DRAFT 5/16/98
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
March 31, 1998 0-26808
HUNGARIAN BROADCASTING CORP.
(Exact name of Registrant as specified in its charter)
Delaware 13-3787223
-------- ----------
(State or other jurisdiction of (I.RS Employer
incorporation or organization) Identification No.)
445 Park Avenue, New York, NY 10022
-----------------------------------
(Address of principal executive offices)
(212) 758-9870
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest possible date:
Common Stock, $.001 par value 6,670,372 Shares*
(Class) ------------------
(Outstanding at May 7, 1998)
- -------------------------
* Excludes 1,330,000 shares of Common Stock held in escrows.
<PAGE>
HUNGARIAN BROADCASTING CORP.
INDEX
Page
Part I. Financial Information
Consolidated balance sheets as of March 31, 1998 (unaudited)
and December 31, 1997 2
Consolidated statements of operations for three month ended
March 31, 1998 (unaudited) and 1997 (unaudited) 3
Consolidated statements of cash flows for the three months ended
March 31, 1998 (unaudited) and 1997 (unaudited) 4
Notes to consolidated financial statements (unaudited) 5-11
Management's discussion and analysis of financial condition
and results of operations 12-16
Part II. Other Information 17
Signature 19
1
<PAGE>
Part I. Financial Information
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED BALANCE SHEETS
(Expressed in US$)
<TABLE>
<CAPTION>
A S S E T S March 31 December 31
------- -----------
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................ $ 220,371 $ 406,733
Accounts receivable, net of allowance of $40,792 and $43,237......... 460,376 469,163
VAT receivable....................................................... 20,458 ---
Program rights costs, net of accumulated amortization of
$191,073 and $0.................................................... 622,069 687,614
Prepaid expenses and other current assets............................ 341,080 177,026
Due from related parties............................................. 1,509,425 361,046
----------- ----------
Total current assets............................................. 3,173,779 2,101,582
----------- ----------
Property, plant and equipment, net of accumulated depreciation
of $245,433 and $112,939.......................................... 753,041 401,178
Production costs..................................................... 464,335 432,886
Copyrights........................................................... 411,670 401,434
Broadcast license costs, net of accumulated amortization of
$1,537,597 and $1,092,979......................................... 20,010,777 1,057,535
Deferred financing and other intangibles, net of accumulated
amortization of $25,197 and $1,130................................ 19,215 7,683
Other................................................................ 178,853 251,605
----------- ----------
Total assets................................................... $25,011,670 $4,653,903
=========== ==========
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
Current liabilities:
Current portion of notes payable..................................... $ 1,189,202 $1,027,306
Accounts payable..................................................... 1,265,816 676,191
Accrued expenses..................................................... 1,036,764 945,538
VAT payable.......................................................... --- 97,185
Due to related parties............................................... 825,816 932,123
Other................................................................ 774,923 247,394
----------- ----------
Total liabilities................................................. 5,092,521 3,925,737
----------- ----------
Commitments and contingencies (Note 8)...............................
Stockholders' equity:
Preferred stock, $.001 par value----shares authorized 5,000,000; issued
and outstanding 25,330 and 38,530; aggregate liquidation preference
approximately $253,000.................... 26 39
Common stock, $.001 par value--shares authorized 15,000,000;
issued and outstanding 6,567,372 and 3,929,281...................... 6,568 3,930
Additional paid-in capital........................................... 33,323,895 11,693,680
Accumulated deficit.................................................. (13,499,547) (11,105,715)
Accumulated other comprehensive income............................... 88,207 136,232
----------- ----------
Total stockholders' equity..................................... 19,919,149 728,166
----------- ----------
Total liabilities and stockholders' equity..................... $25,011,670 $4,653,903
=========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
2
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in US$, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1998 March 31,1997
-------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Net revenues $ 708,778 $ 573,515
Expenses
Other operating costs and expenses 1,116,357 410,205
Amortization of deferred program costs 191,073 285,500
Amortization of broadcast license costs 444,614 107,526
Selling, general and administrative expenses 1,280,135 935,764
----------- -----------
3,032,179 1,738,995
----------- -----------
Operating loss (2,323,401) (1,165,480)
Interest and other income 13,534 136,941
Interest expense (123,571) (61,783)
Foreign currency exchange rate gain 27,373 19,096
----------- -----------
Net loss $(2,406,065) $(1,071,226)
Other comprehensive income:
Foreign currency translation adjustment (48,025) (25,164)
----------- -----------
Comprehensive loss $(2,454,090) $(1,096,390)
=========== ===========
Basic loss per share:
Net loss per share $ (0.38) $ (0.42)
Weighted average number of common shares outstanding 6,392,999 2,583,600
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
3
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in US$)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------ -------------------
Cash flows from operating activities: (unaudited) (unaudited)
<S> <C> <C>
Net loss $(2,406,065) $(1,071,226)
----------- -----------
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of intangibles 690,616 420,086
Depreciation 107,568 22,190
Foreign exchange gains (27,379) (19,759)
Gain on sale of fixed assets (1,386) ---
Changes in operating assets and liabilities,
net of business acquired:
Decrease in accounts receivable 216,361 3,474
Increase in VAT receivable (99,468) (34,509)
Increase in prepaid expenses and other current assets (98,845) (81,979)
Decrease in other assets --- 89,680
Increase in accounts payable 339,700 30,504
Increase (decrease) in accrued expenses 68,534 (36,809)
Increase (decrease) in other liabilities (14,188) 60,000
Increase in production costs (51,576) ---
Increase in copyrights (14,958) ---
----------- -----------
Net cash used in operating activities (1,291,086) (618,348)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets, net of disposals (120,210) (16,849)
Proceeds from sale of fixed assets 1,124 ---
Purchase of program and film rights (105,311) ---
Purchase of investments --- (300,000)
Acquisition of business, net of cash acquired (779,705) ---
----------- -----------
Net cash used in investing activities (1,004,102) (316,849)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in advances from related parties 30,481 (1,352,200)
Proceeds from the issuance of preferred stock --- 4,265.000
Payments for offering costs --- (893,888)
Payment of notes payable (19,830) (850,000)
Capital contributions from shareholders 1,600,000 ---
Exercise of warrants and options 503,800 ---
----------- -----------
Net cash provided (used) by financing activities 2,114,451 1,168,912
Effect of exchange rate changes on cash and cash equivalents (5,625) (21,127)
Net change in cash and cash equivalents (186,362) 212,588
Cash and cash equivalents at beginning of period 406,733 375,823
Cash and cash equivalents at end of period $ 220,371 $ 588,411
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Business
Hungarian Broadcasting Corp. (the "Company"), which was incorporated in
the State of Delaware 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 initially operated in
Hungary through a wholly-owned subsidiary known as HBC Kft, which was organized
in November 1994. In May 1997, the Company organized Hungarian Broadcasting
Corporation Televizios Reszventyarsasag ("HBC Rt"), a wholly owned subsidiary,
for an initial investment of $200,000. HBC Rt has replaced HBC Kft as the
operating subsidiary in Hungary. The Rt format, a corporate structure for larger
companies in Hungary, provides greater flexibility to the Company in conducting
its business and was required to meet changes in the Hungarian Media Law.
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 of the
purchase price over the fair market 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 Kft
continued the broadcasting thereafter. In September 1996, the Company renamed
its station "MSAT." In December 1996, both VI-DOK and DNTV were converted from
Kfts to Rts.
In April 1997, the Company acquired 77% of Studio 2 Kft, a Budapest based
animation studio, for $743,819. The studio is currently producing a feature
length animation film. Mishy and Mushy, which is the sole significant animation
project of the company.
In September 1997, the Company, pursuant to a contract between HBC Rt. and
Antenna Hungaria, began broadcasting 24 hours per day on a newly available
channel in the AM Micro broadcasting system in Budapest. Terms of the contract
provide for broadcasting rights indefinitely into the future.
In November 1997, the Company was awarded a national television license
for its satellite operations. This license allows the Company to broadcast its
programming without code, which lowers the cost of reception by cable television
companies and by direct-to-home customers.
As part of the acquisition of Global Television Networks, Inc. (see
below), the Company acquired Sziv TV Rt, a television broadcasting station with
licenses and audience reach similar to MSAT's.
In January 1998, pursuant to a Reorganization Agreement, the Company
acquired all of the outstanding common stock of Global Television Networks, Inc.
("Global"). See Note 2 -- "Acquisition."
5
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
2. Acquisition
On January 5, 1998, pursuant to a Reorganization Agreement, the Company
acquired all of the outstanding common stock of Global Television Networks, Inc.
("Global") in exchange for 3.75 million shares of the Company's Common Stock,
1.25 million of which are held in escrow to be delivered only upon Global
meeting certain performance measures. These escrowed shares will be provided for
in the period in which resolution of the contingency becomes probable. Global is
a distributor of paid adult television programming, holding exclusive long-term
contracts with NTV Plus, DBS (direct broadcasting system) operators in Russia,
and contracts with United Phillips cable operators in Vienna and Amsterdam. The
purchase price, exclusive of the escrowed shares, was approximately $21.1
million based on the fair market value of the underlying securities, including
3.0 million options given to the shareholders of Global. The acquisition has
been accounted for as a purchase and, accordingly, the operating results of
Global have been included in the consolidated statement of income from its date
of acquisition. The excess of the purchase price over the equity of Global
totaling approximately $18.3 million has been allocated to broadcast licenses
owned by the subsidiary of Global, SZIV Television Rt ("SZIV"). The SZIV
licenses are generally being amortized over 15 years.
In January 1998, immediately prior to the above transaction, Global and
Hungarian Broadcasting Project Kft ("HBP") purchased 24% and 76%, respectively
of Sziv Television, a national satellite-to-cable broadcaster currently reaching
approximately 1.3 million television households through an AM Micro transmission
system in Budapest and about 140 cable companies via satellite distribution in
Hungary. Global is entitled to 99% of all profits from Sziv, and HBP is entitled
to the remaining 1%. In addition, Global has an option to purchase HBP at any
time for $15,000 or to appoint another investor to hold HBP upon payment of
$15,000. Although the legal arrangement structures this subsidiary with HBP
having majority ownership, the substance of this arrangement is that Global is
the controlling shareholder and HBP, the nominee shareholder. Accordingly, 100%
of the operating results of Sziv have been included in the Company's
consolidated statement of income from its date of acquisition. The unaudited pro
forma results below assume the acquisition occurred at the beginning of the
quarter ended March 31, 1997:
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Net sales $ 708,778 $ 1,035,755
Net loss (2,406,065) (1,380,368)
Earnings per share $(0.38) $( 0.27)
</TABLE>
The pro forma results include amortization of the broadcast licenses
acquired as part of the acquisition of Global including Sziv by the Company. The
weighted average number of common shares outstanding used to determine earnings
per share include the 2.5 million common shares issued to acquire Global. The
pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been completed as at January 1, 1997, nor are
they indicative of future consolidated results.
Subsequent to the purchase of Sziv, the Company's management has
determined that the former management of Sziv had not fully and completely
accounted for transactions entered into prior to the purchase and for the period
ending March 31, 1998. Management is currently investigating this situation, but
is confident that no material effect to the consolidated financial statements
will occur upon the ultimate resolution of the issue.
Pursuant to the acquisition, the Company entered into a Registration
Rights Agreement giving the former shareholders of Global the right, starting 24
months after the closing of the Reorganization Agreement, to require the Company
to register the Common Shares granted to them thereunder, with the Securities
and Exchange Commission.
6
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
Pursuant to the acquisition of Global, the Company also entered into
three-year employment agreements with five owners/executives of Global. Total
payments under these contracts will be $2.34 million. In addition, these
employees/consultants received 3.0 million five-year options exercisable into
Common Shares in the Company at $10 per share.
In a transaction related to the acquisition of Global, Global agreed to
allow Peter Klenner, currently Chairman of the Board of the Company, to put to
Global 300,000 Common Shares that he owned in the Company at a price of $7.50
per share on or after December 31, 1998. Upon the acquisition of Global by the
Company, the Company assumed this put obligation.
Immediately after the acquisition of Global, the Company accepted the
resignation of Justin Bodle as a director. Offer Assis, Shai Bar-Lavi, Ami
Shafrir and Fred Smithline were elected directors. Mr. Klenner was elected
Chairman of the Board; Mr. Assis was elected President and Chief Executive
Officer; and Shai Bar-Lavi was elected Chief Operating Officer.
3. Preferred Stock
In September 1996, February 1997 and March 1997, the Company sold a total
of 526,500 shares of Series A convertible cumulative redeemable preferred stock
("Preferred Stock"). Each share of Preferred Stock is convertible into two
shares of common stock and is entitled to cumulative annual dividends of $1.20,
payable on September 15 of each year. The Company may, at its option, pay
dividends in shares of common stock, in lieu of cash. In September 1997, the
Company issued 131,625 shares of unregistered common stock as payment in full
for the dividends due. The Company's dividend obligation of $631,800 was paid
with unregistered common stock with a fair market value of $631,800. As of March
31, 1998 501,170 shares of Series A convertible preferred stock were converted
into common stock, leaving a balance of 25,330 shares of Series A convertible
preferred stock outstanding.
4. Common Stock
Pursuant to the acquisition of Global Television Networks, Inc. in January
1998, the Company issued 3.75 million shares of the Company's Common Stock, 1.25
million of which are held in escrow to be delivered only upon Global meeting
certain performance measures. The Company has excluded these escrowed shares
when calculating the number of its issued and outstanding Common Shares. As part
of the acquisition of Global, Global secured a five year management agreement
with the management and former owners of Sziv Television by issuing and placing
in escrow 80,000 unregistered Common Shares. In April 1998, the Company
terminated the Sziv Television management agreement. During the first quarter of
1998, 26,400 shares of Common Stock were issued pursuant to the conversion of
Preferred Shares, 35,250 were issued due to the exercise of Common Stock
Purchase Warrants, 53,500 were issued due to the exercise of stock options and
23,000 were issued as compensation.
In December 1995, three of the Company's officers contributed stock to the
Company for no consideration. In January 1998, in relation to the acquisition
referred to in Note 2 above, the Company agreed to reimburse these founders and
former officers for a portion of their losses suffered as a result of the
failure of Coleman and Company Securities, Inc. ("Coleman") to complete a firm
commitment underwriting. The Company has an action pending against Coleman in
the Supreme Court in the State of New York to recover damages from the aborted
underwriting. The founders voluntarily cancelled 220,000 of their shares for no
compensation to permit the Company to successfully complete its initial public
offering with another
7
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
underwriter at $5 per share. The Company has agreed to pay these founders
$250,000 in cash and $150,000 in stock at the time of an equity offering in
excess of $2.0 million and a further $250,000 in cash at a future date to be
negotiated but not earlier than January 1, 1999. A further $300,000 in cash will
be paid from any proceeds of the Coleman litigation but to be paid only after
full payment to the Company's bridge note investors. In May 1998, the Company
raised $6.0 million in an equity offering. See Note 10 -- "Subsequent Events."
5. Change in Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
About Segments of an Enterprise and Related Information" is effective for fiscal
years beginning after December 15, 1997. Application of this Statement to
interim periods in the initial year of implementation, however, is not required.
This Statement establishes standards for the way that public business
enterprises report information about its operating segments. The Company intends
to adopt SFAS 131 for the year ended December 31, 1998, but has not yet
determined the impact of implementation of this Statement.
6. Financial Information
Financial data as of December 31, 1997 was derived from the audited
consolidated financial statements of the Company and should be read in
conjunction with those consolidated financial statements and related notes. In
the opinion of management, the accompanying unaudited consolidated financial
statements of the Company include all adjustments necessary to present fairly
its financial position as of March 31, 1998, and operating results and cash
flows for the three months then ended. For additional information, see the notes
to the Company's audited consolidated financial statements for the year ended
December 31, 1997 which are included in the Company's Annual Report filed on
Form 10-KSB with the Securities and Exchange Commission.
7. Related Party Transactions
Beginning in July 1996, the Company hired Justin Bodle as a consultant for
a two year period at a fee of 1,000 shares of unregistered Common Stock per
month. Beginning in January 1997, the monthly payment increased to 1,500 shares.
The parties agreed to terminate the consulting contract on July 1, 1997 and the
Company agreed to pay Mr. Bodle an additional 3,000 shares. The Company records
compensation expense based on the fair value of these securities at each month
end. In January 1998, Mr. Bodle was paid 18,000 shares of Common Stock as
payment in full for his consulting services of approximately $90,000, provided
through June 30, 1997.
The former owners of Global (and current officers of the Company) own
Top-Line Communications, Inc. ("Top-Line"), a television production studio in
New York City. As part of the due diligence in the sale of Global to the
Company, Top-Line financed certain expenses including travel and lodging for
persons associated with the Global-Hungarian Broadcasting Corp. transaction,
including the investigation of broadcasting opportunities elsewhere in Europe.
The Company agreed to reimburse Top-Line for expenditures made in the due
diligence process only if the Company purchased Global. Top-Line has continued
to advance expenses directly related to the Company's activities. For the three
months ended March 31, 1998, Top-Line has incurred $285,000 in expenses on the
Company's behalf. In addition, approximately $71,000 of legal expenses, incurred
by the sellers, was invoiced to the Company for the three months ended March 31,
1998.
As part of the acquisition of Global (see Note 2 above), the shareholders
agreed to infuse $1,750,000 of additional cash into Global in the form of a
capital contribution. As of March 31, 1998, $600,000 has been received and
$1,150,000 is included in due from related parties. This obligation is secured
by 300,000 shares of Common Stock placed in escrow and previously purchased by
the former shareholders of Global for $2,250,000.
8
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
8. Commitments and Contingencies
Consulting and Compensation Agreements
In January 1996, Robert Genova 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 Mr. Genova $144,000 if
there were a change in control of the Company prior to January 17, 1998. In
December 1997, Mr. Genova agreed to serve as a consultant to the Company for
1998 for a fee of $3,000 per month and further agreed to forfeit his rights to
the above mentioned change of control fee.
In January 1998, the Company entered into a five-year employment agreement
with its general counsel and Secretary. Total payments will be $480,000 plus
80,000 five-year options exercisable into Common Shares in the Company at $5.00
per share. The exercise price of these options were below the trading value of
the underlying common stock at the date of grant resulting in compensation
expense of $130,000 recognized in the period ending March 31, 1998.
Listing Requirements
The Company is aware that in February 1998 the listing requirements for
the NASDAQ Small Cap market were raised. In response to an inquiry from the
NASDAQ, the Company provided additional information to them so that they could
determine whether the Company met the new requirements. The NASDAQ subsequently
informed the Company, in writing, that it complied with the new requirements.
Relative to the acquisition of Global referred to above, the Company filed
an initial Form 8K with the Securities and Exchange Commission ("SEC"). As
permitted by relevant regulations, this initial filing did not include all
required financial data related to the companies acquired. Such data should have
been filed no later than March 20, 1998 but, due to difficulties in compiling
the relevant data, this deadline could not be met. Furthermore, the NASDAQ has
requested that the Company provide other data related to documents previously
filed by the Company. The Company, with its attorneys, is working with the SEC
and the NASDAQ to ensure that all filing and listing requirements are fully
complied with. Were the NASDAQ or the SEC to take any action that would cause
suspension in trading or negative action such as delisting from the NASDAQ Small
Cap market, the Company's ability to obtain financing to fund its continuing
development and operations would be severely impaired.
Rental and Lease Agreements
In January 1998, the Company signed a five-year lease with EuroWeb
International Inc., a related party, at a monthly rental fee of $6,481. The
payments are for the rental of four apartments in a 14-unit modern apartment
building next to the offices of the Company. These apartments are used by the
President, the Chief Operating Officer and the General Manager of the station. A
fourth apartment is for use by consultants and business visitors to the Company.
In April 1998, the entire 14-unit building was leased to an independent company.
The Company is in contact with the new lessee about subleasing additional space.
The marketing department, the finance department and film production division
for the Company have all moved into the building and will pay rent at the same
or less per-square-meter cost as reflected in the first four apartments. It is
anticipated that most, if not all, of the other space in the building will be
used by the Company or by others that do business with the Company. The Company
believes that the rental charges are no higher than the costs for comparable
facilities.
9
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
The Company entered into a contract with Antenna Hungaria beginning March
1, 1998 and ending February 28, 2005 for transmission services both on the
Budapest-based AM Micro service and with uplink and transponders services using
the Amos I satellite to Hungarian cable companies, for a monthly fee of
approximately $65,000.
Subsidiary receivership
In November 1997, the Company was notified by the Capital Court of
Budapest that one of its non-operating subsidiaries, HBC Kft, had been placed in
receivership due to the failure to pay an interest penalty of approximately
twenty-five ($25) dollars. The Company had previously paid a nominal judgment.
The Company's Hungarian operating subsidiary, HBC Rt., paid this penalty
interest and has agreed to pay any remaining debt in HBC Kft. The Company
expects that the receivership of HBC Kft will be ended shortly. This event has
had no material impact on the operations or financial condition of the Company.
9. Other Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income." This Statement establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general purpose financial statements. The following table sets
forth the components of comprehensive income for the periods indicated:
<TABLE>
<CAPTION>
Foreign Currency
Items
-----
<S> <C>
Balance at January 1, 1997 $126,215
Current period change 10,017
Balance at December 31, 1997 $136,232
Current period change (48,025)
Balance at March 31, 1998 $ 88,207
--------
</TABLE>
10. Subsequent Events
In April 1998, the Company contracted to purchase 44% of the Galaxie TV
Network ("Galaxie") in the Czech Republic from RTV Gemma spol. S.v.o. Galaxie
has a Regional Terrestrial License to reaching 200,000 television households in
the Czech Republic. The Company agreed to provide up to $1,000,000 in loans to
Galaxie without interest for ten years, of which $200,000 has been lent to the
company in April and May 1998.
In April 1998, the Company contracted with Nickelodeon International, a
wholly-owned subsidiary of Viacom International, Inc., for a minimum of 12 hours
per day of Nickelodeon programming in Hungary and for marketing services for a
minimum period of five years. The Company received certain rights to secure
additional programming for the Czech Republic, Slovakia, Romania and Bulgaria.
For a three year period, Nickelodeon purchased an option to buy 50% of the
Company's Nickelodeon activities.
In May 1998, the Company contracted for $8.0 million of 6% convertible
preferred financing. The Company received $6.0 million at the time of contract
and has an option to receive another $2.0 million at the time its registration
statement becomes effective. The preferred stock is convertible into common
shares at 85% of the then current market value, subject to a limited floor of
$4.00 per share, with certain limitations on the number of shares of common
stock which can be issued.
10
<PAGE>
In May 1998, the Company contracted with a Budapest based investment bank
to seek on a "best efforts" and nonexclusive basis additional debt and equity
capital for the Company in amounts up to $20 million on terms to be negotiated.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company is a leading satellite-to-cable television broadcaster in
Hungary. The Company's two stations, MSAT and Sziv TV distribute to
approximately 1.5 million and 1.3 million households, respectively, or about 39%
and 35% of all television households in the country. In May 1998, the Company
acquired 44% ownership of Galaxie TV Network in the Czech Republic. The
Company's strategy is to continue to expand its broadcasting reach, improve and
specialize its programming and aggressively pursue additional advertising. The
Company expects to benefit from the projected high rates of growth for
television advertising in Hungary and the Czech Republic. In addition, a new
management team, that began operating the station in January 1998, has plans for
significant broadcasting expansion elsewhere in Central and Eastern Europe.
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 April 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 its broadcasting 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.
In September 1996, the Company began transmitting its signal from the
Astra 1E Satellite and in October 1996, the station was renamed "MSAT." In June
1997, the Company switched its satellite transmission service to the Amos 1
satellite with uplink services provided by Antenna Hungaria. In September 1997,
the Company was awarded with a new AM Micro channel and began broadcasting 24
hours per day on the Budapest microwave system. In November 1997 ORTT, the
television regulatory body in Hungary, awarded the Company a national license to
broadcast via satellite. The license permits the Company to send its digital
signal without encoding. Accordingly, cable television companies and
direct-to-home customers can receive the signal without having to acquire
expensive decoders.
In April 1997, the Company purchased Studio 2 Kft, a Budapest-based
animation studio. The Company is currently producing a feature length animation
movie, Mishy and Mushy.
In January 1998, the Company acquired Global Television Networks, Inc.
("Global"). Global owns Sziv TV, one of the three satellite-to cable stations in
Hungary that are also on the AM Micro MMDS system in Budapest. Global is also a
distributor of paid adult television programming, holding exclusive long-term
contracts with NTV Plus DBS operators in Russia and contracts with United
Phillips cable operators in Vienna and Amsterdam.
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The new management is currently overhauling the two stations with
specialized programming to be introduced in August and September 1998. One
channel will provide at least 12 hours per day of localized Nickelodeon programs
for kids supplemented with family programming for young adults in the evening.
In April 1998, the Company signed a long-term contract with Nickelodeon to
jointly launch Nickelodeon Hungary. The second channel will be a quality
entertainment channel featuring independent European and American programming.
In May 1998, the Company purchased 44% ownership in Galaxie TV Networks
("Galaxie") in the Czech Republic. Galaxie has a regional terrestrial license
broadcasting to 200,000 television households and a national satellite-to-cable
license. In May 1998 Galaxie began broadcasting via the Copernicus satellite to
cable and direct-to-home viewers in the Czech Republic and expects to reach
approximately 1,000,000 television households, or about 30% of all television
households shortly. Galaxie has applied to the Board for TV and Radio
Broadcasting for the Czech Republic to enable the company to combine several
regional, military licenses which would give Galaxie as much as 80% coverage of
television households in that country.
The Company's revenues are derived primarily from the sale of television
advertising to international, national and local advertisers. Billing in Hungary
is determined by the program ratings as measured by AGB-Hungarian Meter System,
an independent audience rating service. The Company's direct customers are
generally fewer than a dozen international advertising agencies that arrange the
broadcast of commercials for their clients. The Company engages in certain
barter transactions in which it exchanges unsold commercial advertising for
services and goods. In addition, the Company receives small payments from the
cable operators who contract to carry the Company's signals. 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 $600,000 per month and anticipates
this approximate level of expenses to continue for at least the next six months.
Revenues from the two Company stations are currently averaging $200,000 to
$300,000 per month. New specialized programming planned to begin in late summer
is expected to increase the stations' audience and advertiser demand. Partnering
with Nickelodeon and other major programming producers could constrain
programming costs in the near term and the Company is now gaining the cost
benefits of combining the two stations at one location with one management and
technical group.
Since MSAT was relaunched in April 1996, revenues grew rapidly. Revenues
of nine million forints in May 1996 have risen to 39 million forints in November
1996 and to 72 million forints ($360,000) in October 1997. Two new private
stations entered the market in October 1997, increasing competition for both
audience and advertising. This competition, particularly in pricing, has hurt
recent results. As this introductory period ends, there are indications that the
television market is improving for the established stations.
13
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Once the impact of the new stations is absorbed in the market, management
believes that its growth in sales will continue. It now operates two stations
with the potential for cross promotion, improved marketing and more efficiency.
The Company is a recent entrant in the Hungarian television market, essentially
being available to viewers in Budapest only since Spring 1996 after the Company
was funded in an initial public offering. Since Fall 1996 others in Hungary
began to receive MSAT's channel. Sziv TV began broadcasting via satellite in the
Fall of 1997. The Company is working to increase its reach to as many as 50% of
Hungary's television households as it signs up additional cable companies.
DUNA-TV, a satellite-to-cable, government-owned station begun in 1993, currently
has a broadcast reach of about 48%. The Hungarian television advertising market
in 1997 was over $200 million; over $170 million after agency commissions. The
Company's current rate of sales represents less than 3% of a 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 and
Sziv's signals and increased viewing by households that currently watch the
stations.
The Company conducts its operations through its Hungarian subsidiaries and
its investment in Galaxie in the Czech Republic. 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 and Czech law and foreign currency regulations in Hungary and in the
Czech Republic. 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 and Czech kroner. 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 both Hungary and the Czech Republic, 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 and Czech economies.
Growth in Hungarian and Czech television advertising is directly impacted by the
overall health and growth of their respective economies.
The Company operates with studio licenses and AM-Micro licenses for both
MSAT and Sziv TV. In addition, MSAT has a national satellite-to-cable license,
and Sziv has authority to broadcast via satellite, from ORTT, the Hungarian
television regulatory authority. Galaxie operates with a regional terrestrial
television license and a national satellite-to-cable license. Galaxie has
applied for use of a number of local, military terrestrial broadcasting
licenses, which if granted could expand the reach of the station to as many as
80% of all the television households in the Czech Republic.
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 growth in sales, there is no assurance that the Company will
generate enough revenues to pay its costs.
Results of Operations
Quarter ended March 31, 1998 compared to quarter ended March 31, 1997
14
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The Company's revenues increased by $135,263 or 24% to $708,778 in the
quarter ended March 31, 1998 from $573,515 in the quarter ended March 31, 1997.
The increase is primarily attributable to the operation of two stations versus
one station in the prior year. Revenues in the first quarter of 1998 were
reduced by the increased competition in the Hungarian market due to the Fall
1997 launch of two new national stations into this market and the resulting
increase in competition. In addition, the operations of Sziv TV were relocated
to the MSAT location. And with management's focus on the relaunch of the two
stations in August and September 1998, programming and marketing initiatives
were deferred.
Other operating costs and expenses, including amortization of deferred
program costs, increased by $611,725 to $1,307,430 in the quarter ended March
31, 1998 from $695,705 in the quarter ended March 31, 1997. This increase
reflects the costs associated with running two television stations rather than
one, the acquisition of Global Television Networks (and Sziv TV) by the Company,
the costs of combining two stations at one location and to a lesser extent the
costs of operating the non-Sziv TV operations of Global.
Amortization of the broadcast license costs of $444,614 and $107,526 for
the two periods, respectively, reflects the amortization of both the Sziv and
MSAT broadcasting licenses in the current period, while only the MSAT licenses
were amortized in the earlier period.
Selling, general and administrative expenses increased $344,371 to
$1,280,135 for the quarter ended March 31, 1998 from $935,764 in the quarter
ended March 31, 1997. The primary reason for this increase was the operation of
two stations at two different locations in the current period compared to
operating one station in the prior period. This increase also includes $130,000
of non-cash expenses when the Company signed a five-year employment contract
with its General Counsel which included stock options granted at a price under
the market at the time of the Company's Board resolution. This expense also rose
because of the costs of acquiring Global in January 1998 and the increase in
staffing as the new management group embarked upon a major expansion program for
the Company in Central and Eastern Europe.
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, so that much of
the cash needed to operate the Company is derived from operations.
Net cash used in operating activities was $1,291,086 and $618,348 for
the three months ended March 31,1998 and March 31, 1997, respectively. The
current period reflects the operation of two television stations at two
locations, while the earlier period reflected the costs of operating one
station. In addition, the costs of combing the two stations, the cost of
acquiring Global and the changes resulting from a new management group, all
increased current operating costs compared to the costs of the prior period.
Comparing March 31, 1998 balance sheet items with those of December
31,1997, due from related parties increased $1,148,379 which reflects the
outstanding receivable from Global's former shareholders of $1,150,000 which is
still outstanding and was a term in the purchase of Global by the Company. This
15
<PAGE>
receivable is secured in escrow by 300,000 common shares of the Company's stock.
Property, plant and equipment increased by $351,863 to $753,041 primarily
because of the acquisition of fixed assets from Sziv TV.
Broadcast license costs increased to $20,010,777 from $1,057,535 because
of the purchase by the Company of Sziv TV's broadcasting licenses as part of its
purchase of Global in January 1998. Accounts payable and other liabilities
increase to $1,265,816 and $774,923 from $676,191 and $247,394 as of December
31, 1997, respectively. This reflected both the additional liabilities
associated with the Sziv TV and Global acquisitions and delays paying some
obligations in anticipation of an equity financing.
Pursuant to the acquisition of Global Television Networks, Inc. in
January 1998, the Company issued 3.75 million shares of the Company's Common
Stock, 1.25 million of which are held in escrow to be delivered only
upon Global meeting certain performance measures. The Company has excluded these
escrowed shares when calculating the number of its issued and outstanding Common
Shares. As part of the acquisition of Global, Global secured a five year
management agreement with the management and former owners of Sziv TV by
issuing and placing in escrow 80,000 unregistered Common Shares. In April 1998,
the Company terminated the Sziv TV management agreement. During the
first quarter of 1998, 26,400 shares of Common Stock were issued pursuant to the
conversion of Preferred Shares, 35,250 were issued due to the exercise of Common
Stock Purchase Warrants, 53,500 were issued due to the exercise of stock options
and 23,000 were issued as compensation.
In December 1995, three of the Company's officers contributed stock to the
Company for no consideration. In January 1998, in relation to the acquisition of
Global (See Note 2 -- Acquisitions), the Company agreed to reimburse these
founders and former officers for a portion of their losses suffered as a result
of the failure of Coleman and Company Securities, Inc. ("Coleman") to complete a
firm commitment underwriting. The Company has an action against Coleman in the
Supreme Court in the State of New York to recover damages from the aborted
underwriting. The founders voluntarily cancelled 220,000 of their shares for no
compensation to permit the Company to successfully complete its initial public
offering with another underwriter at $5 per share. The Company has agreed to pay
these founders $250,000 in cash and $150,000 in stock at the time of an equity
offering in excess of $2.0 million and a further $250,000 in cash at a future
date to be negotiated but not earlier than January 1, 1999. A further $300,000
in cash will be paid from any proceeds of the Coleman litigation but to be paid
only after full payment to the Company's bridge note investors. In May 1998, the
Company raised $6.0 million in an equity offering. See Note 10 -- "Subsequent
Events."
As part of its aggressive expansion plans, the Company is planning
significant increases in capital spending in Hungary as well as in the Czech
Republic and other countries where the Company plans to acquire broadcasting
licenses. As part of its new specialized programming strategy, the Company plans
significant investments in equipment and may purchase its current or another
facility to house its expanded operation. With the exception of its expansion
plans, the Company has only limited capital spending requirements. The Company
purchases its programming generally at or near the time of its broadcast.
In May 1998, the Company sold $6.0 million of 6% convertible preferred
financing and has an option to sell another $2.0 million of these securities at
the time its registration statement becomes effective. The preferred stock is
convertible into shares at 85% of the then current market value, subject to a
limited floor of $4.00 per share, with certain limitations on the number of
shares of common stock which can be issued.
16
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The Company believes that its existing cash balance, cash from exercising
its financing option and cash from future operations will be sufficient to fund
the Company's operations for the next twelve months.
Foreign Currency
The Company's broadcasting operations in Hungary incur both general
revenues and operating expenses in Hungarian forints. A portion of the Company's
expenses, primarily programming, is denominated mostly in United States dollars.
Assets and liability accounts are translated from Hungarian forints into United
States dollars at period-end exchange rate; income and expense accounts are
translated at the average exchange rate for the period. The resulting
translation adjustments are reflected in a separate component of stockholders'
equity. Currency translation adjustments relating to transactions of the Company
and its subsidiaries in currencies other than the functional currency of the
entity involved are reflected in the operating results of the Company.
The Company does not hedge against foreign currency exchange risks.
17
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Part II. Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
See "Organization and Business" and "Acquisition" in Notes to Consolidated
Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits (numbers below are references to Regulations S-B)
(3) (a) Certificate of Incorporation filed September 14, 1994*
(b) Certificate of Amendment to Certificate of Incorporation filed
by June 28, 1996*
(c) By-laws*
(d) Certificate of Designations for Series B Preferred Stock
(4) (a) Form of Warrant Agreement**
(b) Form of Common Stock Purchase Warrant Certificate**
(c) Form of Underwriter's Warrant**
(d) Form of Underwriter's Stock Warrant**
(10) (a) Employment Agreement with Peter E. Klenner*
(b) Employment Agreement with Imre M. Kovats*
(c) Financial Consultant Agreement with Robert Genova*
(d) 1994 Incentive Stock Plan*
(e) Sharing agreement for space and facilities between Registrant
and Hungarian Telephone and Cable Corp.*
18
<PAGE>
(f) Agreement to purchase shares in DNTV*
(g) Agreement to purchase shares in VI-DOK*
(h) Letter of intent with Kablecom*
(i) Offer from OKK Kft. to Registrant to rent satellite space to
Company*
(j) Agreement with Land Studios Kft*
(k) Lease agreement with Hakon Ltd. for space at Szamado,
Budapest*
(l) Form of 6% Bridge Note*
(m) License to broadcast on A3*
(n) Form of Consulting Agreement with J.W. Barclay & Co., Inc.**
(o) Form of Mergers and Acquisitions Agreement with J.W. Barclay &
Co., Inc.**
(p) Purchase of programming agreement with Power TV Ltd., dated
February 28 and July 29, 1996***
(q) Satellite space agreement with Nethold Central Europe BV***
(r) Management and consulting agreement with Justin Bodle dated
June 15, 1996.***
(s) Uplink and downlink agreement with Banknet, dated June 26,
1996***
(t) Rental lease with Investor Holding Rt. dated June 25, 1996 ***
(u) Settlement Agreement with Nethold Development H.V., dated
May 22, 1997****
(v) Agreement between the Company and Orion Atlantic, L.P.,
dated July 31, 1996*
(w) Settlement Agreement with Nethold Development BV, dated May
22, 1997 *
(x) Antenna Hungaria Contract, dated May 30, 1997 *
(y) Agreement dated December 17, 1997 between the Offer Assis and
Peter E. Klenner ******
(z) Loan Agreement between Offer Assis and Shafrir Family
Trust ******
(aa) Reorganization Agreement among HBC, Global Television
Networks, Inc. and Offer Assis, Shai Bar-Lavi, Shlomo Kot and
Frederick E. Smithline individually ******
(bb) Transfer and Distribution Agreement, dated as of November 18,
1997, between the Registrant and Hungarian Satellite
Corporation ******
(cc) Agreement to acquire interest in Galaxie Television
Network*****
(21) Subsidiaries of the Registrant*
- ------------------
* Filed with Registration Statement No. 33-96674
** Filed with Registration Statement No. 333-13371
*** Filed with Form 10-KSB dated June 30, 1996
**** Filed with Form 10-QSB dated March 31, 1997
***** Filed herewith
****** Filed with the Company's report on Form 8-K, dated January 8, 1998
B. The following reports on Form 8-K have been filed during the quarter
ended March 31, 1998:
Report on Form 8-K dated January 8, 1998.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 19th day of May, 1998.
HUNGARIAN BROADCASTING CORP.
By /s/ James H. Season
----------------------------
James H. Season
Chief Financial Officer and Treasurer
20
CERTIFICATE OF DESIGNATION
OF RIGHTS AND PREFERENCES OF THE
SERIES B PREFERRED STOCK OF
HUNGARIAN BROADCASTING CORP.
PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE
We, being respectively the President and Secretary of Hungarian
Broadcasting Corp., a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware (hereinafter the
"Corporation"), DO HEREBY CERTIFY:
FIRST: That pursuant to authority expressly granted and vested in the
Board of Directors of said Corporation by the provisions of the Certificate of
Incorporation, said Board of Directors adopted the following resolution setting
forth the designations, powers, preferences and rights of its Series B Preferred
Stock:
RESOLVED: That the designations, powers, preferences and
rights of the Series B Preferred Stock be, and hereby are, as set forth below:
1. Number of Shares of Series B Preferred Stock. Of the 5,000,000 shares
of authorized and unissued Preferred Stock, $.001 par value per share
("Preferred Stock") of the Corporation, sixteen (16) shares shall be designated
and known as "Series B Convertible Preferred Stock."
2. Voting.
(a) Except as provided by law, by the provisions of Subparagraph
2(b) below, or by the provisions establishing any other series of Preferred
Stock, holders of Series B Convertible Preferred Stock shall not have the right
to vote on any matter affecting the Corporation.
(b) The Corporation shall not amend, alter or repeal the
preferences, special rights or other powers of the Series B Convertible
Preferred Stock so as to affect adversely the Series B Convertible Preferred
Stock, without the written consent or affirmative vote of the holders of at
least 80% of the then outstanding shares of Series B Convertible Preferred Stock
to be affected by amendment, alteration or repeal, given in writing or by vote
at a meeting, consenting or voting (as the case may be) separately as a class.
For this purpose, without limiting the generality of the foregoing, the
authorization or issuance of any series of Preferred Stock with preference or
priority over or on a parity with the Series B Convertible Preferred Stock as to
the
<PAGE>
right to receive either dividends or amounts distributable upon liquidation,
dissolution or winding up of the Corporation shall not be deemed to affect
adversely the designated class of Series B Convertible Preferred Stock.
3. Dividends. The holders of shares of Series B Convertible Preferred
Stock shall be entitled to receive, before any cash dividend shall be declared
and paid upon or set aside for the Common Stock in any fiscal year of the
Corporation, only when, as and if declared by the Board of Directors of the
Corporation out of the funds legally available for that purpose, dividends,
which shall accrue and be payable quarterly, in cash or Common Stock, at the
option of the Board of Directors of the Corporation. The dividends shall accrue
in an amount equal to six (6) percent per annum of the Stated Value (as defined
herein) of the shares of Series B Convertible Preferred Stock outstanding on the
last day of each fiscal half-year of the Corporation (June 30 and December 31)
(the "Dividend Amount"). If the Corporation exercises its option to pay a
quarterly dividend in shares of Common Stock, the number of shares which the
holder will receive shall be computed by dividing the Dividend Amount by the
closing bid price of a share of the Common Stock on the last day of the quarter
in which the dividend accrued. The holder shall waive its right to receive such
dividends on any shares of Series B Convertible Preferred Stock converted to
Common Stock during the six calendar months following the Original Issuance Date
(as defined herein). Accordingly, dividends shall be held by the Corporation
until six months following the Original Issuance Date.
4. [NOT USED]
5. Liquidation. In the event of a voluntary or involuntary dissolution,
liquidation, or winding up of the Corporation, the holders of shares of Series B
Convertible Preferred Stock shall be entitled to receive out of the assets of
the Corporation legally available for distribution to holders of its capital
stock, before any payment or distribution shall be made to holders of Common
Stock or any other class of stock ranking junior to Series B Convertible
Preferred Stock, an amount per share equal to $500,000 (the "Stated Value") plus
all dividends which have accrued and are unpaid and therefore are in arrears. If
upon such liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets to be distributed among the holders of
Series B Convertible Preferred Stock shall be insufficient to permit payment to
the holders of Series B Convertible Preferred Stock of the amount distributable
as aforesaid, then the entire assets of the Corporation to be so distributed
shall be distributed ratably among the holders of Series B Convertible Preferred
Stock. Upon any such liquidation, dissolution or winding up of the Corporation,
after the holders of Series B Convertible Preferred Stock shall have been paid
in full the amounts to which they shall be entitled, the remaining net assets of
the Corporation may be distributed to the holders of stock ranking on
liquidation junior to the Series B Convertible Preferred Stock. Written notice
of such liquidation, dissolution or winding up, stating a payment date, the
amount of the liquidation payments and the place where said liquidation payments
shall be payable, shall be given by mail, postage prepaid or by telex or
facsimile to non-U.S. residents, not less than 10 days prior to the payment date
stated therein, to the holders of record of Series B Convertible Preferred
Stock, such notice to be addressed to each such holder at its address as shown
by the records of the Corporation. For purposes hereof, the Common Stock shall
rank on liquidation junior to the Series B Convertible Preferred Stock.
<PAGE>
6. Restrictions. At any time when shares of Series B Convertible
Preferred Stock are outstanding, except where the vote or written consent of the
holders of a greater number of shares of the Corporation is required by law or
by the Corporation's Certificate of Incorporation, as amended, without the
approval of the holders of at least a two-thirds majority of the then
outstanding shares of Series B Convertible Preferred Stock given in writing or
by vote at a meeting, consenting or voting (as the case may be) separately as a
series, the Corporation will not amend or modify the terms of the Series B
Convertible Preferred Stock.
7. Optional Conversion. The holders of shares of Series B Convertible
Preferred Stock shall have the following conversion rights:
(a) Right to Convert: Conversion Price. Subject to the terms,
conditions, and restrictions of this Paragraph 7, the holder of any share or
shares of Series B Convertible Preferred Stock shall have the right to convert
each such share of Series B Convertible Preferred Stock (except that upon any
liquidation of the Corporation, the right of conversion shall terminate at the
close of business on the business day fixed for payment of the amount
distributable on the Series B Convertible Preferred Stock) into a number of
shares of Common stock equal to the Stated Value of such share or shares of
Series B Convertible Preferred Stock divided by the lesser of:
(i) 85% of the low two-day average (not necessarily consecutive)
closing bid price of the Common Stock (the "Average Closing Price"), as reported
by the Nasdaq SmallCap Market or NASDAQ Electronic Bulletin Board or, if neither
is available, by Bloomberg LP during the period of fifteen trading days
immediately preceding the date of conversion (the "Conversion Date"), or
(ii) 130% of the closing bid price of the Common Stock over the
ten consecutive trading days prior to the date of closing of the sale of the
Series B Convertible Preferred Stock (the "Original Issuance Date") (the
"Conversion Price").
However, in the event that as of any Conversion Date, the Average
Closing Price of the Corporation's Common Stock is $4.00 or less (the
"Conversion Limitation"), the Conversion Price for such conversions will be the
closing bid price on the day prior to the trading day on which the conversion
notice is received by the Corporation, provided that, holders converting at the
Conversion Limitation shall receive three-year warrants to purchase such number
of shares of the Corporations Common Stock, equal to fifteen percent (15%) of
the stated value of the Series B Convertible Preferred Stock being converted,
divided by the Average Closing Price on the date of such conversion, at a price
equal to 101% of the Average Closing Price on the Conversion date (the
"Conversion Limitation Warrants").
To illustrate, if the Average Closing Price on the Conversion
Date is $5.00 and one-half (1/2) of the shares of Series B Convertible Preferred
Stock are being converted, or 8 shares, the Stated Value for which would be
$4,000,000, then the Conversion Price shall be $4.25 per share of Common Stock
($5.00 x .85), whereupon the Stated Value of $4,000,000 of Series B Convertible
Preferred Stock would entitle the holder thereof to convert such shares of
<PAGE>
Series B Convertible Preferred Stock into 941,276 shares of Common Stock
($4,000,000 divided by $4.25 equals 941,276).
However, if the Average Closing price on the Conversion Date is
$4.00 or less, and was also $4.00 on the trading day prior to such Conversion
date and one-half (1/2) of the shares of Series B Convertible Preferred Stock
are being converted, or 8 shares, the Stated Value for which would be
$4,000,000, then the Conversion Price shall be $4.00 per share of Common Stock,
whereupon the Stated Value of $4,000,000 of Series B Convertible Preferred Stock
would entitle the holder thereof to convert such shares of Series B Convertible
Preferred Stock into 1,000,000 shares of Common Stock ($4,000,000 divided by
$4.00 equals 1,000,000), and receive the required number of Conversion
Limitation Warrants.
(b) Conversion Dates. The holder of any share or shares of
Series B Convertible Preferred Stock may not convert any of such shares until
the earlier of (i) a period of 120 calendar days following the Original Issue
Date; or (ii) the effective date of the Registration Statement, and thereafter
may convert no more than 8.33% of the total issue of Series B Convertible
Preferred Stock during any business week.
(c) Notice of Conversion; Issuance of Certificates; Time
Conversion Effected. Shall be as provided in the Securities Purchase Agreement
between the Corporation and purchasers of the Series B Convertible Preferred
Stock.
(d) Fractional Shares; Dividends; Partial Conversion. No
fractional shares shall be issued upon conversion of Series B Convertible
Preferred Stock into Common Stock. All fractional shares shall be rounded down
to the nearest whole share. In case the number of shares of Series B Convertible
Preferred Stock represented by the certificate or certificates surrendered
pursuant to Subparagraph 7(a) exceeds the number of shares converted, the
Corporation shall, upon such conversion, execute and deliver to the holder, at
the expense of the Corporation, a new certificate or certificates for the number
of shares of Series B Convertible Preferred Stock represented by the certificate
or certificates surrendered which are not to be converted.
(e) Reorganization or Reclassification. If any capital
reorganization or reclassification of the capital stock of the Corporation shall
be effected in such a way that holders of Common Stock shall be entitled to
receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization or reclassification, lawful
and adequate provisions shall be made whereby each holder of a share or shares
of Series B Convertible Preferred Stock shall thereupon have the right to
receive, upon the basis and upon the terms and conditions specified herein and
in lieu of the shares of Common Stock immediately theretofore receivable upon
the conversion of such share or shares of Series B Convertible Preferred Stock,
such shares of stock, securities or assets as may be issued or payable with
respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of such Common Stock immediately theretofore
receivable upon such conversion had such reorganization or reclassification not
taken place, and in any such case appropriate provisions shall be made with
respect to the rights and interests of such holder to the
<PAGE>
end that the provisions hereof (including without limitation provisions for
adjustments of the conversion rights) shall thereafter be applicable, as nearly
as may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of such conversion rights.
(f) Adjustments for Splits, Combinations, etc. The Conversion
Price and the number of shares of Common Stock into which the Series B
Convertible Preferred Stock shall be convertible shall be adjusted for stock
splits, combinations, or other similar events. Additionally, an adjustment will
be made in the case of an exchange of Common Stock, consolidation or merger of
the Corporation with or into another corporation or sale of all or substantially
all of the assets of the Corporation in order to enable the holder of Series B
Convertible Preferred Stock to acquire the kind and the number of shares of
stock or other securities or property receivable in such event by a holder of
the Series B Convertible Preferred Stock of the number of shares that might
otherwise have been issued upon the conversion of the Series B Convertible
Preferred Stock. No adjustment to the Conversion Price will be made for
dividends (other than stock dividends), if any, paid on the Common Stock or for
securities issued for fair value.
8. Mandatory Conversion.
(a) Mandatory Conversion Date. If at June 30, 2000 (the
"Mandatory Conversion Date"), there remains issued and outstanding any shares of
Series B Convertible Preferred Stock, then the Corporation shall be entitled to
require all (but not less than all) holders of shares of Series B Convertible
Preferred Stock then outstanding to convert their shares of Series B Convertible
Preferred Stock into shares of Common Stock at the then effective Conversion
Price pursuant to Subparagraph 7(a). The Corporation shall provide written
notice (the "Mandatory Conversion Notice") to the holders of shares of Series B
Convertible Preferred Stock of such mandatory conversion. The Mandatory
Conversion Notice shall include (i) the Stated Value of the shares of Series B
Convertible Preferred Stock to be converted, (ii) the Conversion Price at June
30, 2000, and (iii) the number of shares of the Corporation's Common Stock to be
issued upon such mandatory conversion at the then applicable Conversion Price.
(b) Surrender of Certificates. On or before the Mandatory
Conversion Date, each holder of shares of Series B Convertible Preferred Stock
shall surrender his or its certificate or certificates for all such shares to
the Corporation at the place designated in such Mandatory Conversion Notice, and
shall thereafter receive certificates for the number of shares of Common Stock
to which such holder is entitled. On the Mandatory Conversion Date, all rights
with respect to the Series B Convertible Preferred Stock so converted, including
the rights, if any, to receive notices and vote, will terminate. All
certificates evidencing shares of Series B Convertible Preferred Stock that are
required to be surrendered for conversion in accordance with the provisions
hereof, from and after the Mandatory Conversion Date, shall be deemed to have
been retired and cancelled and the shares of Series B Convertible Preferred
Stock represented thereby converted into Common Stock for all purposes,
notwithstanding the failure of the holder or holders thereof to surrender such
certificates on or prior to such date. The Corporation may thereafter take such
appropriate action as may be necessary to reduce the authorized Series B
Convertible Preferred Stock accordingly.
<PAGE>
9. Redemption of Series B Convertible Preferred Stock.
(a) Right to Redeem Series B Convertible Preferred Stock. At any
time, and from time to time, on and after the expiration of the restrictions of
conversion contained in Subparagraph 7(b), the Corporation may, in its sole
discretion, but shall not be obligated to, redeem in cash, in whole or in part,
the then issued and outstanding shares of Series B Convertible Preferred Stock,
at a rate of 120% of the purchase price of the Series B Convertible Preferred
Stock (the "Redemption Price"), plus any accrued but unpaid dividends, subject
to adjustment as provided in Paragraph 7.
(b) Notice of Redemption. The Corporation shall provide each
holder of record of the Series B Convertible Preferred Stock with written notice
of redemption (the "Redemption Notice") not less than 30 days prior to any date
stipulated by the Corporation for the redemption of the Series B Convertible
Preferred Stock (the "Redemption Date"). The Redemption Notice shall contain (i)
the Redemption Date, (ii) the number of shares of Series B Convertible Preferred
Stock to be redeemed from the holder to whom the Redemption Notice is delivered,
(iii) instructions for surrender to the Corporation of the certificate or
certificates representing the shares of Series B Convertible Preferred Stock to
be redeemed, and (iv) specification by the Corporation of the number of shares
of Series B Convertible Preferred Stock to be redeemed as provided in this
Paragraph 9, and (v) a procedure for the holder to specify the number of shares
of Series B Convertible Preferred Stock to be converted into Common Stock
pursuant to Paragraph 7, if applicable.
(c) Right to Convert Series B Convertible Preferred Stock upon
Receipt of Redemption Notice. Upon receipt of the Redemption Notice, the
recipient thereof shall have the option, at its sole election, to specify what
portion of the Series B Convertible Preferred Stock called for redemption in the
Redemption Notice shall be redeemed as provided in this Paragraph 9 or converted
into Common Stock in the manner provided in Paragraph 7. If the holder of the
Series B Convertible Preferred Stock called for redemption elects to convert
such shares, then such conversion shall take place on the Redemption Date, in
accordance with the terms of Paragraph 7.
(d) Surrender of Certificates; Payment of Redemption Price. On or
before the Redemption Date, each holder of the shares of Series B Convertible
Preferred Stock to be redeemed shall surrender the required certificate or
certificates representing such shares to the Depository (as defined in
subparagraph (e)), in the manner and at the place designated in the Redemption
Notice, and upon the Redemption Date, the Redemption Price for such shares shall
be paid by the Corporation via check or wire transfer to the order of the person
whose name appears on such certificate or certificates as the owner thereof, and
each such surrendered certificate shall be cancelled and retired. If a
certificate is surrendered and all the shares evidenced thereby are not being
redeemed, the Corporation shall issue new certificates to be registered in the
names of the person(s) whose name(s) appear(s) as the owners on the respective
surrendered certificates and deliver such certificate to such person(s).
<PAGE>
(e) Deposit of Redemption Price. On the Redemption Date in
respect to any shares of Series B Convertible Preferred Stock, or prior thereto,
the Corporation shall deposit with any bank or trust company (the "Depository")
having a capital and surplus of at least $50,000,000, a sum equal to (i) the
aggregate Redemption Price of all such shares called for redemption, less (ii)
the aggregate Redemption Price for those shares of Series B Convertible
Preferred Stock in respect of which the Corporation has received notice from the
holder thereof of its election, pursuant to Subparagraph 9(c), to convert shares
of Series B Convertible Preferred Stock into Common Stock. The Corporation shall
provide instructions and authority to the Depository to pay, on or after the
Redemption Date, the Redemption Price to the respective holders upon the
surrender of their share certificates. The deposit of the Redemption Price by
the Corporation with the Depository shall constitute full payment for the shares
of Series B Convertible Preferred Stock to be redeemed, and from and after that
date of the deposit, the redeemed shares shall be deemed to be no longer issued
and outstanding, and the holders thereof shall cease to be holders with respect
to such shares and shall have no rights with respect thereto, except the right
to receive from the Depository payment of the Redemption Price, without
interest, upon surrender of their certificates therefor. Any funds so deposited
and unclaimed at the end of one year from the Redemption Date shall be released
and delivered to the Corporation, after which the former holders of shares of
Series B Convertible Preferred Stock called for redemption shall be entitled to
receive payment of the Redemption Price in respect of their shares only from the
Corporation.
10. Notices. In case at any time:
(a) the Corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other pro rata distribution to the
holders of its Common Stock; or
(b) the Corporation shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or other
rights; or
(c) there shall be any capital reorganization or reclassification
of the capital stock of the Corporation, or a consolidation or merger of the
Corporation with or into, or a sale of all or substantially all its assets to,
another entity or entities; or
(d) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by first
class mail, postage prepaid, or by telex or facsimile or by recognized overnight
delivery service to non-U.S. residents, addressed to each holder of any shares
of Series B Convertible Preferred Stock at the address of such holder as shown
on the books of the Corporation, (i) at least 10 days' prior to written notice
of the date on which the books of the Corporation shall close or a record shall
be taken for such dividend, distribution or subscription rights or for
determining rights to vote in respect of any such reorganization,
reclassification,
<PAGE>
consolidation, merger, sale, dissolution, liquidation or winding up and (ii) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, at least 10 days' prior written
notice of the date when the same shall take place. Such notice in accordance
with the foregoing clause (i) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the holders of
Common Stock shall be entitled thereto and (ii) shall also specify the date on
which the holders of Common Stock shall be entitled to exchange their Common
Stock for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be.
11. Stock to be Reserved. The Corporation, upon the effective date of
this Certificate of Designation, has a sufficient number of shares of Common
Stock available to reserve for issuance upon the conversion of all outstanding
shares of Series B Convertible Preferred Stock, pursuant to the terms and
conditions set forth in Paragraph 7. The Corporation will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose of
issuance upon the conversion of Series B Convertible Preferred Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Series B Convertible Preferred
Stock. The Corporation convenants that all shares of Common Stock which shall be
so issued shall be duly and validly issued. The Corporation will take all such
action as may be so taken without violation of any applicable law or regulation,
or of any requirement of any national securities exchange upon which the Common
Stock may be listed. The Corporation will not take any action which results in
any adjustment of the conversion rights if the total number of shares of Common
Stock issued and issuable after such action upon conversion of the Series B
Convertible Preferred Stock would exceed the total number of shares of Common
Stock then authorized by the Corporation's Certificate of Incorporation, as
amended.
12. No Reissuance of Series B Convertible Preferred Stock. Shares of
Series B Convertible Preferred Stock which are converted into shares of Common
Stock as provided herein shall not be reissued.
13. Issue Tax. The issuance of certificates for shares of Common Stock
upon conversion of Series B Convertible Preferred Stock shall be made without
charge to the holder for any United States issuance tax in respect thereof,
provided that the Corporation shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Series B Convertible
Preferred Stock which is being converted.
14. Closing of Books. The Corporation will at no time close its transfer
books against the transfer of any Series B Convertible Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Series B Convertible Preferred Stock in any manner which interferes with the
timely conversion of such Series B Convertible Preferred Stock, except as may
otherwise be required to comply with applicable securities laws.
15. Definition of Common Stock. As used in this Certificate of
Designation, the term "Common Stock" shall mean and include the Corporation's
authorized Common Stock,
<PAGE>
$.001 par value per share, as constituted on the date of filing of these terms
of the Series B Convertible Preferred Stock, and shall also include any capital
stock of any class of the Corporation thereafter authorized which shall neither
be limited to a fixed sum or percentage of par value in respect of the rights of
the holders thereof to participate in dividends nor entitled to a preference in
the distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the corporation; provided that the shares of Common
Stock receivable upon conversion of shares of Series B Convertible Preferred
Stock shall include only shares designated as Common Stock of the Corporation on
the date of filing of this instrument, or in case of any reorganization,
reclassification, or stock split of the outstanding shares thereof, the stock,
securities or assets provided for in Subparagraph 7(f) and (g).
16. Amendments. No provision of these terms of the Series B Convertible
Preferred Stock may be amended, modified or waived without the written consent
or affirmative vote of the holders of at least 80% of the then outstanding
shares of Series B Convertible Preferred Stock.
SECOND: That said determination of the designation, preferences and
relative, participating, optional or other rights, and the qualifications,
limitations or restrictions thereof, relating to the Series B Preferred Stock
was duly made by the Board of Directors pursuant to the provisions of the
Corporation's Certificate of Incorporation and in accordance with the provisions
of Section 151 of the General Corporation Law of the State of Delaware.
IN WITNESS HEREOF, this Certificate has been signed by Offer Assis, its
President and Ronald Scott Moss, its Secretary, this _____ day of May 1998.
- ---------------------------------
Offer Assis
President
- ----------------------------------
Ronald Scott Moss
Secretary
Agreement to Transfer Business Share
between
RTV GEMMA s.r.o., Akademika Bedrny 365. Hradec Krglove, ECO: 62065921
represented by Martin Kindernay
as the "Transferor"
and
Global Television Networks TWC 1123 Broadway, New York
represented by: Offer Assis
as the "Beneficiary"
The Transferor is a partner in the RTV Gemma s-To. Corporation formed under the
laws of the Czech Republic; and recorded in the Commercial Register of the
District Commercial Court in Hradec Kralove Section C, folio. 7694, ICO-.
62065921
As resolved by the General Meeting of 1.4.1998 pursuant to paragraph 115 of the
Commercial Code, all partners expressed their consent with the transfer as
specified herein.
II
The Transferor owns a share in the RTV Gemma s.r.o. Corporation specified by the
ratio of the paid-up stock of 70 000, Corporation, which represents a share of
70% in the Corporation with 100,000 Kc of capital stock. The Transferor declares
that he is the sole- owner of the described share and that it is free and clear
of any lien or encumbrance.
III
The Transferor transfers a portion of his share represented by 44,000, -Kc
herewith on to the Beneficiary, who the said portion purchases and accepts as of
the date of this Agreement.
The new partner GTN declares concomitantly that he acknowledges the Corporate
Articles.
IV
The Parties also agree that the above described Transferor's share as the
subject of the transfer represents 44% of the Corporation share, and is being
transferred for the agreed price of 1,000,000 USD/one million dollars/. The
price will be paid at the final formal signing of this Agreement to the account
***. Within seven days of this signing of this GTN agreement the
<PAGE>
Beneficiary will transfer $100,000 to the Transferor as a loan with one year
with annual interest at 6%.
The effect of the share transfer between the Transferor and the Beneficiary
commences on the day of signing this Agreement.
The effect of the share transfer on the Corporation commences on the day of
delivery of this Agreement to the Corporation.
This Agreement is executed in five counterparts each Party receiving one. The
balance will be used in processing the records in the Commercial Register.
The Parties affirm that this Agreement represents their true and free will in
witness thereof they set their hands at Praha this ___ day of _________19___
RTV GEMMA s.r.o GLOBAL TELEVISION NETWORKS
NETWORKS
<PAGE>
Amendment to
Agreement on Future Agreement
Amendment to Agreement, dated March 30, 1998, among RTV Gemma, Ltd.
("Gemma"), registered in Hradec Kralove, A. Bedrny 366, ICO 620 65921; Global
Television Networks IWC ("GTN NY"), a HBC Company, with offices at 1123
Broadway, New York, New York 10010; and MAC TV, Ltd. ("MAC"), registered in
Kosice, Gresakova 10, Slovak republic, ICO 00618322.
WHEREAS, Gemma, GTN NY and MAC have entered into an Agreement on Future
Agreement, dated March 24, 1998 (the "Agreement"); and
WHEREAS Gemma, GTN NY and MAC now wish to clarify certain matters
contained in the Agreement;
NOW, THEREFORE, in consideration of the premises, and other good and
valuable consideration, the adequacy of which is hereby deemed sufficient, the
parties agree as follows:
1. Once GTN New York has paid a monetary consideration of 44% of the Kc
1,000,000 registered capital of RTV Gemma, Ltd., GTN New York shall be the owner
of 44% of all the voting stock of RTV Gemma Ltd. and shall be entitled to 75% of
all profits of RTV Gemma, Ltd.
2. GTN NY shall have the right to so purchase 44% of all the voting
stock of RTV Gemma Ltd. and shall be entitled to 75% of all profits of RTV
Gemma, Ltd. whether or not the Council for Radio and Television Broadcast of the
Czech Republic approves any additional licenses.
3. All of the other provisions of the Agreement shall remain valid.
4. For a period of 180 days, none of the parties shall disclose the
terms of the Agreement, unless required by law, nor seek alternative partners
relating to the subject thereof.
IN WITNESS WHEREOF, the parties have set their hand as of the date first
above written.
RTV Gemma, Ltd Global Television Networks MAC TV, Ltd.
By: _________________ By: ___________________ By: ______________
Martin Kindernay Offer Assis Marcel Dekanovsky
