As filed with the Securities and Exchange Commission on , 1997
Registration No. 333-13371
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Post-Effective Amendment No. 2 to
FORM SB-2
REGISTRATION STATEMENT
Under The Securities Act of 1933
HUNGARIAN BROADCASTING CORP
(Name of small business issuer in its charter)
DELAWARE 4833 13-36787223
- ---------------------- -------------------------- ------------------
(State or jurisdiction (Primary standard industrial (I.R.S. Employer
of incorporation Classification code number) Identification no.)
or organization)
445 Park Avenue, 15th Floor, New York, New York 10022, (212) 758-9870
---------------------------------------------------------------------
(Address and telephone number of principal executive offices)
Peter E. Klenner
445 Park Avenue, 15th Floor, New York, New York 10022, (212) 758-9870
---------------------------------------------------------------------
(Name, address and telephone number of agent for service)
Copies to:
Ronald Scott Moss, Esq.
445 Park Avenue, 15th Floor
New York, New York 10022
Tel: (212) 758-9870
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this registration statement becomes effective.
If any of the Securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [x]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
This registration statement also relates to a registration statement by the
Company on form SB-2, Registration No. 33-80177.
<PAGE>
PROSPECTUS
HUNGARIAN BROADCASTING CORP.
3,423,400
Shares of Common Stock
This Prospectus relates to an aggregate of 1,843,900 shares of Common
Stock of Hungarian Broadcasting Corp. (the "Company") consisting of (i)
1,603,900 shares issuable upon exercise of Common Stock Purchase Warrants (the
"Warrants") issued as part of the Company's initial public offering in December
1995; (ii) 100,000 shares issuable upon exercise of a like number of
Underwriter's Stock Warrants issued in connection with such offering; and (iii)
140,000 shares issuable upon exercise of a like number of Common Stock Purchase
Warrants underlying 140,000 Underwriter's Warrants also issued in connection
with such offering. This Prospectus also relates to such Underwriter's
Stock Warrants, Underwriter's Warrants and Common Stock Purchase Warrants
underlying the Underwriter's Warrants.
This Prospectus also relates to an additional 1,579,500 shares of Common
Stock consisting of (i) 1,053,000 shares issuable upon conversion of the
Company's Series A Convertible Cumulative Redeemable Preferred Stock (the
"Preferred Shares") which were included in Units (each Unit consisting of one
Preferred Share and one Common Stock Purchase Warrant) offered to the public in
February 1997; and (ii) 526,500 shares of Common Stock issuable upon exercise of
the Warrants included in such Units (the "Unit Warrants"). The components of
the Units as of September 22, 1997.
(CONTINUED ON PAGE 2)
<TABLE>
<CAPTION>
- -------------------------------------------------------- ---------------------- ------------------------- -----------------------
Price to Security Warrant Proceeds to the
Holder(1)(2) Solicitation Fee(3) Company(2)(4)
- -------------------------------------------------------- ---------------------- ------------------------- -----------------------
<S> <C> <C> <C>
For Exercise of Warrants $6.00 $0.60 $5.40
Total $13,622,400 $1,362,240 $12,260,160
For Exercise of Underwriter's Stock Warrants $8.25 --- $8.25
Total $825,000 --- $825,000
For Exercise of Underwriter's Warrants $0.225 --- $0.225
Total $31,500 --- $31,500
- -------------------------------------------------------- ---------------------- ------------------------- -----------------------
</TABLE>
(1) The exercise prices were arbitrarily determined in connection with the
Company's Initial Public Offering and are not related to the Company's
assets, book value of the shares of Common Stock issuable upon exercise
of the Warrants, the Underwriter's Stock Warrants, or the Underwriter's
Warrants.
(2) Assumes the exercise of all of the Warrants, Underwriter's Stock Warrants
and the Underwriter's Warrants, as applicable. There is no assurance that
any of the Company's warrants will be exercised.
(3) Pursuant to an Underwriter Agreement entered into between the Company and
J.W Barclay & Co., Inc. ("Barclay") on December 20, 1995 in connection
with the Initial Public Offering, the Company has agreed to pay Barclay a
warrant solicitation fee of ten (10%) percent of the aggregate exercise
price of the Warrants whose exercise is solicited by a member of the
National Association of Securities Dealers, Inc. ("NASD") and meets
certain other criteria. The Company cannot presently estimate to what
extent any such warrant solicitation fee will be paid. See "Warrant
Solicitation Fee."
(4) All funds received from the exercise of the Warrants, the Underwriter's
Stock Warrants and the Underwriter's Warrants will be paid to the
Company. The Company will incur (i) expenses incurred in connection with
the preparation of this Prospectus, including printing and professional
fees estimated at $100,000; and (ii) a ten (10%) percent warrant
solicitation fee which may be paid to Barclay upon the exercise of the
Warrants. See "Warrant Solicitation Fee."
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
(CONTINUED FROM COVER PAGE)
Trading in the Common Stock, the Warrants and the Preferred Shares is conducted
on the NASDAQ SmallCap Market under the symbols "HBCO," "HBCOW" and "HBCOP,"
respectively. On August 29, 1997, the closing prices of the Common Stock, the
Warrants and the Units on the NASDAQ SmallCap Market were $4-7/8, $1-7/16 and
$9-1/8, respectively.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" ON PAGE 9.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE
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 Ronald Scott Moss,
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 Company does not undertake 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 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
SEPTEMBER 16, 1997, THE EXCHANGE RATE WAS HUF 194 TO $1.
THE COMPANY
Hungarian Broadcasting Corp. ("HBC" or the "Company") 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 ("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. In September 1997, the Company began
broadcasting over-the-air 24 hours per day on AM-Micro channel R7.
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.
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. 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. Television advertising revenues for 1996 were about $180 million. 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.
4
<PAGE>
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.
Advertising billing is determined by the specific program ratings
provided by AGB-Hungarian 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 year 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's satellite transmission had been conducted by Nethold Central
Europe B.V. ("Nethold") in accordance with a five-year agreement entered into in
October 1996. In April 1997, the Company was notified by Nethold Central Europe
BV that Nethold wished to reduce its business activities in Hungary and that it
proposed to negotiate a termination of its contract with the Company as early as
July 31, 1997. On May 22, 1997, the Company signed a settlement agreement with
Nethold, pursuant to which the contract was cancelled and Nethold agreed to pay
the Company $1.4 million, $200,000 representing forgiveness of service charges
for the period January 1, 1997 through June 30, 1997. Also in May 1997 to
replace the Nethold services, the Company contracted, through its wholly owned
Hungarian subsidiary Hungarian Broadcasting Corporation Televizio Rt., 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. A payment by Nethold of $600,000 was received by the Company on
March 30, 1997. A second payment by Nethold of $400,000 was received by the
Company in September 1997. Final payment is due in the beginning of October
1997.
Approximately 340 cable networks currently receive and carry MSAT's signal.
These cable companies reach about 1,320,000 television households, or about 85%
of all cable television households in Hungary. Some of these cable companies
make MSAT available only on their premium service, so that MSAT currently
reaches about 1,150,000 or about 87% of the cable subscribers of those cable
companies that carry MSAT. The Company has recently informed cable operators
that, with the renewal of annual contracts, MSAT's signal will be available to
each cable company only if MSAT's programming is provided to all cable company
subscribers. In addition to cable subscribers, the Company's broadcast signal is
received by about 200,000 customers of the AM-Micro service in Budapest. Over
the next several months, the Company expects to broadcast to virtually all cable
subscribers and AM-Micro subscribers in Hungary, a current market of about
1,800,000 households, or about 48% of all television households. This market is
expected to grow both with the growth of cable and, also, as improved cable
technology catches cable pirates and converts them to customers. Although in its
infancy, an important market in satellite direct-to-home service may also
develop.
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 Ronald Scott Moss,
Esq., 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) 372-1090.
5
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Securities offered....................................... An aggregate of 3,423,400 shares of Common Stock,
consisting of (i) 1,603,900 shares issuable upon exercise
of the Warrants; (ii) 100,000 shares issuable upon
exercise of the Underwriter's Stock Warrants; (iii)
140,000 shares issuable upon exercise of Common Stock
Purchase Warrants underlying the Underwriter's Warrants;
and (iv) 526,500 shares issuable upon exercise of the
Unit Warrants. The 100,000 shares issuable upon exercise
of the Underwriter's Stock Warrants and the 140,000
shares issuable upon exercise of the Common Stock
Purchase Warrants underlying the Underwriter's Warrants
and such warrants are being registered for resale. See
"Description of Securities."
Common Stock outstanding
before offering...................................... 2,583,600 shares (1)
Common Stock outstanding
after offering....................................... 6,009,000 shares (2)
Units outstanding
before and after offering............................ 526,500 units (3)
Risk Factors............................................. Prospective investors should consider carefully certain
Risk Factors relating to an investment in the Company.
See "Risk Factors."
NASDAQ Symbols........................................... Common Stock HBCO
Warrants HBCOW
Preferred HBCOP
</TABLE>
(1) Does not include (i) 1,603,900 shares issuable upon exercise of the
Warrants; (ii) 100,000 shares issuable upon exercise of the Underwriter's
Stock Warrants; (iii) 50,000 shares issuable upon exercise of the
Underwriter's Unit Warrants; (iv) 140,000 shares issuable upon exercise of
the Underwriter's Warrants; (iii) 350,000 shares issuable upon exercise of
employee stock options; (v) 1,000,000 shares issuable upon conversion of
the shares of Preferred Stock; (vi) 150,000 shares issuable upon
conversion of the shares of Preferred Stock and exercise of the Warrants
underlying the Underwriter's Unit Warrants; (vii) approximately 100,000
shares of Common Stock which may be issuable upon payment of dividends on
the shares of Preferred Stock per year, assuming a market price of $6 per
share of Common Stock; or (viii) 526,500 shares issuable upon exercise of
the Unit Warrants.
(2) Includes an aggregate of 3,423,400 shares issuable upon the exercise of
the Warrants, the Underwriter's Stock Warrants and the Underwriter's
Warrants and the Unit Warrants. There can be no assurance that any
Warrants, Underwriter's Stock Warrants, Underwriter's Warrants or Unit
Warrants will be exercised.
(3) Each Unit consists of one share of Series A Convertible Cumulative
Redeemable Preferred Stock (the "Preferred Shares") and one Warrant. Each
Preferred Share is convertible into two shares of Common Stock and is
entitled to dividends at the rate of $1.20 per year payable either in cash
or in shares of Common Stock. On September 9, 1997, the underwriter
determined to separate the Units, effective September 22, 1997.
6
<PAGE>
SUMMARY OF FINANCIAL INFORMATION
The following table summarizes certain selected consolidated financial data
derived from the financial statements of the Company, and is qualified in its
entirety by the more detailed consolidated financial statements included
elsewhere herein.
<TABLE>
<CAPTION>
OPERATING STATEMENT DATA
For the period
September 14, 1994 Six Months Six Months Three Months Three Months
(Date of Inception Year Ended ended ended ended ended
through June 30, December 31, December 31, June 30, June 30,
June 30, 1995 1996 1995 1996 1996 1997
------------------- ------------- ----------- ------------ ------------ --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating $72,043 $672,108 $383,671 $1,239,418 $240,910 $1,143,344
revenues
Operating 560,393 4,351,869 1,710,895 4,056,367 1,565,446 2,004,945
expenses
Net loss (560,333) (4,149,682) (1,720,036) (2,778,608) (1,499,394) (66,202)
Net loss per (0.39) (2.01) (1.06) (1.08) (.58) (0.03)
share
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
December 1, 1996 June 30, 1996 June 30, 1997 June 30, 1997
--------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Current assets $2,240,980 $2,319,652 $2,240,980 $3,272,292
Current liabilities 4,811,954 2,269,757 4,811,954 3,924,639
Working capital (2,570,974) 49,895 (2,570,974) (652,347)
Total assets 4,301,205 4,252,051 5,865,540 5,746,641
Stockholders' equity (510,749) 1,941,968 (510,749) 1,751,296
</TABLE>
7
<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 licenses
under which it operates in Budapest (MSAT) were 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 June 30, 1997, the Company had an
accumulated deficit of $8,972,303 representing a consolidated net loss for
the period from its inception through June 30, 1997. 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 other 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."
8
<PAGE>
6. 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."
7. 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 approximately
1.9% monthly in the second quarter of 1995, 1.3% monthly during the second
half of 1995, 1.2% monthly during 1996, 1.1% through July 1997 and 1.0%
beginning in August 1997. 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. As of September 16, 1997, the Exchange Rate was HUF 194
to $1. 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.
8. 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."
9. ADDITIONAL FINANCING MAY BE REQUIRED. The Company has insufficient capital
to meet its current requirements. For example, as of June 30, 1997, the
Company was obligated to make payments with respect to certain indebtedness
incurred to persons who supplied bridge financing in the amount of
$1,060,000 plus accrued interest. The Company has requested an extension of
this obligation to June 30, 1998 and has received the consent of several of
the noteholders. To the extent warrants, if any, are exercised, the
Company's needs will be alleviated. In the event too few warrants are
exercised, a planned offering in Hungary is not consummated and funds from
operations prove insufficient, 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."
9
<PAGE>
10. 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.
11. 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.
12. 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-Remuneration."
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.
13. 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 Stockholders. 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 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."
14. DIVIDENDS. The Company has not previously paid any dividends on its Common
Stock and intends to follow a policy of retaining all of its cash flow from
operations, if any, to finance the development and expansion of its
business. 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.
15. NECESSITY OF STATE BLUE SKY REGISTRATION; EXERCISE OF WARRANTS. Although
the Warrants have not knowingly been 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
10
<PAGE>
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. See "Description of
Securities-Warrants."
16. FUTURE SALES OF COMMON STOCK COULD HAVE AN ADVERSE EFFECT ON THE MARKET
VALUE. The Company has 2,585,600 shares of Common Stock outstanding as of
the date of this offering, of which 1,022,500 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 one year, 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 two years is entitled to sell such shares
under Rule 144 without regard to the volume limitations described above. Of
such 1,022,500 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 of their agreement 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 satisfied
their holding period in July 1996 and holders of 200,000 satisfied their
holding period in August 1996. Of such 352,000 shares, 237,000 have been
sold. 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."
17. POSSIBLE DELISTING AND RISK OF LOW-PRICED SECURITIES. The Common Stock,
Warrants and Units are currently being quoted on the NASDAQ SmallCap Market
under the symbols "HBCO," "HBCOW" and "HBCOU," respectively. 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
11
<PAGE>
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.
18. 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, at
the option of the Company. The first dividend was paid on September 15,
1997 in 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 Stockholder's tax basis in his
Preferred Shares). The cash portion of the dividend, if any, may not be
sufficient to pay the total federal income tax payable on the cash portion
of the dividend and on shares of Common Stock treated as a taxable dividend
or taxable gain.
19. 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.
20. 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.
12
<PAGE>
21. PENDING LITIGATION
LICENSE PROCEEDING
TV 3, a competitor of the Company, which was granted a six year, 24 hour
per day microwave license, applied to the Ministry of Culture to overturn
the grant of the Company 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 was acting, it would also
have granted the licenses 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 licenses in the Metropolitan Court of Budapest. At a
hearing held on December 1, 1994, the Municipal Court ordered theMinistry
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
licenses had been granted to the Licensees and that the Licensees may
operate in accordance with the terms of the licenses. 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 ruled in favor of the Company. Subsequently, TV 3 has
requested a review of this matter by the Supreme Court, which is currently
pending. The Company's outside legal counsel expects a confirmation of the
Court's prior ruling. However, if the ruling is overturned and the Supreme
Court rules that the Company's licenses are invalid, the Company intends to
apply for new licenses. If these are then denied, the absence of
broadcasting licenses would have a material adverse effect on the Company's
financial position, results of operations and liquidity.
CLAIM REGARDING UNDERWRITERS
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,
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. was named as co-underwriter. 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. In March 1997, the Company and Starr dropped their actions
against each other and released each other from liability.
PRICE RANGE OF SECURITIES
Effective December 20, 1995, the Company's Common Stock and certain Common
Stock Purchase Warrants commenced trading on the 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.
Effective February 5, 1997, the Company's Units commenced trading on NASDAQ
Small-Cap Market under the symbol HBCOU. Each Unit consists of one share of
Preferred Stock and one Common Stock Purchase Warrant.
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<PAGE>
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, markdown or commission transactions.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS UNITS
----------------- ------------------ -----------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------- ------ ------
1995
<S> <C> <C> <C> <C> <C> <C>
Fourth Quarter
(December 20-31)..................... $8.375 $5.500 $4.000 $1.000
1996
First Quarter........................ $11.500 $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
1997
First Quarter........................ $7.500 $4.000 $2.000 $0.750 $14.000 $11.000
Second Quarter. ..................... $6.750 $4.375 $1.375 $1.000 $12.250 $7.500
Third Quarter ....................... $5.00 $3.50 $1.875 $0.812 $9.25 $6.75
(Through August 29, 1997)
</TABLE>
As of August 30, 1997, there were 46 holders of record of the 2,585,600
outstanding shares of Common Stock, twenty holders of record of the 1,603,900
outstanding Warrants and eleven holders of record of the 526,500 Units. As of
August 30, 1997, the Company had an estimated 1,500 beneficial holders of Common
Stock and 575 beneficial holders of Units. The closing bid prices of the Common
Stock, Warrants and Units on September 19, 1997 were 5, 1 15/1 and 9
respectively.
The average daily trading volume of the Company's Common Stock, Common
Stock Purchase Warrants and Units for the month of August 1997 was 11,372
shares, 1,847 warrants, and 3,135 units.
CAPITALIZATION
<TABLE>
<CAPTION>
The following table sets forth the capitalization of the Company at June
30, 1997.
<S> <C>
Bridge notes. ............................................................... $1,060,000
Stockholders' equity:
Common stock, $.001 par value; 15,000,000 shares authorized;
2,585,600 issued; as adjusted 4,189,500 (1) .......................... 4,189
Series A convertible cumulative redeemable
preferred stock $.001 par value, 5,000,000 shares authorized;
526,500 issued ...................................................... 527
Additional paid-in capital (1) ............................................. 20,042,487
Deficit .................................................................... (8,972,303)
Currency translation adjustments ........................................... 299,796
Total capitalization (1) ................................................... $12,434,696
</TABLE>
- -----------------------------
(1) Includes the proceeds of the assumed exercise of 1,603,900 Warrants. Does
not include the exercise of the Underwriter's Warrants or the Underwriter's
Stock Warrants or the possible payment of a warrant solicitation fee of 10%
of the aggregate exercise price of Warrants exercised.
14
<PAGE>
DIVIDEND POLICY
The Company has never paid any cash dividends on the Common Stock. The
Company anticipates that in the foreseeable future, earnings, if any, will be
retained for use in the business or for other corporate purposes, and it is not
anticipated that cash dividends will be paid either on the Preferred Shares or
Common Stock. Dividends on the Preferred Shares will be paid in Common Stock if
the Company is legally able to do so. The Company is dependent upon payment of
dividends from its Hungarian subsidiary companies as the source of its own cash
dividends.
Hungarian companies are permitted to pay annual dividends out of profits,
determined on the basis of Hungarian accounting principles, following
recommendation of its Board of Directors and a declaration by the Annual General
Meeting which must be held in the first five 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, subject to the deduction of any withholding tax.
USE OF PROCEEDS
The net proceeds to the Company, assuming exercise of all of the Warrants
(excluding the Underwriter's Stock Warrants and the Underwriter's Warrants and
the possible payment of a warrant solicitation fee of 10% of the exercise price
of the Warrants pursuant to the Underwriting Agreement entered into in
connection with the Company's initial public offering) and deduction of the
expenses of this offering, are estimated to be approximately $12,260,160.
Assuming exercise of all of the Warrants, the Underwriter's Stock Warrants, and
the Underwriter's Warrants after the possible payment of a warrant solicitation
fee and deduction of expenses of this offering, the net proceeds to the Company
are estimated to be approximately $13,622,400. There can be no assurance that
all or any of the Warrants, the Underwriter's Stock Warrants or the
Underwriter's Warrants will be exercised.
Any net proceeds received from the exercise of Warrants will be added to
working capital. In addition, up to $1 million may be used to pay off
obligations to Bridge Note holders.
The Company was obligated to pay to the holders of Bridge Notes $996,559
plus accrued interest at June 30, 1997. The Company has requested an extension
from its noteholders and 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 when required or at all.
15
<PAGE>
The Company may, when and if the opportunity arises, acquire other
businesses compatible with the Company's business. If such opportunity arises,
the Company may use a portion of the proceeds, if any, from the exercise of its
outstanding warrants, as well as other funds for such purpose. While the Company
regularly evaluates possible acquisition opportunities, as of the date of this
Prospectus, the Company has no agreements, commitments, understandings or
arrangements with respect to any acquisition. There can be no assurance that the
Company will ultimately effect any acquisition.
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.
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<PAGE>
SELECTED FINANCIAL DATA
The financial information set forth below for the year ended June 30, 1996,
for the six month periods ended December 31, 1996 and for the three month period
ended June 30, 1997, respectively should be read in conjunction with the
Company's audited financial statements and accompanying notes appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
OPERATING STATEMENT DATA
For the period
September 14, 1994 Six Months Six Months Three Months Three Months
(Date of Inception Year Ended ended ended ended ended
through June 30, December 31, December 31, June 30, June 30,
June 30, 1995 1996 1995 1996 1996 1997
------------------- ------------- ----------- ------------ ------------ --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating $72,043 $672,108 $383,671 $1,239,418 $240,910 $1,143,344
revenues
Operating 560,393 4,351,869 1,710,895 4,056,367 1,565,446 2,004,945
expenses
Net loss (560,333) (4,149,682) (1,720,036) (2,778,608) (1,499,394) (66,202)
Net loss per (0.39) (2.01) (1.06) (1.08) (.58) (0.03)
share
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
December 1, 1996 June 30, 1996 June 30, 1997 June 30, 1997
--------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Current assets $2,240,980 $2,319,652 $2,240,980 $3,272,292
Current liabilities 4,811,954 2,269,757 4,811,954 3,924,639
Working capital (2,570,974) 49,895 (2,570,974) (652,347)
Total assets 4,301,205 4,252,051 5,865,540 5,746,641
Stockholders' equity (510,749) 1,941,968 (510,749) 1,751,296
</TABLE>
16
<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.
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 1, 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 events format in
June 1995, the Company returned to the video music clip format in October 1995.
In December 1995, the Company sold shares in an initial public offering and
determined to relaunch as a Western-style 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 been previously 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 24 hours per
day from the Astra 1E Satellite and in October 1996 the station was renamed
"MSAT." In September 1997, the Company began over-the-air broadcasting 24 hours
per day on AM-Micro Channel 7.
The Company's revenues are derived primarily from the sale of television
advertising to national, international and local advertisers. Billing is
determined by the program ratings as measured by AGB-Hungarian Meter System, an
independent audience rating service. The Company's direct customers are
generally fewer than a dozen international advertising agencies that arrange the
broadcast of commercials for their clients. One of these agencies accounted for
27% of the Company's revenues for the six months ended December 31, 1996. The
Company engages in certain barter transactions in which it exchanges unsold
commercial advertising for services and goods. In addition, the Company receives
small payments from the 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 calendar year, as new
programming often is launched in the Fall and purchasing tends to increase as
Christmas approaches.
The primary expenses incurred in operating a broadcasting station are
programming costs (buying, producing and editing), 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, amortization of intangibles and foreign
exchange gains or losses) of approximately 82 million Forints ($450,000 at
current exchange rates) per month and anticipates this approximate level of
expenses to continue for at least the next eighteen months.
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<PAGE>
Since the station was relaunched in April 1996, revenues have grown
rapidly. Revenues of nine million Forints in May 1996 rose to 39 million Forints
in November 1996 and to 58 million Forints ($320,000) in June 1997. Management
believes that this upward trend in sales will continue.
The Company believes that its rapid growth of sales will continue for
several reasons. The Company is a new entrant in the Hungarian television
market, essentially being available to viewers in Budapest only since Spring
1996. The April 1996 relaunch was after the Company's initial public offering
and marked the beginning of its Western-style entertainment format. Only since
Fall 1996 have others in Hungary begun to receive the Company's channel. Over
the last few months, national coverage has grown from about 15% to about 36%.
The Company expects shortly to increase its reach to as many as 48% of Hungary's
television households as it signs up additional cable companies. 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 a rapidly growing overall market. The Company's national viewership
share is higher than this percentage. The Company expects growth in the number
of households receiving MSAT's signal and increased viewing by households that
currently watch the station. The Company will face additional competition in
Fall 1997 when two recently privatized channels are expected to 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 under Hungarian law and foreign currency regulations in Hungary.
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 its 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 to the operations of the Company. 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 began operations with studio licenses and AM-Micro broadcasting
licenses for specific time slots on Channels A3 in Hungary. Two of the AM-Micro
licenses expire in July 2000. In September 1997, the Company also began
broadcasting over-the-air 24 hours per day on AM-Micro Channel R7.
In April 1997, the Company was notified by Nethold Central Europe BV that
Nethold wished to reduce its business activities in Hungary and that it proposed
to negotiate a termination of its contract with the Company as early as July 31,
1997. It offered to work with the Company to find alternative transmission
sources and to provide a lump sum payment to reimburse the Company for all
direct and indirect costs caused by Nethold's desire to terminate or modify this
contract. In May 1997, the Company signed a termination of services agreement
with Nethold whereby Nethold's services would terminate on June 30, 1997. The
contract further obligated Nethold to pay $1,400,000 as compensation to the
Company for the contract termination, $200,000 representing forgiveness of
service charges for the period January 1, 1997 through June 30, 1997. Payment of
one million has been received by the Company from Nethold. The Company has
agreed to pay Nethold $30,000 for use of its services through the end of
September 1997. Final payment of $130,000 is due from Nethold in October. Also
in May 1997 to replace the Nethold services, the Company contracted, through its
wholly owned Hungarian subsidiary Hungarian Broadcasting Corporation Televizio
Rt., 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.
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The Company has built its business from a start up operation. On 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 operating expenses, there is no assurance that the Company will generate
enough revenues to pay its costs.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS 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.
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 licenses 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 was increased by $1,200,000 (offset by an increase of $200,000
in other expenses) due to the settlement contract made with Nethold B.V. The
$200,000 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. The Company recognized
$1,100,000 of nonrecurring profit in the second quarter due to the termination
of the Nethold agreement; $1,000,000 of the cash payment and $100,000 of
transmission expenses to Nethold that were canceled.
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.
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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.
Other income increased by $1,200,000 and other expense increased by
$200,000 due to the settlement contract made with Nethold B.V. and a provision
for termination of the Orion license, respectively 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. The Company recognized $200,000 of nonrecurring profit in the
first half due to the termination of the Nethold agreement: $1,000,000 from the
cash settlement payment and $200,000 of transmission expenses to Nethold that
were cancelled.
YEAR ENDED JUNE 30, 1996 COMPARED TO PERIOD ENDED JUNE 30, 1995
The period ended June 30, 1995 is limited to nine months as the station
began operations in September 1994. The Company began its operations in May and
June 1995 when it acquired predecessor companies. It 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 the year ended
June 30, 1996 are not comparable to the nine-month period ended June 30, 1995.
Recognizing the limitations noted above, revenues were $672,108 and $72,043
for the fiscal year ended June 30, 1996 and the period ended June 30, 1995,
respectively. Operating and selling, general and administrative expenses were
$4,351,869 and $560,393 for the fiscal year ended 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.
Net cash used in operating activities was $3,223,645 and $115,998 for the
fiscal year ended June 30, 1996 and the period ended June 30, 1995,
respectively. Cash provided by financing activities was $5,242,270 and
$2,703,785 for the fiscal year ended June 30, 1996 and the period ended June 30,
1995, respectively. The more recent fiscal year reflects the Company's initial
public offering in December 1995, while the earlier period reflects private
placements of debt and equity.
In March 1997, the Company changed its fiscal year to a calendar year to
follow the practices of other broadcasters and to match the reporting periods
for its Hungarian subsidiaries. Statement of Accounting Standards No. 128,
"Earnings Per Share," is effective for periods after December 15, 1997,
including interim periods. The Company intends to adopt SFAS 128 for the first
quarter ended March 31, 1997. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the Company's Stock Option Plan.
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.
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.
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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 receivables 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. In
addition, 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.
On June 30, 1997, notes payable 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. Investor
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 additional compensation of 1,000
Common Stock Purchase Warrants per unit at time of repayment. If 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 nearly all of its
note holders and will reach a compromise with the remainder of the note holders.
The Company believes that its existing cash balance, cash from future
operations and the proceeds from the exercise of the warrants which are the
subject of this registration, and a planned securities offering in Hungary, will
be sufficient to fund the Company's operations for the next twelve months.
However, there is no assurance that any warrants of the Company will be
exercised, that the planned offering in Hungary will be consummated, or that
revenues will increase as expected. If the Company does not receive significant
funds from any of these sources, the Company may need to raise funds from
financial institutions or from other investors.
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FOREIGN CURRENCY
The Company's broadcasting operations are conducted in Hungarian Forints. A
portion of the Company's expenses, primarily programming, is denominated in
United States dollars. Asset and liability accounts are translated from
Hungarian Forints into United States dollars at the period-end exchange rate;
income and expense accounts are translated at the average exchange rate for the
period. The resulting translation adjustment is reflected as 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.
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.
Television advertising expenditures in 1996 were approximately $180 million.
Members of the industry expect such increases to continue.
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.
The government of Hungary has owned and operated 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 and MTV 2 are broadcast over-the-air (terrestrial)
and are transmitted by Antenna Hungaria, a state owned company which built, owns
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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. MTV 2 and a previously dormant frequency
were privatized in July 1997. The State continues to own and operate MTV 1 and
DUNA.
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, 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. In October 1996, the
Company changed its broadcasting name to MSAT. In September 1997, the Company
began over-the-air broadcasting 24 hours per day AM-Micro Channel R7.
NATURE OF HUNGARIAN CORPORATIONS
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
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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 Kft subsidiaries to an RT in December 1996. In 1997, the
Company formed a fourth Hungarian subsidiary called Hungarian Broadcasting
Corporation Televizio Rt. ("HBC Rt.")
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.
Until June 26, 1997, the Company's satellite transmission had been
conducted by Nethold Central Europe B.V. ("Nethold") in accordance with a
five-year agreement entered into in July 1996. In April 1997, the Company was
notified by Nethold Central Europe BV that Nethold wished to reduce its business
activities in Hungary and that it proposed to negotiate a termination of its
contract with the Company as early as July 31, 1997. On May 22, 1997, the
Company signed a settlement agreement with Nethold, pursuant to which the
contract was cancelled and Nethold agreed to pay the Company $1.4 million,
$200,000 representing forgiveness of service charges for the period January 1,
1997 through June 30, 1997. Also in May 1997 to replace the Nethold services,
the Company contracted, through its wholly owned Hungarian subsidiary HBC Rt.,
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.
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 estimated 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 1,150,000 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 by
the end of 1997. This increase in distribution is expected to result in
increases in pricing for each individual advertisement.
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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 Antenna Hungaria satellite.
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.
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. 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.
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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 videotapes and scripts of
the shows. The Company dubs the videotapes 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's twenty-four hour per day
broadcast is expected to help significently.
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.
The Company employs an experienced advertising sales force under the
direction of a sales manager and also uses an outside agency on a commission
basis.
COMPETITION
MSAT's key competitors have been 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
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Company's. In September 1997, TV3 was acquired by Central European Media
Enterprises Ltd., a Bermuda-based company trading on the Nasdaq Natioanal
Market. 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. In July
1997, the government awarded ten-year concessions for these frequencies, one to
a consortium led by Scandinavia Broadcasting System, the other to a consortium
led by CLT-UFA, Europe's largest independent broadcaster. These two new stations
are expected to begin broadcasting in October 1997.
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 and by
satellite in Hungary, and it is licensed to do so.
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.
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 June 30, 1997, the Company had two 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
LICENSE PROCEEDING
TV 3, a competitor of the Company, which was granted a six year, 24 hour
per day microwave license, applied to the Ministry of Culture to overturn the
grant of the Company 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
27
<PAGE>
that even if a new committee was acting, it would also have granted the licenses
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 licenses 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 licenses had
been granted to the Licensees and that the Licensees may operate in accordance
with the terms of the licenses. 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 ruled in favor of the Company. Subsequently, TV 3
has requested a review of this matter by the Supreme Court, which is currently
pending. The Company's outside legal counsel expects a confirmation of the
Court's prior ruling. However, if the ruling is overturned and the Supreme Court
rules that the Company's licenses are invalid, the Company intends to apply for
new licenses. If these are then denied, the absence of broadcasting licenses
would have a material adverse effect on the Company's financial position,
results of operations and liquidity.
CLAIM REGARDING UNDERWRITERS
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, 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. was
named as co-underwriter. 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. In March 1997, the Company and Starr dropped their actions against
each other and released each other from liability.
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 principle 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,
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<PAGE>
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 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 a 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 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.
29
<PAGE>
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, the
Socialist Party was the strongest parliamentary party and formed a coalition
with the Free Democrats to form a government.
Current economic policy identifies a number of key steps to establish
the institutional framework for a market economy by 1998. Its main goals include
reduction of the inflation rate, privatization of state owned enterprises,
currency convertibility and integration into Western trade flows. The government
is actively inviting tenders for the privatization of public utilities, the
energy sector, and TV broadcasting. In connection with this privatization
program, the government is seeking to attract foreign capital investments.
FOREIGN RELATIONS
Hungary joined the United Nations in 1955 and became a member of the
International Monetary Fund and the World Bank in 1982. In 1985, Hungary joined
the International Finance Corporation, an affiliate of the World Bank and the
International Development Association. Hungary is also a signatory to the
General Agreement on Tariffs and Trade ("GATT").
Hungary's association with the Council of Mutual Economic Aid
("COMECON") and the Warsaw Pact ended when both these organizations were
disbanded in 1991. An Association Agreement between the EC and Hungary was
signed on December 16, 1991. Under the Agreement, all customs duties,
quantitative restrictions and other trade barriers in areas other than
agriculture will be eliminated by both sides by December 1, 2000. The EC lifted
some customs duties immediately and the rest will be removed over the next nine
years. Hungary was given a three-year grace period and began reducing customs
duties and quantitative restrictions in 1994.
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. On July 8, 1997,
Hungary was invited to join NATO. The European Commission also announced in July
that Hungary could start negotiations to join the European Union.
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.
30
<PAGE>
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% Deutsche
Marks ("DM") 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%,
26.7% 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, 1.3% monthly during
the second half of 1995, 1.2% monthly during 1996, 1.1% through July 1997 and
1.0% beginning in August 1997. 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. As of
September 16, 1997, the exchange rate was 194 Forints per U.S. Dollar.
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.
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
James H. Season 53 Chief Financial Officer, Treasurer and Director
Justin Bodle 36 Director
Ronald Scott Moss 39 Secretary
</TABLE>
Peter E. Klenner, a German national, has served as President, Chief
Executive 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
31
<PAGE>
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 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 investments.
James H. Season was appointed Chief Financial Officer in August 1996. He
was elected a director and appointed Treasurer in April 1997. 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 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.
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.
Ronald Scott Moss was appointed Secretary in April 1997. From 1994 to 1997,
Mr. Moss was General Counsel to Integrated Media, Inc., an Internet applications
developer in New York City. From 1993 to 1994, he was a consultant to the
Motorola Software Group in Beijing, China. From 1988 to 1993, he was General
Counsel to Total Solutions. Inc., a computer-aided-design services company in
New York City. Mr. Moss graduated from the University of Miami School of Law and
is admitted to practice in New York and Florida. Mr. Moss devotes his full time
to the affairs of the Company.
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
The following table sets forth the compensation earned by or paid to
the officers and directors of the Company for the calendar years 1996, 1995 and
1994:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS, OTHER OPTIONS
- --------------------------- ---- ------ ------------ -------
<S> <C> <C> <C> <C>
Peter E. Klenner, Chairman, President, CEO 1996 $120,000 --- 95,000
and Director 1995 --- --- 50,000
1994 --- --- ---
James H. Season, Treasurer and Director 1996 49,000 --- ---
1995 --- --- ---
1994 --- --- ---
Justin Bodle, Director 1996 30,000 --- 90,000
1995 --- --- ---
1994 --- --- ---
Frank R. Cohen*, Former Secretary, Treasurer 1996 --- --- 10,000
and Director 1995 --- --- ---
1994 --- --- ---
Imre Kovats, Former Executive Vice President
and Director 1996 120,000 25,000 30,000
1995 --- --- ---
1994 --- --- ---
</TABLE>
* Mr. Cohen's law firm acted as general counsel to the Company until April 1997.
32
<PAGE>
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 August 1996, the Company retained James H. Season as its Chief
Financial Officer. In April 1997, he became Treasurer. He is receiving a fee of
$8,000 per month on a month to month basis plus living 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 July 1996.
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. The option on the first 25,000 shares has expired. In November 1996, the
Company granted Mr. Bodle additional options for 40,000 shares of Common Stock.
In April 1997, Imre Kovats, Executive Vice President and Director and Frank
R. Cohen, Secretary, Treasurer and Director resigned from their positions with
the Company to assume executive responsibility with another company. James H.
Season, Chief Financial Officer, was appointed Treasurer and elected a Director.
Ronald Scott Moss was appointed Secretary.
In April 1997, the Company retained Ronald Scott Moss as a consultant for
a fee of $6,000 per month for a period of two years. He is entitled to receive
reimbursement of ordinary and necessary business expenses. The Company also
granted Mr. Moss options to purchase 20,000 shares of the Company's Common Stock
at an exercise price of $5.00 per share.
LIMITATION OF LIABILITY FOR DIRECTORS
The Company's Certificate of Incorporation provides that its directors
shall not be liable for monetary damages for breach of the directors' fiduciary
duty of care to the Company and its stockholders as a director except in the
case of (i) any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) payments of
dividends or approvals of stock repurchases or redemptions that are unlawful
under Delaware law, or (iv) any transactions from which the directors derived an
improper personal benefit. Currently under Delaware law, such provisions do not
eliminate the duty of care, and in appropriate circumstances, equitable remedies
such as injunctive or other forms of relief will remain available under Delaware
law. This provision does not affect a director's responsibilities under federal
securities laws. Pursuant to the Company's Certificate of Incorporation, current
and former directors and officers are indemnified to the maximum extent
permitted, from time to time, by the Delaware General Corporation Law.
In addition, the By-laws of the Company provide that the Company shall
indemnify any and all of its Directors and Officers or former Directors and
Officers or any person who may have served at its request as a Director or
Officer of another Corporation in which it owns shares of capital stock or of
which it is a creditor against expenses actually and necessarily incurred by
them in connection with the defense of any action, suit or proceeding in which
they, or any of them, are made parties, or a party, by reason of being or having
been Directors or a Director or Officer of the Company, or such other
33
<PAGE>
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, 10,000 and 20,000 shares granted to Messrs. Klenner, Kovats, Bodle,
Cohen and Moss respectively. The options granted to Messrs. Klenner, Cohen and
Moss, 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 options to Mr. Robert Genova, former Chairman of
the Board, for 40,000 shares of Common Stock, which options expired according
to their terms upon his leaving the Company.
The following table sets forth information regarding options granted to
the President of the Company during the six month period ended December 31, 1996
and the fiscal year ended June 30, 1996, respectively:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES % OF TOTAL OPTIONS EXERCISE OF
UNDERLYING OPTIONS GRANTED TO EMPLOYEES BASE PRICE
NAME GRANTED IN FISCAL PERIOD PER SHARE EXPIRATION DATE
---- -------------------- -------------------- ----------- -----------------
<S> <C> <C> <C> <C>
December 31, 1996
Peter E. Klenner 95,000 59% $5.00 November 20, 2001
June 30, 1996
Peter E. Klenner 50,000 20% 5.00 December 20, 2000
</TABLE>
34
<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
December 31, 1996 and June 30, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF
SHARES ACQUIRED ON OPTIONS AT FISCAL PERIOD- IN-THE-MONEY OPTIONS
NAME EXERCISE END EXERCISABLE/UNEXERCISABLE FISCAL PERIOD-END
---- ------------------ ---------------------- ---------------------
DECEMBER 31, 1996
- -----------------
<S> <C> <C> <C>
Peter E. Klenner --- 145,000 $0
JUNE 30, 1996
- -------------
Peter E. Klenner --- 0/50,000 0/211,700
</TABLE>
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 June 30, 1997, and as adjusted to reflect
the sale of the Units in February 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.
SHARES BENEFICIALLY
OWNED
-------------------
NAME AND ADDRESS NUMBER PERCENT
- ---------------- -------- --------
Peter E. Klenner(1)(2).................................. 711,266 25.78%
Kelenhegyi ut 39
Budapest, Hungary
Euroweb International Corp.............................. 250,000 9.66%
Varosmajor u. 13
Budapest, Hungary
Justin Bodle(2)......................................... 40,000 1.52%
Kelenhegyi ut 39
Budapest, Hungary
All officers and directors as a group (3) (3 persons) .. 595,000 21.32%
(1) Mr. Klenner may be deemed to be a "promoter" or "parent" 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 and Bodle hold options for 145,000 shares and 40,000
shares, respectively. Such options are presently exercisable and
accordingly such shares are included in this table.
(3) The Secretary of the Company, who is not a director, holds options to
purchase 20,000 shares, and, accordingly, such shares are included
in this table.
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, former Secretary, Treasurer, Director and
Counsel to the Company for $500 ($.01 per share) for an aggregate of $8,500.
35
<PAGE>
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.
Mr. Klenner, President of the Company, owns approximately 9.5% of the
outstanding shares of the common stock (including shares subject to exercisable
options) of HTEL. Mr. Cohen, former officer and director of the Company, owns
approximately 2.9% of the outstanding shares of common stock 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 Company's initial public 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 expired according
to their terms 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. 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 its Unit offering. In
connection with such private offering, the Company paid to J.W. Barclay & Co.,
Inc. a private placement fee of $45,000.
In February 1996, the Company licensed, for $750,000, the exclusive
Hungarian 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 Show" and
others. In July 1996, the Company agreed to license for $1,378,000 the exclusive
Hungarian 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."
In October 1996, in order to provide working capital to the Company, 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 $165,000 at December 31, 1996 (in addition to
the loan mentioned above). These loans were repaid in February 1997.
In December 1996, the Company borrowed $850,000 from the following persons
pursuant to promissory notes payable on 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).
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
notes were repaid in February 1997.
In December 1996, the Company borrowed $850,000 from the following persons
pursuant to promissory notes payable on 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).
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
notes were repaid in February 1997.
36
<PAGE>
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 managed by former 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.
In 1995, the Company advanced $105,000 to a production company known as
Studio II Kft. (the "Studio") to be applied to the financing of the production
of a film (the "Film"). In exchange for the advance the Company was to receive
an 80% interest in the Studio. The Company, due to a lack of funds, was
subsequently unable to complete the financing of the Film, and M&A Management
Kft. ("M&A"), a company wholly owned by the President and Chief Executive
Officer of the Company, thereafter reimbursed the Company $105,000 and agreed to
finance the completion of the Film, advancing to the Studio the sum of $538,819,
in exchange for which M&A received an 80% interest in the Studio. In March 1997,
the Company was approached by representatives of the Hungarian government to
provide programming aimed at retaining workers who had lost their jobs due to
business restructuring. To secure this contract, the Company required a
production studio, and therefore, in April 1997, the Company purchased back 80%
of the Studio from M&A. The Company paid $743,819, with $300,000 having been
paid in March 1997, approximately one week prior to closing of the purchase, and
$443,819 was represented by an unsecured note with annual, simple interest of 8
1/2% due December 31, 1997.
In July 1997, the Company and M&A agreed to convert the $443,819 note
payable to M&A., dated April 1, 1997, into 173,266 non-registered shares of
common stock in the Company.
In April 1997, the Company paid 2,000 shares of its common stock to a
consultant in payment for consulting services.
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.
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.
37
<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 2,585,600 shares of Common Stock 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 consists of one share of Series A Convertible Cumulative
Redeemable Preferred Stock and one Common Stock Purchase Warrant. On September
9, 1997, the Underwriter determined to separate the components of the Units
effective September 22, 1997.
The Warrants will trade under the symbol HBCOW, and the Preferred Shares
will trade under the symbol HBCOP.
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 therefore, 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
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 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, 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, 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.
38
<PAGE>
Because the terms of each series of Preferred Stock may be fixed by the
Company's Board of Directors without Stockholder action, Preferred Stock could
be issued with terms calculated to defeat a proposed takeover of the Company, or
to make the removal of the Company's management more difficult. Under certain
circumstances, this could have the effect of decreasing the market price of the
Preferred Shares, the publicly held Warrants, the Common Stock and the Units.
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" (the "Preferred Shares") 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 as
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.
39
<PAGE>
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.
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 1,603,900 Common Stock Purchase Warrants (the
"Warrants"). Each Warrant entitles the holder to purchase until December 20,
2000 one share of Common Stock at an exercise price of $6.00. The Warrants are
subject to redemption by the Company at any time after April 20, 1997 on 30 days
notice at $.25 per Warrant provided that the closing sale price, or if none, the
closing bid price of the Common Stock is $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 or the Underwriter's Warrant. The Company is
not required to issue fractional shares. The holder of a Warrant does not
possess any rights as a stockholder of the Company unless he exercises his
Warrant and obtains Common Stock. The Warrants have been issued in registered
form under a Warrant Agreement dated as of December 20, 1995 and amended by
agreement dated as of February 5, 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 Offerings in December 1995 and February 1997) 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 the Unit offering, the Company sold 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.
REGISTRATION RIGHTS
The Company has granted certain registration rights to the persons who
purchased the 265,000 shares of its Common Stock in the 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.
40
<PAGE>
TRANSFER AGENT
The transfer agent for the Common Stock and for the Preferred Shares is
American Stock Transfer & Trust Co., 40 Wall Street, New York, New York 10005.
REPORTS TO STOCKHOLDERS
The Company furnishes its Stockholders 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.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has 2,585,600 shares of Common Stock outstanding as of the
date of this offering, of which 1,022,500 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 one year, 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 two years is entitled to sell such shares
under Rule 144 without regard to the volume limitations described above. Of such
1,022,500 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 of their agreement 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 satisfied their holding period in July 1996 and
holders of 200,000 satisfied their holding period in August 1996. Of such
352,000 shares, 237,000 have been sold. 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."
41
<PAGE>
SELLING SECURITYHOLDERS
The following table sets forth information concerning the beneficial
ownership of Common Stock by the holders of the Underwriter's Warrants (the
"Selling Securityholders") as of the date of this Prospectus and the number of
shares included for sale in this Prospectus. Such information was furnished to
the Company by the individual Selling Securityholders.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OWNED SHARES TO BE SHARES TO BE OUTSTANDING
PRIOR TO THE SOLD IN THE OWNED AFTER THE SHARES OWNED
NAME OFFERING(1) OFFERING(1) OFFERING AFTER OFFERING
- ---- ------------ ------------ --------------- --------------
<S> <C> <C> <C> <C>
John A. Bruno 130,000 130,000 0 0
Michael J. Will 57,000 57,000 0 0
John C. Cioffoletti 53,000 53,000 0 0
</TABLE>
(1) Consists of shares issuable upon exercise of the 100,000 Underwriter's
Warrants and the 140,000 Common Stock Purchase Warrants underlying the
Underwriter's Stock Warrants issued in connection with the Company's
initial public offering of securities in December 1995. The
Underwriter's Stock Warrants, Underwriter's Warrants and Common Stock
Purchase Warrants underlying the Underwriter's Warrants have also been
registered for sale by such persons.
The Company has agreed to indemnify the Selling Securityholders and the
Selling Securityholders have agreed to indemnify the Company against certain
civil liabilities, including liabilities under the Securities Act.
None of the Selling Securityholders has held any offices or maintained
any material relationships with the Company or any of its predecessors during
the past three years other than as principals of the underwriter of the
Company's prior public offerings of securities.
The warrants held by the Selling Securityholders and the Common Stock
issuable upon exercise of such warrants may be sold from time to time as market
conditions permit in the over-the-counter market, or otherwise, at prices and
terms then prevailing or at prices related to the then current market price, or
in negotiated transactions. The shares offered hereby may be sold by one or more
of the following methods, without limitation: (a) a block trade in which a
broker or dealer so engaged will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
(d) face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the Selling
Securityholders may arrange for other brokers or dealers to participate. Such
brokers or dealers may receive commissions or discounts from Selling
Securityholders in amounts to be negotiated immediately prior to the sale. Such
brokers or dealers and any other participating brokers or dealers may be deemed
to be "underwriters" within the meaning of the Securities Act of 1933, in
connection with such sales.
The Selling Securityholders will pay the expenses of their counsel, and
the Company will pay the other expenses of this offering.
42
<PAGE>
PLAN OF DISTRIBUTION
The Common Stock issuable upon exercise of the Warrants is being
offered directly by the Company pursuant to the terms of the Warrant Agreement.
A Warrant holder who desires to exercise any Warrants should execute the
Subscription Form on the Warrant certificate and submit it, together with a
check for the appropriate amount made payable to "Hungarian Broadcasting Corp."
to American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005.
WARRANT SOLICITATION FEE
In connection with its initial public offering of securities in 1995,
the Company entered into an underwriting agreement (the "Underwriting
Agreement") with J.W. Barclay & Co., Inc. ("Barclay"), pursuant to which Barclay
acted as the Underwriter for the Company's offer and sale of 1,150,000 shares of
Common Stock and 1,610,000 Common Stock Purchase Warrants.
The Underwriter Agreement provides that upon the exercise of any
Warrants after April 20, 1997, the Company may, to the extent permitted by
applicable law and the rules of the Securities and Exchange Commission and the
NASD, pay Barclay a fee of up to 10% of the aggregate exercise price if: (i) the
market price of the Common Stock on the date each Warrant is exercised is
greater than the then exercise price of such Warrants; (ii) the exercise of such
Warrant was solicited by a member of the NASD; (iii) such Warrant is not held in
a discretionary account; (iv) disclosure of compensation arrangements was made
both at the time of the offering and at the time of exercise of such Warrants,
and (v) the solicitation of such Warrant was not in violation of Rule l0b-6
promulgated under the 1934 Act. In addition, unless an exemption by the
Commission is granted from the provisions of Rule l0b-6, Barclay will be
prohibited from engaging in any market-making activities or solicited brokerage
activities with regard to the Company's securities during the periods prescribed
by Rule l0b-6 (two business days before the solicitation of the exercise of any
Warrants) until the latter of: (i) the termination of such solicitation
activity; or (ii) the termination by waiver or otherwise of any right Barclay
may have to receive a fee for the exercise of the Warrants following such
solicitations.
LEGAL MATTERS
Certain legal matters have been passed upon by for the Company by
Ronald Scott Moss, Esq., 445 Park Avenue, New York, New York 10022. Ronald Scott
Moss is Secretary of the Company. He holds options to purchase 20,000 shares of
the Company's Common Stock.
EXPERTS
The consolidated balance sheets as of December 31, 1996 and June 30, 1996;
the consolidated statements of operations, stockholders' equity and cash flows
for the period July 1, 1996 through December 31, 1996 and for the year ended
June 30, 1996 appearing in this Prospectus have been included herein in reliance
on the report 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 for the period from
September 14, 1994 (date of inception) through June 30, 1995 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 Ormai & Partner, of Budapest, Hungary, Hungarian special counsel to the
Company.
43
<PAGE>
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.
44
<PAGE>
HUNGARIAN BROADCASTING CORP.
FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Accountants ............................................... F-2
Consolidated balance sheets as of December 31, 1996, June 30, 1996 and 1995 and
June 30, 1997 (unaudited) ....................................................... F-4,
F-8
Consolidated statements of operations for the six months ended December 31,
1996, for the year ended June 30, 1996, for the period from September 14, 1994
(date of inception) through June 30, 1995 and for the three months ended June
30, 1996 (unaudited) and 1997 (unaudited) ........................................ F-5,
F-9
Consolidated statements of stockholders' equity for the period September 14,
1994 (date of inception) through June 30, 1995, for the year ended June 30,
1996, for the six months ended December 31, 1996........... ...................... F-6
Consolidated statements of cash flows for the six months ended December 31,
1996, for the year ended June 30, 1996, for the period from September 14, 1994
(date of inception) through June 30, 1995 and for the three months ended June
30, 1996 (unaudited) and 1997 (unaudited) ........................................ F-7,
F-10
Notes to consolidated financial statements for the six months ended December 31,
1996, for the year ended June 30, 1996 and for the quarter ended June 30, 1997
(unaudited) ...................................................................... F-11
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Hungarian Broadcasting Corp.
We have audited the accompanying consolidated balance sheets of Hungarian
Broadcasting Corp. and subsidiaries (the "Company") as of December 31, 1996 and
June 30, 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the period July 1, 1996 through December
31, 1996 and for the year ended June 30, 1996. 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 audits. 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 audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the December and June 1996 consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of Hungarian Broadcasting Corp., as of December 31, 1996 and
June 30, 1996, and the results of its operations and its cash flows for the six
month period ended December 31, 1996 and the year ended June 30, 1996, in
conformity with generally accepted accounting principles in the United States.
COOPERS & LYBRAND
Budapest, Hungary
April 11, 1997
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Hungarian Broadcasting Corp.
We have audited the accompanying consolidated balance sheet of 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
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
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 DECEMBER 31, 1996 AND JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
A S S E T S
DECEMBER 31 JUNE 30
----------- -----------------------------
1996 1996 1995
----------- ----------- ----------
Current Assets:
<S> <C> <C> <C>
Cash and cash equivalents ..................... $ 375,823 $1,462,379 $ 295,006
Accounts receivable, net of allowance of
$28,546, $82,536, $0 and $26,076 ............ 605,826 191,715 87,598
Value added tax receivable .................... -- 123,175 83,429
Program rights costs, net of accumulated
amortization of $236,000, $250,000, 0
and $521,500 ................................ 1,142,000 500,000 --
Due from related parties ...................... -- -- --
Prepaid expenses and other current
assets ...................................... 117,331 42,383 5,000
---------- ---------- ----------
Total current assets ..................... 2,240,980 2,319,652 471,033
---------- ---------- ----------
Investments ................................... -- 653 --
Plant, property and equipment, net of
accumulated depreciation of $44,080, $14,067,
$47,310 and $56,928 .......................... 443,633 136,296 58,562
Broadcast license costs, net of accumulated
amortization of $669,931, $458,405, $35,453
and $777,457 ................................ 1,480,583 1,692,109 2,115,061
Deferred financing and other intangibles, net
of accumulated amortization of $28,870,
$98,460, $46,655 and $4,262 ................. 46,329 103,341 146,079
Other ......................................... 89,680 -- --
---------- ---------- ----------
Total assets ............................. $4,301,205 $4,252,051 $2,790,735
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
Current liabilities:
<S> <C> <C> <C>
Current portion of notes payable ............ $1,867,700 $ 975,412 $ 959,156
Accounts payable ............................ 763,821 479,047 264,112
Accrued expenses ............................ 387,844 129,271 89,627
Due to related parties ...................... 1,731,737 644,720 495,995
Other ....................................... 60,852 41,307 47,424
---------- ----------- -----------
Total current liabilities .............. 4,811,954 2,269,757 1,856,314
---------- ----------- -----------
Notes payable, less current portion ......... -- -- 890,839
Minority interest ........................... -- 40,326 --
---------- ----------- -----------
Total liabilities ...................... 4,811,954 2,310,083 2,747,153
---------- ----------- -----------
Commitments and contingencies (Note 12)
Stockholders' equity
Preferred stock, $.001 par value-shares
authorized 5,000,000; issued and outstanding
100,000, 0, 0, and 526,500 .................. 100 -- --
Common stock, $.001 par value--shares
authorized 15,000,000; issued and outstanding
2,583,600, 2,583,600, 1,265,000 and 2,583,600 2,583 2,583 1,265
Additional paid-in capital .................. 7,119,001 6,789,029 862,545
Accumulated deficit ......................... (7,758,648) (4,980,040) (830,358)
Cumulative translation adjustment ........... 126,215 130,396 10,130
---------- ----------- -----------
Total stockholders' equity ............. (510,749) 1,941,968 43,582
---------- ----------- -----------
Total liabilities and stockholders' equity $4,301,205 $ 4,252,051 $ 2,790,735
========== =========== ===========
</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 SIX MONTHS ENDED DECEMBER 31, 1996,
FOR THE YEAR ENDED JUNE 30, 1996, FOR THE PERIOD FROM
SEPTEMBER 14, 1994 (DATE OF INCEPTION) THROUGH JUNE 30,1995
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31 YEAR ENDED PERIOD ENDED
1996 JUNE 30 1996 JUNE 30 1995
---------------- ------------ -----------------
<S> <C> <C> <C>
Net revenues ............................... $ 1,239,418 $ 672,108 $ 72,043
Expenses
Other operating costs and expenses ......... 1,679,859 2,038,828 185,469
Amortization of deferred program costs ..... 736,000 250,000 --
Amortization of broadcast license costs .... 211,526 423,052 35,453
Selling, general and administrative expenses 1,428,982 1,639,989 339,471
----------- ----------- -----------
4,056,367 4,351,869 560,393
----------- ----------- -----------
Operating loss ............................. (2,816,949) (3,679,761) (488,350)
Interest and other income .................. 146,968 49,671 2,327
Interest expense ........................... (78,588) (481,238) (74,310)
Foreign currency exchange rate (loss) gain . (30,039) -- --
Net loss before minority interest .......... (2,778,608) (4,111,328) (560,333)
Minority interest .......................... -- (38,354) --
----------- ----------- -----------
Net loss ................................... $(2,778,608) $(4,149,682) $ (560,333)
=========== =========== ===========
Net loss per share ......................... $ (1.08) $ (2.01) $ (0.39)
Weighted average number of common shares
outstanding ............................... 2,583,600 2,067,008 1,427,500
</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 PERIOD SEPTEMBER 14, 1994 (DATE OF INCEPTION)
THROUGH JUNE 30, 1995, FOR THE YEAR ENDED JUNE 30, 1996,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------------- ----------------- paid-in
Shares Amount Shares Amount capital
------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
Initial issuance of common stock -
Sept. 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 ......................
Net losses for period ...................
Foreign currency translation ............
adjustment ..............................
------- ------ -------- -------- ----------
BALANCE, JUNE 30, 1995 .................. 1,265,000 1,265 862,545
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 -- Dec 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 ............................
Net loss ................................ (4,149,682)
------- ------ --------- --------- ---------
BALANCE, JUNE 30, 1996 .................. 2,583,600 2,583 6,789,029
Issuance of preferred stock ............. 100,000 100 329,972
Net loss for period .....................
Foreign currency translation
adjustment ............................
------- ------ --------- -------- ---------
BALANCE, DECEMBER 31, 1996 ............. 100,000 $ 100 2,583,600 $ 2,583 $ 7,119,001
</TABLE>
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD SEPTEMBER 14, 1994 (DATE OF INCEPTION)
THROUGH JUNE 30, 1995, FOR THE YEAR ENDED JUNE 30, 1996,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
(continued)
<TABLE>
<CAPTION>
Accumu- Currency Total
lated translation stockholders'
Deficit adjustment equity
------- ----------- ------------
<S> <C> <C> <C>
Initial issuance of common stock -
Sept. 1994 ........................... $ 8,500
Sale of common stock to private placement
investors--Nov. and Dec 1994 .......... 405,310
Issuance of common stock -
March 1995 ... ....................... 450,000
Cumulative losses incurred by acquired
subsidiaries attributable to
minority interest ...................... (270,025) (270,025)
Net losses for period ................... (560,333) (560,333)
Foreign currency translation ............
adjustment .............................. 10,130 10,130
------- -------- ---------
BALANCE, JUNE 30, 1995 .................. (830,358) 10,130 43,582
Issuance of common stock -
July 1995 ............................. 500,000
Issuance of common stock -
August 1995 ........................... 549,812
Shares contributed by officers for
cancellation -- Dec 1995.............. --
Initial public offering in
December 1995 ......................... 5,991,740
Public offering costs ................... (1,150,286)
Exercise of warrants during year ........ 36,536
Foreign currency translation
adjustment ............................ 120,266 120,266
Net loss ................................ (4,149.682) (4,149.682)
--------- -------- ---------
BALANCE, JUNE 30, 1996 .................. (4,980,040) 130,396 1,941,968
Issuance of preferred stock ............. 330,072
Net loss for period ..................... (2,778,608) (2,778,608)
Foreign currency translation
adjustment ............................ (4,181) (4,181)
--------- -------- ---------
BALANCE, DECEMBER 31, 1996 ............. $ (7,758,648 $ 126,215 $ (510,749)
</TABLE>
F-6A
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996,
FOR THE YEAR ENDED JUNE 30, 1996, FOR THE PERIOD FROM
SEPTEMBER 14, 1994 (DATE OF INCEPTION) THROUGH JUNE 30, 1995
<TABLE>
<CAPTION>
Six months Year Period
ended ended ended
December 31, June 30, June 30,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(2,778,608) $(4,149,682) $ (560,333)
--------- --------- -------
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of intangibles ............. 1,044,264 724,757 249,103
Provision for doubtful accounts ......... 82,253 82,536 --
Depreciation ............................ 30,913 13,798 1,786
Foreign exchange losses ................. 30,039 120,266 --
Changes in operating assets and
liabilities:
Increase in accounts receivable ......... (513,874) (186,653) (87,598)
(Increase)decrease in VAT receivable .... 169,905 (39,746) (83,429)
Increase in prepaid expenses and other
current assets ........................ (76,902) (37,383) (5,000)
Increase in other assets ................ (89,680) -- --
Increase in accounts payable ............ 505,467 214,935 264,112
Increase in accrued expenses ............ 283,362 39,644 89,627
Increase (decrease) in other liabilities (218,594) (6,117) 15,734
--------- --------- -------
Net cash used in operating activities . (1,531,455) (3,223,645) (115,998)
--------- --------- -------
Cash flows from investing activities:
Payment for broadcast license cost ....... -- -- (2,146,744)
Purchase of plant, property and equipment (346,054) (91,532) (105,872)
Payment for organizational costs ......... -- -- (40,165)
Purchase of investments .................. -- (653) --
Purchase of program rights costs ......... (611,899) (750,000) --
Net increase in deferred financing costs . -- (9,067) --
--------- --------- ---------
Net cash used in investing activities .... (957,953) (851,252) (2,292,781)
Cash flows from financing activities:
Increase in advances from related parties 178,070 148,725 160,285
Proceeds from issuance of common stock ... -- 5,927,802 458,500
Proceeds from issuance of preferred stock 450,000 -- --
Proceeds from issuance of notes payable .. 850,000 -- 2,120,000
Payments of notes payable, net of issue
discount ................................. -- (874,583) --
Payments for offering costs .............. (69,926) -- (35,000)
Increase in liability to minority
stockholders ........ -- 40,326 --
--------- --------- ---------
Net cash provided by financing
activities .......................... 1,408,144 5,242,270 2,703,785
--------- --------- ---------
Effect of exchange rate changes on cash and
cash equivalents ............................. (5,292) -- --
Net change in cash and cash equivalents ....... (1,086,556) 1,167,373 295,006
--------- --------- ---------
Cash and cash equivalents at beginning of
period ...................................... 1,462,379 295,006 --
--------- --------- ---------
Cash and cash equivalents at end of period .... .$375,823 $ 1,462,379 295,006
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid ......................... $ 0 $ 64,118 --
Noncash investing and financing activities:
Capitalized program rights costs
payable in installments through
December 1997 ......................... $ 768,000 $ 0 --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED BALANCE SHEETS
(Expressed US$)
(Unaudited)
<TABLE>
<CAPTION>
A S S E T S
JUNE 30, DECEMBER 31
1997 1996
------------- ----------
Current Assets:
<S> <C> <C>
Cash and cash equivalents ................................................ $ 708,177 $ 375,823
Accounts receivable, net of allowance of $28,546,
$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
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
JUNE 30, DECEMBER 31
1997 1996
------------ -----------
Current liabilities:
<S> <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 ...................................... 200,000 --
Other .................................................................... 223,777 60,852
---------- ----------
Total current liabilities ............................................. 3,924,639 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, 2,583,600 ............................ 2,585 2,583
Additional paid-in capital ............................................... 10,420.691 7,119,001
Accumulated deficit ...................................................... (8,972,303) (7,758,648)
Cumulative translation adjustment ........................................ 299,796 126,215
----------
Total stockholders' equity ............................................ 1,751,296 (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.
F-8
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Expressed in US$, except share and per share amounts)
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
ENDED ENDED
---------------------------- ----------------------------
JUNE 30, 1997 JUNE 30,1996 JUNE 30, 1997 JUNE 30,1996
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net revenues ............................. $ 1,143,344 $ 240,910 $ 1,716,859 $ 288,437
Expenses
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 ............................ (200,000) -- (200,000) --
Interest expense ......................... (56,677) (174,858) (118,460) (264,886)
Foreign currency exchange rate gain(loss) (14,970) -- 4,126 --
----------- ----------- ----------- -----------
Net loss ................................. $ (66,202) $(1,499,394) $(1,137,428) $(2,429,646)
Net loss per share ....................... $ (0.03) $ (0.58) $ (0.44) $ (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
F-9
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Expressed in US$)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
-------------- --------------
Cash flows from operating activities
<S> <C> <C>
Net loss .................................................. $(1,137,428) $(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 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 stockholders .............. -- 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
F-10
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1996
AND THE SIX MONTHS ENDED DECEMBER 31, 1996
(AUDITED)
1. ORGANIZATION AND BUSINESS
Hungarian Broadcasting Corporation (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. On June 16, 1995, the Company acquired a
90% interest in VI-DOK Video es Filmgyarto studio Kft. ("VI-DOK") for $240,000,
and on May 30, 1995 an 80% interest in DNTV Kft. ("DNTV") for $176,000, two
Hungarian companies (the "Licensees") which had been granted television licenses
by the Hungarian Cultural Ministry in April 1994 to broadcast over Budapest
Channel AM-Micro A3 ("A3") from July 1, 1994 through July 1, 2000. Broadcasting
on A3 commenced in September 1994. The acquisitions were accounted for as
purchases and, accordingly, the purchase price was allocated to the assets
acquired and the liabilities assumed based on their fair market values. The
excess of the purchase price over the fair value of net assets acquired is
classified as broadcast license costs. The Licensees effectively ceased
operations shortly after their acquisition and the Company's wholly-owned
subsidiary HBC continued the broadcasting thereafter. In September 1996, the
Company renamed its station "MSAT." In December 1996, both VI-DOK and DNTV were
converted from Kft.s to Rt.s, a corporate structure for larger companies in
Hungary, in order to meet requirements of Hungarian media legislation.
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. At December 31, 1996 and June 30,
1996, respectively, 62% and 54% of total assets, and 24% and 35% of total
liabilities of the Company were maintained in the Company's Hungarian
subsidiaries accounts.
In May 1997, the Company formed Hungarian Broadcasting Corporation
Televizios Rt. ("HBC Rt.") as a wholly owned subsidiary. 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and all its subsidiaries (which are all majority owned and in
which the Company has control over their operations). All material intercompany
transactions and balances have been eliminated in consolidation.
The subsidiaries of the Company are as follows:
COUNTRY OF
NAME INCORPORATION PERCENTAGE OWNED
---------- ------------- ----------------
HBC Kft.......... Hungary 100%
VI-DOK Rt........ Hungary 90%
DNTV Rt.......... Hungary 80%
F-11
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1996
AND THE SIX MONTHS ENDED DECEMBER 31, 1996
(AUDITED)
(B) FISCAL YEAR
Effective March 14, 1997, the Company changed its fiscal year-end from
June 30 to December 31.
(C) REVENUE RECOGNITION
Revenue primarily results from the sale of advertising time. Advertising
revenue is recognized at the time the commercials are broadcast.
(D) BARTER TRANSACTIONS
Revenue from barter transactions (television advertising time provided in
exchange for goods and services) is recognized when commercials are broadcast;
merchandise or services received are charged to expense (or capitalized, as
appropriate) when received or used. The Company records barter transactions at
the estimated fair market value of the services and merchandise received unless
not readily determinable in which case the transaction is recorded at the
estimated fair market value of the advertising time provided. If services or
merchandise is provided prior to the broadcast of a commercial, a liability is
recorded. Likewise, if a commercial is broadcast first, a receivable is
recorded. There were no barter gains or losses, receivables or payables at
December 31, 1996 and June 30, 1996.
(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 ranging from nine
to fifteen months. Program rights are reported at the lower of unamortized cost
or estimated net realizable value.
(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) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is recorded
following a straight-line method over the estimated useful lives of the assets,
which is five years for television broadcasting and production equipment, three
to five years for office equipment and fixtures and fittings and five years for
automotive equipment. The Company reviews for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company evaluates recoverability using an undiscounted cash
flow approach over the remaining life of the assets. Leasehold improvements are
amortized over the life of the lease or the related asset, whichever is shorter.
When assets are retired or disposed of, the costs and accumulated depreciation
or amortization are removed from the respective accounts and any related gain or
loss is recognized. Maintenance and repairs are charged to expense when
incurred. Significant expenditures, which extend useful lives of assets, are
capitalized.
(H) BROADCAST LICENSE COSTS
The costs of acquiring licenses to broadcast are capitalized and amortized
over the life of the related licenses. Broadcast license costs acquired for
$2,150,514 are being amortized over the life of the relevant licenses which
terminate in July 2000. Broadcast license costs are reported at the lower of
unamortized cost or estimated net realizable value.
F-12
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1996
AND THE SIX MONTHS ENDED DECEMBER 31, 1996
(AUDITED)
(I) INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). This Statement requires a liability approach for measuring deferred taxes
based on temporary differences between the financial statement and income tax
bases of assets and liabilities existing at each balance sheet date using
enacted rates for the years in which the taxes are expected to be paid or
recovered.
(J) 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.
(K) FOREIGN CURRENCY TRANSLATION
The functional currency is the United States dollar for the Company and the
Hungarian Forint for its three Hungarian subsidiaries. Assets and liabilities in
foreign currencies are translated to each company's functional currency using
the corresponding exchange rate in effect at the balance sheet date with any
resulting gain or loss included in net income. Assets and liabilities of the
subsidiaries are translated into the reporting currency (U. S. dollar) using the
rate in effect at the balance sheet date and equity accounts using the
historical rate. The statement of operations and cash flows is translated using
the weighted average rate in effect for the period. Gains and losses from these
transactions are recorded as a separate component of stockholders' equity. Gains
and losses resulting from transactions by the companies in currencies other than
their functional currency are included in net income.
(L) CASH EQUIVALENTS
The Company classifies as cash equivalents all highly liquid investments
with a maturity of three months or less at the time of purchase.
(M) 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 subsidiaries as the source
of its own dividends. 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. At December 31, 1996,
there were no significant distributable reserves in the Hungarian subsidiaries
of the Company.
In 1996 and in February 1997, the Company issued shares of Series A
Convertible Cumulative Redeemable Preferred Stock. The Company may pay dividends
on this Preferred Stock either in cash or in shares of Common Stock. For the
foreseeable future, the Company intends to make payments on these securities in
shares of Common Stock.
(N) CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash and trade
receivables. The Company places its temporary cash and investments with high
quality financial institutions. At times, demand deposits and cash equivalents
may be in excess of the FDIC and National Depository Insurance Fund in Hungary
insurance limits. Concentration of credit risk with respect to trade receivables
are significant due to the Company's largest advertising customer representing
approximately 27% and 10% of total revenue and 25% and 24% of total receivables
at December 31, 1996 and June 30, 1996, respectively. Generally, the Company
does not require collateral or other security to support contract receivables.
(O) 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 periods.
F-13
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1996
AND THE SIX MONTHS ENDED DECEMBER 31, 1996
(AUDITED)
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.
(P) LITIGATION
The Company provides for contingent liabilities in connection with pending
legal matters when losses are both probable and estimable.
(Q) RECLASSIFICATIONS
Certain reclassifications were made to prior period amounts to conform to
current period classifications.
(R) 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 first quarter ended March 31, 1997, but has not yet
determined the impact of this statement.
3. VAT RECEIVABLE/PAYABLE
Value-added taxes paid in Hungary, for which a reimbursement claim was
submitted by the Company, have been included in current assets. When at a period
close VAT balances net to a payable, such balances are included in current
liabilities.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DECEMBER 31, 1996 JUNE 30, 1996
----------------- -------------
Television broadcasting and
production equipment ..................... $133,709 $ 7,010
Office equipment, fixtures and
fittings ................................. 160,457 70,371
Leasehold improvements.................... 186,278 65,338
Vehicles ................................. 7,269 7,644
------- -------
487,713 150,363
Less: Accumulated depreciation .......... 44,080 14,067
------- --------
$443,633 $136,296
5. PROVISION FOR INCOME TAXES
The Company and its subsidiaries had approximate cumulative deferred tax
assets of $1,810,000 and $1,050,000 at December 31, 1996 and June 30, 1996,
respectively, arising from net operating losses from the current and prior
periods. The cumulative net operating losses of $7,450,269, at December 31,
1996, since the Company's inception can be carried forward and applied to reduce
taxable income in the future. There are no deferred tax liabilities to be offset
by those future tax deductions, the future tax deductions cannot be realized by
loss carryback because no taxes have been paid, and the companies have had
pretax losses since their inception. Therefore, as there is not sufficient
positive evidence, as defined by SFAS 109, to overcome the negative evidence
discussed above regarding the recordability of the deferred tax assets, the
Company has fully provided for the deferred tax asset of $1,810,000 and
$1,050,000 at December 31, 1996 and June 30, 1996, respectively.
F-14
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1996
AND THE SIX MONTHS ENDED DECEMBER 31, 1996
(AUDITED)
6. NOTES PAYABLE
From November 1994 through March 1995, the Company sold (in a private
placement) units consisting of $2,120,000 aggregate principal amount of
unsecured promissory notes and 265,000 shares of common stock for an aggregate
purchase price of $2,120,000. The Company incurred $153,789 of financing
expenses relating to the private placement, of which $122,100 and $31,689 has
been allocated to debt and equity, respectively. The $153,789 includes legal
fees of $28,200 paid to the Company's former secretary/stockholder. The notes
bear simple interest at 6% per annum and were originally due upon the earlier of
December 31, 1995 or the successful consummation of the initial public offering,
which was rescinded during November 1995 (See Note 12). 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 initial public
offering. 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 $42,294, and $11,820 and $84,588 and
$23,640, respectively, as of December 31, 1996 and June 30, 1996. During January
1996, $1,060,000 of the notes were repaid.
The balance of the notes payable were $1,867,700 and $975,412 at December
31, 1996 and at June 30, 1996 including the unamortized portion of the original
issue discount of $42,294 and $84,588, respectively.
In December 1996, the Company borrowed $850,000 by issuing promissory notes
payable upon the earlier of one year from the date of issuance or the
consummation of a public offering of securities by the Company with interest at
18% per annum. These notes are collateralized by a pledge of 370,000 shares of
common stock owned by the President of the Company, Peter E. Klenner, and 30,000
shares owned by Frank R. Cohen, Treasurer of the Company at that time. In
February 1997, these borrowings were repaid from proceeds of a public offering
by the Company.
7. UNITS: PREFERRED STOCK AND COMMON STOCK PURCHASE WARRANTS
In September 1996, the Company sold 100,000 shares of Series A Convertible
Cumulative Redeemable Preferred Stock ("Preferred Stock") for $450,000 in a
private offering. Subsequently, the Company agreed to issue (for no additional
consideration) 100,000 Common Stock Purchase Warrants to the purchasers in such
offering on the basis of one warrant for each share of Preferred Stock purchased
in order to permit the purchasers to own and offer Units identical to those
being offered by the Company in a public offering in the first quarter of 1997.
Proceeds of the private placement were $329,972, net of issuance costs. Each
share of Preferred Stock is convertible into two shares of Common Stock and is
entitled to cumulative annual dividends of $1.20 payable on September 15 of each
year. The Company may, at its option, pay dividends in shares of Common Stock,
in lieu of cash. The Preferred Stock is redeemable by the Company at the
redemption price of $12 per share plus accumulated dividends, but only after the
closing price of the Common Stock equals or exceeds $10 per share for 20 of 30
consecutive trading days prior to the redemption notice. Shares of Preferred
Stock are entitled to one vote per share voting together with the Common Stock.
If dividends payable on the Preferred Stock have been unpaid for two dividend
periods, the holders of the Preferred Stock, voting as a class, shall be
entitled to elect two directors to the Board of Directors. Preferred Stock will
be entitled to a preference on liquidation equal to $10 per share, plus
accumulated unpaid dividends
Common Stock Purchase Warrants (the "Warrants") have the same terms as the
Common Stock Purchase Warrants issued during the initial public offering on
December 20, 1995. Each Warrant entitles the holder to purchase until December
20, 2000 one share of Common Stock at an exercise price of $6.00. The Warrants
are subject to redemption after the Units are separated at $0.25 per share
provided that the closing price of the underlying Common Stock equals or exceeds
$8.50 per share on at least 20 of 30 trading days prior to notice of redemption.
F-15
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1996
AND THE SIX MONTHS ENDED DECEMBER 31, 1996
(AUDITED)
8. COMMON STOCK
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.
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 (See Note 12). 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.
On December 20, 1995, the Company completed an initial public offering 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.
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.
9. STOCK OPTION PLAN
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
Company's 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. Options
generally vest over a period of one year. 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 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.
F-16
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1996
AND THE SIX MONTHS ENDED DECEMBER 31, 1996
(AUDITED)
Had compensation cost for the Company's Plan been determined based on the
fair value at the grant date of awards in 1995 and 1996 consistent with the
provisions of SFAS No. 123, the Company's net loss and net loss per share would
have been increased to the pro forma amounts indicated below:
PERIOD AS REPORTED PRO FORMA
------ ----------- ---------
SIX MONTHS ENDED
DECEMBER 31, 1996
-----------------
Net loss $(2,778,608) $(2,929,728)
Net loss per share $(1.08) $(1.13)
YEAR ENDED
JUNE 30, 1996
-------------
Net loss $(4,149,682) $(4,493,704)
Net loss per share $(2.01) $(2.17)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years are anticipated.
A summary of the status of the Company's stock options as of December 31,
1996 and June 30, 1996 and changes during the periods ended on those dates is
presented below:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31, 1996 JUNE 30, 1996
----------------------- ----------------
Wgtd Avg Wgtd Avg
Shares Exer. Price Shares Exer. Price
----------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 185,000 $7.91 -- $ --
Granted 285,000 5.53 225,000 7.39
Exercised -- -- -- --
Canceled (125,000) 9.30 (40,000) 5.00
-------- ----- ------- -----
Outstanding at end of period 345,000 $5.44 185,000 $7.91
Options exercisable at end of period -- --
Options available for future grants 5,000 165,000
Weighted average fair value of options
granted during the period $ 2.67 $ 3.67
</TABLE>
The fair value of each option granted during 1995 and 1996 is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: (i) dividend yield 0%, (ii) expected volatility of 50%,
(iii) 6.15% interest rate, and (iv) expected term of five years. The effects of
applying SFAS 123 in this pro forma disclosure are not indicative of future
amounts, SFAS 123 does not apply to awards prior to 1995, and additional awards
in future years are anticipated.
F-17
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1996
AND THE SIX MONTHS ENDED DECEMBER 31, 1996
(AUDITED)
The following table summarizes information about the Company's stock
options outstanding at December 31, 1996 and June 30, 1996, respectively.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Number Wgtd avg Wgtd avg Number Wgtd avg
outstanding remain. life exerc. price exercisable exer. price
----------- ------------ ------------ ----------- -----------
At December 31, 1996:
<S> <C> <C> <C> <C> <C> <C>
$ 5 195,000 4.6 yrs. $ 5.00 60,000 $ 5.00
$ 6 150,000 9.5 yrs $6.00 75,000 $ 6.00
At June 30, 1996:
$ 5 60,000 4.5 yrs. $ 5.00 --- ---
$ 9- $10 125,000 10.0 yrs. $ 9.30 --- ---
</TABLE>
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments for which it is
practical to estimate that value:
CASH AND CASH EQUIVALENTS
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates their fair values due to the short-term maturity of
those instruments.
NOTES PAYABLE:
The carrying amount of the Company's borrowings under its notes payable
approximates its fair value since the imputed interest rate on the notes payable
is comparable to the interest rate the Company could currently obtain on
borrowings with similar terms.
11. RELATED PARTY TRANSACTIONS
Certain officers and directors of the Company formerly controlled a company
(the "related party") that purchased $800,000 of unsecured promissory notes and
100,000 shares of common stock in the November 1994 private placement (Note 6).
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. The amount
outstanding relating to the unsecured promissory notes was $400,000 as of
December 31, 1996 and has been included in notes payable in the balance sheet.
In addition, the related party had advanced approximately $120,000 to the
Company, amounts which were repaid in January 1996. During the year ended June
30, 1996, the Company made interest free short term loans to the related party
for operational purposes. The total amount outstanding relating to these loans
was approximately $64,000 at December 31, 1996.
On June 30, 1995, the minority Stockholders of two of the Company's
subsidiaries were owed $416,000, as a result of the Company's purchase of their
stock in those subsidiaries. In February 1996, $189,800 was paid, leaving a
balance due of $226,200 at December 31, 1996 and June 30, 1996. The amount due
to related parties at December 31, 1996 also includes $40,000 due to an
officer/director.
F-18
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1996
AND THE SIX MONTHS ENDED DECEMBER 31, 1996
(AUDITED)
In February 1996, the Company licensed for $750,000 the exclusive Hungarian
rights to certain programming for MSAT for the period April through December
1996 from Power Television Limited ("Power TV"), a company owned by Justin
Bodle, a director of the Company. In July 1996, the Company agreed to license
for $1,378,000 the exclusive Hungarian rights to additional programming for the
period October 1, 1996 through December 31,1997 from Power TV. Amounts payable
totaling $1,151,500 and $190,000 are included in due to related parties at
December 31, 1996 and June 30, 1996, respectively.
Beginning in July 1996, the Company hired Justin Bodle as a consultant for
a two-year period at a fee of 1,000 shares of non-registered common stock per
month. The Company records compensation expense based on the fair value of these
securities at each month-end. Compensation expense relating to these consultant
services totaled $30,000 for the six-month period ended December 31, 1996. The
Company has fully provided for this amount, as these securities have not been
paid to the consultant as of December 31, 1996.
In November 1996, an officer/director advanced $200,000 as 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. The Company had approximately $201,000
outstanding in connection with this loan, including accrued interest at December
31, 1996.
Also in November 1996, Justin Bodle was granted options to purchase 40,000
share of Common Stock at $5.00 per share as partial inducement to defer
approximately $700,000 due to Power TV under the July 1996 license agreement
described above.
12. COMMITMENTS AND CONTINGENCIES
CONSULTING AND COMPENSATION AGREEMENTS
The Company has various employment agreements with executives and
management of the Company with terms ranging from two to five years with
approximately $736,000 in total future payments.
In January 1996, an officer/director resigned and forfeited remaining
payments on an employment contract and canceled an option to purchase 40,000
shares of Common Stock. At that time, the Company agreed to pay this
officer/director $144,000 if there were a change in 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.
LEASES
The Company has a five year lease agreement with Nethold Central Europe
B.V. ("Nethold"), commencing on October 6, 1996 and extending through October 6,
2001, at a quarterly rental fee of $100,000, whereby Nethold transmits the
Company's program signals by satellite throughout Hungary. In addition to the
quarterly rental payments, the Company is required to provide, free of charge,
advertising time with a value of $300,000 per year for the promotion of Nethold.
The Company has a nine year lease agreement with Orion Atlantic Satellite
Services ("Orion Atlantic"), commencing on August 31, 1996 and extending through
August 31, 2005, at a monthly rental fee of $27,240, whereby Orion Atlantic
provides the Company with space on its satellite to transmit its broadcast
signal to Nethold's uplink facilities in the Netherlands.
The Company leases office facilities in Budapest, Hungary under an
operating lease, with monthly payments of $12,000, plus value added tax,
expiring June 30, 2001.
F-19
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1996
AND THE SIX MONTHS ENDED DECEMBER 31, 1996
(AUDITED)
At December 31, 1996, the aggregate minimum rental payments required under
all operating leases that had initial or remaining terms in excess of one year
were as follows:
YEAR AMOUNT
---- ---------
1997 $870,880
1998 870,880
1999 870,880
2000 870,880
2001 704,042
Thereafter 1,199,157
---------
$5,386,719
Total rent expense for all operating leases amounted to $641,538 and
$762,135 for the six months and the year ended December 31, 1996 and June 30,
1996, respectively.
LICENSE PROCEEDING
TV 3, a competitor of the Company, which was granted a six year, 24 hour
per day microwave license, applied to the Ministry of Culture to overturn the
grant of the Company 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 was acting, it would also have granted the licenses
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 licenses 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 licenses had
been granted to the Licensees and that the Licensees may operate in accordance
with the terms of the licenses. 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 ruled in favor of the Company. Subsequently, TV 3
has requested a review of this matter by the Supreme Court, which is currently
pending. The Company's outside legal counsel expects a confirmation of the
Court's prior ruling. However, if the ruling is overturned and the Supreme Court
rules that the Company's licenses are invalid, the Company intends to apply for
new licenses. If these are then denied, the absence of broadcasting licenses
would have a material adverse effect on the Company's financial position,
results of operations and liquidity.
CLAIM REGARDING UNDERWRITERS
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
F-20
<PAGE>
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.
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. 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.
In March 1997, the Company and Starr dropped their actions against each
other and released each other from liability.
13. COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1996 WITH SIX MONTHS
ENDED DECEMBER 31, 1995 (UNAUDITED)
In March 1997, the Company changed its fiscal year-end from June 30 to
December 31. The following figures for the six months ended December 31,1996 and
1995 (unaudited) for the transition period resulting from the change in fiscal
year-end are for comparative purposes:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31 DECEMBER 31
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
Net revenues ....................................... $ 1,239,418 $ 383,671
Expenses
Other operating costs and expenses ........... 1,679,859 678,598
Amortization of deferred program costs........ 736,000 --
Amortization of broadcast license costs....... 211,526 199,462
Selling, general and administrative expenses.. 1,428,982 844,267
----------- ----------
4,056,367 1,722,327
Operating loss ............................... (2,816,949) (1,338,656)
Interest and other income ......................... 146,968 2,957
Interest expense .................................. (78,588) (254,706)
Foreign currency exchange rate loss............... (30,039) --
Write-off of deferred offering costs .............. -- (129,631)
----------- ----------
Net loss before minority interest ................. (2,778,608) (1,720,036)
----------- ----------
Net loss $(2,778,608) $(1,720,036)
------------ -----------
</TABLE>
14. SUBSEQUENT EVENTS
In February 1997, the Company in a public securities offering sold 426,500
Units of Series A Convertible Cumulative Redeemable Preferred Stock and Common
Stock Purchase Warrants for $10.00 per Unit. Net proceeds to the Company after
expenses from this Offering were $3,292,138. See Note 7 for a description of
these securities.
F-21
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1996
AND THE SIX MONTHS ENDED DECEMBER 31, 1996
(AUDITED)
In April 1997, both Imre Kovats, Executive Vice President of the
Company, and Frank R. Cohen, Secretary and Treasurer of the Company, resigned as
officers and directors. Mr. Kovats was recently appointed president, and Mr.
Cohen, chairman, of Hungarian Teleconstruct Corp., a provider of internet
services in Hungary. Each former officer/director stated that he would not have
sufficient time to devote to the Company. James H. Season, Chief Financial
Officer of the Company, was elected a director and appointed Treasurer. Ronald
Scott Moss was appointed Secretary.
In April 1997, the Company purchased 80% of Studio II., Ltd., a
Budapest based animation studio. This company was purchased from Peter E.
Klenner, President of the Company, for $743,819 of which $443,819 is represented
by an unsecured note with annual, simple interest of 8 1/2% due December 31,
1997.
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, if successful, is intended to be made on a "best efforts" basis. Each
GDR represents one share of the Company's common stock. It is anticipated that
the GDR's will be listed in the "Listed B Category" on the Budapest Stock
Exchange. In the event that the issue is not completed, the Company would need
to seek alternative sources of financing to fund the continued development and
operations of the Company.
F-22
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 1997
(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 monthsended 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.
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.
F-23
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 1997
(UNAUDITED)
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.
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 planned 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.
F-24
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 1997
(UNAUDITED)
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 $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 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 these broadcasting
licenses would not have a material adverse effect on the Company's financial
position, results of operations and liquidity, because the Company would
continue to operate under its new AM-Micro license.
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
F-25
<PAGE>
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.
F-26
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General corporation Law of the State of Delaware ("DGCL")
provides, in general, that a corporation incorporated under the laws of the
State of Delaware, such as registrant, may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than a derivative action by or in
the right of the corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another enterprise, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if such person acted
in good faith and in a manner such person reasonable believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such director,
officer, employee or agent of the corporation person's conduct was unlawful. In
the case of a derivative action, a Delaware corporation may indemnify any such
person against expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection with the defense or settlement of such
action or suit if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery of the State of Delaware or any other court in which such action was
brought determines such person is fairly and reasonably entitled to indemnity
for such expenses. Section 10 of the Company's Certificate of Incorporation, and
Article X of the Company's By-laws provide that the Company shall indemnify its
officers, directors, employees and agents to the extent permitted by the DGCL.
In addition, Section 9 of the company's Certificate of Incorporation provides,
in general, that no director of the Company shall be personally liable to the
Company or its stockholders for monetary damages for beach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL (which provides that under certain
circumstances, directors may be jointly and severally liable for willful or
negligent violations of the DGCL provisions regarding the payment of dividends
or stock repurchases or redemptions), or (iv) for any transaction from which the
director derived an improper personal benefit.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses of the registrant, other than underwriting discounts and
commissions, to be incurred in connection with the issuance and distribution of
the securities being registered hereby are estimated to be as follows:
Printing Fee
Accounting fees and expenses*
Legal Fees and expenses
Blue sky fees and expenses (including counsel fees and expenses)*
Transfer agent and Warrant agent fees and expenses*
Miscellaneous*
Total*
*Estimated
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant has sold securities to a limited
number of persons, as described below. Except as indicated, there were no
underwriters involved in the transactions and there were no underwriting
discounts or commissions paid in connection therewith. The purchasers of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
certificates for the securities issued in such transactions. All purchasers of
securities in each such transaction had adequate access to information about the
Registrant.
(1) On September 14, 1994, Registrant sold 850,000 Shares at $.0l per share to
Peter E. Klenner, (480,000), to Robert Genova, (320,000), and to Frank R. Cohen
(50,000). In July 1995, Mr. Genova transferred 30,000 shares to an unaffiliated
person and Mr. Klenner transferred 20,000 shares to two unaffiliated persons.
The issuances of these securities were considered to be exempt from registration
under Section 4(2) of the Securities Act of 1933 and the regulations promulgated
thereunder.
(2) In December 1994 and March 1995, Hungarian Teleconstruct Corp. ("HTEL"),
which at that time was an affiliated corporation, purchased 20 Units in a
private placement, each Unit consisting of the Company's 6% Bridge Note in the
principal amount of $40,000 ($800,000 aggregate) and 5,000 shares (100,000
aggregate) of Common Stock, for a total purchase price of $800,000. This
purchase was deemed part of the "November 1994 Bridge Financing." As additional
consideration for the purchase, registrant granted to HTEL an option to purchase
150,000 shares exercisable at $3 per share. In March 1995, HTEL exercised its
option and was issued 150,000 shares against payment of $450,000. The issuances
of these securities were considered to be exempt from registration under Section
4(2) of the Securities Act of 1933, and the regulations promulgated thereunder.
(3) From November 1994 to March 1995, Registrant sold to 31 persons an aggregate
of 33 units (the "Units"), each Unit consisting of the Company's 6% Bridge Note
in the principal amount of $40,000 and 5,000 shares of Common Stock for a
purchase price of $40,000 per Unit, or an aggregate of $1,320,000 (the "November
1994 Bridge Financing") and 165,000 shares. Adding the 20 units referred to in
paragraph 2 above to the 33 units referred to herein, a total of 53 units were
sold to private investors in the November Bridge Financing, for an aggregate
purchase price of $2,120,000. One-half of the 6% Bridge Notes were repaid with a
portion of the proceeds of the December 20, 1995 Offering. In connection with
the November Bridge Financing, the Registrant paid selling commissions of
$114,000 to unaffiliated NASD brokers. Officers and directors who effected sales
received no compensation for their services. Each of the purchasers signed a
letter indicating an agreement to hold the shares for investment. The issuance
of such securities was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof and Regulation D promulgated thereunder. The
names of the persons purchasing units pursuant to the private placement are as
follows:
II-2
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT NUMBER OF AMOUNT
NAME OF NOTES SHARES PAID
- ---- ---------------- --------- -------
<S> <C> <C> <C>
Walter W. Mathews $40,000 5,000 $40,000
Elias J. Lehaf $40,000 5,000 $40,000
Arie and Bonnie Seidler Joint Tenants with
Rights of Survivorship $20,000 2,500 $20,000
Richard G. David $20,000 2,500 $20,000
Arthur Inden $40,000 5,000 $40,000
Peter Rosenbauer $40,000 5,000 $40,000
Ara Vennogensverwaltung GmbH $40,000 5,000 $40,000
Dr. Barbara A. Lenehan $80,000 10,000 $80,000
Ben L. Berg $40,000 5,000 $40,000
W.L. Abt Inc $40,000 5,000 $40,000
Peter P. Smigowski $60,000 7,500 $60,000
CP Baker Venture Fund I LP $40,000 5,000 $40,000
Lawrence Auriana $120,000 15,000 $120,000
Dezso J. Ladanyi and Alice R. Ladanyi,
Joint Tenants with Rights of Survivorship $80,000 10,000 $80,000
Peter Lerner $60,000 7,500 $60,000
James G. Schindler $40,000 5,000 $40,000
John A. Miller $20,000 2,500 $20,000
Lifelines Care, Inc $20,000 2,500 $20,000
David C. Palmer $40,000 5,000 $40,000
Stephen N. Gibbs $40,000 5.000 $40,000
Dr. Paul H. Drugel $20,000 2,500 $20,000
Gerald Greenberg $40,000 5,000 $ 40,000
Joseph H. Dowling $40,000 5,000 $40,000
Thomas J. Kramer $20,000 2,500 $20,000
NFC ABW Trading Ltd. Edward M. Rose, Director $100,000 12,500 $100,000
Robert N. and Verena Erickson Joint Tenants
with Right of Survivorship $ 20,000 2,500 $20,000
Christopher P. Baker $40,000 5,000 $40,000
Martin T. Orne $40,000 5,000 $40,000
Les C. Vinney $40,000 5,000 $40,000
Mildred J. Geiss $20,000 2,500 $20,000
IRA FIBIO Christopher P. Baker DLSSC as $20,000 2.500 $20,000
Custodian
</TABLE>
II-3
<PAGE>
(4) In July 1995, Registrant sold 182,500 shares to 11 persons at a price of $3
per share, totaling $547,500 (the "July 1995 Bridge Financing"). One of the
persons purchasing shares was Peter E. Klenner who purchased 30,000 shares for
$90,000 and no commissions were paid in connection with this sale. Sales of the
shares were made by an unaffiliated NASD broker who received $1,500 as
commissions and by a European company which acted as a finder and received a fee
of $30,000. Each of the purchasers signed a letter indicating an agreement to
hold the shares for investment. The issuance of such securities was exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) thereof
and Regulation D promulgated thereunder. The names of the persons purchasing
shares pursuant to the private placement are as follows:
NAME SHARES PURCHASED AMOUNT PAID
- ---- ---------------- -----------
Joseph H. Dowling 5,000 $ 15,000
John A. Miller 7,500 $22,500
Christopher P. Baker 10,000 $30,000
CP Baker Venture Fund I LP 5,000 $15,000
Dr. Elias J. Lehaf 5,000 $15,000
Walter Abt 5,000 $15,000
James Schindler 5,000 $15,000
Peter Rosenbauer 10,000 $30,000
Arabella S.A. 66,667 $200,000
World Media Group Limited 33,333 $100,000
Peter B. Klenner 30,000 $90,000
(5) In August 1995, Registrant sold 200,000 shares to three persons for a price
of $3 per share ($600,000 aggregate) (the "August 1995 Bridge Financing"). Sales
of these shares were effected in Europe through a European broker who received a
10% commission. Each of the purchasers signed a letter indicating an agreement
to hold the shares for investment. The issuance of these securities was
considered exempt from registration under Section 4(2) of the Securities Act of
1933 and the regulations promulgated thereunder. The names of the three
investors, the number of shares purchased and the amounts paid are as follows:
NAME SHARES PURCHASED AMOUNT PAID
- ---- ---------------- -----------
M.M. Warburg & Co. KgaA 140,000 $420,000
European Value Fund LP 50,000 $20,000
Stephan Eilesbrecht-Kemena 10,000 $30,000
(6) In September 1996, the Company sold 100,000 Shares of Series A Convertible
Cumulative Redeemable Preferred Stock (the "Preferred Stock") to seven persons
for a price of $4.50 per share ($450,000 aggregate). Each of the purchasers
signed a letter indicating an agreement to hold the shares for investment. The
issuance of these securities was considered exempt from registration under
Section 4(2) of the Securities Act of 1933, and Regulation D promulgated
thereunder. The names of the seven investors, the number of shares of Preferred
Stock purchased and the amounts paid are as follows:
II-4
<PAGE>
NAME SHARES PURCHASED AMOUNT PAID
- ---- ---------------- ----------
Dean Rivera 10,000 $45,000
Patricia Weremeychik 10,000 $45,000
Mark Lyons 10,000 $45,000
Joan Downey 20.000 $90,000
Louis Spadafora 10,000 $45,000
Matthew Langdon 20,000 $90,000
John Delgaizo 20,000 $90,000
J.W. Barclay & Co., Inc. was the underwriter of such offering and
received a fee of $45,000 for its services in the offering. Such shares were
sold to accredited investors only in an aggregate offering limited to 100,000
shares without any form of general advertising, who acquired such securities for
themselves with knowledge that such securities cannot be resold without being
registered under the Securities Act or unless an exemption from registration is
then available. Exemption from any registration was claimed in reliance upon the
Rule 506 of Regulation D as well as Section 4(6) of the Securities Act of 1933.
The Company subsequently issued one Common Stock Purchase Warrant to such
purchasers for each share purchased for no additional cash consideration in
order to permit them to own and offer Units as described under "Certain
Transactions" in the Prospectus.
(7) The Company issued 4 promissory notes in an aggregate principal amount
of $850,000 to four persons in December 1996, which are repayable at the earlier
of December 31, 1997 or the closing of any public offering of securities with
interest at the rate of 18% per annum. Exemption from registration with respect
to the issuance of such notes is claimed under Section 4(2) of the Securities
Act of 1933 as a transaction not involving a public offering. The notes were
repaid in February 1997.
The certificates representing all of the aforesaid securities bear
appropriate legends restricting their sale and have stop transfer orders placed
thereon.
In permitting this Registration Statement to become effective, the
Commission shall not have been understood as having ruled that the claimed
exemptions are available in the circumstances set forth.
ITEM 27. EXHIBITS(1)
(1) (a) Form of Underwriting Agreement(1)
(b) Selected Dealer Agreement(l)
(3) (a) Certificate of Amendment to Certificate of Incorporation
filed June 28, 1996(1)
(b) Certificate of Incorporation filed September 14, 1994(1)
(c) Proposed Corrected Certificate of Designation Relating to the
Series A Convertible Preferred Stock (1)
(d) By-laws(1)
(4) (a) Form of Warrant Agreement(4)
(b) Amendment to Warrant Agreement, including Form of Common
Stock Purchase Warrant Certificate(l)
(c) Form of Series A Preferred Stock Certificate(l)
(d) Form of Underwriter's Unit Warrant(l)
(e) Form of Unit Certificate(1)
(5) (a) Opinion of Cohen & Cohen as to legality of shares
being offered(1)
II-5
<PAGE>
(10) (a) Employment agreement between Registrant and Peter E. Klenner(3)
(b) Employment agreement between Registrant and Imre M. Kovats(3)
(c) Financial Consultant agreement between Registrant and Robert
Genova(3)
(d) 1994 Incentive Stock Option Plan(3)
(e) Sharing agreement for space and facilities between Registrant
and Hungarian Telephone & Cable Corp. (3)
(f) Agreement to Purchase Shares in DNTV (3)
(g) Agreement to purchase shares in VI-DOK (3)
(h) Letter of intent with Kable Com(3)
(i) Offer from OKK Kft to Registrant to rent satellite space to
Company(3)
(j) Agreement with Land Studios Kft.(3)
(k) Lease agreement with HAKON Ltd.for space at Szamado, Budapest(3)
(l) Form of 6% Bridge Note(3)
(m) License to broadcast on A3(3)
(n) Consulting Agreement with J.W. Barclay & Co., Inc., dated
December, 1996(1)
(o) Amendment to Mergers and Acquisitions Agreement with
J.W. Barclay & Co., Inc.(l)
(p) Contracts for purchase of programming between Power TV Ltd.
and Registrant dated February 28 and July 29, 1996(5)
(q) Agreement between Nethold Central Europe BV and Registrant
dated July 5,1996(5)
(r) Management consulting agreement between Registrant and
Justine Bodle dated June 15, 1996(5)
(s) Agreement between Registrant and Banknet dated
June 26, 1996(5)
(t) Rental lease between Registrant and Investor Holding RT
dated June 25.1996(5)
(u) Agreement between the Company and Orion Atlantic, L.P.,
dated July 31, 1996(1)
(v) Settlement Agreement with Nethold Development BV, dated
May 22, 1997 (1)
(w) Antenna Hungaria Contract, dated May 30, 1997 (2)
(16) Letter from prior accountants Todman & Co. (6)
(21) Subsidiaries of the Registrant(3)
(23) (a) Consent of Cohen & Cohen (1)
(b) Consent of Simon, Buros & Partners(l)
(c) Consent of Coopers & Lybrand(1)
(d) Consent of Todman & Co.(1)
(e) Consent of Dr. Marianna Csabai(1)
(f) Consent of Ronald Scott Moss (1)
(25) Power of Attorney (included on signature page)
- -------------------
(1) Previously filed.
(2) Filed herewith.
(3) Incorporated by reference to corresponding exhibit in the Company's
Registration Statement on Form SB-2 (SEC file No.33-96674).
(4) Incorporated by reference to corresponding exhibit in the Company's
Registration Statement on Form SB-2 (SEC file No.33-80177).
(5) Incorporated by reference to the corresponding exhibit in the
Company's report on form 10K for the year ended December 31, 1996.
(6) Incorporated by reference to exhibit in the Company's report on Form
8-K dated April 11, 1996.
II-6
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) to reflect in the prospectus any facts or events
which individually or together represent a
fundamental change in the information in the
registration statement; and
(iii) to include any additional or changed material on the
plan of distribution.
(2) That, for determining any liability under the Securities
Act, it will treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the securities
at that time to be the initial bona fide offering;
(3) To file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
The undersigned registrant hereby undertakes that:
(1) For determining any liability under the Securities Act it
will treat the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(l) or (4) or 497(h) under the Securities Act as part of
this registration statement as of the time it was declared effective.
(2) For determining any liability under the Securities Act, it
will treat each post-effective amendment that contains a form of
prospectus as a new registration statement relating to the securities
offered therein, and the offering of such securities at that time as
the initial bona fide offering of these securities.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2, and authorized this post-effective
amendment to the registration statement to be signed on its behalf by the
undersigned, in the City of New York, State of New York, on September 26, 1997.
HUNGARIAN BROADCASTING CORP.
By: /s/Peter E. Klenner
-----------------------------
Peter E. Klenner, President
Each of the undersigned do hereby appoint Ronald Scott Moss its and his
true and lawful attorney to execute on behalf of the undersigned any and all
amendments(including post-effective amendments) to this Post-Effective amendment
and to file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed below by the following persons in the
capacities and on the dates stated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Peter E. Klenner Chairman, President CEO
- ------------------- and Director September 26, 1997
Peter E. Klenner
/s/Justin Bodle Director September 26, 1997
- -------------------
Justin Bodle
/s/James H. Season Chief Financial Officer, September 26, 1997
- ------------------- Treasurer and Director
James H. Season
II-8
The modification is registered under reg. no. 91044411
MODIFICATION 1 OF AGREEMENT NO.910.444
signed by parties on May 30 1997 AND MADE
by and between
HUNGARIAN BROADCASTING CORPORATION TELEVISION COMPANY (of 1118
Budapest, kelenhegyl ut 39.),
tax no.: 12288168-2-13,
sorting code: Raiffeisen UNIC bank 12001008-00183864-OO1OOOO1, as
User (hereinafter referred to as User), on the one hand, and
Antenna Hungaria Magyar Musorszoro es
Radiohirk6zlesi Reszvenytarsasag (of 1119 Budapest,
Xl.Petzval Jozsef utca 31-33,
mailing address H-1519 Budapest, P.O. Box 447),
tax no.: 10834730-2-44,
sorting code: Magyar Kullkereskedelmi Bank Rt. 10300002-20366522-
00003285~
as service provider (hereinafter referred to as Service provider)1 on the
other, wherein the above two contracting parties will be referred to
hereinafter as Parties.
I./1./e SHALL BE MODIFIED AS FOLLOWS:
Service provider undertakes to transmit the program signals from OMK
through channel R7 of AM-micro Budapest distribution system under terms and
conditions stated in Annex to Radio License and Studio License
no.136.438119931 as well as ORTT Statement of July 22, 1997 modifying the
latter.
IV./2 SHALL BE MODIFIED AS FOLLOWS:
Service provider shall provide the service stated in I./1./b from June 26,
1997 and service stated in I./1./e. from September 1 1997 on a continued
basis. The Service provider shall not be responsible for failure in doing
so, if the stated deadline is not observed due to delay in any
administrative licensing procedures for which the Service provider shall
not be accountable.
IV./11.SHALL BE MODIFIED AS FOLLOWS:
Service: provider shall provide the service stated in I./1./e. during the
program broadcasting time stated in ORTT Statement of July 22,1997 with a
reliability coefficient of 99.5% on annual basis. The failure due to the
failure of the microwave connection mentioned in I./1./b shall not be taken
into account for calculating the above reliability coefficient.
<PAGE>
V/2 SHALL BE MODIFIED AS FOLLOWS:
User states that he requests the provision of Service Provider's services
stated in I./1./a-d on a continued basis, for 24 hours per day, while
services stated in I.1 /e. will be required on a basis stated in ORTT
Statement of July 22, 1997.
The provisions of the initial agreement not concerned by this modification
shall remain in force without any change. From this day, the initial
agreement shall be valid in a form as modified hereby and herein.
Budapest, August 29, 1997
signed for and on behalf of
ANTENNA HUNGARIA
Magyar Musorszoro es Reszvenytarsasag Rt.
Budapest, XI. Petzval(J. u. 31-33.
Mailing address: 1519 Bp., P.O~Box 447
Phone: 203-6060
as Service provider
signed for and on behalf of
HUNGARIAN BROADCASTING CORPORATION
TELEVIZIOS RT
H-1118 Bp., Kelenhegyl U. 39.
Tax no.: 12288168-2-43
as User
