiana). According to the latest population census of January
1995, Hungary has a
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population of 10.4 million. Currently, about 3.2 million people are living in
Budapest and environs, the capital of Hungary. Budapest is the administrative,
cultural, industrial, commercial and economic center of the country. No other
urban area in Hungary has over 220,000 people.
Political and Economic Environment
The nobility, landowners and middle class were virtually wiped out during
World War II, leaving the industrial proletariat and peasants to run the
government. Hungary was physically occupied by Soviet military forces after
World War II. A coalition government took over consisting of four political
parties besides the Communists. The government enacted a new electoral law and
in 1948 the Communists declared themselves victorious. In 1956, an uprising
against the communist system was crushed with the aid of Russian troops. The
Soviet Union installed Janos Kadar in 1956 as head of the "revolutionary
workers-peasant" government and Kadar remained in control until 1988. In 1956
Khrushchev was the leader in Russia. Kadar eased the Communist dictatorship,
allowing more personal freedom and travel to the West, and introduced limited
market economy including the production of consumer goods and block houses.
In order to improve communication with the populace, the state commenced
building a trunk network of television transmitter stations in 1956. Since the
opening of the Budapest transmitter station in 1957, 17 transmitter stations
were built with 19 main transmitters in operation. The state subsidized the
sale of television sets and made it easy for households to purchase them so
that the households could watch the two state owned stations--MTV1 and MTV2,
which broadcast very few programs that were of interest to the general
population and fewer that were of interest to the 14 to 35 year old age group.
The State also started to experiment with satellite broadcasting transmission
and commenced building an AM-microwave network in the 1970s and encouraged and
subsidized cities and towns to build local cable systems throughout Hungary so
that they could receive programs broadcast over AM microwave frequencies and
by satellite transmission. As a result, most of the Hungarian cities and towns
currently have operating cable systems.
Beginning in 1968, Kadar introduced a series of economic reforms known
collectively as the New Economic Mechanism aimed at easing restrictions on
private enterprise and reducing the role of central planning in the economy,
and trying to combine a market economy with the Socialist system. Chief among
these changes were reforms to the banking system and the Companies Act, which
allowed for non-state ownership of business organizations, liberalized prices
and wages, substantially reduced government subsidies, and provided for a more
advanced Western style legal system. Occupying Russian forces started
departing from Hungary in 1988, with the last units departing Hungary in July
1991. Kadar was dismissed as leader by the governing Communist party in 1988.
In 1989, the governing party amended the Hungarian Constitution so as to
provide for free elections every four years and separating powers among
executive, legislative and judiciary branches.
In the elections of March and April 1990, the Hungarian Democratic Forum
emerged as the strongest parliamentary party. Prime Minister Jozsef Antall
formed a coalition government with two smaller conservative parties, the
Independent Smallholders Party and the Christian Democrats. The Communist
Party consequently lost control of the government. In the elections of 1994, a
Socialist Party was the strongest parliamentary party and formed a coalition
with the Free Democrats to form a government.
Current economic policy identifies a number of key steps to establish the
institutional framework for a market economy by 1998. Its main goals include
reduction of the inflation rate, privatization of state owned enterprises,
currency convertibility and integration into Western trade flows. The
government is actively inviting tenders for the privatization of public
utilities, the energy sector, and TV broadcasting. In connection with this
privatization program, the government is seeking to attract foreign capital
investments.
Foreign Relations
Hungary joined the United Nations in 1955 and became a member of the
International Monetary Fund and the World Bank in 1982. In 1985, Hungary
joined the International Finance Corporation, an affiliate of the World Bank
and the International Development Association. Hungary is also a signatory to
the General Agreement on Tariffs and Trade ("GATT").
28
<PAGE>
Hungary's association with the Council of Mutual Economic Aid ("COMECON")
and the Warsaw Pact ended when both these organizations were disbanded in
1991. An Association Agreement between the EC and Hungary was signed on
December 16, 1991. Under the Agreement, all customs duties, quantitative
restrictions and other trade barriers in areas other than agriculture will be
eliminated by both sides by December 1, 2000. The EC lifted some customs
duties immediately and the rest will be removed over the next nine years.
Hungary was given a three year grace period and began reducing customs duties
and quantitative restrictions in 1994.
The Hungarian government has undertaken measures to replace communist
alliances with alliances with Western European countries and the United
States. Hungary is a member of the Council of Europe, and has been an
Associate Member of the European Union since February 1994. The government
applied for full membership of the European Union in April 1994. Hungary is a
member of the United Nations, International Monetary Fund, the World Bank, the
International Finance Corporation and the European Bank for Reconstruction and
Development. It also takes part in NATO's Partnership for Peace initiative,
and the government has expressed its desire to eventually join NATO.
FOREIGN INVESTMENT, FOREIGN EXCHANGE AND INFLATION IN HUNGARY
Foreign Investment
Act XXIV of 1988 on the Investments of Foreigners in Hungary (the "Foreign
Investment Act"), effective January 1, 1989, provided for significant tax
benefits to foreigners investing in Hungarian companies. These benefits have
since been reduced by an amendment to the Foreign Investment Act which went
into effect on January 1, 1991. Generally, the profits of Hungarian companies
are subject to tax at the rate of 40 percent of their profits.
The Foreign Investment Act provides for the benefit of foreign investors:
--a state indemnity against any damage resulting from expropriation or
nationalization of investments with compensation at "actual value" in the
currency of investment;
--for direct investment in Hungarian business organizations, whether new or
existing; and
--for free repatriation in the currency of investment of any dividends,
share of profits and share of capital from the sale or winding-up of any
investment without restrictions or limitations on the amount of Forints
that a company can convert or on the amount of currency that can be
removed from Hungary.
Foreign Exchange and Revaluation
The Hungarian Forint is a convertible currency in Hungary, but not
internationally at this time. Its exchange rate is set by the National Bank of
Hungary against a basket of convertible currencies. Any devaluation exceeding
5% requires government approval. The National Bank of Hungary has announced
that its policy in the future will be to adjust the Forint on a continual
floating basis, thereby avoiding large devaluations. As of the date of this
prospectus, the exchange rate of the Forint is based on a ratio consisting of
70% European Currency Units ("ECU") and 30% United States Dollars. The
Hungarian Forint has been devalued against the U.S. Dollar in 1993, 1994, 1995
and 1996, by 14.2%, 15.9%, 20.7% and 18.0%, respectively. In March 1995, an
immediate 9.0% devaluation of the Hungarian Forint was announced together with
a new policy of daily or "crawling peg" devaluation. This involved daily
devaluations amounting to approximately 1.9% monthly in the second quarter of
1995 and 1.3% monthly during the second half of 1995, and 1.2% monthly during
1996. The amount of monthly devaluation is presently expected to be decrease
further, subject to Hungary's economic and financial condition. The exchange
rate for the Hungarian Forint, as set by the National Bank of Hungary,
declined from approximately 100.70 Forints per U.S. Dollar at December 31,
1993 to 164.93 Forints per U.S. Dollar at December 31, 1996.
Inflation
The Hungarian economy is characterized by high inflation as measured by the
consumer price index (23% in 1993, 19% in 1994, 30% in 1995 and 23% in 1996)
and slow or negative growth in gross domestic product. Prices have been rising
rapidly in recent years mainly because of reduction or removal of subsidies
and price controls, not because of expansionist monetary policies. The Company
believes that, as the removal of price controls and subsidy programs is
completed, the inflation rate may decline in the future. If the inflation rate
exceeds the rate of increase in advertising rates, the Company's operating
results could be adversely affected.
29
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Peter E. Klenner........ 38 President, Chief Executive Officer, and Director
Imre M. Kovats.......... 40 Executive Vice President and Director
Frank R. Cohen.......... 75 Secretary and Treasurer, Director
Justin Bodle............ 35 Director
James H. Season......... 52 Chief Financial Officer
</TABLE>
Peter E. Klenner, a German national, has served as President, Chief
Financial Officer and a director of the Company since its inception in 1994.
Mr. Klenner has also served as President, Chief Executive Officer and a
director of Hungarian Teleconstruct Corp. ("Teleconstruct"), a publicly traded
construction corporation from 1993 to October 1996. In February 1992, Mr.
Klenner founded Hungarian Telephone and Cable Corp. ("HTCC"), an owner of
local telephone exchanges, and served as President, Chief Executive Officer,
and Chief Financial Officer from February 1992 until May 1995, when he
resigned in order to devote his time to the Broadcasting Company. From June
1991 to May 1992 he served as Chairman of the Board of Montavid Engineering
AG, a Budapest based building and engineering firm. Mr. Klenner attended the
University of Munich. Mr. Klenner devotes 90% of his time to the affairs of
the Company, with the balance of his time devoted to private investment.
Imre M. Kovats, of Austro-Hungarian nationality, has been Executive Vice
President of the Company since March 1995 and a director since August 1995. In
1990, he founded the Saatchi & Saatchi Group Hungary and was Group Chairman
until 1994. The Saatchi & Saatchi Group Hungary engaged in the business of
buying time from broadcasting companies for their clients and in producing
commercials for their clients for use in broadcasting stations. Mr. Kovats
graduated from the University of Translators and Interpreters at Vienna and
attended the University of Law of Vienna. Mr. Kovats devotes his full time to
the affairs of the Company.
Frank R. Cohen has served as Secretary, Treasurer, and director since the
Company's inception in 1994. He has been practicing law in the City of New
York since 1946. Since 1985 he has been a member of the law firm of Cohen &
Cohen, counsel to the Company. He also serves as Secretary-Treasurer and a
director of Teleconstruct. Mr. Cohen is a graduate of Columbia University Law
School. Mr. Cohen devotes such time to the affairs of the Company as he deems
necessary to perform his duties, presently estimated at 50% of his time.
Justin Bodle, has been a director since June 1996. Since 1992, he has been
managing director and owner of Power Television Limited, which specializes in
distributing and licensing television programs. Power Television is the
largest syndication company serving Central Europe. From 1989 to 1992, he was
Managing Director and Board Member of Carat Entertainment, the largest media
buying company in Europe. Prior to 1989, he was Sales Director for all of Jim
Henson international productions. Mr. Bodle is a graduate of Eton and
Sandhurst. Mr. Bodle devotes such time to the affairs of the Company as he
deems necessary to perform his duties.
James H. Season was appointed Chief Financial Officer in August 1996. Mr.
Season was managing director of RHL Management Group, Inc. from 1990 to
August, 1996, which was engaged in financial consulting. From 1986 to 1990,
Mr. Season was a Group Vice President and Chief Investment Officer of Golodetz
Trading Corporation, an international trading firm. Prior to 1986, Mr. Season
was a Managing Director of Chase Investment Bank, a subsidiary of Chase
Manhattan Bank, N.A. He also serves as a director of Hungarian Telephone and
Cable Corp. Mr. Season holds a J.D. degree from the University of Virginia and
an M.B.A. from the University of Michigan. Mr. Season devotes his full time to
the affairs of the Company.
30
<PAGE>
Directors are elected annually and hold office until the next annual meeting
of the stockholders of the Company and until their successors are elected and
qualified. Officers are elected annually and serve at the discretion of the
Board of Directors. Officers do not receive any compensation for serving as
directors.
REMUNERATION
Prior to January 1996, no officer or director received any compensation from
the Company, and no officer received compensation of $100,000 or more during
the last fiscal year.
The following table sets forth the compensation earned by or paid to the
President of the Company for the fiscal years ending June 30, 1996 and 1995:
Summary
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Long Term
Name and Compensation Awards
Principal Position Year Salary Bonus Securities Underlying Options
------------------ ---- ------ ----- -----------------------------
<S> <C> <C> <C> <C>
Peter E. Klenner,
President 1996 $60,000 -0- 50,000(1)
1995 -0- -0- -0-
</TABLE>
- --------
(1) 50,000 shares of Common Stock underlying stock options.
In July 1995, the Company entered into a five year employment agreement with
Peter E. Klenner effective January 1, 1996 providing for a monthly salary of
$10,000. He is entitled to receive reimbursement of ordinary and necessary
business expenses. In July 1995, the Company also entered into a two year
employment agreement with Imre M. Kovats effective January 1, 1996 providing
for a monthly salary of $10,000. He also is entitled to receive reimbursement
of ordinary and necessary business expenses.
In June 1996, the Company retained Justin Bodle as a consultant to supervise
programming and station management for the Company at a fee of 1,000 shares of
Common Stock per month for a two year period beginning in such month. The
Company also had agreed to grant to Mr. Bodle options for 50,000 shares of
Common Stock exercisable for a two year period commencing June 15, 1996 at an
exercise price of $6.00 per share, of which the grant of options for 25,000
shares was contingent upon the Company having had a profitable quarter prior
to March 31, 1997 and the grant of options for the additional 25,000 shares is
contingent upon the Company having a profitable quarter prior to December 31,
1997.
In August 1996, the Company retained James H. Season as its Chief Financial
Officer at a fee of $6,500 per month through November 1996 and thereafter at a
fee of $8,000 per month on a month to month basis plus living expenses.
Mr. Cohen receives no compensation as a director or officer of the Company.
He is a member of Cohen & Cohen which receives an annual fee of $100,000 for
its services as counsel for the Company.
LIMITATION OF LIABILITY FOR DIRECTORS
The Company's Certificate of Incorporation provides that its directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
of care to the Company and its stockholders as a director except in the case
of (i) any breach of a director's duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) payments of
dividends or approvals of stock repurchases or redemptions that are unlawful
under Delaware law, or (iv) any transactions from which the directors derived
an improper personal benefit. Currently under Delaware law, such provisions do
not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as injunctive or other forms of relief will remain available
under Delaware law. This provision does not affect a director's
responsibilities under federal securities laws. Pursuant to the Company's
Certificate of Incorporation, current and former directors and officers are
indemnified to the maximum extent permitted, from time to time, by the
Delaware General Corporation Law.
In addition, the By-laws of the Company provide that the Company shall
indemnify any and all of its directors and officers or former directors and
officers or any person who may have served at its request as a
31
<PAGE>
director or officer of another corporation in which it owns shares of capital
stock or of which it is a creditor against expenses actually and necessarily
incurred by them in connection with the defense of any action, suit or
proceeding in which they, or any of them, are made parties, or a party, by
reason of being or having been directors or a director or officer of the
Company, or such other corporation, except, in relation to matters as to which
any such director or officer or person shall be adjudged in such action, suit
or proceeding to be liable for negligence or misconduct, in the performance of
duty.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and persons controlling the
Company pursuant to the foregoing provisions or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable.
STOCK OPTION PLAN
In 1994 the Company adopted a Stock Option Plan (the "Plan"). An aggregate
of 350,000 shares of Common Stock are authorized for issuance under the Plan.
The Plan provides that incentive and non-qualified options may be granted to
officers, employees, directors and consultants to the Company for the purpose
of providing an incentive to those persons to work for the Company. The Plan
is administered by the Board of Directors. The Board of Directors determines,
among other things, the persons to whom stock options are granted, the number
of shares subject to each option, the date or dates upon which each option may
be exercised and the exercise price per share.
Options granted under the Plan are exercisable for a period of up to ten
years from the date of grant. Options terminate upon the optionee's
termination of employment or consulting arrangement with the Company, except
that under certain circumstances an optionee may exercise an option within the
three-month period after such termination of employment. An optionee may not
transfer any options except that an option may be exercised by the personal
representative of a deceased optionee within the three-month period following
the optionee's death. Incentive options granted to any employee who owns more
than 10% of the Company's outstanding Common Stock immediately before the
grant must have an exercise price of not less than 110% of the fair market
value of all underlying stock on the date of the grant and the exercise term
may not exceed five years. The aggregate fair market value of Common Stock
(determined at the date of grant) for which any employee may exercise
incentive options in any calendar year may not exceed $100,000. In addition,
the Company will not grant a non-qualified option with an exercise price less
than 85% of the fair market value of the underlying Common Stock on the date
of the grant. Options to purchase an aggregate of 295,000 shares of Common
Stock have been granted and are outstanding under the Plan, including options
to purchase 145,000, 30,000, 40,000 and 10,000 shares granted to Messrs.
Klenner, Kovats, Bodle and Cohen, respectively. The options granted to Messrs.
Klenner and Cohen, exercisable currently at $5 per share and the other options
at prices between $5 and $6 per share are exercisable currently.
The Company also granted an option to Mr. Robert Genova, former Chairman of
the Board, for 40,000 shares of Common Stock, which option expired upon his
leaving the Company.
The following table sets forth information regarding options granted to the
President of the Company during the fiscal year ended June 30, 1996:
Option Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
Number of % of Total
Securities Options Granted
Underlying to Employees in Exercise or Base Expiration
Name Options Granted Fiscal Year Price per Share Date
---- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Peter E.
Klenner December 20,
President 50,000 50% $5.00 2000
</TABLE>
32
<PAGE>
The following table sets forth information regarding exercised options and
the value of unexercised options held by the President of the Company as of
June 30, 1996:
Aggregated Options Exercised in Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of
Unexercised Unexercised In-
Options at Fiscal the-Money Options
Shares Acquired Year-End at Fiscal Year-
Name on Exercise Unexercisable(1) End Unexercisable
---- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Peter E. Klenner -0- -0- $162,500
</TABLE>
- --------
(1)Not exercisable until December 20, 1996
The Company has no pension or profit sharing plan or other contingent forms
of remuneration. The Company has not obtained and does not intend to obtain
any key-man life insurance covering the life of Mr. Klenner or any of its
other officers.
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Common Stock as of September 30, 1996, and as adjusted to
reflect the sale of the Units offered hereby (assuming no exercise of the
Underwriter's over-allotment option and the Preferred Shares included in the
Units had been immediately and fully converted as of the date of this
offering) by (i) each person known by the Company to own beneficially more
than 5% of the outstanding Common Stock; (ii) each director of the Company;
and (iii) all directors and officers as a group. Except as otherwise indicated
below, each of the entities or persons named in the table has sole voting and
investment powers with respect to all shares of Common Stock beneficially
owned by it or him as set forth opposite its or his name.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
NAME AND ADDRESS PRIOR TO OFFERING AFTER OFFERING
- ---------------- ----------------------- ----------------------
NUMBER PERCENT NUMBER PERCENT
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Peter E. Klenner(1)(2)........ 535,000 16.55% 535,000 13.43%
Szamado u. 19
Budapest, Hungary
Hungarian Teleconstruct
Corp......................... 250,000 7.75% 250,000 6.28%
Szamado u. 19
Budapest, Hungary
Frank R. Cohen(1)(2).......... 40,000 1.24% 40,000 1.02%
445 Park Avenue
New York, NY 10022
Imre Kovats(2)................ 35,000 1.07% 35,000 0.84%
Szamado u. 19
Budapest, Hungary
Justin Bodle(2)............... 40,000 1.24% 40,000 1.02%
Szamado u. 19
Budapest, Hungary
All officers and directors as
a group (5 persons).......... 650,000 20.10% 650,000 16.31%
</TABLE>
- --------
(1) Messrs. Klenner and Cohen may be deemed to be the "promoters" or "parents"
of the Company, as those terms are defined in the rules and regulations as
adopted under the Securities Act of 1933, as amended.
(2) Messrs. Klenner, Cohen, Kovats and Bodle hold options for 145,000 shares,
10,000 shares, 30,000 shares and 40,000 shares, respectively. Such options
are presently exercisable and accordingly such shares are included in this
table.
33
<PAGE>
CERTAIN TRANSACTIONS
On September 14, 1994, the Company sold 480,000 shares to Peter E. Klenner,
president of the Company for $4,800 ($.01 per share); 320,000 shares to Robert
Genova, formerly Chairman of the Board for $3,200 ($.01 per share); and 50,000
shares to Frank R. Cohen, Secretary, Treasurer, Director and Counsel to the
Company for $500 ($.01 per share) for an aggregate of $8,500.
In December 1994 and March 1995, the Company borrowed $800,000 from
Hungarian Teleconstruct Corp. ("HTEL"), at 6% per annum interest. Fifty
percent of the loan was repaid in January 1996. As an additional
consideration, the Company issued 100,000 shares of its Common Stock to HTEL
and granted HTEL an option to purchase 150,000 additional shares of Common
Stock at $3 per share. HTEL exercised its option to purchase 150,000
additional shares in March 1995. Messrs. Klenner and Cohen, officers and
directors of the Company, own approximately 17.2% and 2.3%, respectively, of
the outstanding shares of the Common Stock (including shares subject to
exercisable options) of HTEL.
In connection with the July 1995 private placement in which the Company sold
182,500 shares at $3 per share, Peter E. Klenner purchased 30,000 shares on
the same terms as the other investors.
In December 1995, Messrs. Klenner, Genova and Cohen contributed 100,000
shares, 100,000 shares, and 20,000 shares, respectively to the Company without
cost to the Company for cancellation as a condition to the Underwriter
agreeing to underwrite the offering.
The Company granted options under its Stock Option Plan to Messrs. Klenner,
Genova and Cohen for 50,000 shares, 40,000 shares and 10,000 shares,
respectively as of December 20, 1995, exercisable at $5.00 per share until
December 20, 2000. Mr. Genova's options lapsed after he resigned from the
Company.
In September 1996, the Company sold 100,000 shares of Preferred Stock for
$450,000 in a private offering. (See "Selling Securityholders.").
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 the subject offering.
In connection with such private offering, the Company paid to J.W. Barclay &
Co., Inc., the Underwriter of the subject offering, a private placement fee of
$45,000.
The Company maintains a policy of not entering into any transaction with any
officer, director, principal stockholder or affiliate of the Company, unless
such transaction is approved by a resolution of at least a majority of the
independent members of the Board of Directors of the Company. Any transaction
with an affiliate will be on terms no less favorable to the Company than could
be obtained from an independent third party. The Company believes that all
previous transactions with affiliates were on terms no less favorable to the
Company than could be obtained from an independent party.
In February 1996, the Company licensed, for $750,000, the exclusive rights
to programming for MSAT for the period April through December 1996 from Power
Television Limited ("Power TV"), a company owned by Justin Bodle, one of the
Company's directors. The programming included rights to the TV series "Beauty
and the Beast," "Sirens," "Pacific Blue," "Benny Hill Shows" and others. In
July 1996, the Company agreed to license for $1,378,000 the exclusive rights
to programming for the period October 1, 1996 through December 31, 1997 from
Power TV. The programming included rights to such series as "LA Law," "Murder
One," "Cops" and "Homicide."
34
<PAGE>
In October 1996, in order to provide working capital to the Company pending
the completion of this offering, Mr. Klenner loaned the Company $200,000 at
bank interest rates and Mr. Bodle deferred payments for the programming. In
consideration of the foregoing, Messrs. Klenner and Bodle were granted options
to purchase 95,000 and 40,000 shares, respectively, from the Company's 1994
Stock Option Plan exercisable at $5 per share, which was the closing price of
the shares of Common Stock on the date of grant.
In addition to the $200,000 loan made in October, 1996, Mr. Klenner had
previously made loans from time to time to the Company for general working
capital purposes, which aggregated $145,000 at September 30, 1996. The Company
and Mr. Klenner have agreed to offset the amount of $105,000 of such loans by
a transfer from the Company to Mr. Klenner of the Company's equity interest in
Studio II Kft. Studio II Kft is a Hungarian company controlled by Mr. Klenner
which is engaged in movie production. The Company invested $105,000 in Studio
II in March 1996, and subsequently, the Board of Directors decided to
discontinue such investment. The balance of such loans, $40,000, is to be
repaid to Mr. Klenner without interest from the Company's general revenues and
will not be repaid from the proceeds of the offering.
In December 1996, the Company borrowed $850,000 from the following persons
pursuant to promissory notes payable upon the earlier of one year from the
date of issuance or the closing of any public offering of securities by this
Company with interest at the rate of 18% per annum: Matthew Langdon
($400,000); Dennis J. Giunta ($250,000); John A. Bruno ($100,000); and Michael
J. Wills ($100,000). Messrs. Bruno and Wills are officers and principals of
the Underwriter and Mr. Langdon is one of Selling Securityholders. Such notes
are to be repaid from the proceeds of the subject offering. Such notes were
secured by a pledge of 370,000 shares of Common Stock of the Company owned by
Peter Klenner and 30,000 shares, owned by Frank R. Cohen.
The Company has entered into a two-year agreement ending on December 31,
1997 retaining Cohen & Cohen to provide all SEC related legal services, except
for services in connection with private placements or public offerings of
securities for an annual fee of $100,000. Frank R. Cohen is a member of Cohen
& Cohen.
See "Management--Remuneration" regarding employment agreements with Peter E.
Klenner and Imre M. Kovats, and the consulting agreement with Justin Bodle.
SELLING SECURITYHOLDERS
Of the Units offered hereby, 100,000 Units are being sold by Selling
Securityholders. The Company will not realize any proceeds from the sale of
Units by the Selling Securityholders except for proceeds, if any, that may be
realized in the event of the exercise of the Warrants included in the Units
offered by them. All expenses of the registration of Units on behalf of
Selling Securityholders are being borne by the Company except for the Selling
Securityholders' proportionate share of the Underwriter's expense allowance.
The shares included in such Units were acquired by the Selling Securityholders
in a private offering by the Company in September 1996. (See "Certain
Transactions").
The name of each Selling Securityholder and the number of Units currently
owned, the number being offered and the number to be owned upon completion of
the offering, are as follows:
<TABLE>
<CAPTION>
AMOUNT OF PERCENTAGE OF
AMOUNT OF AMOUNT OF UNITS TO BE UNITS TO BE
NAME UNITS OWNED UNITS BEING SOLD OWNED OWNED
---- ----------- ---------------- ------------ --------------
<S> <C> <C> <C> <C>
Dean Rivera............. 10,000 10,000 0 0
Patricia Weremeychik.... 10,000 10,000 0 0
Mark Lyons.............. 10,000 10,000 0 0
Joan Downey............. 20,000 20,000 0 0
Louis Spadafora......... 10,000 10,000 0 0
Matthew Langdon......... 20,000 20,000 0 0
John Delgaizo........... 20,000 20,000 0 0
</TABLE>
35
<PAGE>
DESCRIPTION OF SECURITIES
The Company's authorized capitalization consists of 15,000,000 shares of
Common Stock, par value $.001 per share and 5,000,000 shares of Preferred
Stock, par value $.001 per share, which may be issued in one or more series.
As of the date of this prospectus, the Company had 2,583,600 of Common Stock
outstanding and 100,000 Preferred Shares outstanding. The following is a
summary description of the Units, Common Stock, Common Stock Purchase Warrants
and Preferred Shares. All securities are qualified in their entirety by
reference to the Company's Certificate of Incorporation, as amended.
UNITS
Each Unit offered hereby consists of one share of Series A Convertible
Cumulative Redeemable Preferred Stock and one Common Stock Purchase Warrant.
The components of the Units will not be separately transferable until November
5, 1997, or such earlier date after April 7, 1997 as may be determined by the
Underwriter (the "Separation Date").
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by stockholders. The holders of shares of Common
Stock are entitled to dividends when and as declared by the Board of Directors
from funds legally available therefor, and, upon liquidation, are entitled to
share pro rata in any distribution to stockholders after payments to creditors
and after paying or providing for any liquidation preferences to the Preferred
Stock. There are no conversion or redemption privileges, nor sinking fund
provisions with respect to the Common Stock, and stockholders have no
preemptive rights to acquire shares of Common Stock issued by the Company in
the future. All of the outstanding shares of Common Stock are validly issued,
fully paid and non-assessable.
The Common Stock is traded on the NASDAQ SmallCap Market under the symbol
HBCO.
PREFERRED STOCK
The Preferred Stock may be issued in one or more series, to be determined
and to bear such title or designation as may be fixed by resolution of the
Board of Directors prior to the issuance of any shares thereof. Each series of
Preferred Stock will have such voting powers, if any, preferences, and other
rights as determined by the Board of Directors, with such qualifications,
limitations or restrictions as may be stated in the resolutions of the Board
of Directors adopted prior to the issuance of any shares of such series of
Preferred Stock.
The Preferred Shares being offered hereby are the first series of Preferred
Stock designated by the Board of Directors. The Company may not, without the
affirmative vote of the holders of at least a majority of the outstanding
Preferred Shares offered hereby, amend, alter or repeal any of the provisions
of the Certificate of Incorporation or the Certificate of Designation for the
Preferred Shares, or authorize any reclassification of the Preferred Shares so
as to adversely affect the preferences, special rights or privileges or voting
power of the Preferred Shares or authorize or create any class of stock
ranking prior to the Preferred Shares as to dividends or distribution of
assets, or create or issue any shares of any series of the Company's
authorized preferred stock ranking prior to the Preferred Shares as to
dividends or distribution on liquidation. The Board has no present plans to
issue any other series of Preferred Stock. However, purchasers of the
Preferred Shares offered hereby should be aware that subject to the foregoing
restrictions, the holders of any series of the Preferred Stock which may be
issued in the future could have voting rights, rights to receive dividends or
rights to distribution in liquidation superior to those of holders of the
Preferred Shares or Common Stock, thereby adversely affecting rights of the
holders of the Preferred Shares or Common Stock.
Because the terms of each series of Preferred Stock may be fixed by the
Company's Board of Directors without shareholder action, the Preferred Stock
could be issued with terms calculated to defeat a proposed
36
<PAGE>
takeover of the Company, or to make the removal of the Company's management
more difficult. Under certain circumstances, this could have the effect of
decreasing the market price of the Preferred Shares, the publicly held
Warrants, and the Common Stock. Management of the Company is not aware of any
such threatened transaction to obtain control of the Company.
SERIES A CONVERTIBLE CUMULATIVE PREFERRED STOCK
The Board of Directors has filed a Certificate of Designation designating
1,000,000 shares of Preferred Stock as "Series A Convertible Cumulative
Preferred Stock" with the following rights, preferences and privileges:
Conversion. Unless previously redeemed by the Company, the holders of the
Preferred Shares are entitled beginning on the Separation Date, to convert
each Preferred Share into two (2) shares of Common Stock subject to adjustment
described below. In lieu of issuing fractional shares upon conversion, the
Company may pay an equivalent amount in cash. No adjustment for dividends will
be made on conversion of any Preferred Shares. Accordingly, accrued dividends
will not be paid on a Preferred Share if it is converted between a dividend
payment date and the next record date for dividend payments. If any holder
surrenders a Preferred Share for conversion after the close of business on the
record date for the payment of a dividend and prior to the opening of business
on the next dividend payment date, then, notwithstanding such conversion, the
dividend payable on such dividend date will be paid to the registered holder
of such share on such record date. In such event, such share, when surrendered
for conversion, must be accompanied by payment of an amount equal to the
dividend payable on such dividend payment date on the share so converted. In
the case of Preferred Shares called for redemption, conversion rights will
expire at the close of business on the redemption date.
The conversion rate is subject to adjustment upon the occurrence of certain
events, including the issuance of stock of the Company as a dividend or
distribution on the Common Stock but not as dividends on the Preferred Shares;
sub-divisions and combinations of Common Stock; certain reclassifications,
consolidations, mergers and sales of property of the Company; the issuance to
all holders of Common Stock of certain rights or warrants; and the
distribution to all holders of Common Stock of evidence of indebtedness of the
Company or of assets (excluding cash dividends or distributions from retained
earnings). Except as stated above, the Conversion Price will not be adjusted
for the issuance of Common Stock or any securities convertible into or
exchangeable for Common Stock, or carrying the right to purchase any of the
foregoing, in exchange for cash, property or services.
Dividends. Each Preferred Share is entitled to cumulative annual dividends
of $1.20 payable on September 15 of each year commencing September 15, 1997.
Unpaid dividends will accumulate and be payable prior to the payment of
dividends on the Common Stock. The Company may, at its option, pay dividends
in shares of Common Stock, in lieu of cash. Shares used for such purpose will
be valued at the average closing bid price during the ten trading days ending
on the tenth day before the dividend payment date, subject to certain
conditions. For the foreseeable future, the Company expects to make dividend
payments on the Preferred Shares in shares of Common Stock.
Redemption. The Preferred Shares are redeemable after the Separation Date at
the option of the Company, on not less than 30 days' written notice to
registered holders at the redemption price of $12 per share plus accumulated
dividends, provided the Company may not redeem the Preferred Shares unless the
closing price of the Common Stock equals or exceeds $10 per share for at least
20 of the 30 consecutive trading days ending within five trading days prior to
the date the redemption notice is mailed.
Voting Rights. Preferred Shares are entitled to one vote per share voting
together with the Common Stock as one class, except as otherwise provided by
the Delaware General Corporation Law provided, however, that if dividends
payable on the Preferred Shares shall have been unpaid for two dividend
periods, the holders of the Preferred Shares, voting as a class, shall be
entitled to elect two directors to the Board of Directors.
Preference on Liquidation. Preferred Shares will be entitled to a preference
on liquidation equal to $10 per share, plus accumulated unpaid dividends.
37
<PAGE>
No Sinking Fund. The Company is not required to provide for the retirement
or redemption of the Preferred Shares through the operation of a sinking fund.
COMMON STOCK PURCHASE WARRANTS
The Company has outstanding 1,703,900 Common Stock Purchase Warrants (the
"Warrants"), and an additional 400,000 Warrants are being sold as part of the
Units offered hereby. 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 outstanding prior to the subject offering are subject to redemption
by the Company at any time after April 20, 1997, and the Warrants offered
hereby are subject to redemption at any time after the Separation Date, on 30
days notice at $.25 per Warrant provided that the closing sale price, or if
none, the closing bid price of the Common Stock $8.50 per share on at least 20
days of the 30 trading days ending within 15 days of the date on which the
notice of redemption is mailed. Holders of Warrants shall have exercise rights
until the close of the business day preceding the date fixed for redemption.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price in certain events, such as stock
dividends and distributions, stock splits, recapitalizations, mergers and
consolidations. No adjustment exists for the issuance of shares of Common
Stock, among other circumstances, upon exercise of any of the Warrants or
options granted under any stock option plan. The Company is not required to
issue fractional shares. The holder of a Warrant does not possess any rights
as a stockholder of the Company unless he exercises his Warrant and obtains
Common Stock. The Warrants have been issued in registered form under a Warrant
Agreement dated as of December 20, 1995 and amended by agreement dated as of
January , 1997, between the Company and American Stock Transfer & Trust
Company as Warrant Agent. The shares of Common Stock issued upon exercise of a
Warrant, will be fully paid and non-assessable.
A Warrant may be exercised upon the surrender of a duly completed warrant
certificate on or prior to its expiration, accompanied by cash or certified
bank check for the exercise price.
The Warrants are traded on the NASDAQ SmallCap Market under the symbol
HBCOW.
UNDERWRITER'S WARRANTS
In December 1995, the Company sold to J.W. Barclay & Co., Inc. (the
underwriter in the Public Offering in December 1995 and underwriter in this
offering) at a price of $.001 per Warrant 100,000 warrants (the "Underwriter's
Stock Warrants") to purchase a like number of shares of Common Stock of the
Company and 140,000 warrants (the "Underwriter's Warrants") to purchase a like
number of Common Stock Purchase Warrants. The Underwriter's Stock Warrants are
exercisable at a price of $8.25 per share and the Underwriter's Warrants are
exercisable at a price of $0.225 per Common Stock Purchase Warrant for a
period ending December 20, 2000. In connection with this offering, the Company
has agreed to sell to the Underwriter, for a nominal consideration, 50,000
Unit Warrants to purchase a like number of Units at an exercise price of
$16.50 per Unit. Any profit realized upon any resale of the Underwriter's Unit
Warrants or securities underlying same may be deemed to be additional
Underwriter's compensation. The Company has agreed to register (or file a
post-effective amendment with respect to any registration statement
registering) the Underwriter's Unit Warrants and their underlying securities
under the Securities Act at its expense on one occasion, and at the expense of
the holders thereof on another occasion, upon the request of a majority of the
holders thereof. The Company has also agreed to certain "piggy-back"
registration rights for the holders of the Underwriter's Unit Warrants and
their underlying securities.
BRIDGE FINANCINGS
From November 1994 to March 1995, the Company sold 53 Units (including 20
Units sold to Hungarian Teleconstruct), each Unit consisting of one $40,000
principal amount of 6% Promissory Notes and 5,000 shares
38
<PAGE>
of Common Stock at a price of $40,000 per Unit (the "November 1994 Private
Placement") for an aggregate of $2,120,000. The net proceeds of such Private
Placement was used for acquiring and financing the Company's Hungarian
subsidiaries and for operational funds for the Company. A portion of the net
proceeds from the Company's December 1995 initial public offering was used to
repay one-half of the 6% Promissory Notes.
In July 1995, the Company sold 182,500 shares of Common Stock at $3.00 per
share in a private placement, and in August, 1995 it sold an additional
200,000 shares of Common Stock at a price of $3.00 per share in a further
private placement.
In September 1996, the Company sold 100,000 Units at $4.50 per Unit
realizing proceeds of $354,500 net of issuance costs, which proceeds were used
by the Company for working capital. The 100,000 Units are being registered for
resale in this offering. (See, "Selling Securityholders")
CERTAIN TAX CONSIDERATIONS
The following discussion sets forth what the Company believes are material
federal income tax consequences, under current law, of a purchase of the Units
which include Preferred Shares and Common Stock Purchase Warrants. However,
the Company has not requested a ruling from the Internal Revenue Service or a
formal tax opinion from its counsel. Prospective purchasers of the Units
should consult their own tax advisors with respect to the consequences to them
of the purchase and holding of such securities including the Preferred Shares
and the applicability and effect of federal, state and other tax laws.
The sale of a Unit or any of its components, will result in the recognition
of gain or loss to the holder in an amount equal to the difference between the
amount realized and his adjusted basis therein. Such a sale will result in
capital gain or loss, provided the security is a capital asset in the hands of
the holder. Such capital gain or capital loss will be long-term gain or loss
if the Unit or component being sold has been held for more than one year at
the time of such sale of exchange. Shares of Common Stock received on
conversion of Preferred Shares will have the same tax basis and holding period
as the Preferred Shares converted into such shares and will be accorded the
same tax treatment on sale as the Preferred Shares.
Dividends paid on the Preferred Shares will be includable in income, for
federal income tax purposes, by the holders thereof. If the dividend is paid
in Common Stock (rather than in cash) the amount of dividend so includible
will be equal to the fair market value of the Common Stock on the date of
payment (which is expected to be equal to the amount of cash that otherwise
would have been paid as a dividend), and the amount so includible will become
the holder's tax basis in the Common Stock. The holding period of any Common
Stock paid as a dividend will commence on the date of payment.
A holder of Units, Preferred Shares or Common Stock may be subject to backup
withholding at the rate of 20% with respect to interest or dividends paid on
the Preferred Shares or the Common Stock, respectively, and with respect to
the gross proceeds of amounts paid to redeem the Preferred Shares if such
proceeds are received by the holder's broker, unless such holder (a) is a
corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (b) provides a current taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules.
The Company will report to the holders of the Units, Preferred Shares and
the Common Stock and to the Internal Revenue Service the amount of any
"reportable payments" for each calendar year and the amount of tax withheld,
if any, with respect to payments on the securities.
The tax consequences referred to in the preceding paragraphs are based on
the current provisions of the Internal Revenue Code of 1986, as amended, and
the currently applicable regulations, in final and proposed form, promulgated
thereunder. In addition to the foregoing, the Internal Revenue Code of 1986,
as amended, provides that (i) for taxable years commencing in 1988 for
individuals, and (ii) for taxable years commencing on or after
39
<PAGE>
July 1, 1987 for corporations, gain from the sale of long term capital assets
will be taxed at the same rates as ordinary income. There can be no assurance,
however, that any such provisions may not change in the future, either
retroactively or prospectively, resulting in changes in such tax consequences.
There may, in addition, be other federal, state, local or foreign tax
considerations applicable to the circumstances of a prospective investor.
BECAUSE THE MATTERS DISCUSSED ABOVE ARE NOT, AS A MATTER OF FEDERAL INCOME
TAX LAW, FREE FROM DOUBT, AND APPLICABLE PROPOSED REGULATIONS OF THE INTERNAL
REVENUE SERVICE ARE SUBJECT TO VARYING INTERPRETATIONS, PURCHASERS OF THE
SECURITIES OFFERED HEREBY ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THIS OFFERING, AS WELL AS WITH RESPECT TO OTHER FEDERAL, STATE AND
LOCAL TAX CONSIDERATIONS WHICH MAY BE RELEVANT TO THEIR SITUATIONS.
REGISTRATION RIGHTS
The Company has granted certain registration rights to the persons who
purchased 265,000 shares of its Common Stock in its November 1994 Private
Placement. These investors have the right to include their shares in any
registration statement filed by the Company ("Piggy Back Registration Rights")
unless, in the reasonable opinion of the managing underwriter of the offering
so registered, such registration would adversely affect the plan of
distribution contemplated.
TRANSFER AGENT
The transfer agent for the Common Stock and for the Preferred Shares, and
the Warrant Agent for the Warrants, is American Stock Transfer & Trust
Company, 40 Wall Street, New York, New York 10005.
REPORTS TO SHAREHOLDERS
The Company furnishes its shareholders with annual reports containing
financial statements audited and reported upon by its independent accounting
firm and other reports as it determines or is required by law.
APPLICATION FOR LISTING
It is anticipated that after this offering, the Units will be quoted on
NASDAQ SmallCap under the symbols "HBCOU." The Common Stock and the Warrants
are currently being quoted on the NASDAQ SmallCap Market under the symbols
"HBCO" and "HBCOW." No assurance can be given that a trading market for the
Company's Units will develop or be sustained.
SHARES ELIGIBLE FOR FUTURE SALE
The Company currently has 2,583,600 shares of Common Stock outstanding. Of
these shares, 1,436,100 are freely tradeable and 1,147,500 not freely
transferable as "restricted securities", as that term is defined under Rule
144 under the Securities Act of 1933 (the "Act") and may not be resold except
in compliance with the registration requirements of the Securities Act or
pursuant to Rule 144 or some other exemption from registration. See "Certain
Transactions."
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated under the terms of Rule
144), who has beneficially owned restricted shares of Common Stock for at
least two years is entitled to sell, within any three-month period, a number
of shares that does not exceed the greater of 1% of the total number of
40
<PAGE>
outstanding shares of the same class, or the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the sale. A person
who has not been an affiliate of the Company for at least the three months
immediately preceding the sale and who has beneficially owned shares of Common
Stock for at least three years is entitled to sell such shares under Rule 144
without regard to the volume limitations described above. The private
placement stockholders who acquired 182,500 shares in July 1995 (except for
Mr. Klenner who acquired 30,000 shares), cannot sell or otherwise dispose of
any of these shares under Rule 144 until July 1997 and the private placement
stockholders who acquired 200,000 shares in August 1995, cannot sell or
otherwise dispose of any of their shares under Rule 144 until August 1997.
Current stockholders of the Company owning 765,000 shares, including all
current and former directors and officers of the Company and affiliates, have
agreed not to sell or otherwise dispose of any of their shares of Common Stock
prior to two years from the date hereof without the prior written consent of
the Underwriter, and 30,000 shares are subject to agreements not to sell or
transfer prior to December 20, 1997 without such consent.
The Company is unable to predict the effect that sales of the Company's
securities made under Rule 144, pursuant to future registration statements or
otherwise, may have on the then prevailing market price of securities of the
Company, although it is likely that sales of a large number of shares would
depress such market prices.
UNDERWRITING
J. W. Barclay & Co., Inc., the Underwriter, has agreed, subject to the terms
and conditions of the underwriting agreement (the "Underwriting Agreement"),
to purchase from the Company and the Selling Securityholders, and the Company
and the Selling Securityholders have agreed to sell to the Underwriter, on a
firm commitment basis, 500,000 Units, (each Unit consisting of one Preferred
Share and one Common Stock Purchase Warrant.
The Underwriter is committed to purchase all Units offered hereby, if any of
such Units are purchased.
The Underwriter has advised the Company that it proposes to offer the Units
to the public at the offering prices set forth on the cover page of this
Prospectus and that it may allow to certain dealers who are members in good
standing of the National Association of Securities Dealers, Inc. ("NASD")
concessions, not in excess of $0.25 per Unit of which $0.125 may be reallowed
to certain other dealers. After the public offering, the public offering
price, concession and reallowance to dealers may be changed by the
Underwriter.
The Company has granted the Underwriter an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 60,000 Units from it at
the public offering prices less the underwriting discounts set forth on the
cover page of this Prospectus. The Underwriter may exercise this option,
solely to cover over-allotments in the sale of the Units offered hereby.
The Company and the Selling Securityholders have agreed to pay to the
Underwriter a non-accountable expense allowance equal to 3% of the gross
proceeds of the Units sold by the Company and the Selling Securityholders in
the offering.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Selling Securityholders and the Underwriter against
certain civil liabilities, including liabilities under the Securities Act.
The Underwriter acted as a placement agent for the September 1996 Bridge
Financing for which it received selling commissions of $45,000 and a non-
accountable expense allowance of $13,500. See "Description of Securities--
Bridge Financings."
The Company has agreed to sell to the Underwriter or its designees, at a
price of $.001 per warrant, a total of 50,000 warrants (the "Underwriter's
Unit Warrants") to purchase a like number of Units of the Company. The
Underwriter's Unit Warrants will be exercisable at a price equal to 165% of
the initial offering price set forth on the cover page of this Prospectus for
a period of five years, and will not be transferable for one year
41
<PAGE>
from the date hereof except to selected dealers and officers and partners of
the Underwriter and selected dealers. Any profit realized upon any resale of
the Underwriter's Unit Warrants or upon any sale of the securities underlying
same may be deemed to be additional Underwriter's compensation. The Company
has agreed to register (or file a post-effective amendment with respect to any
registration statement registering) the Underwriter's Unit Warrants and their
underlying securities under the Act at its expense on one occasion, and at the
expense of the holders thereof on another occasion, upon the request of a
majority of the holders thereof. The Company has also agreed to certain
"piggy-back" registration rights for the holders of the Underwriter's Unit
Warrants and their underlying securities.
The Underwriter has informed the Company that it does not expect sales of
the Units to be made to any discretionary accounts.
The Company has agreed not to solicit exercise of the Warrants included in
the Units being sold hereunder other than through the Underwriter and will pay
the Underwriter a commission equal to ten percent of the gross proceeds
received from the exercise of the Warrants, of which a portion may be
reallowed to any dealer who solicited the exercise, provided that (i) at the
time of exercise the market price of the Common Stock is greater than the
exercise price of the Warrants, (ii) the exercise of the Warrants was
solicited by a member of the NASD, (iii) the Warrants exercised are not held
in discretionary accounts, (iv) disclosure of the compensation arrangements
has been made both at the time of the issuance of the Warrants and at the time
of exercise, (v) the solicitation of the exercise of the Warrants is not in
violation of Rule 10b-6 under the Securities Exchange Act of 1934, (vi) the
solicitation is not in violation of any other rule of the Securities and
Exchange Commission or the NASD, and (vii) the Underwriter is designated in
writing by the Warrantholder as having solicited the exercise of the Warrants.
The Underwriter will not be entitled to such commission during the twelve-
month period following the date hereof.
In connection with the initial public offering, the Company entered into an
agreement with the Underwriter pursuant to which it retained the Underwriter
as its financial consultant until December 20, 1997 at an annual fee of
$34,100. The Company has agreed, subject to the successful completion of the
subject offering, to enter into a further agreement retaining the Underwriter
as its financial consultant for a two-year period commencing December 20, 1997
at a fee of $46,750 per year, which fee will be payable in full at the closing
of the subject offering.
The Company entered into an agreement, dated December 20, 1995, with the
Underwriter providing for the payment of compensation to the Underwriter in
the event the Underwriter is responsible for a merger or other acquisition
transaction to which the Company is a party or for venture capital or private
placement financing. The Underwriter is to be paid a fee ranging from seven
percent (7%) of the first $1,000,000 down to two and one-half percent (2.5%)
of the excess, if any, over $9,000,000 of the consideration involved in any of
the foregoing transactions consummated by the Company as to which the
Underwriter introduced the other party to the Company. The Company has agreed
to extend such agreement so that it shall expire five years from the date
hereof.
The Company has agreed that it will not, without the prior written consent
of the Underwriter, during the two year period ending December 20, 1997 issue
any shares of preferred stock, or for a period of five years from the date
hereof sell any securities under Regulation S of the Securities Act of 1933 or
authorize any options.
The Company has granted the Underwriter the right, for a period of five
years ending five years from the date hereof, to designate a person to attend
meetings of the Board of Directors. Such person is entitled to attend all such
meetings and to receive all notices and other correspondence and
communications sent by the Company to members of its Board of Directors. The
Company shall reimburse the designee of the Underwriter for his out-of-pocket
expenses incurred in connection with his attendance at such meetings. As of
the date of this Prospectus, the Underwriter has not designated any director.
See "Certain Transactions" with respect to loans in the aggregate of
$850,000 made to the Company by four individuals including two officers of the
Underwriter.
42
<PAGE>
LEGAL MATTERS
The validity of the Units (including the Preferred Shares and the Common
Stock Purchase Warrants) offered hereby will be passed upon for the Company by
Cohen & Cohen, 445 Park Avenue, New York, New York 10022. (Cohen & Cohen will
rely upon Dr. Marianna Csabai of Budapest, Hungary, special Hungarian counsel
for the Company, as to certain matters of Hungarian law). Frank R. Cohen, a
partner in Cohen & Cohen, owns 30,000 shares of the Common Stock and holds
options to purchase an additional 10,000 shares of Common Stock and is
Treasurer, Secretary and a director of the Company. Certain legal matters in
connection with this offering are being passed upon for the Underwriter by
Henry C. Malon, Esq., 1 Battery Park Plaza, New York, NY 10004.
EXPERTS
The consolidated balance sheet as of June 30, 1996 and the consolidated
statement of operations, stockholders' equity and cash flows for the year then
ended appearing in this Prospectus have been included herein in reliance on
the report, which includes an explanatory paragraph related to the Company's
further public offering, of Coopers & Lybrand, independent accountants, given
on the authority of that firm as experts in accounting and auditing.
The consolidated balance sheet as of June 30, 1995 and the consolidated
statement of operations, stockholders' equity and cash flows for the period
then ended appearing in this Registration Statement have been included herein
in reliance on the report of Todman & Co., CPAs, P.C., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The discussion contained in the Prospectus under the headings "Business,"
and "Dividends" relating to Hungarian laws and conditions and the legal
proceedings involving the broadcast licenses have been reviewed by the law
firm of Dr. Marianna Csabai, of Budapest, Hungary, Hungarian special counsel
to the Company.
CHANGE IN ACCOUNTANTS
On April 11, 1996, the Board of Directors of the Company selected Coopers &
Lybrand, as its new independent auditor. Todman & Co., CPAs, P.C. had served
as the Company's independent auditor until that time. The Company made the
change because Coopers & Lybrand has an auditing staff in the Republic of
Hungary, while Todman & Co., CPAs, P.C. does not. The Company believes that
such a local auditing presence in Hungary will serve the Company better during
its anticipated growth period. The Board of Directors approved the decision to
change public accountants based on the reasons stated above. The Board of
Directors did not dismiss Todman & Co., CPAs, P.C., nor did Todman & Co.,
CPAs, P.C. resign or decline to serve if reappointed. None of Todman & Co.,
CPAs, P.C. reports on the financial statements for any year contained an
adverse opinion or disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principle. There were no disagreements
with Todman & Co., CPAs, P.C. on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure in
connection with the audits of the Company at any time.
43
<PAGE>
HUNGARIAN BROADCASTING CORP.
FINANCIAL STATEMENTS
INDEX
<TABLE>
<S> <C>
Reports of Independent Accountants................................ F-2 - F-3
Consolidated balance sheets as of June 30, 1996, June 30, 1995,
and September 30, 1996 (unaudited)............................... F-4
Consolidated statements of operations for the year ended June 30,
1996, and the period September 14, 1994 (date of inception)
through June 30, 1995 and for the three months ended September
30, 1996 (unaudited) and September 30, 1995 (unaudited).......... F-5
Consolidated statements of stockholders' equity for the year ended
June 30, 1996, and the period September 14, 1994 (date of
inception) through June 30, 1995 and for the three months ended
September 30, 1996 (unaudited)................................... F-6
Consolidated statements of cash flows for the year ended June 30,
1996, and the period September 14, 1994 (date of inception)
through June 30, 1995 and for the three months ended September
30, 1996 (unaudited) and September 30, 1995 (unaudited).......... F-7
Notes to consolidated financial statements for the year ended June
30, 1996......................................................... F-8 - F-15
Notes to consolidated financial statements for three months ended
September 30, 1996 (unaudited)................................... F-16 - F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of Hungarian Broadcasting Corp.
We have audited the consolidated balance sheet of Hungarian Broadcasting
Corp. and subsidiaries (the "Company") as of June 30, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of the
Company as of June 30, 1995, were audited by other auditors whose report dated
August 30, 1995 (and December 19, 1995, as to notes 5 and 12) included an
explanatory paragraph that described two restatements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hungarian
Broadcasting Corp., as of June 30, 1996, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles in the United States.
We draw to your attention, as described in Note 14, that the Company plans a
further public offering to finance its continued development and operations.
COOPERS & LYBRAND
Budapest, Hungary
September 19, 1996
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Hungarian Broadcasting Corp.
We have audited the accompanying consolidated balance sheet of the Hungarian
Broadcasting Corp. (a development stage company) as of June 30, 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the period September 14, 1994 (date of inception) through June 30,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As explained in Note 5, the financial statements have been restated to
reflect the revised amortization charges to operations of deferred financing
costs and original issue discount resulting from a change in the terms of the
Bridge Notes Payable. Under the new terms, 50% of the Notes will be paid from
the proceeds of this public offering, and the balance is due on June 30, 1997.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Hungarian Broadcasting Corp. at June 30, 1995, and the consolidated
results of its operations and its cash flows for the period September 14, 1994
(date of inception) through June 30, 1995, in conformity with generally
accepted accounting principles.
Todman & Co., CPAs, P.C.
New York, New York
August 30, 1995 (as to note 5 and 12
the date is December 19, 1995)
F-3
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996, JUNE 30, 1995
AND SEPTEMBER 30, 1996 (UNAUDITED)
(EXPRESSED IN US$)
<TABLE>
<CAPTION>
JUNE 30
----------------------- SEPTEMBER 30
1995 1996 1996
---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.............. 295,006 1,462,379 569,867
Accounts receivable, net of allowance
for doubtful accounts of $0
(June 30, 1995); $82,536 (June 30,
1996); $89,057 (September 30, 1996)... 87,598 191,715 409,075
VAT receivable......................... 83,429 123,175 82,842
Deferred program costs, less
accumulated amortization of $250,000
(June 30, 1996); $500,000 (September
30, 1996)............................. -- 500,000 250,000
Prepaid expenses and other current
assets................................ 5,000 42,383 75,907
---------- ----------- -----------
Total Current Assets................. 471,033 2,319,652 1,387,691
Investments............................ -- 653 632
Broadcasting and transportation
equipment, less accumulated
depreciation of $7,310 (June 30,
1995); $14,067 (June 30, 1996);
$21,247 (September 30, 1996).......... 58,562 136,296 346,808
Broadcast license costs, less
accumulated amortization of $35,453
(June 30, 1995); $458,405 (June 30,
1996); $564,163 (September 30, 1996)
...................................... 2,115,061 1,692,109 1,586,351
Other deferred financing and other
expenses, less accumulated
amortization of $46,655 (June 30,
1995); $98,460 (June 30, 1996);
$118,754 (September 30, 1996)......... 146,079 103,341 65,396
---------- ----------- -----------
Total Assets......................... $2,790,735 $ 4,252,051 $ 3,386,878
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of notes payable....... 959,156 975,412 996,559
Accounts payable....................... 264,112 479,047 438,018
Accrued expenses....................... 89,627 129,271 199,765
Due to related parties................. 495,995 454,720 414,784
Other.................................. 47,424 231,307 29,447
---------- ----------- -----------
Total Current Liabilities............ 1,856,314 2,269,757 2,078,573
---------- ----------- -----------
Long-term Liabilities
Notes payable, less current portion.... 890,839 -- --
Minority Interest........................ -- 40,326 34,462
---------- ----------- -----------
Total Liabilities.................... 2,747,153 2,310,083 2,113,035
---------- ----------- -----------
Commitments and Contingencies (Note 12);
(Notes 10 and 11: September 30, 1996)
Stockholders' Equity
Preferred stock, $.001 par value--
shares authorized 5,000,000
(June 30, 1995:0; June 30, 1996:
5,000,000); issued and outstanding
100,000 (June 30, 1995:0; June 30,
1996:0)............................... -- -- 100
Common stock, $.001 par value--shares
authorized 15,000,000
(June 30, 1995; 5,000,000; June 30,
1996: 15,000,000); issued and
outstanding 2,583,600 (June 30, 1995:
1,265,000; June 30, 1996: 2,583,600).. 1,265 2,583 2,583
Additional paid-in capital............. 862,545 6,789,029 7,143,429
Accumulated deficit.................... (830,358) (4,980,040) (6,076,569)
Currency translation adjustment........ 10,130 130,396 204,300
---------- ----------- -----------
Total Stockholders' Equity .......... 43,582 1,941,968 1,273,843
---------- ----------- -----------
Total Liabilities and Stockholders'
Equity................................ $2,790,735 $ 4,252,051 $ 3,386,878
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996, AND THE
PERIOD SEPTEMBER 14, 1994 (DATE OF INCEPTION)
THROUGH JUNE 30, 1995 AND FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
AND SEPTEMBER 30, 1995 (UNAUDITED)
(EXPRESSED IN US$)
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------------
1994/1995 1995/1996 1995 1996
---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................... 72,043 672,108 207,837 353,315
Expenses
Operating costs and
expenses................ 185,469 2,038,828 420,596 611,355
Amortization of broadcast
license costs........... 35,453 423,052 96,292 105,763
Amortization of deferred
program costs........... -- 250,000 -- 250,000
Selling, general and
administrative
expenses................ 339,471 1,639,989 414,993 353,848
---------- ----------- ---------- -----------
560,393 4,351,869 931,881 1,320,966
---------- ----------- ---------- -----------
Operating loss........... (488,350) (3,679,761) (724,044) (967,651)
Interest and other income.. 2,327 49,671 8,766 25,951
Interest expense........... (74,310) (481,238) (131,152) (65,453)
Exchange rate loss......... -- (95,240)
---------- ----------- ---------- -----------
Net loss................... (560,333) (4,111,328) (846,430) (1,102,393)
Minority interest.......... -- (38,354) -- 5,864
---------- ----------- ---------- -----------
Net loss after minority
interest................ $ (560,333) $(4,149,682) $ (846,430) $(1,096,529)
========== =========== ========== ===========
Net loss per share......... $ (0.39) $ (2.01) $ (0.59) $ (0.42)
Weighted average number of
common shares
outstanding............... 1,427,500 2,067,008 1,427,500 2,583,600
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEAR ENDED JUNE 30, 1996 AND
THE PERIOD SEPTEMBER 14, 1994 (DATE OF INCEPTION)
THROUGH JUNE 30, 1995 AND FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
(EXPRESSED IN US $)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
----------------- PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
--------- ------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PERIOD TO JUNE 30, 1995
Initial issuance of
common stock--
September, 1994........ 850,000 $ 850 $ 7,650 $ -- $ --
Sale of common stock to
private placement
investors--Nov. and
Dec. 1994.............. 265,000 265 405,045
Issuance of common
stock--March 1995...... 150,000 150 449,850
Cumulative losses
incurred by acquired
subsidiaries
attributable to
minority interest...... (270,025)
Net losses for period... (560,333)
Foreign currency
translation
adjustment............. 10,130
--------- ------ ----------- ----------- --------
BALANCE, JUNE 30, 1995.. 1,265,000 1,265 862,545 (830,358) 10,130
YEAR ENDED JUNE 30, 1996
Issuance of common
stock--July 1995....... 182,500 182 499,818
Issuance of common
stock--August 1995..... 200,000 200 549,612
Shares contributed by
officers for
cancellation in
December 1995.......... (220,000) (220) 220
Initial public offering
in December 1995....... 1,150,000 1,150 5,990,590
Public Offering Costs... (1,150,286)
Exercise of warrants
during year............ 6,100 6 36,530
Foreign currency
translation
adjustment............. 120,266
Net loss................ (4,149,682)
--------- ------ ----------- ----------- --------
BALANCE, JUNE 30, 1996.. 2,583,600 $2,583 $ 6,789,029 $(4,980,040) $130,396
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL CUMULATIVE
---------------- ----------------- PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
--------- ------ --------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
SEPTEMBER 30, 1996
(UNAUDITED)
BALANCE, JUNE 30, 1996.. 2,583,600 $2,583 $6,789,029 $(4,980,040) $130,396
Issuance of preferred
stock.................. 100,000 100 354,400
Net loss for period..... (1,096,529)
Foreign currency
translation
adjustment............. 73,904
BALANCE, SEPTEMBER 30,
1996................... 2,583,600 2,583 100,000 100 7,143,429 (6,076,569) 204,300
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1996, AND
THE PERIOD SEPTEMBER 14, 1994 (DATE OF INCEPTION) THROUGH JUNE 30, 1995
AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND SEPTEMBER 30,
1995(UNAUDITED)
(EXPRESSED IN US$)
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1994/1995 1995/1996 1995 1996
---------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Operating
Activities
Net loss......................... (560,333) (4,149,682) (846,430) (1,096,529)
---------- ---------- -------- ----------
Adjustments to reconcile net
loss to net cash used in
operating activities:
Amortization of deferred
financing costs and
organization................ 213,650 51,805 91,560 20,294
Amortization of program costs.. -- 250,000 -- 250,000
Amortization of broadcast
license costs............... 35,453 422,952 96,292 105,763
Depreciation of fixed
assets...................... 1,786 13,798 7,747 7,180
Currency translation
adjustment.................. -- 120,266 -- 95,240
Changes in operating assets and
liabilities:
Increase in accounts
receivable.................. (87,598) (104,117) (775) (217,360)
Increase in VAT receivable... (83,429) (39,746) (61,100) 40,333
Increase in prepaid expenses
and other assets............ (5,000) (37,383) (12,024) (33,524)
Increase in accounts
payable..................... 264,112 214,935 (171,330) (41,029)
Increase in accrued
expenses.................... 89,627 39,644 16,373 70,494
Increase in other
liabilities................. 15,734 183,883 11,427 (201,860)
---------- ---------- -------- ----------
Net cash used in operating
activities...................... (115,998) (3,033,645) (868,260) (1,000,998)
Cash Flows from Investing
Activities
Payment for broadcast license
cost.......................... (2,146,744) -- -- --
Purchase of office and
transportation equipment net
of disposal................... (105,872) (91,532) -- (218,692)
Payment for organizational
costs......................... (40,165) -- -- --
Investments.................... -- (653) -- --
Purchase of programs........... -- (750,000) -- --
Net increase in deferred
financing costs............... -- (9,067) -- --
---------- ---------- -------- ----------
Net cash used in investing
activities.................... (2,292,781) (851,252) -- (218,692)
Cash Flows from Financing
Activities
(Decrease)/Increase in advances
from related parties.......... 160,285 (41,275) 53,360 (39,936)
Proceeds from issuance of
common stock.................. 458,500 5,927,802 949,812 --
Proceeds from issuance of
preferred stock............... -- -- -- 450,000
Proceeds from issuance of notes
payable....................... 2,120,000 -- -- --
Payments of notes payable, net
of issue discount............. -- (874,583) -- --
Payments for offering costs.... (35,000) -- (99,446) (95,500)
Increase in liability to
minorities.................... -- 40,326 -- --
---------- ---------- -------- ----------
Net cash provided by financing
activities...................... 2,703,785 5,052,270 903,726 314,564
---------- ---------- -------- ----------
Effect of translation adjustment
on cash......................... 12,788 12,614
Increase in Cash and Cash
Equivalents..................... 295,006 1,167,373 53,254 (892,512)
---------- ---------- -------- ----------
Cash and cash equivalents at
beginning of period............. -- 295,006 295,006 1,462,379
---------- ---------- -------- ----------
Cash and cash equivalents at end
of period....................... 295,006 1,462,379 348,260 569,867
========== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1996
1. ORGANIZATION AND BUSINESS
Hungarian Broadcasting Corp. (the "Company") which was incorporated in the
State of Delaware on September 14, 1994, was organized to acquire interests in
companies that have commercial broadcasting licenses to own, develop, expand
and operate television stations in Hungary. The Company operates in Hungary
through a wholly-owned subsidiary known as HBC (Hungary) Kft. ("HBC") which
was organized in November 1994. As disclosed in the financial statements drawn
up as at June 30, 1995, the Company acquired a 90% interest in VI-DOK Video es
Filmgyarto studio Kft. ("VI-DOK") as of June 16, 1995, and an 80% interest in
DNTV Kft. ("DNTV") as of May 30, 1995, two Hungarian companies (the
"Licensees") which had been granted television licenses by the Hungarian
Cultural Ministry in April to broadcast over Budapest Channel AM-micro A3
("A3") from July 1, 1994 through July 1, 2000, daily between 6 a.m. and 5 p.m.
and between 7.30 p.m. and 6 a.m. with a maximum advertising time of 20%.
Broadcasting on A3 commenced in September 1994. The 90% interest in VI-DOK was
acquired for $240,000 and the 80% interest in DNTV for $176,000. The
acquisitions were accounted for by the purchase method of accounting; the
acquisitions and purchase price allocation were computed as follows:
The Company acquired a 90% interest in VI-DOK's assets of $76,471 and
assumed 90% of its liabilities of $1,437,328. The excess of VI-DOK's
liabilities over its assets acquired was $1,224,771 (90% of $1,360,857).
The Company acquired an 80% interest in DNTV's assets of $7,409 and assumed
80% of its liabilities of $744,707 for an excess of liabilities over assets
acquired of $589,838 (80% of $737,298). The Company paid $416,000 ($240,000
plus $176,000) for the excess of the two companies' liabilities over assets
acquired ($1,224,771 plus $589,838) for a total consideration of $2,230,609.
After applying a valuation allowance of $80,095, the Company assigned the
balance of $2,150,514 to the acquired broadcast license costs; this amount is
being amortized over approximately five years. Prior to September 14, 1994,
when broadcasting began, VI-DOK had been in the business of producing and
editing motion picture films on a contract by contract basis. From its
organization in December 1991 until September 14, 1994, VI-DOK worked on three
primary contracts. On March 31, 1994 (two days after acquiring the broadcast
license) VI-DOK organized Pest-Buda as a division to conduct its broadcasting
activities. Pest-Buda was dissolved as division on June 16, 1995, the date VI-
DOK was acquired by the Company. DNTV, organized in February 1994, broadcast
from September 1994 through May 30, 1995 (date of acquisition). The Licensees
effectively ceased operations shortly after their acquisition and the
Company's wholly-owned subsidiary HBC continued the broadcasting thereafter.
From the date of inception through September 30, 1995, the Company's
consolidated financial statements reflected nominal revenues and the Company
was considered to be in the development stage. In management's opinion, the
Company emerged from the development stage during the three months ended
December 31, 1995.
The operations of the Company are essentially in Hungary where the majority
of revenues and expenditures are incurred. With the exception of cash and cash
equivalents amounting to $1,375,532 and notes payable of $975,412, the assets
and liabilities of the company relate to Hungary.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation and Use of Estimates
The consolidated financial statements include the accounts of the Company
and all its subsidiaries (which are all majority owned by the Company), from
their respective acquisition dates. All material intercompany transactions and
balances have been eliminated.
F-8
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED JUNE 30, 1996
The subsidiaries of the Company are as follows:--
<TABLE>
<CAPTION>
NAME COUNTRY OF INCORPORATION PERCENTAGE OWNED
---- ------------------------ ----------------
<S> <C> <C>
HBC Kft............................ Hungary 100%
VI-DOK Kft......................... Hungary 90%
DNTV Kft........................... Hungary 80%
</TABLE>
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period.
(b) Fiscal Year
The Company's reporting period is the fiscal year ending June 30.
(c) Revenue Recognition
Revenues result from the sale of advertising time. Advertising revenue is
recognized at the time the commercials are broadcast.
(d) Barter Transactions
Revenues from barter transactions (television advertising in exchange for
goods and services) are recognized when advertisements are broadcast;
merchandise or services received are charged to expense (or capitalized, as
appropriate) when received or used.
Receivables and payables arising from barter transactions are offset when
the services have been rendered to the customer and the merchandise or
services are received from the vendor.
(e) Program and Film Rights
Program and film rights acquired under license agreements and the related
obligations incurred are recorded as assets and liabilities when the license
period begins, the cost of each program is determinable, and the program is
available for telecast. The capitalized costs are amortized using the
straight-line method based upon the estimated period of usage.
(f) Production Costs
Production costs for self-produced programs are capitalized and expensed
when the program is first broadcast, except where the program has potential to
generate future revenues. In that case, production costs are capitalized and
amortized on the same basis as programming obtained from third parties.
(g) Office and Transportation Equipment
Property and equipment are carried at cost and depreciated on a straight-
line basis using the shorter of estimated useful lives, or, if applicable, the
underlying lease period.
(h) Broadcast License Costs
The costs of acquiring licenses to broadcast are capitalized and amortized
over the life of the related licenses. It is the Company's policy to value
broadcast licenses at the lower of amortized cost or fair value. As
F-9
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED JUNE 30, 1996
part of an ongoing review of the valuation and amortization of such assets,
management assesses the carrying value of such assets if facts and
circumstances suggest that they may be impaired. If this review indicates that
the assets will not be recoverable based on a cash flow analysis, the carrying
value of these assets would be reduced to its estimated fair market value.
(i) Organization Costs
The Company has capitalized organization costs, which are being amortized
over five years.
(j) Income Taxes
At June 30, 1996, the Company sustained a net loss of approximately
$4,110,000. Such loss may be carried over and applied to reduce taxable income
over a period of up to 15 years, ending in the year 2010. Under SFAS 109,
"Accounting for Income Taxes", due to the uncertainty as to the realizability
of such loss, the Company has set up a full valuation allowance against any
future tax benefit that may accrue from the net operating loss, and no
deferred tax asset has been recognized. In addition, income taxes have not
been recorded in the accompanying financial statements as no tax is due for
this period due to the incurred losses.
(k) Deferred Financing Expenses
Deferred financing expenses represent the costs associated with the debt
portion of a consummated private placement financing and are being amortized
on a straight-line basis over the expected term of the related borrowing.
(l) Foreign Currency Translation and Transactions
The assets and liabilities of the foreign subsidiaries were translated using
the exchange rate in effect at the balance sheet date. Income and expense
accounts were translated at the average rates in effect during the period.
Translation adjustments are included in the stockholders' equity section in
the accompanying balance sheets.
Foreign currency transaction gains and losses are recorded for changes in
exchange rates affecting cash denominated in U.S. dollars held in Hungarian
bank accounts.
(m) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
(n) Dividend Policy
The Company has never paid and does not anticipate paying any cash dividends
on its common stock in the foreseeable future. The Company is dependent upon
payment of dividends by its Hungarian subsidiary companies as the source of
its own dividends. Hungarian companies are permitted to pay annual dividends
out of profits determined on the basis of Hungarian accounting principles,
which differs from U.S. generally accepted accounting principles ("GAAP").
Significant differences between U.S. GAAP and Hungarian accounting principles
include the accounting for long term investments, which, under Hungarian
accounting principles are valued at the lower of cost or market value. In
addition, deferred taxes are not presented on the face of Hungarian financial
statements, although note disclosure may be required. Leases are not
capitalized and unrealized foreign currency translation gains are not
reflected in financial statements of Hungarian entities. Dividends are payable
to foreign investors such as the Company in forints, which may be converted
into U.S. dollars at the official rate of exchange set by the National Bank of
Hungary. As at June 30, 1996, there were no significant distributable reserves
in the Hungarian subsidiaries of the Company.
F-10
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED JUNE 30, 1996
(o) Loss Per Share
Net loss per share has been calculated based on the weighted average number
of common shares outstanding during each period.
3. CASH AND CASH EQUIVALENTS
At June 30, 1996, cash of $1,375,532 denominated in U.S. dollars was on
deposit with a major U.S. money center bank. In addition, $86,847 (denominated
partly in U.S. dollars and partly in Hungarian forints) was on deposit with a
Hungarian bank.
4. VAT RECEIVABLE
Value-added taxes paid in Hungary for which a reimbursement claim was
submitted by the Company, have been included in current assets.
5. DEFERRED PROGRAM COSTS
During the year, the Company purchased program rights for a total of
$750,000. These are being amortized over the life of the related rights of
nine months.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes television broadcasting and
production equipment, vehicles and office equipment, fixtures and fittings.
These are being depreciated on a straight line basis over their estimated
useful lives, being between three and ten years.
7. BROADCAST LICENSE COSTS
Broadcast license costs acquired for $2,150,514 are being amortized over the
life of the relevant licenses which terminate in July 2000.
8. NOTES PAYABLE
From November 1994 through March 1995, the Company sold (in a private
placement) units consisting of $2,120,000 aggregate principal amount of
unsecured promissory notes and 265,000 shares of common stock for an aggregate
purchase price of $2,120,000. The Company incurred $153,789 of financing
expenses relating to the private placement, of which $122,100 and $31,689 has
been allocated to debt and equity, respectively. The $153,789 includes legal
fees of $28,200 paid to the Company's secretary/stockholder. The notes bear
interest at 6% per annum and were originally due upon the earlier of December
31, 1995 or the successful consummation of the IPO, which was rescinded during
November 1995 (See Note 13(b)). The revised terms require that only one-half
of the notes were due upon the earlier of December 31, 1995 or the successful
consummation of the subsequent IPO. The balance of the notes are due on June
30, 1997. Consequently, the amortization expense relating to the original
issue discount and deferred financing expenses were recomputed over the
revised expected term of the notes. Total original issue discount of $437,000
(an imputed interest rate of 19% per annum) has been recorded and is being
amortized over the expected term of the notes, along with the $122,100 of
financing expenses related to the debt portion of the private placement. The
remaining unamortized original issue discount and deferred financing expenses
totaled $84,588, and $23,640, respectively, as of June 30, 1996. During
January 1996, $1,060,000 of the notes were repaid. Should the remaining notes
be repaid before June 30, 1997, any unamortized portion of the original issue
discount and deferred financing expenses will be charged to operations.
F-11
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED JUNE 30, 1996
Notes payable of $975,412 at June 30, 1996 (all short-term liability)
consist of the original $2,120,000 principal amount of the notes, less notes
of $1,060,000 repaid during the year ended June 30, 1996, less the unamortized
portion of the original issue discount of $84,588.
The private placement investors have the right to include their shares in
any registration statement filed by the Company after the IPO to the extent
that the managing underwriter of the public offering advises the Company that
such inclusion would not interfere with the orderly sale of the securities to
be publicly offered.
9. COMMON STOCK
(a) In July 1995, the Company sold 182,500 of common stock at a price of $3
per share for an aggregate of $547,500 ($500,000 net) of which 30,000 shares
were sold to a director and officer of the Company. In August 1995, the
Company sold 200,000 shares of common stock at a price of $3 per share for an
aggregate of $600,000 (approximate $550,000 net). The remaining stock
subscription receivable at September 30, 1995, of $100,000, was received on
October 4, 1995. On December 6, 1995, three of the Company's officers, Messrs.
Klenner, Genova and Cohen, contributed to the Company for cancellation
100,000, 100,000 and 20,000 common shares, respectively, for no consideration.
(b) The Company made a public offering of 1,000,000 shares of common stock
at $7 per share in November 1995. The offering was rescinded after the shares
offered traded below $7 per share between the effective date and the scheduled
closing date of the offering. The Company incurred $129,631 of expenses in
connection with that offering, which were shown as deferred offering costs in
the financial statements at September 30, 1995 and were charged to operations
during the three months ended December 31, 1995.
(c) On December 20, 1995 the Company completed an IPO of 1,150,000 shares of
its common stock at $5.00 per share and 1,610,000 redeemable common stock
purchase warrants at $0.15 per warrant. Each warrant entitles the holder to
purchase one share of common stock at an exercise price of $6.00 per share
during the five-year period ending December 20, 2000. The warrants will be
redeemable, commencing April 20, 1997. The Company also issued to the
underwriter warrants for the purchase of 100,000 shares of common stock at
$8.25 per share and 140,000 common stock purchase warrants at $0.225 per
warrant. The proceeds of this offering amounted to $4,995,338, net of
underwriting commissions and expenses.
(d) On June 21, 1996, the Company increased the number of authorized shares
of Common Stock from 5,000,000 to 15,000,000; authorized the issuance of up to
5,000,000 shares of preferred stock; and increased the number of shares of the
Common Stock available under the Company's 1994 Incentive Stock Option Plan,
as amended, from 100,000 shares to 350,000 shares for use as incentive awards
to certain key employees, directors and consultants.
10. STOCK OPTION PLAN
The Company has adopted a Stock Option Plan (the "Plan"). The Plan provides
that incentive and non-qualified options may be granted to officers,
employees, directors and consultants to the Company for the purpose of
providing an incentive to those persons to work for the Company. The Plan will
be administered by the compensation committee of the Board of Directors (the
"Committee"). The Committee determines, among other things, the persons to
whom stock options are granted, the number of shares subject to each option,
the date or dates upon which each option may be exercised and the exercise
price per share.
F-12
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED JUNE 30, 1996
Options granted under the Plan are exercisable for a period of up to ten
years from the date of the grant. Options terminate upon the optionee's
termination of employment or consulting arrangement with the Company, except
that, under certain circumstances, an optionee may exercise an option within
the three-month period after such termination of employment. An optionee may
not transfer any options except that an option may be exercised by the
personal representative of a deceased optionee within the three-month period
following the optionee's death. Incentive options granted to any employee who
owns more than 10% of the Company's outstanding common stock immediately
before the grant must have an exercise price of not less than 110% of the fair
market value of all underlying stock on the date of the grant and the exercise
term may not exceed five years. The aggregate fair market value of common
stock (determined at the date of the grant) for which any employee may
exercise incentive options in any calendar year, may not exceed $100,000. In
addition, the Company will not grant a non-qualified option with an exercise
price less than 85% of the fair market value of the underlying common stock on
the date of the grant. On December 20, 1995, the Company granted to certain
directors options to purchase an aggregate of 100,000 shares of common stock
at $5.00 per share, not exercisable before December 20, 1996.
The following table is a summary of all stock options as of June 30, 1996:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS OPTION PRICE PER SHARE
------------------- ----------------------
<S> <C> <C>
July 1, 1995...................... -- --
Granted in 1995................... 100,000 $5.00
-------
Balance at June 30, 1996.......... 100,000 $5.00
=======
</TABLE>
As of June 30, 1996, none of the stock options were exercisable.
11. RELATED PARTY TRANSACTIONS
Certain officers and directors of the Company control a company (the
"related party") that purchased $800,000 of unsecured promissory notes and
100,000 shares of common stock in a November 1994 private placement (Note 8).
As additional compensation, the related party received an option (which was
exercised in March 1995) to purchase 150,000 shares of common stock at $3 per
share and the right of first refusal for a three-year period to act as general
contractor for all broadcast facilities to be built by the Company. In
addition, the related party had advanced approximately $120,000 to the Company
amounts which were repaid in January 1996.
12. COMMITMENTS AND CONTINGENCIES
(a) Consulting and Compensation Agreements
The Company has a five-year employment agreement with its President and
Chief Financial Officer effective beginning in January 1996, at a monthly
salary of $10,000. The employment agreement also permits reimbursement of
ordinary and necessary business expenses.
The Company has a two-year employment agreement with its Executive Vice
President effective beginning in January 1996, at a monthly salary of $10,000.
He is also entitled to receive reimbursement for ordinary and necessary
business expenses.
The Secretary is a partner in a firm which has a two-year retainer agreement
to provide all SEC related legal services for the Company for a fee of
$100,000 per year, beginning in 1996.
F-13
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED JUNE 30, 1996
A financial and management consultant receives a fee of $3,000 per month for
a two-year term, beginning in January 1996.
As compensation to outside directors, the Company pays directors' fees equal
to $2,000 per meeting, minimum of four meetings per year, and reimburses their
travel and other out-of-pocket expenses. Officers do not receive any
compensation for serving as directors.
(b) Leases
The Company has a lease for office facilities in Budapest, Hungary, with
minimum monthly payments including taxes of $3,125, expiring May 30, 2000,
cancelable by the Company upon 90 days notice.
13. LEGAL PROCEEDINGS
(a) License Proceeding
TV 3, a competitor of A3, which was granted a six year, 24 hour per day
microwave license, applied to the Ministry of Culture to overturn the grant of
the A3 license to the Licensees and NAP TV made on March 29, 1994 on the
ground that proper procedures were not followed because the authority of the
committee that awarded the licenses had expired prior to the date the licenses
were granted. The Ministry of Culture denied the application and held that
even if a new committee were acting, it would also have granted the A3 license
to the Licensees and to NAP TV. TV 3 thereafter instituted a legal action on
December 1, 1994 against the Ministry of Culture, but not against either of
the Licensees, to overturn its decision in awarding the A3 broadcast license
in the Metropolitan Court of Budapest. At a hearing held on December 1, 1994,
the Municipal Court ordered the Ministry to follow prescribed procedures and
make a new decision. The Ministry appealed this decision to the Appeals Court
of Budapest. On April 25, 1995, the Company received a letter from the
Ministry confirming that the license had been granted to the Licensees and the
Licensees may operate in accordance with the terms of the license. On November
6, 1995, the Appeals Court vacated the decision of the Metropolitan Court on
the ground that no notice of the hearing had been given to the Licensees
(which had not had an opportunity to appear at that hearing). The Appeals
Court ruled that the only issue to be decided by the Metropolitan Court is
whether the Ministry's committee was properly constituted to grant the
licenses and remanded the matter for a hearing in the Fall 1996 term. In
particular, the Appeals Court ruled that the Metropolitan Court does not have
jurisdiction to revoke the grant of the licenses or otherwise modify the
decision of the Ministry's committee and, accordingly, the Licensees may
continue to operate under the licenses, pending a final determination by the
Ministry committee. In its ruling dated June 24, 1996, the Metropolitan Court
has now ruled in favor of the Company.
(b) Claim regarding underwriters
Prior to November 20, 1995, the Company filed a Registration Statement with
the Securities and Exchange Commission of Form SB-2 for an Initial Public
Offering of 1,000,000 of its shares of Common Stock at $7 per share, which
Registration Statement became effective at 5.30 p.m. on Friday, November 17,
1995. On Monday, November 20, 1995, the Company entered into a firm commitment
underwriting agreement with Coleman and Company Inc. ("Coleman") for sale of
1,000,000 of its shares at $7 per share. Starr Securities Inc. ("Starr") was
named as a co-underwriter in the Registration closing schedule for November
27, 1995. At the Closing, Coleman advised the Company that it did not have the
funds to close, that it was unilaterally rescinding the contract; and that it
would request NASDAQ to cancel all trades made since November 20, 1995.
On January 3, 1996, the Company commenced an action against Coleman and
Starr in the United States District Court of the Southern District of New York
for breach of contract demanding judgment of the full contract price of the
public offering together with such other compensatory and consequential
damages in an amount to be determined at trial.
F-14
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED JUNE 30, 1996
On January 19, 1996, Starr commenced an action in the Supreme Court of New
York against the Company and its former Chairman of the Board, Robert Genova,
for libel and defamation of Starr's character, and for threatening to continue
to defame Starr's character by stating that Starr "walked away" from the
Initial Public Offering deal and breached its contract with the Company unless
Starr made a bridge loan to or a private placement for the Company. The
complaint further alleged that when Starr did not accede to the Company's
demands, the Company continued to vilify Starr in the financial community by
stating that Starr walked away from the Initial Public Offering deal and
breached its contract with the Company and by commencing an action in the U.S.
District Court, Southern District of New York on January 3, 1996, falsely
accusing Starr of breach of contract. Starr further included a course of
action on the same facts for prima facie tort. The Company had this action
removed to the US. District Court, Southern District of New York. Starr moved
to remand both actions to the New York Supreme Court on the ground of lack of
diversity of citizenship, which motion was granted. The Company then
recommenced its action in the New York Supreme Court and consolidated its
action with the Starr proceeding. The Company believes its action has merit
and that it has valid defenses to the action brought by Starr.
Management believes that the outcome of the above litigation matters will
not have a material adverse effect on the consolidated financial position,
liquidity or results of operations of the Company.
14. SUBSEQUENT EVENT
In September 1996, the Company sold 100,000 Preferred Shares at $4.50 per
share and 100,000 common stock purchase warrants with the same terms as
warrants sold with the initial public offering. Proceeds were $354,500, net of
issuance costs.
The Company intends to issue further securities to the public in the near
future to fund the continued development and operations of the Company. On
September 18, 1996, J.W. Barclay & Co. signed a letter of intent to underwrite
this issue. Under the terms of this letter of intent, it is anticipated that
the proceeds to the company upon completion of the issue will be between
$2,880,000 and $4,320,000. In the event that this issue is not completed, the
Company would be required to seek alternative sources of financing to fund the
continued development and operations of the Company.
F-15
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1996
(UNAUDITED)
1. ORGANIZATION AND BUSINESS
Hungarian Broadcasting Corp. (the "Company") which was incorporated in the
State of Delaware on September 14, 1994, was organized to acquire interests in
companies that have commercial broadcasting licenses to own, develop, expand
and operate television stations in Hungary. The Company operates in Hungary
through a wholly-owned subsidiary known as HBC (Hungary) Kft. ("HBC") which
was organized in November 1994. The Company acquired a 90% interest in VI-DOK
Video es Filmgyarto studio Kft. ("VI-DOK") as of June 16, 1995, and an 80%
interest in DNTV Kft. (DNTV) as of May 30, 1995, two Hungarian companies (the
"Licensees") which had been granted television licenses by the Hungarian
Cultural Ministry in April 1994 to broadcast Channel AM-micro A3 ("A3") from
July 1, 1994 through July 1, 2000, daily between 6 a.m. and 5 p.m. and between
7.30 p.m. and 6 a.m. with a maximum advertising time of 20%. Broadcasting on
A3 (subsequently renamed M SAT) 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 "M SAT".
From the date of inception through September 30, 1995, the Company's
consolidated financial statements reflected nominal revenues and the Company
was considered to be in the development stage. In management's opinion, the
Company emerged from the development stage during the three months ended
December 31, 1995.
The operations of the Company are essentially in Hungary where the majority
of revenues and expenditures are incurred. With the exception of cash and cash
equivalents amounting to $549,539 and notes payable of $996,559, the assets
and liabilities of the company relate to Hungary.
2. INTERIM FINANCIAL INFORMATION
The accompanying consolidated financial statements for the three months
ended September 30, 1996, and the three months ended September 30, 1995 are
unaudited but, in the opinion of management, include all adjustments,
consisting mainly of normal recurring accruals necessary for the fair
presentation. Results for the interim periods are not necessarily indicative
of the results for a full year.
3. INCORPORATION BY REFERENCE
Reference is made to the Company's consolidated financial statements, and
the notes thereto, which were included in Form 10-KSB filed with the U.S.
Securities and Exchange Commission in September 1996, and which are
incorporated herein by reference.
4. ADDITIONAL SIGNIFICANT ACCOUNTING POLICIES
(a) Loss Per Share
Net loss per share has been calculated based on the weighted average
number of common shares and, as appropriate, dilutive common stock
equivalents outstanding for the period.
Average common equivalent shares for stock options and Common Stock
purchase warrants were not included as the effect would be antidilutive for
loss periods. Fully dilutive per-common-share amounts relating to the
Company's Convertible Preferred Stock are not applicable to loss periods.
F-16
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTH PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
(b) Stock-Based Compensation
The Financial Accounting Standards Board (FASB) recently issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-
Based Compensation." This new standard encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock
options, and other equity instruments based on a fair-value method of
accounting.
Companies that do not choose to adopt the new expense recognition rules
of SFAS No. 123 will continue to apply the existing accounting rules
contained in Accounting Principles Board Opinion (APBO) No. 25, but will be
required to provide pro forma disclosures of the compensation expense
determined under the fair-value provisions of SFAS No. 123, if material.
APBO No. 25 requires no recognition of compensation expense for most of the
stock-based compensation arrangements provided by the Company, namely,
option grants where the exercise price is equal to the market price at the
date of grant.
The Company is required to adopt either the recognition or the disclosure
provisions of SFAS No. 123 by no later than July 1, 1997. The Company
expects to continue to follow the accounting provisions of APBO. No. 25 for
stock-based compensation and to furnish the pro forma disclosures required
under SFAS No. 123, if material.
5. NOTES PAYABLE
From November 1994 through March 1995, the Company sold (in a private
placement) units consisting of $2,120,000 aggregate principal amount of
unsecured promissory notes and 265,000 shares of common stock for an aggregate
purchase price of $2,120,000. The Company incurred $153,789 of financing
expenses relating to the private placement, of which $122,100 and $31,689 has
been allocated to debt and equity, respectively. The $153,789 includes legal
fees of $28,200 paid to the Company's secretary/director. The notes bear
interest at 6% per annum and were originally due upon the earlier of December
31, 1996 or the successful consummation of the IPO, which was rescinded during
November 1995 (See Note 9: "Legal Proceedings"). 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 $63,441 and $17,730, respectively, as of September 30, 1996.
During January 1996, $1,060,000 of the notes were repaid. Should the remaining
notes be repaid before June 30, 1997, any unamortized portion of the original
issue discount and deferred financing expenses will be charged to operations
at the time of repayment.
Notes payable of $996,559 at September 30, 1996 consist of the remaining
notes due of $1,060,000, less the unamortized portion of the original issue
discount of $63,441.
The private placement investors have the right to include their shares in
any registration statement filed by the Company to the extent that the
managing underwriter of the public offering advises the Company that such
inclusion would not interfere with the ordinary sale of the securities to be
publicly offered.
6. COMMON STOCK
(a) In July 1995, the company sold 182,500 shares of common stock at a price
of $3 per share for an aggregate of $547,500 ($500,000 net) of which 30,000
shares were sold to a director/officer of the Company. In August 1995, the
Company sold 200,000 shares of common stock at a price of $3 per share for an
aggregate of
F-17
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTH PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
$600,000 (approximately $550,000 net). $100,000 representing the remaining
stock subscription receivable at September 30, 1995, was received on October
4, 1995. On December 6, 1995, three of the Company's officers, Messrs.
Klenner, Genova, and Cohen, contributed to the Company for cancellation
100,000, 100,000 and 20,000 common shares, respectively, for no consideration.
(b) The Company made a public offering of 1,000,000 shares of common stock
at $7 per share in November 1995. The offering was rescinded after the shares
offered traded below $7 per share between the effective date and the scheduled
closing date of the offering. The company incurred $129,631 of expenses in
connection with that offering, which were shown as deferred offering costs in
the financial statements at September 30, 1995 and were charged to operations
during the quarter ended December 31, 1995.
(c) On December 20, 1995 the Company completed an IPO of 1,150,000 shares of
its common stock at $5 per share and 1,610,000 redeemable common stock
purchase warrants at $.15 per warrant. Each warrant entitles the holder to
purchase one share of common stock at an exercise price of $6.00 per share
during the five-year period ending December 20, 2000. The warrants will be
redeemable beginning April 20, 1997. The Company also issued to the
underwriter warrants for the purchase of 100,000 shares of common stock at
$8.25 per share and 140,000 common stock purchase warrants at $0.225 per
warrant. The proceeds of this offering amounted to approximately $4,995,338
net of underwriting commissions and expenses.
(d) On June 21, 1996, the Company increased the number of authorized shares
of Common Stock from 5,000,000 to 15,000,000; authorized the issuance of up to
5,000,000 shares of Preferred Stock; and increased the number of shares of
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.
(e) As of August 1996 the Company hired a consultant ( a director of the
Company) for a two year period at a fee of 1,000 shares of non-registered
Common Stock per month. The Company has determined the value of these
securities to be $5 per share. The Company has not paid these securities to
the consultant.
7. STOCK OPTION PLAN
The Company has adopted a Stock Option Plan (the "Plan"). An aggregate of
350,000 shares of Common Stock are authorized for issuance under the Plan. The
Plan provides that incentive and non-qualified options may be granted to
officers, employees, directors and consultants to the Company for the purpose
of providing an incentive to those persons to work for the Company. The Plan
will be administered by the Board of Directors. The Board determines, among
other things, the persons to whom stock options are granted, the number of
shares subject to each option, the date or dates upon which each option may be
exercised and the exercise price per share.
Options granted under the Plan are exercisable for a period of up to ten
years from the date of the grant. Options terminate upon the optionee's
termination of employment or consulting arrangements with the Company, except
that, under certain circumstances, an optionee may exercise an option within
the three-month period after such termination of employment. An optionee may
not transfer any options except that an option may be exercised by the
personal representative of a deceased optionee within the three month period
following the optionee's death. Incentive options granted to any employee who
owns more than 10% of the Company's outstanding common stock immediately
before the grant must have an exercise price of not less than 110% of the fair
market value of all underlying stock on the date of the grant and the exercise
term may not exceed five years. The aggregate fair market value of common
stock (determined at the date of the grant) for which any employee may
exercise incentive options in any calendar year, may not exceed $100,000. In
addition, the Company will not grant a non-qualified option with an exercise
price less than 85% of the fair market value of
F-18
<PAGE>
HUNGARIAN BROADCASTING CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1996
(UNAUDITED)
the underlying common stock on the date of the grant. On December 20, 1995,
the Company granted certain directors options to purchase an aggregate of
100,000 shares of common stock at $5.00 per share, not exercisable before
December 20, 1996. On January 16, 1996, options to purchase 40,000 shares of
Common Stock were cancelled, leaving 60,000 options outstanding.
On June 25, 1996, the Company granted certain employees options to purchase
an aggregate of 75,000 shares of common stock at $9.50 per share, without
restriction as to time of exercise. Subsequently, on September 16, 1996 the
Committee and the Board of Directors reduced the price of the options issued
in June to $6.00 per share. This was done following a decline in the price of
the Company's common stock in order to provide appropriate incentives to
senior employees. In September 1996, the Company granted certain employees
options to purchase an aggregate of 25,000 shares of Common Stock at $6 per
share.
The following table is a summary of all stock options as of September 30,
1996:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS OPTION PRICE PER SHARE
------------------- ----------------------
<S> <C> <C>
Balance at July 1, 1995.......... -- --
Granted December 1995............ 100,000 $5.00
Terminated in January 1996....... (40,000) $5.00
Granted June 1996................ 75,000 $6.00
Granted September 1996........... 25,000 $6.00
Balance at September 30, 1996.... 160,000
</TABLE>
As of September 30, 1996, none of the options were exercised.
8. UNITS: PREFERRED STOCK AND COMMON STOCK PURCHASE WARRANTS
In September 1996, the Company sold 100,000 shares of 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 shares of
Preferred Stock purchased in order to permit the purchasers to own and offer
Units identical to those being offered by the Company in the subject offering.
[See "Description of Securities."]
In connection with such private offering, the Company paid to J.W. Barclay &
Co., the Underwriter of the subject offering, a private placement fee of
$45,000.
9. RELATED PARTY TRANSACTIONS
On June 30, 1995, the minority stockholders were owed $416,000, as a result
of the Company's purchase of their stock. On February 5, 1996, $189,800 was
paid, leaving a balance due of $226,200 at September 30, 1996. The amount due
to related parties at September 30, 1996 also includes $145,000 due to an
officer/director.
In February 1996, the Company licensed, for $750,000, the exclusive 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,
one of the Company's directors. In July 1996, the Company agreed to license
for $1,378,000 the exclusive rights to additional programming for the period
October 1, 1996 through December 31, 1997 from Power TV.
10. COMMITMENTS
(a) Consulting and Compensation Agreements
The Company has a five-year employment agreement ending December 31, 2000
with its President and Chief Executive Officer at a monthly salary of $10,000.
He is also entitled to reimbursement for ordinary and necessary business
expenses.
The Company has a two-year employment agreement ending December 31, 1997
with its Executive Vice President at a monthly salary of $10,000. He is also
entitled to reimbursement for ordinary and necessary business expenses.
F-19
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1996
(UNAUDITED)
The Company's Secretary is a partner in a firm which has a two-year retainer
agreement ending December 31, 1997 to provide all SEC. related legal services
for the Company, except for services in connection with private placements or
public offerings, for a fee of $100,000 per year, beginning in 1996.
A financial and management consultant receives a fee of $3,000 per month for
a two-year term ending December 31, 1997.
Another consultant (a director of the Company) receives 1,000 shares of
common stock as a monthly fee for the period August 1, 1996 through July 31,
1998.
In January 1996 an officer/director resigned and forfeited remaining
payments on an employment contract and cancelled an option to purchase 40,000
shares of Common Stock. At that 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.
(b) Leases
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.
11. LEGAL PROCEEDINGS
Prior to November 20, 1995, the Company filed a Registration Statement with
the Securities and Exchange Commission on Form SB-2 for an Initial Public
Offering of 1,000,000 of its shares of Common Stock at $ 7 per share, which
Registration Statement became effective on November 17, 1995. On November 20,
1995, the Company entered into a firm commitment underwriting agreement with
Coleman and Company Inc. ("Coleman") for the sale of 1,000,000 of its shares
at $7 per share. Starr Securities Inc. ("Starr") was named as a co-underwriter
in the Registration Statement with closing scheduled for November 27, 1995. At
the Closing, Coleman advised the Company that it did not have the funds to
close, that it was unilaterally rescinding the contract; and that it would
request NASDAQ to cancel all trades made since November 20, 1995.
On January 3, 1996, the Company commenced an action against Coleman and
Starr in the United States District Court, Southern District of New York for
breach of contract demanding judgment of the full contract price of the public
offering together with such other compensatory and consequential damages in
amounts to be determined at trial.
On January 19, 1996, Starr commenced an action in the Supreme Court of New
York against the Company and its former Chairman of the Board, Robert Genova,
for libel and defamation of Starr's character, and for threatening to continue
to defame Starr's character by stating that Starr "walked away" from the
Initial Public Offering and breached its contract with the Company unless
Starr made a bridge loan to or private placement for the Company. The
complaint further alleged that when Starr did not accede to the Company's
demands, the Company continued to vilify Starr in the financial community by
stating that Starr walked away from the Initial Public Offering and breached
its contract with the Company and by commencing an action in the U.S. District
Court, Southern District of New York on January 3, 1996, falsely accused Starr
of breach of contract. Starr further included a cause of action on the same
facts for prima facie tort. The Company had this action removed to the U.S.
District Court, Southern District of New York. Starr moved to remand both
actions to the New York Supreme Court on the ground of lack of diversity of
citizenship, which motion was granted. The Company then recommenced its action
in the New York Supreme Court and consolidated its action with the Starr
proceeding. The Company believes its action has merit and that it has valid
defenses to the action brought by Starr.
F-20
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1996
(UNAUDITED)
Management believes that the outcome of the above litigation will not have a
material adverse effect on the financial position, liquidity or results of
operations of the Company.
12. SUBSEQUENT EVENTS
The Company has filed a draft registration statement with the Securities and
Exchange Commission in anticipation of a public offering of securities over
the next few weeks.
In November 1996, an officer/director advanced $200,000 of short-term
financing to the Company. 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.
Also in November 1996, a consultant to the Company who is also a director
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 the
director's wholly-owned company that has contracted with the Company to
provide programming.
F-21
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH IN-
FORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OF-
FER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
UNITS OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE UNITS OR FROM ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPEC-
TUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IM-
PLICATION THAT THERE HAS BEEN NO CHANGE IN THE BUSINESS OR AFFAIRS OF THE COM-
PANY SINCE THE DATE HEREOF OR THAT THE INFORMATION IN THIS PROSPECTUS IS COR-
RECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................................. 3
Forward-Looking Statements............................................................. 3
Prospectus Summary..................................................................... 4
Risk Factors........................................................................... 10
Price Range of Securities.............................................................. 16
Capitalization......................................................................... 17
Dividend Policy........................................................................ 17
Use of Proceeds........................................................................ 17
Selected Financial Data................................................................ 18
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 19
Business............................................................................... 21
Management............................................................................. 30
Principal Stockholders................................................................. 33
Certain Transactions................................................................... 34
Selling Securityholders................................................................ 35
Description of Securities.............................................................. 36
Shares Eligible for Future Sale........................................................ 40
Underwriting........................................................................... 41
Legal Matters.......................................................................... 43
Experts................................................................................ 43
Change in Accountants.................................................................. 43
Index to Financial Statements.......................................................... F-1
</TABLE>
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500,000 UNITS
HUNGARIAN BROADCASTING CORP.
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PROSPECTUS
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J.W. BARCLAY & CO., INC.
FEBRUARY 5, 1997
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