HUNGARIAN BROADCASTING CORP, 10QSB, 1997-08-11

HUNGARIAN BROADCASTING CORP
10QSB, 1997-08-11
TELEVISION BROADCASTING STATIONS

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Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-QSB

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Quarter Ended Commission File Number
June 30,1997 0-26808

HUNGARIAN BROADCASTING CORP.
(Exact name of Registrant as specified in its charter)

Delaware 13-3787223
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

445 Park Avenue, New York, NY 10022
(Address of principal executive offices)

(212) 758-9870
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest possible date:

Common Stock, $.001 par value 2,585,600 Shares
----------------
(Class) (Outstanding at May 30, 1997)

<PAGE>

HUNGARIAN BROADCASTING CORP.

INDEX

Page No.
--------

Part I. Financial Information

Consolidated balance sheets as of June 30, 1997 (unaudited)
and December 31, 1996 2

Consolidated statements of operations for the quarters ended
June 30, 1997 (unaudited) and 1996 (unaudited) and the six
months ended June 30, 1997 (unaudited) and 1996 (unaudited) 3

Consolidated statements of cash flows for the six months ended
June 30, 1997 (unaudited) and 1996 (unaudited) 4

Notes to consolidated financial statements (unaudited) 5-8

Management's Discussion and Analysis of Financial Condition
and Results of Operations 9

Part II. Other Information 14

Signature 16

<PAGE>

Part I. Financial Information

HUNGARIAN BROADCASTING CORP.

CONSOLIDATED BALANCE SHEETS
(Expressed in US$)

June 30, December 31,
1997 1996
---------- ------------
(Unaudited)
A S S E T S
<S> <C> <C>
Current assets
Cash and cash equivalents $ 708,177 $ 375,823
Accounts receivable, net of allowance for doubtful accounts
of $28,537 and $28,546 740,880 605,826
Other receivable 600,000 --
Program rights costs, net of amortization of $807,000 and
$236,000 571,000 1,142,000
Prepaid expenses and other current assets 183,235 117,331
Due from related parties 469,000 --
---------- ----------
Total current assets 3,272,292 2,240,980
Plant, property and equipment, net of accumulated
depreciation of $83,407 and $44,080 415,765 443,633
Movie copyrights 376,143 --
Movie production 367,602 --
Broadcast license costs, net of accumulated amortization of
$884,983 and $669,931 1,265,531 1,480,583
Deferred financing and other intangibles, net of accumulated
amortization of $38,311 and $28,870 49,308 46,329
Other 89,680
---------- ----------
Total assets $5,746,641 $4,301,205
========== ==========
<CAPTION>

L I A B I L I T I E S A N D S T O C K H O L D E R S E Q U I T Y
Current liabilities
<S> <C> <C>
Current portion of notes payable $1,059,996 $1,867,700
Accounts payable 527,991 763,821
Accrued expenses 479,311 387,844
Due to related parties 1,433,564 1,731,737
Provision for contract cancellation 1,200,000 --
Other 223,777 60,852
---------- ----------
Total current liabilities 4,924,639 4,811,954
---------- ----------
Minority interest 70,706 --
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $.001 par value - shares authorized 5,000,000;
issued and outstanding 526,500 and 100,000 527 100
Common stock, $.001 par value - shares authorized 15,000,000;
issued and outstanding 2,585,600 and 2,583,600 2,585 2,583
Additional paid-in capital 10,420,691 7,119,001
Accumulated deficit (9,972,303) (7,758,648)
Cumulative translation adjustment 299,796 126,215
---------- ----------
Total stockholders' equity 751,296 (510,749)
---------- ----------
Total liabilities and stockholders' equity $5,746,641 $4,301,205
========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

<PAGE>

HUNGARIAN BROADCASTING CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Expressed in US$, except share and per share amounts)

Quarter Ended Six Months Ended
---------------------------- ----------------------------
June 30, 1997 June 30,1996 June 30, 1997 June 30,1996
------------- ------------ ------------- ------------
Net revenues $1,143,344 $ 240,910 $ 1,716,859 $ 288,437

Expenses
<S> <C> <C> <C> <C>
Other operating costs and expenses 524,490 927,884 934,695 1,230,599
Amortization of deferred program 285,500 250,000 571,000 250,000
Amortization of broadcast license costs 106,986 128,897 214,512 223,590
Selling, general and administrative exp. 1,087,969 258,665 2,023,733 795,722
----------- ---------- ---------- ----------
2,004,945 1,565,446 3,743,940 2,499,911
----------- ---------- ---------- ----------
Operating loss (861,601) (1,324,536) (2,027,081) (2,211,474)
Interest and other income 1,067,046 --- 1,203,987 46,714
Other expense (1,200,000) --- (1,200,000) ---
Interest expense (56,677) (174,858) (118,460) (264,886)
Foreign currency exchange rate
gain(loss) (14,970) --- 4,126 ---
----------- ---------- ---------- ----------
Net loss $(1,066,202) $(1,499,394) $(2,137,428) $(2,429,646)

Net loss per share $ (0.41) $ (0.58) $ (.83) $ (0.94)
Weighted average number of
common shares outstanding 2,584,600 2,583,600 2,584,100 2,580,550

</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements

<PAGE>

HUNGARIAN BROADCASTING CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Expressed in US$)

Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
---------------- ----------------
Cash flows from operating activities

<S> <C> <C>
Net loss $(2,137,428) $(2,429,646)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization of intangibles 839,103 207,769
Provision for doubtful accounts 28,537 49,536
Depreciation 50,316 2,366
Foreign exchange losses(gains) (4,126) 120,266

Changes in operating assets and liabilities
(net of business acquired)::
Increase in accounts receivable (249,804) (83,222)
Increase in other receivables (600,000) --
(Increase)decrease in VAT receivables 55,455 (63,010)
(Increase)decrease in prepaid expenses (79,190) 111,852
Increase in other assets (260,320) --
Increase(decrease) in accounts payable (164,620) 96,083
Increase(decrease) in accrued expenses 111,118 (35,643)
Increase in provision for contract
cancellation 1,200,000 --
Increase in other liabilities 127,388 2,601
----------- -----------
Net cash used in operating activities (1,083,571) (2,021,048)
----------- -----------
Cash flows from investing activities:
Purchase of plant, property and
equipment (144,435) (77,981)
Purchase of program rights costs -- (750,000)
Purchase of investments (200,000) (653)
Increase in deferred financing costs -- (9,067)
Acquisition of business, net of cash
acquired (245,085) --
----------- -----------
Net cash used in investing activities (589,520) (837,701)
----------- -----------
Cash flows from financing activities:
Decrease in advances from related parties (349,943) (26,039)
Proceeds from issuance of preferred stock 4,265,000 --
Payments for offering costs (974,881) (22,718)
Payment of notes payable (850,000) (874,583)
Increase liability to minority stockholder -- 40,326
----------- -----------
Net cash provided (used) by financing activities 2,090,176 (883,013)

Effect of exchange rate changes on cash and
cash equivalents (84,731) (225,834)
Net change in cash and cash equivalents 332,354 (3,515,928)
Cash and cash equivalents at beginning of period 375,823 4,978,307
Cash and cash equivalents at end of period $ 708,177 $ 1,462,379
=========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

4
<PAGE>

HUNGARIAN BROADCASTING CORP.

Notes to Consolidated Financial Statements
(Unaudited)

1. Organization and Business

Hungarian Broadcasting Corp. (the "Company"), which was incorporated in the
State of Delaware in September 1994, was organized to acquire interests in
companies that have commercial broadcasting licenses to own, develop, expand and
operate television stations in Hungary. The Company operates in Hungary through
wholly owned subsidiaries known as HBC (Hungary) Kft. ("HBC Kft."), which was
organized in November 1994 and Hungarian Broadcasting Corporation Televizios Rt.
("HBC Rt."), which was organized in May 1997. The Company acquired a 90%
interest in VI-DOK Video es Filmgyarto Studio Kft. ("VI-DOK") as of June 1995,
and an 80% interest in DNTV Kft. (DNTV) as of May 1995, two Hungarian companies
(the "Licensees") which had been granted television licenses by the Hungarian
Cultural Ministry in April 1994 to broadcast on Channel AM-Micro A3 ("A3") from
July 1994 through June 2000, daily between 6 a.m. and 5 p.m. and between 7.30
p.m. and 6 a.m. with a maximum advertising time of 20%. Broadcasting on A3
commenced in September 1994. The 90% interest in VI-DOK was acquired for
$240,000 and the 80% interest in DNTV for $176,000. In September 1996, the
Company began broadcasting throughout Hungary and renamed its station "MSAT."

In April 1997, the Company acquired a 77% interest in Studio 2 Kft.,
incorporated in Budapest, Hungary. See Note 2 -- "Acquisition."

From the date of inception through September 1995, the Company's
consolidated financial statements reflected nominal revenues and the Company was
considered to be in the development stage. In management's opinion, the Company
emerged from the development stage during the three months ended December 1995.

The operations of the Company are essentially in Hungary where the majority
of revenues and expenditures are incurred. At June 30, 1997 and December 31,
1996, respectively, 60% and 62% of total assets, and 28% and 24% of total
liabilities of the Company were maintained in the Company's Hungarian
subsidiaries' accounts.

In May 1997, the Company organized a wholly owned subsidiary, HBC Rt. for
an initial investment of $200,000. It is anticipated that HBC Rt. will replace
HBC Kft. as the operating subsidiary in Hungary and may be used as a holder of
future broadcasting licenses.

2. Acquisition

In April 1997, the Company acquired 77% of the issued and outstanding stock
of Studio 2 Kft., a Budapest based animation studio. This company was purchased
from M&A Management Kft., a company wholly owned by the President and Chief
Executive Officer of the Company, for $743,819, of which $300,000 was paid in
cash and $443,819 was represented by an uncollateralized note with annual simple
interest of 8 1/2 % due December 31, 1997. The acquisition has been accounted
for as a purchase and, accordingly, the results of Studio 2 Kft. have been
included in the Company's consolidated financial statements from the date of
acquisition. The purchase price of $743,819 has been fully allocated to the
underlying assets of Studio 2 Kft. based upon their respective fair values at
the time of acquisition.

<PAGE>

HUNGARIAN BROADCASTING CORP.

Notes to Consolidated Financial Statements
(Unaudited)

3. Change in Accounting Standards

Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
is effective for periods ending after December 15, 1997, including interim
periods. This statement simplifies the existing computational guidelines,
revising the disclosure requirements, and increasing the comparability of
earnings per share data on an international basis. The Company intends to fully
adopt SFAS 128 for the year ended December 31, 1997, but has not yet determined
the impact of this statement.

4. Financial Information

Financial data as of December 31, 1996 was derived from the audited
consolidated financial statements of the Company and should be read in
conjunction with those consolidated financial statements and related notes. In
the opinion of management, the accompanying unaudited consolidated financial
statements of the Company include all adjustments necessary to present fairly
its financial position as of June 30, 1997, and operating results and cash flows
for the six months then ended. For additional information, see the notes to the
Company's audited consolidated financial statements for the year ended December
31, 1996 which are included in the Company's Annual Report filed on Form 10-KSB
with the Securities and Exchange Commission.

5. Related Party Transactions

Beginning in July 1996, the Company hired Justin Bodle as a consultant for
a two-year period at a fee of 1,000 shares of non-registered common stock per
month. Compensation expenses relating to these consultant services totaled
approximately $30,000 for the six months ended June 30, 1997. At June 30, 1997,
the Company had accrued $60,000 for these services, as the securities had not
been paid to the consultant.

In February 1997, the Company loaned Euroweb International Corp. (formerly
Hungarian Teleconstruct Corp.), a company formerly run by officers and directors
of the Company, $350,000 bearing 6% interest due June 30, 1997 collateralized by
a previously outstanding note to the related party. Subsequently, the note was
extended until June 30, 1998.

6. Commitments and Contingencies

Consulting and Compensation Agreements

In April 1997, the Company contracted with a Budapest-based securities
broker to initiate a Hungarian offering jointly with another Hungarian
investment firm, of up to 1,500,000 Global Depository Receipts (GDR's). The
offering is to be made on a "best efforts" basis. Each GDR represents one share
of the Company's common stock, and it is anticipated that the GDRs will be
listed on the Budapest Stock Exchange.

The Company has an employment agreement with the President of the Company
that pays $10,000 per month expiring December 31, 2000.

In January 1996, an officer/director resigned, forfeited remaining payments
on an employment contract and canceled an option to purchase 40,000 shares of
Common Stock. At the time, the Company agreed to pay this officer/director
$144,000 if there were a change of control of the Company prior to January 17,
1998.

6
<PAGE>

HUNGARIAN BROADCASTING CORP.

Notes to Consolidated Financial Statements
(Unaudited)

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.

In April 1997, the Company paid 2,000 shares of its common stock to a
consultant in payment for consulting services.

Leases

During the first quarter of 1997, Nethold Development B.V., the Company's
contractor for satellite downlink services with the Astra 1E satellite, notified
the Company of its plans to reduce its activities in Hungary and expressed its
desire to terminate its satellite contract with the Company. In May 1997, the
Company and Nethold signed a termination agreement whereby Nethold's services
ended on June 30, 1997. The contract obligates Nethold to pay $1,400,000 as
compensation to the Company, $200,000 representing forgiveness of service
charges for the period January 1, 1997 through June 30, 1997. To replace this
service, the Company contracted with Antenna Hungaria for satellite-to-cable
broadcast services using the Amos satellite, which began in late-June 1997.

The Company has a nine year lease agreement with Orion Atlantic Satellite
Services ("Orion Atlantic"), commencing on August 31, 1996 and extending through
August 31, 2005, at a monthly rental fee of $27,240, whereby Orion Atlantic
provides the Company with space on its satellite to transmit its broadcast
signal to Nethold's uplink facilities in the Netherlands. In May 1997, Nethold
and the Company agreed to terminate Nethold's services and the Company is
exploring possibilities for others to take over the Orion contract. The Company
has recorded a provision for $1,200,000 at June 30, 1997 relating to possible
costs in assigning or terminating this contract and for other expenses incurred
or to be incurred as a result of the Nethold contract termination.

The Company has a five-year lease for broadcasting and office facilities in
Budapest, Hungary, with minimum monthly payments before value added taxes of
$12,000, ending June 30, 2001.

Legal Proceeding

TV3, a competitor of the Company, which was granted a six year, 24 hour per
day microwave license on the AM Micro system in Budapest, applied to the
Ministry of Culture to overturn the grant of the licenses to the Licensees and
NAP TV made in March 1994 on the ground that proper procedures were not followed
because the authority of the committee that awarded the licenses had expired
prior to the date that the licenses were granted. The Ministry of Culture denied
the application and held that even if a new committee were acting, it would also
have granted the licenses to the Licensees and to NAP TV. TV3 thereafter
instituted a legal action in December 1994 against the Ministry of Culture, but
not against either of the Licensees, to overturn its decision in awarding the
licenses in the Metropolitan Court of Budapest. At a hearing, the Municipal
Court ordered the Ministry to follow prescribed procedures and make a new
decision. The Ministry appealed this decision to the Appeals Court of Budapest.
In April 1995, the Company received a letter from the Ministry confirming that
the licenses had been granted to the Licensees and that the Licensees may
operate in accordance with the terms of the licenses. In November 1995, the
Appeals Court vacated the decision of the Metropolitan Court on the ground that
no notice of the hearing had been given to the Licensees (which had not had an
opportunity to appear at the hearing). The Appeals Court further ruled that the
only issue to be decided by the Municipal Court is whether the Ministry's
committee was properly

<PAGE>

HUNGARIAN BROADCASTING CORP.

Notes to Consolidated Financial Statements
(Unaudited)

constituted to grant the licenses and remanded the matter for a hearing in the
Fall 1996 term. In particular, the Appeals Court ruled that the Metropolitan
Court does not have jurisdiction to revoke the grant of the licenses or
otherwise modify the decision of the Ministry's committee and, accordingly, the
Licensees may continue to operate under the licenses, pending final
determination by the Ministry committee. In its ruling in June 1996, the
Metropolitan Court ruled in favor of the Company. Subsequently, TV3 has
requested a review of this matter by the Supreme Court, which is currently
pending. The Company's outside legal counsel expects a confirmation of the
Court's prior ruling. If the ruling is overturned, however, and the Supreme
Court rules that the Company's licenses are invalid, the Company plans to apply
for new licenses. If these are denied, the absence of broadcasting licenses
would have a material adverse effect on the Company's financial position,
results of operations and liquidity.

7. Subsequent Events

In July 1997, the Company and M&A Management Kft. (a company wholly owned
by the President of the Company) agreed to convert the $443,819 note payable to
M&A Management Kft., dated April 1, 1997, into 173,266 non-registered shares of
common stock in the Company.

On June 30, 1997, promissory notes totaling $1,060,000 were due. The
Company has offered the note holders compensation to extend the notes for one
year to June 30, 1998. Note holders representing $600,000 of the debt have
extended, in writing, the maturity of the notes for one year. Other note holders
have agreed orally to extend the notes and their oral commitment is being
converted to a written commitment or have not responded to the Company's
inquires. Note holders representing $40,000 principal amount have requested
immediate payment. Note holders who have agreed to an extension have been paid
50% of interest accrued as of June 30, 1997. In addition, if the notes are fully
repaid prior to November 1, 1997, the note holders will receive further
compensation of 1,000 Common Stock Purchase Warrants per unit at the time of
repayment. If the notes are not repaid prior to November 1, 1997, the note
holders will receive, in November 1997, 2,500 Common Stock Purchase Warrants per
unit. The Company believes that it will successfully negotiate an extension of
maturity with its note holders.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

The Company is the leading satellite-to-cable television broadcaster in
Hungary and the third leading television broadcaster after the two state
controlled terrestrial stations, MTV-1 and MTV-2. The station distributes to 1.6
million households or 43% of all television households in the country. The
Company's strategy is to continue to expand its broadcasting reach, promote its
Western-style programming and aggressively pursue additional advertising. The
Company expects to benefit from the projected high rates of growth for
television advertising in Hungary. In June 1997, the government of Hungary
privatized MTV-2 and awarded an additional terrestrial station to a second,
private broadcasting group.

The Company was organized in September 1994. In November 1994, it obtained
a six month option to acquire majority interests in DNTV and VI-DOK, two
Hungarian corporations that were granted licenses in March 1994 for a six year
term (commencing July 1994) to broadcast over Budapest television channel
AM-Micro A3. Broadcasting began on a limited basis in September 1994 and
increased to 21 1/2 hours per day in December 1994. In May and June 1995, the
Company purchased 80% of DNTV and 90% of VI-DOK, respectively. Initially, the
station broadcast only music clips. After changing to a civic format in June
1995, the Company returned to the video music clip format in October 1995.

In December 1995, the Company sold shares in an initial public offering and
planned to relaunch its broadcasting as a Western-style entertainment station.
In April 1996, the Company introduced new programming for the hours 7:30 p.m. to
11:00 p.m. featuring American and British syndicated series that had previously
been successful in prime time in those countries. The Company dubbed these
programs into Hungarian. Audience acceptance of these programs has been
favorable and has increased over time.

In September 1996, the Company began transmitting its signal from the Astra
1E Satellite and in October 1996, the station was renamed "MSAT." In July 1997,
the Company switched its satellite transmission service from the Astra satellite
to the Amos satellite.

The Company's revenues are derived primarily from the sale of television
advertising to international, national and local advertisers. Billing is
determined by the program ratings as measured by AGB-Hungarian Meter System, an
independent audience rating service. The Company's direct customers are
generally fewer than a dozen international advertising agencies that arrange the
broadcast of commercials for their clients. The Company engages in certain
barter transactions in which it exchanges unsold commercial airtime for services
and goods. In addition, the Company receives small payments from cable operators
who contract to carry MSAT's signal. The Company experiences seasonality, with
advertising sales tending to be lowest in January of each year as the major
advertising agencies negotiate the next year's buy and in the summer months of
July and August. The highest level of advertising activity is during the fourth
quarter of each year as new programming is often launched in the Fall and
advertising tends to increase as Christmas approaches.

The primary expenses incurred in operating a broadcasting station are
programming costs, employee salaries, broadcast transmission expenses and
selling, general and administrative expenses.

The Company is currently operating with expenses (excluding non-cash items
such as depreciation, barter expense and foreign exchange gains or losses) of
approximately 90 million forints ($450,000, at current exchange rates) per month
and anticipates this approximate level to continue through 1997 and 1998.

Since the station was relaunched in April 1996, revenues have grown
rapidly. Revenues (before barter) of nine million forints in May 1996 have risen
to 39 million forints in November 1996 and to 58 million forints ($320,000) in
June 1997.

Management believes that its rapid growth of sales will continue for
several reasons. The Company is a new entrant in the Hungarian television
market, essentially being available to viewers in Budapest only since

<PAGE>

Spring 1996. The April 1996 relaunch was after the Company's initial public
offering and marked the beginning of its Western-style entertainment format.
Only since Fall 1996 have others in Hungary begun to receive the Company's
channel. Over the last few months, national coverage has grown from about 15% to
43% of all television households. The Company expects to increase its reach to
as much as 55% of Hungary's television households as it signs up additional
cable companies. DUNA-TV, a satellite-to-cable station begun in 1993 currently
has a broadcast reach of approximately 53%. The Hungarian television advertising
market in 1996 was about $180 million; $165 million after agency commissions.
The Company's current rate of sales represents less than 2.4% of this rapidly
growing market. The Company expects growth in the number of households that
currently watch the station. Hungarian Broadcasting will face additional
competition in November 1997 when a privatized state channel and a new private
channel begin broadcasting.

The Company conducts its operations through its Hungarian subsidiaries.
Accordingly, the primary internal sources of the Company's cash are dividends
and other distributions from its subsidiaries. The Company's ability to obtain
dividends or other distributions is subject to, among other things, restrictions
on dividends and foreign currency regulations under Hungarian law. The
subsidiaries' ability to make distributions to the Company is also subject to
legal availability of sufficient operating funds which are not needed for
operations, obligations or other business plans.

The Company's revenues and a majority of expenses are denominated in
Hungarian forints. Accordingly, the business operations of the Company are
impacted only to a limited degree by foreign exchange fluctuations. Inflation
also is of limited direct importance. In Hungary, advertising in general and
television advertising in particular, have consistently grown more rapidly than
the rate of inflation. Of greater importance, is the potential impact of
currency fluctuations and inflation on the health of the Hungarian economy.
Growth in Hungarian television advertising is directly impacted by the overall
health and growth of the Hungarian economy.

The Company operates with studio licenses and AM-Micro licenses in Hungary.
Management believes that, assuming the Company is in compliance with media
regulations (and it intends to so comply), its AM-Micro licenses will be renewed
as a matter of course. Other European countries have granted medium term
broadcasting licenses which are nearly always extended without controversy. If
the Company should lose one or more of its television licenses and the Company
is not able to obtain a new license, the loss would have a material adverse
effect on its business.

The Company has built its business from a start up operation. During the
quarter ended December 31, 1995, the Company emerged from its development stage.
Although the Company has displayed rapid growth in sales, and sales have
recently grown to approach cash expenses, there is no assurance that the Company
will generate enough revenue to pay its costs.

Recent Developments

In April 1997, the Company purchased 77% of Studio 2 Kft., a Budapest based
animation studio. This company was purchased from M&A Management Kft., a company
wholly-owned by the President of the Company, for $743,819 of which $300,000 was
paid in cash and $443,819 was represented by an unsecured note with annual
interest of 8 1/2% due December 31, 1997. In July 1997, the Company and M&A
Management Kft. agreed to exchange the note for 173,266 restricted shares of
common stock of the Company.

In April 1997, Imre Kovats, Executive Vice President of the Company, and
Frank R. Cohen, Secretary and Treasurer of the Company, resigned as officers and
directors. Mr. Kovats was appointed president and Mr. Cohen chairman of Euroweb
International Corp. (formerly Hungarian Teleconstruct Corp.), a provider of
Internet services in Hungary. James H. Season, Chief Financial Officer of the
Company, was elected a director and appointed Treasurer. Ronald Scott Moss was
appointed Secretary.

<PAGE>

In April 1997, the Company contracted with a Budapest-based securities
broker to initiate a Hungarian Offering jointly with another Hungarian
investment firm, of up to 1,500,000 Global Depository Receipts (GDR's). The
Offering is intended to be made on a "best efforts" basis. Each GDR represents
one share of the Company's Common Stock, and it is anticipated that the GDRs
will be listed on the Budapest Stock Exchange.

During the first quarter of 1997, Nethold Development B.V., the Company's
contractor for its satellite downlink services with the Astra 1E satellite,
announced that it planned to reduce its presence in Hungary. In May 1997, the
Company signed a termination of services agreement with Nethold whereby
Nethold's services terminated on June 30, 1997. The contract further obligated
Nethold to pay $1,400,000 as compensation to the Company for the contract
termination, $200,000 representing forgiveness of service fees for the period
January 1, 1997 through June 30, 1997. Also in May 1997 to replace the Nethold
services, the Company contracted with Antenna Hungaria to provide
satellite-to-cable broadcast services via space that it holds on the Amos
satellite. This new satellite transmission service began on June 26, 1997.

In May 1997, the Company organized a wholly-owned subsidiary, Hungarian
Broadcasting Corporation Televizios Rt. ("HBC Rt.") for an initial investment of
$200,000. It is anticipated that HBC Rt. will replace HBC Kft. as the operating
subsidiary in Hungary and may be used as a holder of future broadcasting
licenses.

Results of Operations

Quarter ended June 30, 1997 compared to quarter ended June 30, 1996

The Company's revenues increased by $902,434 or 375% to $1,143,344 in the
quarter ended June 30, 1997 from $240,910 in the quarter ended June 30, 1996.
The increase is attributable to the general increase in advertising at the
station, particularly since the station's relaunch in April 1996. Barter
revenues were $92,123 for the period compared to negligible barter revenues in
the earlier period.

<PAGE>

Other operating costs and expenses, including amortization of deferred
program costs, decreased by $367,894 to $809,990 in the quarter ended June 30,
1997 from $1,177,884 in the quarter ended June 30, 1996. This decrease primarily
reflects a reclassification of some expenditures from operating costs to
selling, general and administrative expenses since the prior period. .

Amortization of the broadcast license costs of $106,986 and $128,897 for
the two periods, respectively, reflects the amortization of the initial costs of
the licenses over the remaining life of the license ending in July 2000.

Selling, general and administrative expenses increased $829,304 to
$1,087,969 for the quarter ended June 30, 1997 from $258,665 in the quarter
ended June 30, 1996. This increase reflects both a reclassification of some
expenditures from operating costs to selling, general and administrative
expenses since the prior period and larger sales and management staffs and the
increased cost of their support.

Other income and other expense were each increased by $1,200,000 due to the
settlement contract made with Nethold B.V. The expense reserve will be used to
offset the costs of assigning or canceling the Orion Atlantic contract and other
costs resulting from Nethold's cancellation of services from the Astra 1E
satellite.

Six months ended June 30, 1997 compared to six months ended June 30, 1996

The Company's revenues increased by $1,428,422 or 495% to $1,716,859 in the
six months ended June 30, 1997 from $288,437 in the six months ended June 30,
1996. The increase is attributable to the general increase in advertising at the
station, particularly since the station's relaunch in April 1996. Barter
revenues were $199,506 for the period compared to negligible barter revenues in
the prior year period.

Other operating costs and expenses, including amortization of deferred
program costs, increased by $25,096 to $1,505,695 in the six months ended June
30, 1997 from $1,480,599 in the six months ended June 30, 1996. This increase
reflects the increased costs of the station mostly offset by a reclassification
of some expenditures from operating costs to selling, general and administrative
expenses since the prior period. .

Amortization of the broadcast license costs of $214,512 and $223,590 for
the two periods, respectively, reflects the amortization of the initial costs of
the licenses over the remaining life of the license ending in July 2000.

Selling, general and administrative expenses increased $1,228,011 to
$2,023,733 for the six months ended June 30, 1997 from $795,722 in the six
months ended June 30, 1996. This increase reflects both reclassification of some
expenditures from operating costs to selling, general and administrative
expenses since the prior period and larger sales and management staffs and the
increased cost of their support in the more recent period.

Liquidity and Capital Resources

The Company has historically derived its cash for capital expenditures,
working capital and operations primarily from the sale of securities to and
borrowing from investors. As the broadcasting station has established itself in
the market and as its broadcasting reach has expanded through satellite-to-cable
distribution, the Company's cash flow and revenues have risen significantly, so
that currently a majority of cash needed to operate the Company is derived from
operations. Management believes that this growth will continue and that prior to
the end of 1997 the Company will generate more cash than is needed to pay its
operating costs.

<PAGE>

Net cash used in operating activities were $1,083,571 and $2.021,048 for
the six months ended June 30,1997 and June 30, 1996, respectively. Starting in
April 1996, the Company made significant expenditures in providing an
entertainment format and, beginning in Fall 1996, in gaining satellite- to-cable
distribution. Only in recent months have revenues grown significantly to mostly
offset these expenditures.

Comparing June 30, 1997 balance sheet items with those of December 31,1996,
$850,000 of notes payable and $526,500 due to a related party for program
acquisition costs were paid out of proceeds of funds raised in the February 1997
offering.

Other receivable increased by $600,000 representing the balance of monies
owed to the Company pursuant to the Nethold settlement. Due from related parties
primarily represents a $350,000 loan due June 30, 1998 made to Euroweb
International Corp. (formerly Hungarian Teleconstruct Corp.). Movie copyright
and movie production assets relate to the acquisition of Studio 2 Kft. Provision
for contract cancellation is a reserve for costs associated with the assignment
or cancellation of the Orion Atlantic lease and other costs expected to be
incurred as a result of the Nethold satellite service contract cancellation. And
the minority interest provision represents the ownership interest by others in
Studio 2 Kft.

The Company has only limited capital spending requirements. It rents its
operations building. While its studio equipment also is rented, the Company
intends to purchase its current equipment, or other similar equipment, at
advantageous prices. The Company purchases its programming in advance pursuant
to short-term contracts.

From its inception through November, 1995, the Company sold 1,647,500
shares of common stock in a series of private transactions for proceeds of
$1,913,622 net of issuance costs and, in addition, issued promissory notes in
the aggregate amount of $ 2,120,000. In December 1995, 220,000 shares owned by
three officers of the Company were contributed to the Company for no
consideration. In December 1995, the Company completed an initial public
offering with proceeds $4,995,338, net of underwriting commissions and expenses.
In September 1996 and February 1997, the Company sold 526,500 units of
convertible preferred stock and warrants for proceeds, net of expenses, of
$3,622,110. In April 1997 the Company issued 2,000 shares of non-registered
common stock to a consultant valued at $6,000 in payment of consultant services.

The Company believes that its existing cash balance, cash from future
operations and the net proceeds from a planned securities offering will be
sufficient to fund the Company's operations for the next twelve months. There is
no assurance, however, that the planned offering will be consummated, or that
revenues will increase as expected. If the planned offering is delayed or
canceled, the Company may need to raise funds from financial institutions or
from other investors.

Foreign Currency

The Company's broadcasting operations in Hungary incur both general
revenues and operating expenses in Hungarian forints. A portion of the Company's
expenses, primarily programming, is denominated in United States dollars. Assets
and liability accounts are translated from Hungarian forints into United States
dollars at period-end exchange rate; income and expense accounts are translated
at the average exchange rate for the period. The resulting translation
adjustments are reflected in a separate component of stockholders' equity.
Currency translation adjustments relating to transactions of the Company and its
subsidiaries in currencies other than the functional currency of the entity
involved are reflected in the operating results of the Company.

The Company does not hedge against foreign currency exchange risks.

<PAGE>

Part II. Other Information

Item 1. Legal Proceedings

See "Legal Proceedings" in Notes to Consolidated Financial Statements.

Item 2. Changes in Securities

See "Commitments and Contingencies" in Notes to Consolidated
Financial Statements.

Item 3. Defaults upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

See "Organization and Business" and "Acquisition" in Notes to
Consolidated Financial Statements.

Item 6. Exhibits and Reports on Form 8-K

A. Exhibits (numbers below are references to Regulations S-B)
(3) (a) Certificate of Incorporation filed September 14, 1994*
(b) Certificate of Amendment to Certificate of Incorporation
filed by June 28, 1996*
(c) By-laws*
(4) (a) Form of Warrant Agreement**
(b) Form of Common Stock Purchase Warrant Certificate**
(c) Form of Underwriter's Warrant**
(d) Form of Underwriter's Stock Warrant**
(10) (a) Employment Agreement with Peter E. Klenner*
(b) Employment Agreement with Imre M. Kovats*
(c) Financial Consultant Agreement with Robert Genova*
(d) 1994 Incentive Stock Plan*
Sharing agreement for space and facilities between Registrant and
Hungarian Telephone and Cable Corp.* (f) Agreement to purchase shares
in DNTV* (g) Agreement to purchase shares in VI-DOK* (h) Letter of
intent with Kablecom* (i) Offer from OKK Kft. to Registrant to rent
satellite space to Company* (j) Agreement with Land Studios Kft* (k)
Lease agreement with Hakon Ltd. for space at Szamado, Budapest* (l)
Form of 6% Bridge Note* (m) License to broadcast on A3* (n) Form of
Consulting Agreement with J.W. Barclay & Co., Inc.** (o) Form of
Mergers and Acquisitions Agreement with J.W. Barclay & Co., Inc.**
Purchase of programming agreement with Power TV Ltd., dated February 28
and July 29, 1996***

<PAGE>

(q) Satellite space agreement with Nethold Central Europe BV*** (r)
Management and consulting agreement with Justin Bodle dated June 15,
1996.*** (s) Uplink and downlink agreement with Banknet, dated June 26,
1996*** Rental lease with Investor Holding Rt. dated June 25, 1996 ***
(u) Settlement Agreement with Nethold Development B.V., dated May 22,
1997 ****

Subsidiaries of the Registrant*
- ------------------
* Filed with Registration Statement No. 33-80177
** Filed with Registration Statement No. 333-13371
*** Filed with Form 10-KSB dated June 30, 1996
**** Filed with Form 10-QSB dated March 31, 1997

B. The following reports on Form 8-K have been filed during the quarter
ended June 30, 1997:

None.

<PAGE>

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 11th day of June, 1997.

HUNGARIAN BROADCASTING CORP.

By /s/ James H. Season
----------------------------
James H. Season
Chief Financial Officer and Treasurer

<ARTICLE> 5
<CIK> 0000932554
<NAME> HUNGARIAN BROADCASTING CORP.

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