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
September 30, 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.)
1123 Broadway Suite 902, New York, NY 10010
-------------------------------------------
(Address of principal executive offices)
(212) 627-5522
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 12(g) or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest possible date:
Common Stock, $.001 par value 10,198,466 Shares*
----------------------------- ------------------
(Class) (Outstanding at October 22, 1998)
- -------------------------
* Excludes 1,330,000 shares of Common Stock held in escrows and 27,000 shares
of Common Stock in Treasury.
<PAGE>
HUNGARIAN BROADCASTING CORP.
INDEX
<TABLE>
<CAPTION>
Page
----
Part I. Financial Information
<S> <C>
Consolidated balance sheets as of September 30, 1998 (unaudited)
and December 31, 1997 3
Consolidated statements of operations for three months ended September 30,
1998 (unaudited) and 1997 (unaudited) and the nine
months ended September 30, 1998 (unaudited) and 1997 (unaudited) 4
Consolidated statements of cash flows for the nine months ended
September 30, 1998 (unaudited) and 1997 (unaudited) 5
Notes to consolidated financial statements (unaudited) 6-14
Management's discussion and analysis of financial condition
and results of operations 15-24
Part II. Other Information 25-27
Signature 27
</TABLE>
<PAGE>
Part I. Financial Information
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED BALANCE SHEETS
(Expressed in US$)
<TABLE>
<CAPTION>
A S S E T S September 30, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 194,182 $ 406,733
Accounts receivable, net of allowance of $251,722 and $ 43,237 634,104 469,163
VAT receivable 212,746 --
Program rights costs, net of accumulated amortization of $611,305 and $ 0 739,333 687,614
Prepaid expenses and other current assets 1,463,943 177,026
Due from related parties 1,531,476 361,046
------------ ------------
Total current assets 4,775,784 2,101,582
------------ ------------
Property, plant and equipment, net of accumulated depreciation of
$1,021,483 and $ 112,939 1,844,250 401,178
Production costs -- 432,886
Copyrights -- 401,434
Broadcast license costs, net of accumulated amortization of
$2,561,370 and $ 1,092,979 21,498,336 1,057,535
Deferred financing and other intangibles, net of accumulated
amortization of $31,467 and $ 1,130 68,860 7,683
Other -- 251,605
------------ ------------
Total assets $ 28,187,230 $ 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 $ 2,112,590 $ 1,027,306
Accounts payable 3,610,579 676,191
Accrued expenses 2,006,234 945,538
VAT Payable -- 97,185
Due to related parties 479,415 932,123
Other 2,571,723 247,394
------------ ------------
Total current liabilities 10,780,541 3,925,737
------------ ------------
Commitments and contingencies (Note 8)
Minority interest 655,207 --
Stockholders' equity
Preferred stock, $.001 par value - shares authorized 5,000,000; Series A
issued and outstanding 23,630 and 38,530; aggregate liquidation
preference $236,300; and Series B - issued and outstanding 8.05 and 0,
aggregate liquidation preference $6,000,000 25 39
Common stock, $.001 par value--shares authorized 15,000,000; issued
and outstanding 8,840,000 and 3,929,281 8,840 3,930
Additional paid-in capital 40,824,272 11,693,680
Accumulated deficit (24,180,295) (11,105,715)
Accumulated other comprehensive income 98,640 136,232
------------ ------------
Total stockholders' equity 16,751,481 728,166
------------ ------------
Total liabilities and stockholders' equity $ 28,187,230 $ 4,653,903
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
Part I. Financial Information
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in US$, except share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
----------- ----------- ------------ -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues $ 1,115,790 $ 679,645 $ 2,896,491 $ 2,396,504
Expenses
Other operating costs and expenses (1,356,991) (478,484) (3,751,184) (1,613,179)
Amortization of deferred
program costs (193,600) (285,500) (554,757) (856,500)
Amortization of broadcast license
costs (579,155) (102,772) (1,468,387) (317,284)
Selling, general and
administrative expenses (3,100,734) (662,054) (7,323,310) (2,685,787)
----------- ----------- ------------ -----------
Total operating costs (5,230,480) (1,528,810) (13,097,638) (5,472,750)
----------- ----------- ------------ -----------
Operating loss (4,114,690) (849,165) (10,201,147) (3,076,246)
Interest and other income 100,590 63,209 144,297 1,267,196
Other expense -- -- (1,143,600) --
Interest expense (153,393) (9,599) (494,916) (128,059)
Foreign currency exchange rate loss (6,258) 37,404 (70,452) 41,530
Loss on disposal of subsidiary -- -- (476,497) --
----------- ----------- ------------ -----------
Net loss before minority interest $(4,173,751) $ (758,151) $(12,242,315) $(1,895,579)
Minority interest 114,523 -- 226,735 --
----------- ----------- ------------ -----------
Net loss $(4,059,228) $ (758,151) $(12,015,580) $(1,895,579)
Other comprehensive income: $ (5,344) $ (181,824) $ (37,592) $ (8,243)
Foreign currency translation movement
Beneficial conversion feature of
preferred shares $ (556,000) -- $ (1,059,000) --
Comprehensive (loss) income $(4,620,572) $ (939,975) $(13,112,172) $(1,903,822)
Basic loss per share:
Net (loss)income per share $ (0.58) $ (0.28) $ (1.79) $ (0.72)
Weighted average number of
common shares outstanding $ 6,988,351 2,738,546 $ 6,700,446 2,640,651
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Part I. Financial Information
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in US$)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, September 30,
1998 1997
------------ -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(12,015,580) $(1,895,579)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of intangibles 2,284,769 1,255,830
Provision for doubtful accounts 207,401 (5,454)
Depreciation 385,343 68,324
Foreign exchange gain (43,269) (23,918)
Minority interest (226,735) (14,791)
Gain on sale of fixed assets (10,473) (16,600)
Loss on sale of subsidiary 476,497
Issuance of equity instruments for services 301,283 --
Changes in operating assets and liabilities, net of business acquired:
(Increase) decrease in accounts receivable 261,143 50,655
(Increase) decrease in other receivables (206,434) (231,289)
(Increase) decrease in VAT receivable (146,718) --
(Increase) decrease in prepaid expenses and other current assets (205,105) (127,983)
(Increase) decrease in other assets -- 89,680
Increase (decrease) in accounts payable 1,012,670 (93,214)
Increase (decrease) in accrued expenses (271,816) 2,888
Increase in provision for contract cancellation -- --
Increase (decrease) in other liabilities 1,978,387 228,279
(Increase) decrease in production costs and copyrights (66,535) --
------------ -----------
Net cash provided by (used in) operating activities (6,285,172) (713,172)
------------ -----------
Cash flows from investing activities:
Purchase of fixed assets, net of disposals (564,265) (43,782)
Proceeds from sale of fixed assets 10,211 --
Purchase of program and film rights (284,843) --
Purchase of investments -- (200,000)
Acquisition of business, net of cash acquired (1,113,844) (241,630)
------------ -----------
Net cash used in investing activities (1,952,741) (485,412)
------------ -----------
Cash flows from financing activities:
Decrease in advances from related parties (630,048) (1,178,326)
Proceeds from the issuance of common stock --
Proceeds from the issuance of preferred stock 6,000,000 4,265,000
Proceeds from issuance of notes payable 368,000
Payments for offering costs (437,030) (974,881)
Payment of notes payable (77,783) (880,000)
Capital contributions from shareholders 1,600,000 --
Exercise of warrants and options 1,203,800 --
------------ -----------
Net cash provided by financing activities 8,026,939 1,231,793
Effect of exchange rate changes on cash and cash equivalents (1,577) (77,760)
Net change in cash and cash equivalents (212,551) (44,551)
Cash and cash equivalents at beginning of period 406,733 375,823
------------ -----------
Cash and cash equivalents at end of period $ 194,182 $ 331,272
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
Notes to Consolidated Financial Statements
(unaudited)
1. Organization and Business
Hungarian Broadcasting Corp. ("HBCO"). a Delaware corporation, was formed in
September 1994. HBCO, together with its subsidiaries (HBCO and its subsidiaries
are collectively referred to as the "Company"), invests in, develops and
operates national satellite-to-cable and regional terrestrial, commercial
television stations in Central Europe.
In Hungary, the Company operates two television stations, MSAT and Sziv TV,
operating in Budapest and distributing their signals there by MMDS (Microwave
Multiple Distribution System) and by transmission to satellite-to-cable systems
throughout Hungary. The Company has a 99% profit interest and a 74% ownership
interest in Hungarian Broadcasting Corporation Televizios Reszvenytarsasag ("HBC
Rt"), a Hungarian corporation, which holds the broadcasting licenses for MSAT.
In addition, the Company has a 99% profit interest and a 24% ownership interest
in Sziv TV Rt ("Sziv TV"), a Hungarian corporation, which holds the broadcasting
licenses for Sziv TV.
The Company has established Global Productions as a division of HBC Rt. This
division is a supplier of film production services for movies, commercials and
television.
In the Czech Republic, the Company owns a 76.5% profit interest and a 46.2%
ownership interest (with an option to increase the ownership interest to 70.4%
for a payment of one dollar) in RTV Gemma, s.r.o. ("Gemma"), a Czech corporation
that holds the broadcasting licenses for Galaxie TV. Galaxie TV broadcasts
terrestrially from Hradec Kralove in the central region of the country and
broadcasts by satellite to cable companies throughout the Czech Republic.
In Slovakia, the Company owns a 76.5% profit interest and a 46.2% ownership
interest (with an option to increase the ownership interest to 70.4% for a
payment of one dollar) in M.A.C. TV, Ltd. ("MAC"), a Slovak corporation that
holds the broadcasting license for TV NASA. TV NASA broadcasts terrestrially
from Kosice in the eastern region of the country and plans to launch
satellite-to-cable broadcasting throughout Slovakia over the next few months.
MAC also owns 66% of Nasa TV, Ltd. (34% owned by the municipality of Kosice)
which in turn owns a production business and certain related real estate.
Included in the ownership and profit interests above is MAC's 5% ownership in
Gemma (receiving 2% of the profits) and Gemma's 5% ownership in MAC (receiving
2% of the profits).
The Company also has long term agreements to distribute adult films to a
direct-to-home television network in Russia and to cable companies in Vienna and
Amsterdam. This film redistribution business and its related contracts is
planned to be transferred to a newly formed corporation ("NEWCO") shares of
which will be distributed as a dividend to common stock shareholders of record
of the Company as of August 31, 1998. The shares of the ("NEWCO") have not been
issued yet. See Footnote 10. Dividend of Adult Distribution Assets to
Shareholders
Two directors resigned, Mark Graff on July 23, 1998 and Haim Sion on October 21,
1998. Peter E. Klenner, former Chairman of the Board resigned as the Chairman of
the Board and as a Director on September 1, 1998.
<PAGE>
Notes to Consolidated Financial Statements
(unaudited)
2. Accounting Standards Issued and Not Yet Effective
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.
SFAS No. 132, "Employers' Disclosure about Pensions and Other Post-retirement
Benefits" is effective for fiscal years beginning after December 15, 1997. The
Statement significantly changes current financial statement disclosure
requirements from those that were previously required. The Company does not
sponsor any pension or post-retirement benefits plan.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" is
effective for fiscal years beginning after June 15, 1999. This Statement
establishes a new model for accounting for derivatives and hedging activities
and supersedes and amends a number of existing standards. The Company has not
yet determined the impact of implementation of this Statement.
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
("Series A Preferred"). As of September 30, 1998 502,870 shares of Series A
Preferred had been converted into common stock, leaving a balance of 23,630
shares of Series A Preferred outstanding.
In May 1998, the Company issued 12 shares, at nominal value of $500,000 each,
of Series B 6% Convertible Redeemable Preferred Stock with $0.001 par value per
share ("Series B Preferred") at a price of $500,000 per share. The Series B
Preferred are convertible into shares of the Company's common stock at 85% of
the low two-day average (not necessarily consecutive) closing bid price of the
common stock for the 15 consecutive trading days prior to the trading day on
which a notice of conversion is received by the Company, but with a price no
higher than $9.685 per share. Therefore, the lower the market price for the
common stock, the greater the number of common shares that the converting holder
of Series B Preferred will be able to receive, and the greater consequent
dilution to existing stockholders in the event the shares of Series B Preferred
are converted.
If the average closing price of the Company's common stock is $4.00 or less at
the time of conversion, the conversion price will be the price on the day prior
to the date that the conversion notice is received, without discount. In this
event, however, the converting shareholders, in addition to their common stock,
will receive three-year warrants for an amount of common stock equal to 15% of
the nominal value of the preferred stock being converted at a price equal to
101% of the
7
<PAGE>
Notes to Consolidated Financial Statements
(unaudited)
Average Closing Price on the date of conversion. Holders of the Series B
Preferred are permitted to convert no more than 8.33% of their stock each week.
If the Company is unable to issue the common stock because of Nasdaq Stock
Market rules limiting the sale of more than 20% of the Company's stock without
shareholder approval, the Company will use its best efforts to secure
shareholder approval. If the Company cannot issue the required shares, the
holders can demand redemption of their securities plus a premium of 20%.
As part of the issuance of these $6 million of Series B Preferred, the Company
had the option of selling an additional $2 million of these securities to the
investors 30 and 60 days after an effective registration statement. As of
September 5, 1998 the Company had not completed an effective registration
statement. The terms of the agreement provide for a penalty of 2% per month of
the outstanding amount of Series B Preferred in relation to a delay in obtaining
an effective registration statement. As of September 30, 1998 $67,000 were
accrued. However, as noted below the Company is in the process of negotiating
revised terms of the Preferred Shares Offering with the holders and does not
anticipate that this penalty will ultimately be paid.
The holders of Series Preferred B converted certain of these shares into common
stock in September 1998. The total number of shares issued to the Holders of
Series Preferred B was 1,925,136 through September 30, 1998. On September 8,
1998 188,339 shares of common stock were issued by conversion of 0.45 Preferred
Stock B, on September 18, 1998 297,223 shares of common stock were issued by
conversion of 0.6 Preferred Stock B and on September 29, 1998 1,439,574 shares
of common stock were issued by conversion of 2.9 Preferred Stock B.
The shares issued on September 29, 1998 have not been delivered to the relevant
holders as the Company believes this issue breaches the terms of the Preferred
Shares agreement as more than 8.33% shares were converted in the week in
question. The Company is currently in negotiations with the current holders of
Series B Preferred Stock and relevant shares issued on September 29, 1998 but
not yet delivered, to revise the terms of the original offering. The Company is
confident that a mutually acceptable solution will be arrived at. It is not
known what revised terms might ultimately be negotiated and as to when or if
such an agreement will be reached.
4. Common Stock
On July 30, 1998 per the Company's Board resolution dated June 23, 1998 the
Company agreed to grant James H. Season, the CFO of the Company 30,000
unregistered common shares as compensation, having an ascribed value of
$105,000, as at that day's market rate, 3.50.
On July 30, 1998 per the Company's Board resolution dated June 23, 1998
agreed to grant Tibro, a related company, whose representative is Sasha Klein,
Chief Operational Manager of the Company, 25,000 unregistered common shares as
compensation, having an ascribed value of $87,500, as at that day's market rate,
3.50.
8
<PAGE>
Notes to Consolidated Financial Statements
(unaudited)
On August 7, 1998 the Company agreed to grant Ron Midili, the Company's program
consultant 10,000 unregistered common shares as compensation, having an ascribed
value of $22,500, as at that day's market rate, 2.25
On August 7, 1998 8,000 unregistered common stock were given to Jesup & Lamont
Securities Corporation as commission in connection with the Offering of
convertible preferred shares, to be freely tradable upon the establishment of an
effective registration statement.
The Company's legal consultant firm based in Hungary, Lendvai and Nyiri's
Attorney Office was granted 20,000 unregistered common shares on August 13,
1998, having an ascribed value of $40,626, as at that day's market value rate,
2.0313, in compensation for services rendered.
During the third quarter of 1998, a total of 2,018,136 shares of common stock
were issued in respect of conversion of Series B Preferred Stock and pursuant to
the consulting compensations and other fees referred to above. 1,439,574 shares
have not yet been delivered until the issue discussed above is resolved.
In December 1995, three of the Company's officers/founders contributed stock to
the Company for no consideration. In 1998, in relation to the purchase of Global
and the resulting effective change of control of the Company, 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 & Company Securities, Inc.
("Coleman") to complete a firm commitment underwriting.
The Company had an action against Coleman in the Supreme Court of the State of
New York to recover damages from the aborted underwriting, including the damages
suffered by the founders, which was settled on August 7, 1998. Coleman & Company
Securities Inc. and HBCO Corp. agreed to settle the case with an amount of $
300,000. Of this amount, $ 150,000 was to be paid on or before August 31, 1998
and $ 150,000 is to be paid in cash on or before December 31, 1998. The Company
decided to accept this settlement based on the advice of legal counsel. Although
settlement was reached, no payment had been received by September 30, 1998 and
thus no income was recorded. The Company received $64,000 from Coleman in
October 1998 .
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. In May and June 1998, the final terms of
negotiations with the founders were completed. The Company has agreed to pay
Peter E. Klenner, former Chairman of the Board of Directors of the Company and
formerly Chief Executive Officer, $ 500,000 for the cancellation of his 100,000
shares. This amount has been credited to Mr. Klenner for his purchase of Studio
2 Kft by his wholly-owned corporation, M&A Management Kft. The other two former
officers/founders, were granted a total of 63,158 unregistered shares
representing a stock price of $4.75 on the date of Board approval for a value of
$300,000. In addition, for these two founders, if the Company receives payment
from a judgement prior to June 1, 1999 in excess of $300,000, the two founders
can put these shares to the company for $300,000 in cash. If no judgement in
excess of $300,000 has been collected by the Company prior to June 1, 1999 and
the price of the common stock on that day is
9
<PAGE>
Notes to Consolidated Financial Statements
(unaudited)
below $4.75, the Company will issue additional shares to these two founders to
allow the market value of the total shares paid to these two individuals to be
$300,000 as of that date.
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 September 30, 1998, and operating results and cash flows for the
nine 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.
The Company has filed an initial SB/2 registration statement on June 9, 1998,
subsequent to the issue of securities referred to in Note 3 above. This
registration statement is undergoing the review and clearance process with the
SEC. If, as a result of this review, the Company decides that either preferable
or corrective changes in accounting policies are warranted, it may amend its
filings.
The Company agreed to obtain a third party independent valuation of the
Company's Sziv TV broadcasting License in respond to a NASDAQ inquiry, and the
company has agreed to incorporate such valuation on its Balance Sheet. If the
third party valuation is less than 5,000,000 dollars or if NASDAQ does not
accept such third party valuation and the company does not take other steps
available to it to meet listing criteria, there is a risk that NASDAQ might
question whether or not the company continues to meet the criteria to retain its
listing. Management believe that this issue will be resolved favorably.
7. Related Party Transactions
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. In May 1998 the Company contracted for three years with Top Line to
provide business services for the Company at a cost of $60,000 per month. This
fee includes $25,000 per month due to the Chief Operating Officer of the Company
pursuant to his separate three year employment contract with the Company. Top
Line has two other employees who spend all or nearly all of their time on
Company business. This payment also includes office rent, telephone, other
miscellaneous office expenses, and travel and lodging.
As part of the acquisition of Global, the shareholders of Global agreed to
infuse $1,750,000 of additional cash into Global in the form of a capital
contribution. As of September 30, 1998, $600,000 has been received and
subsequent to September 30, 1998 Offer Assis repaid the amount of $1,150,000
which is included in due from related parties as at September 30, 1998.
In a transaction related to the acquisition of Global Television Networks, Inc.
("Global"), Global agreed to allow Peter Klenner, to put 300,000 common shares
that he owned in the Company at a price of $7.50 per share on or after December
31, 1998 if Global was acquired by the Company. Upon the acquisition of Global
by the Company, the Company assumed this put obligation. Since the time of the
acquisition, the Company's stock has declined in value. Accordingly, the Company
recognized in the second quarter other expenses of $1,143,600 to reflect the
potential liability of the Company due to this put obligation based on the price
of the Company's stock as of June 30, 1998. In discussions between Mr. Klenner
and the Chief Executive Officer of the Company, Mr. Klenner has agreed not to
put these shares to the Company unless it can reasonably afford to make the
10
<PAGE>
Notes to Consolidated Financial Statements
(unaudited)
payment. Additional negotiations are taking place with Mr. Klenner to reduce the
potential liability of this obligation.
The Company received a 21-day loan in the principle amount $ 300,000 from 8670
Property Partners, a related party, with annual interest at maturity at a rate
equal to 2 percent in excess of LIBOR, secured by the Company's interest. The
Company used $368,000 credit facility in September 1998 from 8670 Property
Partners. Subsequent to the period end the loan, plus the interest, was repaid
to 8670 Property Partners.
8. Commitments and Contingencies
Programming Contract
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 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 up to 50% of the Company's
Nickelodeon activities.
MTV Networks Europe ("MTVNE") and HBCO Corp. signed an agreement starting
service by August 20, 1998. MTVNE carries on the business of producing a twenty
four hour a day music television service known as MTV: Music Television ("MTV")
and distributing and / or licensing others to broadcast such services and/or the
programming contained therein. HBCO Corp through its affiliated companies,
carries on the business of providing television services to viewers to cable and
MMDS networks in Hungary, and terrestrial broadcast network in the Czech
Republic and Slovakia and wishes to license part of the MTV programming and
broadcast a local language version of it under the "MTV" brand name. The term of
the contract year is one year commencing August 20, 1998 and any subsequent
period as agreed between the parties. MTVNE grants HBCO a non-exclusive license
during the Term to include within and broadcast as part of the Licensed
Channels, one hour only of the Programming each day between the hours
15:00-21:00 every day of the week. The one hour of Programming broadcast on the
Licensed Channels shall be branded on-screen "MTV", and shall be known as the
"MTV Magazine".
Filing of Form 8-K
Relative to the acquisition of Global in January 1998, the Company filed an
initial Form 8-K with the Securities and Exchange Commission ("SEC"). 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. The final filing of the Form 8-K, including 1996 and 1997
audited financial statements of both Global Television Networks, Inc. and Sziv
TV Rt, was made in May 1998.
11
<PAGE>
Notes to Consolidated Financial Statements
(unaudited)
Rental and Lease Agreements
By the end of September HBC TV Rt, the Company's Hungarian affiliate, which
previously leased the entire 14-unit building B located at Kelenhegyi ut 43 in
Budapest from Hafisa Kft, returned eight of the units rented in the building,
which were previously used for Company offices; marketing, finance, and
administration, plus overnight accommodation; five of the remaining units are
used by expatriate employees or expatriate consultants who spend all or nearly
all of their time on the Company's business, and one unit for Global Production
division. The agreement between HBC TV Rt and Hafisa Kft was terminated. HBC now
pays, on a monthly basis, approximately $10,000 to Euroweb. The Company
believes that the rental charges are no higher than the costs for comparable
facilities.
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 is negotiating with the
value added tax office as to final amounts due to that office and plans to end
the receivership after this dispute is resolved. This event has had no material
impact on the operations or financial condition of the Company.
1. 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>
Items
---------
<S> <C>
Balance at January 1,1997 $ 126,215
1997 foreign currency movement 10,017
---------
Balance at December 31, 1997 $ 136,232
Current period foreign currency movement (37,592)
Beneficial conversion feature of preferred shares (1,059,000)
---------
Balance at September 30, 1998 $(960,360)
=========
</TABLE>
12
<PAGE>
Notes to Consolidated Financial Statements
(unaudited)
10. Dividend of Adult Distribution Assets to Shareholders
In June 1998, the Board of Directors voted to distribute its adult programming
assets to stockholders of the Company. The holder of each share of the Company
will receive one share in the newly formed corporation ("NEWCO") for
shareholders of record on August 31, 1998. The fair market value of the dividend
is insignificant as the distributed assets have no book value, modest sales and
no current profitability. The assets being distributed are 100% of the stock of
MERSA Holding B.V. Bare Necessities NV, RPPV Services, Ltd., APPV Services, Ltd.
C.D.I. Productions Corp. and Chatline Corp. NV. C.D.I. Productions Corp. and
Chatline Corp. NV are currently inactive. The President of NEWCO will be Offer
Assis, the President of the Company. The assets of NEWCO currently are
generating approximately $10,000 per month of revenue with approximately
breakeven profitability. Mr. Assis has had preliminary negotiations with Ami
Shafrir, a former director of the Company. Mr. Shafrir owns a number of Los
Angeles based adult Internet businesses including Net Options, Inc. ("Shafrir
Businesses"). It is Messrs. Assis' and Shafrir's intentions to negotiate the
combination of NEWCO and Shafrir Businesses shortly after the spin off of NEWCO.
The parties expect that NEWCO shareholders will hold a substantial minority
ownership position which may be as high as 50% in the merged company. In 1997,
Shafrir Businesses had sales of approximately $1.0 million with unaudited pre
tax income of about $0.15 million. An associate of Mr. Shafrir is expected to be
elected Chief Executive Officer of the merged company.
As a result of this spin-off, the Board of Directors has determined that certain
incentive criteria for senior management and for other former shareholders of
Global should be adjusted. More specifically, following the spin off the Board
has preliminarily decided that the option price on the 3,000,000 options
exercisable at $10 per share be reduced to $8 per share and the market price
performance criteria for vesting the 1,250,000 escrowed shares be reduced from
$10 per share to $8 per share. In addition, the annual per share earnings
performance criteria for those escrowed shares are reduced from $0.50 per share
to $0.40 per share.
The Board is still in the process of retaining a qualified appraiser to opine on
the fairness of these proposed adjustments. The shares have not been issued yet.
11. Subsequent Events
EuroWeb International, an unrelated party, holds $400,000 principal amount of
notes and has agreed to convert its holdings into common stock. The Company had
previously loaned EuroWeb $350,000 at 6% interest with a maturity date of June
30, 1998. Prior to redeeming EuroWeb's note, the two loans and their accrued
interest were offset. Euroweb was willing and agreed to take the difference of
$177.418 in the common stock of HBC, valued based on 30 % below the closing
price of $3.6875 on June 30, 1998. The shares were issued in mid-November 1998.
Subsequent of September 30, 1998 the Company has received $350,000 credit
facility from Change Consolidated BV, starting from October 2, 1998.
13
<PAGE>
Notes to Consolidated Financial Statements
(unaudited)
Exchange of Investor Notes for Common Stock
As of June 30, 1998, promissory notes totaling $1,020,000 plus accrued interest
were due. The Company offered these note holders shares of unregistered common
stock in the Company as payment in full for the notes plus accrued interest. The
value of the common stock offered was $2.5813 per share which represented a
discount of 30% from the market value of the common stock on June 30, 1998 of
$3.6875 per share. Note holders representing $700,000 or 69% of the outstanding
debt have accepted in writing this offer. Additional note holders representing
$320,000 or 31% have either not responded to the offer or are in negotiation
with the company to find a way to settle this obligation. EuroWeb International,
a related party, holds $400,000 principal amount of these notes and has agreed
to convert its holdings into common stock. The Company had previously loaned
EuroWeb $350,000 at 6% interest with a maturity date of June 30, 1998. Prior to
redeeming EuroWeb's note, the two loans and their accrued interest will be
offset.
Contract with Video International Media Services
In July 1998, the Company contracted for five years with Video International
Media Services to become the Company's exclusive advertising sales agent in
Hungary. The agreement calls for guaranteed payments of up to $80 million over
five years once the Company meets certain performance criteria, including an
audience share in Hungary of 7%. The Company's current audience share for its
two stations in Hungary is about 3%.
Video International Media Services set up an office based in Hungary,
exclusively for advertising for the two channels.
Video International Media Services started to operate as an exclusive
advertising sales house in Budapest for the two television stations, MSAT and
SZIV TV as of September 7, 1998.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company is a 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 television households, respectively, or about 39% and 35% of all
television households in the country. In May 1998, the Company acquired 46.2%
ownership and 76.5% profit interest of Galaxie TV in the Czech Republic and
46.2% ownership and 76.5% profit interest in TV MAC, a Slovak corporation that
holds the broadcast license for TV NASA. Galaxie TV has an audience reach of
approximately 1.0 million television households. TV NASA has a terrestrial reach
of about 0.2 million television households and plans to begin broadcasting by
satellite this fall to cable households in Slovakia and increase the station's
reach to about 0.8 million television households.
The Company's strategy is to continue to expand its broadcasting reach, improve
and specialize its programming and aggressively pursue additional advertising.
The Company has contracted with Nickelodeon, a unit of Viacom, Inc., to provide
12 hours per day of children's programming on one of its Hungarian channels. It
is expected that other, similar programming commitments will be made with
Nickelodeon or others in the Czech Republic and in Slovakia. The Company expects
to benefit from the high rates of growth for television advertising in Hungary,
the Czech Republic and Slovakia projected by Zenith Media / Saatchi and Saatchi.
In addition, a new management team, that began operating the stations in January
1998, has plans for significant broadcasting expansion elsewhere in Central and
Eastern Europe.
The Company was organized in September 1994. Broadcasting of the Company's MSAT
channel began on a limited basis in September 1994 and increased to 21 1/2 hours
per day in December 1994.
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.
In September 1997, the Company was awarded 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 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 is 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. The Company will spin off
these adult programming assets to its shareholders as of the record date August
31,1998.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Under Hungarian media law there are certain restrictions on one corporate entity
owning two national or regional television stations. There is no such rule for
specialized or satellite-to-cable television stations. The Company carefully
structured its acquisition of Sziv TV to be in compliance with the law. On
September 28, 1998 HBCO's affiliate SZIV TV Rt ("SZIV") has been approved and
registered for a national satellite broadcasting license for its satellite
operations. This license was confirmed by ORTT, the Hungarian television
regulatory authority, and permits SZIV to transmit its digital signal without
code. Accordingly, small cable television companies and direct-to-home customers
can receive the satellite broadcast transmission using an inexpensive, basic
television box.
The new management is currently overhauling the two Hungarian stations with
specialized programming to be introduced in August through November 1998. Since
August 20, 1998 MSAT launched two-hour-program of Nickelodeon. Since November
15, 1998 Nickelodeon children programming is on MSAT for six hours on a daily
basis. The management's intention is to expand to 12 hours per day of localized
Nickelodeon programs for children supplemented with family programming for young
adults in the evening. SZIV TV will be an entertainment channel providing
specialized programming.
As part of its strategy to ally itself with major, professional companies in the
broadcasting business, the Company in July 1998 signed an exclusive five year
contract with Video International Media Services to be the Company's advertising
sales agent in Hungary. The agreement calls for guaranteed payments of up to $80
million over five years once the Company meets certain performance criteria,
including an audience share in Hungary of 7%. The Company's current audience
share for its two stations in Hungary is about 3%. The two companies expect to
expand their cooperation in the Czech Republic, in Slovakia and elsewhere in
Central and Eastern Europe. Video International Media Services set up an office
based in Hungary, exclusively for advertising for the two channels.
Video International Media Services started to operate as an exclusive
advertising sales house in Budapest for the two television stations, MSAT and
SZIV TV as of September 7, 1998.
In May 1998, the Company purchased 46.2% ownership and 76.5% profit interest in
Galaxie TV ("Galaxie") in the Czech Republic. Galaxie has a regional terrestrial
license and a national satellite-to-cable license. In January 1998 Galaxie began
broadcasting via satellite to cable and direct-to-home viewers in the Czech
Republic and is reaching approximately 1.1 million television households(about
3.2 million viewers, or about 32% of all television households in the Czech
Republic. Glaxie TV had expanded its terrestrial coverage in that country by
80,000 television households. This expansion is a result of a long-term,
exclusive broadcast affiliation agreement with a station in Northern Bohemia
which will broadcast 21 hours per day of Galaxie TV programming. 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 about 72% coverage of television households in that country.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Galaxie TV Network acquired the rights to broadcast 70 National Hockey League
games, including playoffs, in the Czech Republic and Slovakia for the 1998-99
season, and secured the broadcast rights for the Year 2000 season well. Since
the beginning of October, Galaxie has been broadcasting the NHL matches live
Friday and Saturday nights, with reruns on Saturdays and Sundays, to more than
one million TV households (terrestrial and cable) in the Czech Republic and
500,000 TV households in Slovakia (about 4.2 million viewers collectively).
Also in May 1998, the Company purchased 46.2% ownership and 76.5% profit
interest in MAC in Slovakia. MAC, through its 100% ownership of TV NASA, has a
regional terrestrial license broadcasting to about 0.2 million television
households and plans this fall to begin broadcasting by satellite to cable
households in Slovakia and increase the station's reach to about 0.8 million
television households, or about 40% of all television households in Slovakia.
MAC has applied to the Council of Slovak Republic for Radio and TV Broadcasting
to combine several regional terrestrial licenses which would give TV NASA up to
60% coverage of television household in that country. MAC TV has concluded
contracts with nine of 36 cable operators in Slovakia and expects to conclude
contracts with the remaining operators in time for the start of satellite-to-
cable broadcasting in November 1998. In addition to the two terrestrial stations
already broadcasting its signal, the Company has added TV Tatry, a terrestrial
station in Northeastern Slovakia, to its television network with broadcasting
beginning in November 1998.
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. Billings in the Czech Republic and in
Slovakia generally are from rate card quotes. A majority of the Company's
revenues have been derived from fewer than ten international advertising
agencies that arrange the broadcast of commercials for their clients. Future
advertising in Hungary will be sold by Video International Media Services ("VI")
and it is likely that this media company will also represent the Company with
Galaxie and with NASA. The Company engages in certain barter transactions in
which it exchanges unsold commercial advertising for services and goods,
primarily in exchanging advertising time with magazines for television listings
and general promotion of the stations. In the future the Company may contract
with cable companies to receive monthly subscription fees. The Company
experiences seasonality, with advertising sales tending to be lowest in the
summer months of July and August and in January as the major advertising
agencies negotiate the next year's buy. The highest level of advertising
activity is during the fourth quarter 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.
Revenues from Company operations are averaging about $350,000 per month, of
which about $150,000 per month are from the Hungarian stations. Nickelodeon as a
new specialized programming started in August 20, 1998 for 2 hours on a daily
basis and since to November 15,
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1998 6 hours on a daily basis in Hungary may increase the Hungarian stations'
audience and advertiser demand. In addition, as of September 7, 1998, VI became
the exclusive sales agent for the Company's advertising in Hungary. Both the
Company and VI believe that this marketing agreement will increase the Company's
advertising revenue in Hungary.
The Company has gained the cost benefits of combining the two Hungarian stations
at one location with one management and technical group. The Company has had a
buildup of expenses, particularly of Selling, General and Administrative
expenses, that are necessary to support the Company's ambitious expansion plans.
Certain non-cash expenses were incurred with long-term employment and consulting
contracts where a portion of the payment was made with securities of the
Company. Obligations paid for in common stock or options are non-cash expenses.
In October 1997, two new private stations entered the Hungarian market and one
regional station was acquired by a major international broadcasting company,
increasing competition in Hungary for both audience and advertising. This
competition, particularly in pricing, has hurt results.
The Company conducts its operations through its Hungarian, Czech and Slovakian
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 and Czech law and foreign
currency regulations in Hungary, in the Czech Republic and in Slovakia. 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, Czech korona and Slovakian korona 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,
Czech and Slovakian economies. Growth in Hungarian, Czech and Slovakia
television advertising is directly impacted by the overall health and growth of
their respective economies.
In the past the Company has funded its operations largely from investor funds.
The Company has a plan to make the Hungarian stations profitable over the next
three years. Prospects for significant profitability in the Czech Republic and
Slovakia are better. Planned expansion elsewhere in Central and Eastern Europe
looks favorable. In the medium term, the Company needs to rely on funding from
investors to finance its operations and its plans for growth. There is no
assurance that investors will continue to fund this business while it
experiences losses. Management believes, at least for the next twelve months,
that the Company can continue to raise the necessary funds for its business
needs.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Quarter ended September 30, 1998 compared to quarter ended September 30, 1997
The Company's revenues increased by $436,145, or 39% to $1,115,790 in the
quarter ended September 30, 1998 from $679,645 in the quarter ended September
30, 1997. Revenues from the newly acquired Czech and Slovak stations were
$555,161 for a portion of the third quarter. Revenues increased due to the fact
that the Company operated four stations versus one station in the prior year.
Revenues for the period for the Hungarian stations were reduced by the increased
competition in the Hungarian market due to the fall 1997 launch of new stations.
Management's focus has been on the launch of the two Hungarian stations' new
formats in August through November 1998 period; accordingly, programming and
marketing initiatives have been deferred.
Other operating costs and expenses, including amortization of deferred program
costs, increased by $786,607 to $1,550,591 in the quarter ended September 30,
1998 from $763,984 in the quarter ended September 30, 1997. Other operating
costs and expenses for the Czech and Slovak stations were $149,282 for the third
quarter ended September 30, 1998. This increase reflects the costs associated
with running four television stations rather than one and the continuing costs
of combining two stations at one location.
Amortization of the broadcast license costs increased by $476,383 to $579,155 in
the quarter ended September 30, 1998 from $102,772 recorded in the prior period.
The newly acquired stations have insignificant broadcasting license
amortization. This increase 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 $2,438,680 to $3,100,734
for the quarter ended September 30, 1998 from $662,054 in the quarter ended
September 30, 1997. Selling, general and administrative expenses for the Czech
and Slovak stations were $1,044,345. A primary element of this expense increase
is a result of the build up in staffing as the new management group has embarked
upon a major expansion program for the Company in Central and Eastern Europe.
This expense also rose because of the costs of acquiring the Czech and Slovak
stations. Another reason for this increase in this expense for the Hungarian
companies was the operation of two stations in the current period compared to
operating one station in the prior period.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine months ended September 30, 1998 compared to nine months ended September 30,
1997
The Company's revenues increased by $499,987 or 21% to $2,896,491 in the nine
months ended September 30, 1998 from $2,396,504 in the nine months ended
September 30, 1997. Revenues for the two newly acquired non-Hungarian stations
were $876,352. The increase is attributable to the operation of four stations
versus one station in the prior year. Revenues in the nine months ended
September 30, 1998 for the Hungarian stations declined due to the fall 1997
launch of new stations in the Hungarian market and the resulting increase in
competition. In addition, the operations of Sziv TV were relocated to the MSAT
location. Management's focus has been on the launch of the two Hungarian
stations' new formats in August through November 1998; accordingly, programming
and marketing initiatives were deferred.
Other operating costs and expenses, including amortization of deferred program
costs, increased by $1,836,262 to $4,305,941 in the nine months ended September
30, 1998 from $2,469,679 in the nine months ended September 30, 1997. Other
operating costs and expenses for the Czech and Slovakia stations were $242,309
for the nine months ended September 30, 1998.This increase reflects the costs
associated with running four television stations rather than one and the costs
of combining two stations at one location.
Amortization of the broadcast license costs increased by $1,151,103 to
$1,468,387 from $317,284 in the nine months ended September 30, 1997. This
increase 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 $4,637,523 to $7,323,310
for the nine months ended September 30, 1998 from $2,685,787 in the nine months
ended September 30, 1997. Selling, general and administrative expenses for the
Czech and Slovak stations were $1,637,046. A primary element of this expense
increase is the build up in staffing as the new management group has embarked
upon a major expansion program for the Company in Central and Eastern Europe.
This expense also rose because of the costs of acquiring the Czech and Slovak
stations and the acquisition of Global Television Networks, Inc. Another reason
for this increase in this expense for the Hungarian companies was the operation
of two Hungarian stations in the current period compared to operating one
station in the prior period.
Interest and other income decreased to $144,297 in the first nine months of 1998
from $1,267,196 in the prior year first nine months due to a $1,000,000 gain on
a satellite service contract cancellation by a supplier recognized in the prior
years' period.
Other expense increased to $1,143,600 in the first nine months of 1998 from $0
in the prior year first nine months due to an estimated mark-to-market ascribed
valuation of a put obligation of the Company owed to its Chairman. Negotiations
are underway to reduce this potential expense of the Company.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest expense increased to $494,916 in the first nine months of 1998 from
$128,059 in the prior year first nine months due to high interest expense on
financing operating activities. As of September 30, 1998 the Company accrued
$67,000 penalty interest regarding the delay of the registration statement.
Loss on disposal of subsidiary of $476,497 in the first nine moths of 1998
resulted from the sale of the Company's animation studio, Studio 2 Kft, to its
Chairman for a price below book value.
Liquidity and Capital Resources
The Company has historically derived its cash for capital expenditures, working
capital and operations primarily from investor financing. The Company expects
over the medium term to continue to need investor financing to fund its
operations.
Net cash used in operating activities was $6,285,172 and $713,172 for the nine
months ended September 30,1998 and September 30, 1997, respectively. The current
period reflects the operation of two television stations in Hungary (at two
locations for a portion of the period) and, for a limited period, stations in
the Czech Republic and in Slovakia, while the earlier period reflected the costs
of operating one station. In addition, the costs of combining the two stations,
the cost of acquiring Global, the Czech and Slovak stations and the changes
resulting from a new management group, all increased current operating costs
compared to the costs of the prior period.
Comparing September 30, 1998 balance sheet items with those of December 31,1997,
due from related parties increased $1,170,430 to $1,531,476 which reflects the
outstanding receivable from Global's former shareholders of $1,150,000 and was a
term in the purchase of Global by the Company. Subsequent to period end Offer
Assis repaid the $1,150,000. Net property, plant and equipment increased by
$1,443,072 to $1,844,250 primarily because of the acquisition of fixed assets
from the three acquired television stations. Net broadcast license costs
increased to $21,498,336 from $1,057,535 because of the purchase by the Company
of Sziv TV's broadcasting licenses in January 1998.
Accounts payable and accrued expenses increased to $3,610,579 and $2,006,234 as
of September 30, 1998 from $676,191 and $945,538 as of December 31, 1997,
respectively. This reflected a build up of business expenses as well as
additional liabilities associated with the companies acquired during the
Company's acquisition activities.
Due to related parties decreased to $479,415 on September 30, 1998 from $932,123
on December 31, 1997. This change largely resulted from a repayment of a
$250,000 loan to the Company's Chairman of the Board had previously advanced and
the recognition of a potential liability to the Company of a put option it had
granted to the Chairman at the time that the Company purchased Global Television
Networks, Inc. This liability resulted from an approximate mark-to-market
ascribed valuation of this potential expense due to the decline in the Company's
stock.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 which will 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 shares of Common Stock.
In December 1995, three of the Company's officers/founders contributed stock to
the Company for no consideration. In 1998, in relation to the purchase of Global
Television Networks, Inc. and the resulting change of control of the Company,
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 & Company
Securities, Inc. ("Coleman") to complete a firm commitment underwriting. The
Company had an action against Coleman in the Supreme Court in the State of New
York to recover damages from the aborted underwriting, including the damages
suffered by the founders. 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. In May and
June 1998 the final terms of these negotiations were completed. The Company has
agreed to pay Peter E. Klenner, Chairman of the Board of Directors of the
Company and formerly Chief Executive Officer, $500,000 for the cancellation of
his 100,000 shares. This amount has been credited to Mr. Klenner for his
purchase of Studio 2 Kft. by his wholly-owned corporation, M&A Management Kft.
See Note 2, "Sale of Subsidiary." The other two former officers/founders, were
granted a total of 63,158 unregistered shares representing a stock price of
$4.75 on the date of Board approval or an ascribed value of $300,000. In
addition, for these two founders, if the Company receives payment from a
judgement prior to June 1, 1999 in excess of $300,000, the two founders can put
these shares to the company for $300,000 in cash. If no judgement in excess of
$300,000 has been collected by the Company prior to June 1, 1999 and the price
of the common stock on that day is below $4.75, the Company will issue
additional shares to these two founders to allow the market value of the total
shares paid to these two individuals to be $300,000 as of that date. On August
7, 1998 a settlement was reached by the Company with Coleman, where by Coleman
would pay the Company a total of $300,000 of two equal installments of $150,000
due August 31, 1998 and December 31, 1997. The first installment has not been
paid as at September 30, 1998, but subsequent to the period close a partial
payment of $64,000 was received.
As part of its aggressive expansion plans, the Company is planning significant
increases in capital spending in Hungary, in the Czech Republic, in Slovakia and
in 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. With the exception of its expansion plans, the Company
has only limited capital spending requirements. The Company pays for its
programming generally at or near the time of its broadcast
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In May 1998, the Company issued 12 shares, at nominal value of $500,000 each, of
Series B 6% Convertible Redeemable Preferred Stock with $0.001 par value per
share ("Series B Preferred"). The Series B Preferred are convertible into shares
of the Company's common stock at 85% of the two-day low average (not necessarily
consecutive) closing price over the prior ten consecutive trading days prior to
the date of conversion, but with a price no higher that $9.685 per share.
Therefore, the lower the market price for the common stock, the greater the
number of common shares that the converting holder of Preferred Stock B will be
able to receive, and the greater consequent dilution to existing stockholders in
the event the shares of Series B Preferred are converted.
If the average closing price of the Company's common stock is $4.00 or less at
time of conversion, the conversion price will be the price on the day prior to
the date that the conversion notice is received, without discount. In this
event, however, the converters in addition to their common stock will receive
three-year warrants for an amount of stock equal to 15% of the stated value of
the preferred stock being converted at a price equal to 101% of the Average
Closing Price on the date of conversion. Holders of the Series B Preferred are
permitted to convert no more than 8.33% of their stock each week.
If the Company is unable to issue the common stock because of rules limiting the
sale of more than 20% of the Company's stock without shareholder approval, the
Company will use its best efforts to secure shareholder approval. If the Company
cannot issue the required shares, the holders can demand redemption of their
securities plus a premium of 20%.
As part of the issuance of these $6 million of Series B Preferred, the Company
has the option of selling an additional $2 million of these securities to the
investors 30 and 60 days after an effective registration statement. The Company
had agreed to have an effective registration statement available for the holders
of the Series B Preferred as of September 5, 1998, but this has not yet been
established. The terms of the agreement provide for a penalty of 2% per month of
the outstanding amount of Series B Preferred for delay in an effective
registration statement.
As of June 30, 1998, promissory notes (exclusive of accrued interest) totaling
$1,020,000 were due. The company offered these note holders shares of
unregistered common stock in the Company as payment in full for the notes
including accrued interest. The value of the common stock offered was $2.5813
per share which represented a discount of 30% from the market value of the
common stock on June 30, 1998 of $3.6875 per share. Note holders representing
$700,000 or 69% of the outstanding debt have accepted in writing this offer.
Additional note holders representing $320,000 or 31% have either not responded
to the offer or are in negotiation with the company to find a way to settle this
obligation. EuroWeb International, a related party, holds $400,000 principal
amount of these notes and has agreed to convert its holdings into common stock.
The Company had previously loaned EuroWeb $350,000 at 6% interest with a
maturity date of June 30, 1998. Prior to redeeming EuroWeb's note, the two loans
and their accrued interest will be offset.
The Company will need additional financing to fund its operations for the next
twelve months. The Company is reviewing various funding options and believes
that it will secure sufficient financial resources for its requirements for the
next year.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Foreign Currency
The Company's broadcasting operations in Hungary incur both general revenues and
operating expenses in Hungarian forints. Broadcasting operations in the Czech
Republic and in Slovakia incur revenues and expenses in Czech korunas and Slovak
korunas, respectively. 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, Czech korunas and
Slovak korunas 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.
Year 2000 Issue
As many computer systems and other equipment with embedded chips or processors
(collectively "Business Systems") use only two digits to represent the year,
they may be unable to process accurately certain data before, during or after
the year 2000. As a result, business and governmental entities are at risk for
possible miscalculations or systems failures causing disruptions in their
business operations. This is commonly known as the Year 2000 ("Y2K") issue or
Century Date Change ("CDC") issue. The "CDC" issue can arise at any point in the
Company's supply, processing, production, distribution and financial chains.
The Company has established a Year 2000 compliance plan and timetable directed
by its Chief Financial Officer. The Company is reviewing its systems and
equipment and is inquiring of its major suppliers to identify problem areas or
potential problem areas. Prior to the end of 1998, the Company expects to
complete its review of systems and equipment as well as the readiness of its
suppliers, estimate compliance costs and initiate a compliance plan and prepare
contingency plans in the event that full compliance is not attainable.
The Company's broadcast operations are dependent upon computers and equipment
with embedded computer technology as well as the continuity of operations of its
suppliers. Any widespread failure would have a material adverse impact on the
Company's results of operations.
Forward-looking Statements
The statements contained in "Introduction" and in "Liquidity and Capital
Resources" regarding the Company's plans for the future development and
operation of its business are forward-looking statements that involve risk and
uncertainties. While management believes that the assumptions underlying these
statements are reasonable, actual results could differ materially. Among the
factors that could cause actual results to differ materially are: an inability
to raise sufficient capital to implement the Company's business plan; the
inability to penetrate other markets; foreign currency fluctuations; the effect
of economic conditions; the introduction of new technologies and
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
competition; and other factors listed in the Company's Annual Report on Form
10-K and other Company filings with the Securities and Exchange Commission.
Important factors with respect to completion of the Company's Year 2000
compliance plan include the outcome of the Company's systems and equipment
review and the extent to which Company and third party systems are found to be
out of compliance.
25
<PAGE>
Part II. Other Information
HUNGARIAN BROADCASTING CORP.
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
The Company has issued 12 shares of its Series B Convertible Preferred Stock to
three institutional investors pursuant to Section 4(2) under the Securities Act.
See Note 4 of the Notes to Unaudited Financial Statements and Management's
Discussion and Analysis -- Liquidity and Capital Resources.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
A. Exhibits (numbers below are references to Regulation S-B)
<S> <C> <C>
(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)
(e) Certificate of Designations for Series B Preferred Stock
(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)
(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)
26
<PAGE>
Part II. Other Information
HUNGARIAN BROADCASTING CORP.
(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(1)
(x) Agreement dated December 17, 1997 between the Offer Assis and Peter E. Klenner(7)
(y) Loan Agreement between Offer Assis and Shafrir Family Trust(7)
(z) Reorganization Agreement among HBC, Global Television Networks, Inc. and Offer Assis, Shai Bar-Lavi,
Shlomo Kot and Frederick E. Smithline individually(7)
(aa) Transfer and Distribution Agreement, dated as of November 18, 1997, between the Registrant
and Hungarian Satellite Corporation(7)
(bb) Licensing Agreement with Nickelodeon(2)
(cc) Agreement with Galaxie TV Network(8)
(dd) Agreement with MAC TV(2)
</TABLE>
- ----------------------------------------------
(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 the Company's report on Form 8-K dated April
11, 1996.
(7) Incorporated by reference to the Company's report on Form 8-K dated
January 5, 1998
(8) Incorporated by reference to the corresponding exhibit in the Company's
report on form 10QSB for the quarter ended March 31, 1996
27
<PAGE>
Part II. Other Information
HUNGARIAN BROADCASTING CORP.
B. The following reports on Form 8-K have been filed during the quarter ended
June 30, 1998: Form 8-K Amendment dated June 3, 1998 to Form 8-K dated
January 5, 1998.
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 23rd day of November, 1998.
HUNGARIAN BROADCASTING CORP.
By /s/ James H. Season
- ------------------------
James H. Season
Chief Financial Officer and Treasurer
