As filed with the Securities and Exchange Commission, June 9, 1998
Registration No.
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
FORM SB-2
REGISTRATION STATEMENT
Under The Securities Act of 1933
--------------------------------
HUNGARIAN BROADCASTING CORP.
(Name of small business issuer in its charter)
Delaware 4833 13-36787223
(State or jurisdiction of (Primary Standard (I.R.S. Employer
incorporation Industrial Classification Identification No.)
or organization) Code Number)
445 Park Avenue, 15th Floor, New York, New York 10022 (212) 758-9870
(Address and telephone number of principal executive offices)
Offer Assis
445 Park Avenue, 15th Floor, New York, New York 10022, (212) 758-9870
(Name, address and telephone number of agent for service)
Copies to:
Ronald Scott Moss, Esq.
445 Park Avenue, 15th Floor, New York, New York 10022, (212) 758-9870
Approximate date of proposed sale to the public: As soon as practicable
after this registration statement becomes effective.
If any of the Securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [x]
If this form is a post effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. This registration statement also relates to registration
statements by the Company on form SB-2, Registration Nos. 33-80177 and
333-13371.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<TABLE>
<CAPTION>
Calculation of Registration Fee
- -------------------------------------------------------------------------------------------------------
Title of each class Proposed maximum Amount to be Proposed maximum Amount of
of securities aggregate registered offering price registration fee
to be registered offering price per share
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 $14,256,660 2,376,110 $6.00 Previously paid
par value issuable upon
exercise of Warrants
- -------------------------------------------------------------------------------------------------------
Common Stock, $0.001 $0 45,660 N/A Previously paid
par value issuable upon
conversion of Series A
Preferred Stock
- -------------------------------------------------------------------------------------------------------
Common Stock, $0.001 $6,000,000 1,142,857* $7.00 $1,770.00
par value issuable upon
conversion of Series B
Preferred Stock
- -------------------------------------------------------------------------------------------------------
Common Stock, $0.001 $56,000 8,000 $7.00 $16.52
par value issuable to
Jesup and Lamont
- -------------------------------------------------------------------------------------------------------
</TABLE>
* Estimated pursuant to Rule 457(c) under the Securities Act of 1933 solely for
the purpose of calculating the registration fee based on the closing price as
reported on the SmallCap Market of The Nasdaq Stock Market on May 7, 1998.
<PAGE>
Hungarian Broadcasting Corp.
Cross-Reference Sheet Showing Location in Prospectus,
Filed as Part of this Registration Statement, of Information
Required by Form SB-2
<TABLE>
<CAPTION>
Item Number
in Form SB-2 Caption or Location In Prospectus Item Caption in Forms SB-2
<S> <C> <C>
1 Front of the Registration
Statement and Outside Front Cover
Page of Prospectus Front Cover Page
2 Inside Front and Outside Back Inside Front Cover Page;
Cover Pages of Prospectus Back Cover Page
3 Summary Information and Risk Prospectus Summary; Risk
Factors Factors
4 Use of Proceeds Use of Proceeds
5 Determination of Offering Price Front Cover Page
6 Dilution Dilution
7 Selling Security Holders Inapplicable
8 Plan of Distribution Plan of Distribution
9 Legal Proceedings Business
10 Directors, Executive Officers, Management; Certain
Promoters, and Control Persons Transactions
11 Security Ownership of Certain
Beneficial Owners and Management Principal Stockholders
12 Description of Securities Description of Securities
13 Interests of Named Experts and
Counsel Legal matters, Experts
14 Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities Inapplicable
15 Organization Within Last Five Years Business
16 Description of Business Front Cover Page;
Prospectus Summary; The
Company; Use of Proceeds;
Capitalization; Selected
Financial Data;
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations; Business;
Management; Principal
Stockholders; Description
of Securities; Combined
Financial Statements
17 Management's Discussion and Management's Discussion and
Analysis Analysis of Financial
Condition
18 Description of Property Business
19 Certain Relationships and Related
Transactions Certain Transactions
20 Market for Common Equity and Risk Factors; Description
Related Stockholder Matters of Securities; Shares
Eligible for Future Sale;
Dividend Policy
21 Executive Compensation Management
22 Financial Statements Combined Financial
Statements
23 Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure Change in Accountants
</TABLE>
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 9, 1998
HUNGARIAN BROADCASTING CORP.
3,572,627 Shares of Common Stock
This Prospectus relates to an aggregate of 3,572,627 shares of Common Stock
("Common Stock") of Hungarian Broadcasting Corp. (the "Company") consisting of
(i) an aggregate of 2,376,110 shares issuable upon exercise of Common Stock
Purchase Warrants (the "Warrants") issued as part of the Company's initial
public offering in December 1995 and as part of Units (each Unit consisting of
one Series A Preferred Share and one Common Stock Purchase Warrant) offered to
the public in February 1997 (the "Units"); (ii) 45,630 shares issuable upon
conversion of the Company's Series A Convertible Cumulative Redeemable Preferred
Stock (the "Series A Preferred Stock") which were included in the Units; (iii)
8,000 shares issuable to the placement agent for the Company's Series B
Preferred Stock, and (iv) an aggregate of 1,142,857 plus an indeterminate number
of shares of Common Stock issuable upon conversion of 12 shares of Series B
Preferred Stock, par value $0.001 per share, previously sold in a private
transaction pursuant to Regulation D of the Securities Act of 1933 (the "Series
B Preferred Stock") and conversion of 4 shares of Series B Preferred Stock to be
sold in a subsequent private transaction pursuant to Regulation D of the
Securities Act of 1933. For purposes of this Registration Statement, the number
of shares of Common Stock issuable upon conversion of the shares of Series B
Preferred Stock has been estimated by assuming a conversion price of $7.00.
Pursuant to Rule 416, this Registration Statement also covers an indeterminate
number of additional shares of Common Stock which may become issuable upon
conversion of the Series B Preferred Stock by reason of reductions of the
conversion price. The actual number of shares of Common Stock issuable upon
conversion of the Series B Preferred Stock may be subject to increase or
decrease depending upon the conversion rate in effect on the date of conversion.
The Company is also registering 100,000 Warrants issued to the Company's
Chairman of the Board as a fee for his having provided a credit facility to the
Company. See "May 1998 Private Placement," "Description of Securities-Series B
Preferred Stock" and "Legal Matters."
Trading in the Common Stock and the Warrants is conducted on the NASDAQ SmallCap
Market under the symbols "HBCO" and "HBCOW," respectively. On May 15, 1998, the
closing prices of the Common Stock and the Warrants on the NASDAQ SmallCap
Market were $7.625 and $2.25, respectively.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Price to Security Warrant Proceeds
Holder(1)(2) Solicitation to the
Fee(3) Company(2)(4)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
For Exercise of Warrants $6.00 $0.60 $5.40
Total $14,256,660 $1,425,666 $12,830,994
- --------------------------------------------------------------------------------
</TABLE>
(1) The exercise prices were arbitrarily determined in connection with the
Company's Initial Public Offering and are not related to the Company's
assets, book value of the shares of Common Stock issuable upon exercise of
the Warrants.
(2) Assumes the exercise of all of the Warrants. There is no assurance that
any of the Company's warrants will be exercised.
(3) Pursuant to an Underwriter Agreement entered into between the Company and
J.W Barclay & Co., Inc. ("Barclay") on December 20, 1995 in connection
with the Initial Public Offering, the Company has agreed to pay Barclay a
warrant solicitation fee of ten (10%) percent of the aggregate exercise
price of the Warrants whose exercise is solicited by a member of the
National Association of Securities Dealers, Inc. ("NASD") and meets
certain other criteria. The Company cannot presently estimate to what
extent any such warrant solicitation fee will be paid. See "Warrant
Solicitation Fee."
(4) All funds received from the exercise of the Warrants will be paid to the
Company. The Company will incur (i) expenses incurred in connection with
the preparation of this Prospectus, including printing and professional
fees estimated at $10,000; and (ii) a ten (10%) percent warrant
solicitation fee which may be paid upon the exercise of the Warrants. See
"Warrant Solicitation Fee."
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE
AND INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE
The date of this Prospectus is , 1998
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933 (the
"Act") with respect to the securities to which this Prospectus relates. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all of the information set forth in the Registration Statement. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, which may be inspected without charge at the principal office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Offices
of the Commission located at the Northeast Regional Office, 7 World Trade
Center, New York, N.Y. 10048 and the Midwest Regional Office, 500 West Madison
Street, Chicago, IL. 60661 and copies of which may be obtained from the Public
Reference Section of the Commission's principal office upon payment of the
prescribed fees.
The Company furnishes its stockholders after the close of each fiscal
year, annual reports containing financial statements audited by its independent
certified public accountants. The Company also furnishes other reports as it
determines or as required by law.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance with
Section 12(g) thereunder, files reports, proxy statements, and other information
with the Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission, and copies of such materials can be obtained at prescribed rates
from the Public Reference Section of the Commission's Washington Office.
The Commission maintains a Web Site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
companies such as the Company, that file documents electronically with the
Commission.
FORWARD-LOOKING STATEMENTS
This prospectus includes certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
the financial condition, results of operations and business of the Company. Such
statements reflect significant assumptions and subjective judgments by the
Company's management concerning anticipated results. These assumptions and
judgments may or may not prove to be correct. Moreover, such forward-looking
statements are subject to risks and uncertainties that may cause actual results
to differ materially from those contemplated in such forward-looking statements.
For a discussion of such risks, see "Risk Factors." Investors are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company does not undertake any obligation to release
publicly any revisions to these forward-looking statements to reflect events
occurring or circumstances arising after the date hereof or to reflect the
occurrence of unanticipated events.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. Except as otherwise noted all statistical and
financial information presented in this Prospectus has been converted into
United States Dollars using exchange rates as of the dates of ending balance
sheets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Foreign Currency." All references to $ or Dollars are to
United States Dollars; all references to "HUF" are to Hungarian Forints. As of
May 15, 1998, the Exchange Rate was HUF 211 to $1.
The Company
Hungarian Broadcasting Corp. ("HBC" or the "Company") was incorporated in
the State of Delaware on September 14, 1994 to acquire interests in companies
that have commercial broadcasting licenses to own, develop, expand and operate
television stations in Hungary. In 1998, the Company expanded the scope of its
operations by acquiring additional interests in television stations in Central
Europe. The Company currently operates two satellite-to-cable stations in
Hungary, MSAT and SZIV TV, one terrestrial station in the Czech Republic,
Galaxie TV, and one terrestrial station in the Slovak Republic, MAC TV. All such
operations are conducted through subsidiaries in compliance with local laws and
are sometimes referred to herein as "Licensees."
The three basic methods of television transmission are (i) over-the-air
(terrestrial) broadcasting, which can be either local or national in scope, (ii)
MMDS, or microwave transmission and (iii) satellite-to-cable broadcasting. In
over-the-air broadcasting, the station operator broadcasts its signal at an
established frequency and power via one or more land-based transmitters, each
with a limited geographic range, directly to homes and other receivers. Such
signal can be picked up by home antenna as well as by cable heads in the area.
MMDS transmission requires a small antenna for reception. In satellite-to-cable
broadcasting, the programming signal is transmitted to a satellite which
redirects the signal to cable system heads or other receivers.
Approximately 80% of the cable networks in Hungary currently receive and
carry MSAT's signal. These cable companies reach about 1,100,000 television
households. In addition to cable subscribers, the Company's broadcast signal is
received by about 300,000 customers of the AM-Micro service in Budapest. SZIV TV
currently reaches approximately 1,200,000 television households through the
AM-Micro transmission system in Budapest and via satellite distribution in
Hungary combined. Over the next several months, the Company expects to broadcast
to virtually all cable subscribers and AM-Micro subscribers in Hungary, a
current market of about 1,500,000 households, or about 40% of all television
households. This market is expected to grow both with the growth of cable and,
also, as improved cable technology catches cable pirates and converts them to
customers. Although in its infancy, an important market in satellite
direct-to-home service may also develop. In addition, the Company is in the
process of expanding its distribution through the approximately 140 local
television stations in Hungary.
Prior to April 1994, all radio and television broadcasting stations in
Hungary were owned and operated by the State. The State permitted commercial
advertising commencing in 1990 on State owned stations. Based on a report
prepared by Saatchi & Saatchi/Zenith Media World Wide, TV advertising
expenditures in Hungary increased from approximately $45 million in 1991 to
approximately $200 million in 1997. According to the same report, until 1997,
when two state-owned stations were privatized, most of this television
advertising money was spent on the three state owned stations. The Company
expects TV advertising expenditures to continue to grow in Hungary as
advertisers increasingly use television as an integral part of their advertising
strategy and as consumer oriented multi-national companies market their products
to satisfy the emerging demand for basic goods as well as convenience products.
The Company's operating results are primarily dependent upon the sale of
commercial advertising time.
3
<PAGE>
Advertising billing is determined by the specific program ratings provided
by AGB-Hungarian Meter System ("AGB"), an independent audience rating service.
As the Company's distribution increases, its advertising rates should increase
proportionally, and as the coverage broadens, the station should be of
increasing interest to national and international advertisers. AGB is currently
giving the Company a rating of 34% coverage. However, the Company is in
negotiation with AGB to increase its coverage rating to 48%, which management
believes is a more accurate number.
In April 1998, the Company entered into an agreement with Nickelodeon, a
division of Viacom, Inc., which grants the Company exclusive rights to cable
distribution of Nickelodeon in Hungary (the "Nickelodeon Agreement"). The
Nickelodeon Agreement gives the Company the right to use Nickelodeon logos and
character likenesses for advertising tie-ins.
In May 1998, the Company acquired 44% of Galaxie TV Network ("Galaxie") in
the Czech Republic and 44% of MAC TV, Ltd. ("MAC TV") in the Slovak Republic.
The Company has the right to receive 76.5% of the profits of Galaxie and of MAC
TV.
In the Czech Republic, Galaxie transmits to about 200,000 television
households via its terrestrial distribution and to additional television
households via satellite that should together total 1,000,000 television
households in the next few months, or about 30% of all television households in
the Czech Republic. Galaxie has applied with Czech broadcasting regulators to
acquire a series of local military terrestrial broadcasting frequencies. If this
application is approved, Galaxie could extend its broadcasting reach up to 80%
of television households in the Czech Republic.
In Slovakia, MAC TV, through its station NASA, broadcasts to about 250,000
television households in Eastern Slovakia. The Company plans to offer
satellite-to-cable transmission shortly to increase its national coverage to
700,000 television households, or 40% of the television households in that
country. MAC TV has applied with Slovakian authorities to be granted local
military terrestrial licenses. If this application is successful, NASA could
broadcast to 80% or more of the television households in Slovakia.
In connection with the acquisition of Galaxie, the Company retained the
consulting servies of KOK Bakkerij B.V ("KOK"), which had been of invaluable
assistance in securing the agreement to acquire Galaxie, at a rate of $100,000
per year, for four years, and made a loan of $400,000 to KOK, secured by
payments under the consulting agreement, and agreed to issue to KOK 75,000
shares of the Company's Common Stock.
In April 1998, in connection with the acquisition of MAC TV, the Company
entered into consulting agreements with Marcel Dekanovsky and Eva Dekanovska,
the powners of MAC TV, agreed to pay Mr. Dekanovsky the sum of $4,000 per month
and Mrs. Dekanovska the sum of $2,500 per month.
Since its inception, the Company has run at a deficit in each month of its
operations. The Company's current expansion plans suggest that deficits will
continue until the year 2001. There can be no assurance that the Company can
generate enough revenues after that time to cover its expenses.
Specific goals of the Company's operating strategy with respect to its
existing and new markets include (i) obtaining and localizing appropriate
specialized or other high quality programming for each market in which the
Company operates, (ii) developing effective program scheduling and marketing
strategies for each market in which the Company operates, (iii) controlling
station operating costs, (iv) hiring key personnel with local expertise, and (v)
developing an effective advertising sales and marketing staff.
The representative office of the Company in the United States is c/o
Ronald Scott Moss, Esq., 445 Park Avenue, New York, NY 10022; Telephone number:
(212) 758-9870. The office in Hungary is 1118 Budapest, Kelenhegyi ut 39;
Telephone number: (361) 372-1000.
4
<PAGE>
<TABLE>
<CAPTION>
The Offering
<S> <C>
Securities offered An aggregate of 3,572,627 shares of Common Stock
("Common Stock") of Hungarian Broadcasting Corp.
(the "Company") consisting of (i) an aggregate of
2,376,110 shares issuable upon exercise of Common
Stock Purchase Warrants (the "Warrants") issued as
part of the Company's initial public offering in
December 1995 and as part of Units (each Unit
consisting of one Preferred Share and one Common
Stock Purchase Warrant) offered to the public in
February 1997 (the "Units"); (ii) 45,660 shares
issuable upon conversion of the Company's Series A
Convertible Cumulative Redeemable Preferred Stock
(the "Series A Preferred Stock") which were included
in the Units; (iii) 8,000 shares issuable to the
placement agent for the Company's Series B Preferred
Stock and (iv) an aggregate of 1,142,857 plus an
indeterminate number of shares of Common Stock
issuable upon conversion of 12 shares of Series B
Preferred Stock sold, and 4 shares of Series B
Preferred Stock to be sold, in a private transaction
pursuant to Regulation D of the Securities Act of
1933. For purposes of this Registration Statement,
the number of shares of Common Stock issuable upon
conversion of the shares of Series B Preferred Stock
has been estimated by assuming a conversion price of
$7.00. The actual number of shares of Common Stock
issuable upon conversion of the Series B Preferred
Stock may be subject to increase or decrease
dependent upon the conversion rate in effect on the
date of conversion. The Company is also registering
100,000 Warrants issued to the Company's Chairman of
the Board as a fee for his having provided a credit
facility to the Company. See "May 1998 Private
Placement," "Description of Securities-Series B
Preferred Stock" and "Legal Matters."
Common Stock outstanding
before offering 6,670,372 shares (1)
Common Stock outstanding
after offering 10,242,999 shares (2)
Risk Factors Prospective investors should consider carefully
certain Risk Factors relating to an investment in
the Company. See "Risk Factors."
NASDAQ Symbols Common Stock HBCO
Warrants HBCOW
</TABLE>
(1) Does not include (i) 1,330,000 shares held in escrow, to be released only
upon the occurrence of future events; (ii) 2,376,110 shares issuable upon
exercise of the Warrants; (iii) 100,000 shares issuable upon exercise of
Underwriter's Stock Warrants; (iv) 181,000 shares issuable upon exercise
of employee stock options; (v) 45,660 shares issuable upon conversion of
the shares of Series A Preferred Stock; (vi) 150,000 shares issuable upon
conversion of the shares of Preferred Stock and exercise of the Warrants
underlying Underwriter's Unit Warrants; or (viii) approximately 1,188,517
shares of Common Stock which may be issuable upon conversion of the Series
A and Series B Preferred Stock.
(2) Includes an aggregate of 3,550,797 shares issuable upon the exercise of
the Warrants, conversion of the Series A and Series B Preferred Stock and
to a placement agent. There can be no assurance that any Warrants will be
exercised or that any of the Series A or Series B Preferred Stock will be
converted.
5
<PAGE>
SUMMARY OF FINANCIAL INFORMATION
The following table summarizes certain selected consolidated financial
data derived from the financial statements of the Company, and is qualified in
its entirety by the more detailed consolidated financial statements included
elsewhere herein.
<TABLE>
<CAPTION>
Operating Statement Data
Three months Three months Year ended Six months ended Year ended
ended March 31, ended March 31, December 31, December 31, June 30,
1998 1997 1997 1996 1996
-------------- -------------- ------------ ---------------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues $ 708,778 $ 573,515 $ 2,981,260 $ 1,239,418 $ 672,108
Operating expenses 3,032,179 1,738,995 7,147,770 4,056,367 4,351,869
Net loss (2,454,090) (1,096,390) (3,347,067) (2,778,608) (4,149,682)
Net loss per share $ (0.38) $ (0.41) $ (2.12) $ (1.08) $ (2.01)
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data
March 31, 1998 December 31, 1997 December 31, 1996
-------------- ----------------- -----------------
<S> <C> <C> <C>
Current assets $ 3,173,779 $ 2,101,582 $ 2,240,980
Current liabilities 5,092,521 3,925,737 4,811,954
Working capital (1,918,742) (1,824,155) (2,570,974)
Total stockholders' equity 19,919,149 728,166 (510,749)
</TABLE>
6
<PAGE>
RISK FACTORS
Prospective investors should carefully consider, among other things, the
following factors concerning the business of the Company and this offering, as
well as all other information set forth elsewhere in this Prospectus.
1. Limited Operating History; Risks of New Industry. The Company was
incorporated in Delaware on September 14, 1994. Commercial television
supported by advertising revenues represents a new industry in Central and
Eastern Europe, the viability of which is unproven, and there can be no
assurance that the Company will be successful in achieving its objectives.
See "Business."
2. Accumulated Deficit; Operating Losses. At March 31, 1998, the Company had
an accumulated deficit of $13,499,547 (unaudited) representing a
consolidated net loss for the period from its inception through March 31,
1998. The consolidated loss was caused primarily by the costs involved in
producing live programming, purchasing programming and in operating costs
and in seeking customer identification. The Company's cash flow since
inception has been principally the result of equity and debt financing and
not the result of profitable operating activities by the Company. The
Company's ability to achieve profitability is dependent upon its ability
to realize revenues from advertising that exceed costs. See "Financial
Statements."
3. Government Regulation. Broadcast operations in Central and Eastern Europe
are subject to extensive government regulation. Regulations govern the
issuance, renewal, transfer and ownership of station licenses, and the
timing, content and amount of commercial advertising permitted. There are
also regulations requiring that certain percentages of programming be
produced or originated in local markets. These regulations are
substantially different from regulations relating to television broadcast
operations in the United States. While Hungary has certain restrictions on
the ownership of more than one television station, the Company and its
counsel believe that the Company is operating two stations in compliance
with government laws and regulations. The Company further believes that it
is in compliance in all material respects with all applicable laws, rules
and regulations. There can be no assurance, however, that it will be able
to continue to comply with all such laws, rules and regulations or that
more restrictive laws, rules, regulations or policies will not be adopted
in the future which could make compliance more difficult or expensive or
otherwise adversely affect the Company's business or prospects. If any of
the countries in which the Company operates becomes part of the European
Union, the Company will be subject to additional regulation. See
"Business"
4. Uncertainty of License Renewals. While television broadcasting licenses
held by the Company in Hungary were granted without expiration date, and
the license in the Czech Republic, which expires by its terms in the year
2001 and the Slovak Republic, which expires by its terms in the year 2007,
are expected to be renewed, the loss of the Company's television
broadcasting licenses would have a material adverse effect on the Company.
See "Business"
5. Business is Subject to Substantial Competition. The Company encounters,
and expects to continue to encounter, substantial competition in the
television broadcasting industry and from other media which compete for
advertising revenues. The Company believes that it will be able to compete
effectively against its existing and future competitors but there can be
no assurance that it will be able to continue to compete effectively. See
"Business - Competition"
6. Risks Inherent in Foreign Investment. Risks inherent in foreign operations
include loss of revenue, property and equipment from expropriation,
governmental royalties and fees and involuntary renegotiation of contracts
with or licenses from foreign governments. The Company is also exposed to
7
<PAGE>
the risk of changes in foreign and domestic laws, regulations and policies
that govern operations of overseas-based companies. The Company has
invested the majority of its resources in operations in Hungary. In the
event the Company achieves profitable operations in Hungary, if it retains
earnings it will be subject to a 18% tax on all profits earned in Hungary,
and if it pays dividends, it will be subject to a 40% tax on all profits
earned in Hungary. See "Business -Republic of Hungary"
There is currently a 25% tax on repatriated earnings from the Czech
Republic. Other than this tax, there are no barriers to the flow of
capital out of the country and none are expected to be erected in the near
future. See " Business -Czech Republic"
7. Inflation and Local Currency Devaluation. The Company believes that United
States investors seek a return on investment based upon the dollar value
of the Company's foreign operating results. Significant inflation in
Hungary, the Czech Republic or the Slovak Republic, or significant future
devaluation of the currencies of these nations would decrease the dollar
value of the Company's investments.
The Hungarian economy has been characterized by high rates of inflation
and devaluation of the Hungarian Forint against the U.S. Dollar and
certain European currencies. In 1993, 1994, 1995, 1996 and 1997 the annual
reported inflation rate in Hungary (measured by the national consumer
price index) was approximately 23%, 19%, 30%, 23% and 18%, respectively.
The Hungarian Forint was devalued against the U.S. Dollar in 1993, 1994,
1995, 1996 and 1997 by 14.2%, 15.9%, 26.7%, 18.0% and 23.6%, respectively.
In March 1995, an immediate 9% devaluation of the Hungarian Forint was
announced together with a new policy of daily or "crawling peg"
devaluation. This involved daily devaluations amounting to approximately
1.9% monthly in the second quarter of 1995, 1.3% monthly during the second
half of 1995, 1.2% monthly during 1996, 1.1% through July 1997 and 1.0%
beginning in August 1997. The monthly rate is presently 0.9% and is
expected to be further decreased, subject to Hungary's economic condition.
The exchange rate for the Hungarian Forint, as set by the National Bank of
Hungary, declined from 100.70 Forints per U.S. Dollar at December 31, 1993
to 211 Forints per U.S. Dollar at May 15, 1998. See "Business -Republic of
Hungary,"
On April 16, 1997, the government of the Czech Republic announced a
package of measures designed to finish vital microeconomic tasks, such as
completing the privatization of the energy distribution companies and
state-owned banks, restructuring firms to maintain competitiveness, and
strengthening the regulatory framework. Following pressure on the currency
resulting in a 15% depreciation, the government announced a further
austerity package on May 28th. The depreciation, along with increases in
controlled rents and utilities at midyear and the floods, is expected to
push 1997 inflation above 10%. This compares to earlier forecasts of up to
8.8% for 1997. Inflation in 1996 reached 8.8%. See "Business -Czech
Republic"
Inflation in the Slovak Republic was approximately 10% in 1997 and has
been falling. See "Business -Slovak Republic"
8. Foreign Currency and Exchange Risks and Regulation. The Company is subject
to significant foreign exchange risk. There are currently no meaningful
ways to hedge currency risk in any Eastern European country. Therefore,
the Company's ability to limit its exposure to currency fluctuations is
significantly restricted.
The Hungarian forint (HUF) became convertible for essentially all business
transactions within Hungary on January 1, 1996 and complies with IMF
Article VIII and OECD convertibility
8
<PAGE>
requirements. The HUF is generally not traded outside the country. The HUF
exchange rate is set by a basket which is composed of the deutsche mark
(70%) and the dollar (30%).
The Hungarian Investment Act guarantees foreigners the right to repatriate
"in the currency of the investment" any dividends, after-tax profits,
royalties, fees, or other income deriving from the operation or sale of
the investment. The Act also grants foreign employees of a foreign
investment the right to transfer all of their after-tax salaries. There
are no onerous foreign exchange requirements, and there are no known
instances of delay in repatriations.
Foreign investors are allowed to keep cash contributions made in a
convertible currency in a foreign exchange account. Companies may use
these funds to import duty-free goods considered as part of the
investment. Alternatively, it may import goods using foreign exchange
bought in HUF. Companies are allowed to maintain foreign currency accounts
at Hungarian banks where they keep their export receipts. Companies must
receive permission from the National Bank before taking out a hard
currency loan. See "Republic of Hungary."
In the fall of 1995, the Czech Parliament approved a Foreign Exchange Act
which resulted in expanded convertibility of the Czech crown. In May of
1997, the CNB board canceled the fluctuation band for the Czech crown's
exchange rate (which had been set at +/-7.5 percent in February 1996). The
board also decided to abandon the previously used currency basket (65
percent German Mark (DEM), 35 percent USD) and peg the crown to the DEM.
As of July 1997, the exchange rate was roughly 31 crowns to the U.S.
dollar and 17 to 19.50 per 1 DEM. See "Czech Republic"
The Slovak koruna (SK) became fully convertible for current account
transactions on October 1, 1995. The koruna's value is established daily
on the basis of a basket consisting of the German mark (60%) and the U.S.
dollar (40%). As of October 12, 1995, the exchange rate was approximately
30 SK to one dollar. There are no difficulties in converting or
transferring funds associated with an investment into a freely convertible
currency. Very large transactions (over $50 million) may require advance
notice to the National Bank of Slovakia. Foreign exchange operations are
governed by the Foreign Exchange Act, which was amended in September 1995;
the amendment liberalizes business transactions, introduces
current-account convertibility of the koruna, and states Slovakia's
adherence to Article VIII of the IMF.
9. Additional Financing May be Required. As of June 30, 1997, the Company was
obligated to make payments with respect to certain indebtedness incurred
to persons who supplied bridge financing in the amount of $1,060,000 plus
accrued interest. The Company requested an extension of this obligation to
June 30, 1998 and received the consent of the majority of the noteholders.
In May 1998 the Company completed a private offering of $6,000,000. In the
event too few Warrants are exercised, or the recently completed offering
and funds from operations prove insufficient, the Company will be required
to seek additional equity capital through an additional public offering or
private offering of securities or bank financing to support its ongoing
operations and to satisfy its debt obligations. The Company has no current
arrangements for additional financing, other than a commitment by the
purchasers of the Series B Preferred Stock to purchase an additional four
shares of Series B Preferred Stock at a price of $500,000 per share, if
requested to do so by the Company. No assurance can be given that such
additional financing, if required, will be available on terms that are
satisfactory to the Company, if they are available at all. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operation."
10. Directors and Officers Liability Limited. The Company's Certificate of
Incorporation provides that directors (but not officers) of the Company
shall be relieved of liability for monetary damages to the
9
<PAGE>
Company or its stockholders for any breaches of their fiduciary duty to
the fullest extent permitted by applicable law. In addition, the Company's
bylaws provide that the Company shall indemnify any and all of its
directors and officers against expenses actually and necessarily incurred
by them in connection with the defense of any action in which they are
made parties by reason of being an officer or director except as to
matters in which the director or officer is adjudged to be liable for
misconduct or negligence in the performance of duty. The Company carries
Directors and Officers Liability insurance.
11. Uncertainty of Enforcement of Civil Liabilities and Judgments. Certain of
the directors and officers of the Company are non-residents of the United
States, and all or a substantial portion of the assets of such persons are
or may be located outside the United States. As a result, it may not be
possible for investors to effect service of process within the United
States upon such persons, or to enforce against them judgments obtained in
the United States courts, including judgments predicated upon the civil
liability provisions of the United States federal securities laws. There
is uncertainty as to whether the courts of Hungary or other foreign
countries would enforce either judgments of United States courts obtained
against such persons predicated upon the civil liability provisions of the
United States federal and state securities laws or liabilities against
such persons in any original actions brought in Hungary or other foreign
countries predicated upon the United States federal and state securities
laws.
12. Dependence on Key Personnel and Lack of Experience of Management. The
success of the Company is particularly dependent upon the active
involvement of Offer Assis, President and Chief Executive Officer, and Mr.
Shai Bar-Lavi, Chief Operating Officer, of the Company. The loss of the
services of Mr. Assis and/or Mr. Bar-Lavi could have a material adverse
effect on the Company. The Company has not obtained key-man life insurance
on the lives of Mr. Assis or Mr. Bar-Lavi or any other officer of the
Company. The Company intends to obtain such insurance in the near future.
The Company has employment agreements with Messrs. Assis and Bar-Lavi,
each of which expire December 31, 2000.
13. Possible Conflict of Interest with Affiliates. The Company has engaged in
certain transactions with companies in which directors of the Company are
also officers, directors or stockholders. Such transactions include
issuance of capital stock and the borrowing of money to finance the
operations of the Company and purchase of rights for television
programming. The Company maintains a policy of not entering into any
transactions with any officer, director or principal stockholder of the
Company or any of such affiliates unless such transaction is approved by a
resolution of at least a majority of the members of the board of directors
of the Company not interested in such transaction. The Company believes
that all transactions with such persons prior to the date of this
prospectus were on terms no less favorable to the Company than could be
obtained from an independent third party. Any transactions with such
persons in the future will be on terms no less favorable to the Company
than could be obtained from an independent third party. Failure of the
Company and its management to conduct the Company's business in its best
interests may result in liability to the Company and its management. See
"Management" and "Certain Transactions."
14. Dividends. Other than the spinoff of Central European Satellite Corp.
shares as of December 31, 1997, the Company has not previously paid any
dividends on its Common Stock and intends to follow a policy of retaining
all of its cash flow from operations, if any, to finance the development
and expansion of its business. Since its formation, the Company's
operations have resulted in losses, and for the foreseeable future, the
Company expects to pay dividends on the Series A and Series B Preferred
Stock in Common Stock to the extent legally permissible.
15. Necessity of State Blue Sky Registration; Exercise of Warrants. Although
the Warrants have not knowingly been sold to purchasers in jurisdictions
in which the Warrants were not registered or
10
<PAGE>
otherwise qualified for sale, purchasers may buy Warrants in the
after-market or may move to jurisdictions in which the Warrants and the
Common Stock underlying the Warrants are not so registered or qualified.
In this event, the Company would be unable to issue Common Stock to those
persons desiring to exercise their Warrants unless and until the Warrants
and the underlying Common Stock are qualified for sale in jurisdictions in
which such purchasers reside, or an exemption from such qualification
exists in such jurisdictions. There can be no assurance that the Company
will be able to effect any required qualification. See "Description of
Securities-Warrants."
16. Future Sales of Common Stock Could Have an Adverse Effect on the Market
Value. The Company has 6,670,372 shares of Common Stock outstanding as of
the date of this prospectus, of which 4,739,291 shares are not freely
transferable as being "restricted securities" as that term is defined
under Rule 144 under the Securities Act of 1933. In general, under Rule
144 as currently in effect, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company, who has owned
restricted shares of Common Stock beneficially for at least one year, is
entitled to sell, within any three-month period, a number of shares that
does not exceed the greater of 1% of the total number of outstanding
shares of the same class, or the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the sale, as
reported by all national securities exchanges on which the Common Stock is
traded and/or the automated quotation system of a registered securities
association. A person who has not been an affiliate of the Company for at
least the three months immediately preceding the sale and who has
beneficially owned shares of Common Stock for at least two years is
entitled to sell such shares under Rule 144 without regard to the volume
limitations described above. Of such 4,739,291 restricted shares, the
holders of 3,750,000 shares have entered into agreements not to sell or
transfer such shares prior to January 5, 2000. The possibility that
substantial amounts of Common Stock may be sold in the public market may
have an adverse effect on prevailing market prices for the Common Stock
and could impair the Company's ability to raise capital through the sale
of its equity securities. See "Description of Securities."
17. Possible Delisting and Risk of Low-Priced Securities. The Common Stock and
Warrants are currently being quoted on the NASDAQ SmallCap Market under
the symbols "HBCO," and "HBCOW," respectively. NASDAQ maintenance rules
may affect continued listing on NASDAQ. If the Company is unable to
satisfy the NASDAQ SmallCap Market maintenance criteria in the future, its
Common Stock and Warrants may be delisted from trading on the NASDAQ
SmallCap Market. If it did not qualify for such listing, trading, if any,
would thereafter be conducted in the over-the-counter market in the
so-called "pink sheets" or the "Electronic Bulletin Board" of the National
Association of Securities Dealers, Inc. ("NASD"), and consequently an
investor could find it more difficult to dispose of, or to obtain accurate
quotations as to the price of the Company's securities.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in
connection with trades in any stock defined as a penny stock. Commission
regulations generally define a penny stock to be an equity security that
has a market price of less than $5.00 per share, subject to certain
exceptions. Such exceptions include any equity security listed on NASDAQ
and any equity security issued by an issuer that has (i) net tangible
assets of at least $2,000,000, if such issuer has been in continuous
operation for three years, (ii) net tangible assets of at least
$5,000,000, if such issuer has been in continuous operation for less than
three years, or (iii) average annual revenue of at least $6,000,000 for
the last three years. Unless an exception is available, the regulations
require the delivery, prior to any transaction involving a penny stock, of
a disclosure schedule explaining the penny stock market and the risks
associated therewith.
In addition, if the Company's securities are not quoted on NASDAQ, or the
Company does not have $2,000,000 in net tangible assets, trading in the
Common Stock would be covered by Rule 15g-9
11
<PAGE>
promulgated under the Exchange Act for non-NASDAQ and non-exchange listed
securities. Under such rule, broker/dealers who recommend such securities
to persons other than established customers and accredited investors must
make a special written suitability determination for the purchaser and
receive the purchaser's written agreement to a transaction prior to sale.
Securities also are exempt from this rule if the market price is at least
$5.00 per share.
If the Company's securities become subject to the regulations applicable
to penny stocks, the market liquidity for the Company's securities could
be severely affected. In such an event, the regulations on penny stocks
could limit the ability of broker/dealers to sell the Company's securities
and thus the ability of purchasers of the Company's securities to sell
their securities in the secondary market.
18. Regulatory and Tax Aspects of Dividends Paid in Common Stock; Loss of
Dividends Upon Conversion of Preferred Shares. The Dividends payable on
the Series A Preferred Stock are cumulative. Dividends on the Series A and
the Series B Preferred Stock 0may be paid either in cash or in shares of
Common Stock or partly in cash and partly in shares of Common Stock, at
the option of the Company. The first dividend on the Series A Preferred
Stock was paid on September 15, 1997 in shares of Common Stock. The
Company expects to make dividend payments in shares of Common Stock for
the foreseeable future to the extent it may legally do so. The Company
will be unable to legally issue Common Stock as dividend payments on the
Series A or Series B Preferred Stock unless it has sufficient authorized
shares of Common Stock and has surplus available for such purpose. Payment
of dividends in shares of Common Stock will create federal income tax
liability, equivalent to the then current market price of such Common
Stock, to the recipient without the receipt by such recipient of any cash
to pay such tax liability.
For federal income tax purposes, distributions of Common Stock with
respect to Preferred Shares are treated as taxable distributions of
property. The fair market value of such shares of Common Stock distributed
will be treated as a taxable dividend (to the extent of the Company's
current or accumulated earnings and profits) or a taxable gain (if the
excess of the fair market value of such shares over the Company's current
or accumulated earnings and profit per share exceeds the Stockholder's tax
basis in his Preferred Shares). The cash portion of the dividend, if any,
may not be sufficient to pay the total federal income tax payable on the
cash portion of the dividend and on shares of Common Stock treated as a
taxable dividend or taxable gain.
19. Possible Negative Effects of Preferred Stock. The Company has authorized
5,000,000 shares of Preferred Stock, the designation, rights and
preferences of which (including voting, dividend, redemption and
liquidation rights) may be fixed by the Company's Board of Directors, from
time to time, without further action by the holders of Common Stock.
Shares of Preferred Stock could be issued in the future with such rights
and preferences as could make the possible takeover of the Company or the
removal of management of the Company more difficult or could otherwise
adversely impact the rights of holders of Common Stock. Further, under
current regulations, if any such Preferred Stock were issued by the
Company with such voting rights as had the effect of nullifying,
restricting or disparately reducing the per share voting rights of holders
of Common Stock, such issuance could result in the disqualification of the
Company's securities from listing on NASDAQ or on a securities exchange.
In addition, the conversion of the Series B Preferred Stock may cause
significant dilution to the holders of the Common Stock. See "Management's
Discussion and Analysis - Liquidity and Capital Resources - May 1998
Private Placement"
20. Voting Rights of Preferred Shares. The Series A Preferred Stock are
entitled to one vote per share voting together with the Common Stock as
one class on all matters except as otherwise provided by Delaware law and
with respect to certain other matters including the issuance of certain
additional
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<PAGE>
shares of Preferred Stock. Each share of Series A Preferred Stock is
convertible into two (2) shares of Common Stock, each of which is entitled
to one vote. Shares of Series B Preferred Stock are not entitled to vote.
13
<PAGE>
PRICE RANGE OF SECURITIES
In December 1995, the Company's Common Stock and certain Common Stock
Purchase Warrants commenced trading on the NASDAQ Small-Cap Market under the
symbols HBCO and HBCOW respectively. Prior to December 1995, there was no
established public trading market for the Company's Common Stock or Warrants.
Effective February 1997, the Company's Units commenced trading on the NASDAQ
Small-Cap Market under the symbol HBCOU. Each Unit consisted of one share of
Series A Convertible Redeemable Preferred Stock and one Common Stock Purchase
Warrant. In September 1997, the Units were separated and the Company's Series A
Preferred Stock began trading on the NASDAQ Small-Cap Market under the symbol
HBCOP. Subsequently, nearly all of the Company's Series A Preferred Stock was
converted by holders into shares of Common Stock. Due to the decrease in trading
volume, market makers ceased trading that security and the Series A Preferred
Stock was delisted by NASDAQ.
The following table sets forth the range of high and low closing prices
for each quarter as reported by NASDAQ.
<TABLE>
<CAPTION>
Series A
Common Stock Warrants Units Preferred Stock
------------------ ------------------- ------------------ ----------------
1996 high low high low high low high low
------ ----- ------ ----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st quarter 9.000 8.000 4.375 2.750 -- -- -- --
2nd quarter 11.875 7.875 5.500 2.750 -- -- -- --
3rd quarter 10.000 5.500 3.750 1.750 -- -- -- --
4th quarter 7.375 4.000 2.375 0.750 -- -- -- --
1997
1st quarter 7.000 4.000 2.000 0.750 14.000 11.000 -- --
2nd quarter 6.250 4.625 1.750 1.125 12.250 7.500 -- --
3rd quarter 5.250 3.500 1.625 0.813 9.250 6.750 -- --
4th quarter 9.125 4.375 3.250 1.375 13.375 8.875 20.00 11.00
1998
1st quarter 8.313 4.875 3.250 1.063 -- -- -- --
2nd quarter (to 5/15) 9.500 6.750 3.7508 2.000 -- -- -- --
</TABLE>
Shareholders
On May 15, 1998, there were 46 holders of record (and an estimated 1,500
beneficial holders) of the 6,670,372 outstanding shares of Common Stock, 35
holders of record of the 2,376,110 outstanding Common Stock Purchase Warrants
and four holders of record of the 22,830 Series A Preferred Stock. The closing
prices of the Common Stock and Common Stock Purchase Warrants on May 15, 1998
were $7.626 and $2.50, respectively.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998.
<TABLE>
<CAPTION>
March 31, 1998
--------------
<S> <C>
Current portion of bridge notes payable $ 1,189,202
Stockholders' equity:
Preferred stock, $.001 par value---shares
authorized 5,000,000; issued and outstanding 25,330 26
Common stock, $.001 par value---shares
authorized 15,000,000; issued and
outstanding 6,567,372 6,568
Additional paid-in capital 33,323,895
Accumulated deficit (13,499,547)
Accumulated other comprehensive income 88,207
------------
Total $ 21,108,351
============
</TABLE>
DIVIDEND POLICY
The Company has never paid any cash dividends on the Common or Preferred
Stock. The Company anticipates that in the foreseeable future, earnings, if any,
will be retained for use in the business or for other corporate purposes, and it
is not anticipated that cash dividends will be paid either on the Preferred
Shares or Common Stock. Dividends on the Preferred Shares will be paid in Common
Stock if the Company is legally able to do so. The Company is dependent upon
payment of dividends from its subsidiary companies as the source of its own cash
dividends.
Hungarian companies are permitted to pay annual dividends out of profits,
determined on the basis of Hungarian accounting principles, following the
recommendation of its Board of Directors and a declaration by the Annual General
Meeting which must be held in the first five months of each year. Dividends are
payable to foreign investors, such as the Company, in Hungarian Forints, which
may be converted into U.S. Dollars at the official rate of exchange set by the
National Bank of Hungary, subject to the deduction of any withholding tax.
USE OF PROCEEDS
The net proceeds to the Company, assuming exercise of all of the Warrants
(excluding the possible payment of a warrant solicitation fee of 10% of the
exercise price of the Warrants pursuant to the Underwriting Agreement entered
into in connection with the Company's initial public offering) and deduction of
the expenses of this offering, are estimated to be approximately $14,256,660.
Assuming exercise of all of the Warrants, after the possible payment of a
warrant solicitation fee and deduction of expenses of this offering, the net
proceeds to the Company are estimated to be approximately $12,830,994. There can
be no assurance that all or any of the Warrants will be exercised.
Any net proceeds received from the exercise of Warrants will be added to
working capital. In addition, up to $1 million may be used to pay off
obligations to Bridge Note holders. The Company will receive no further proceeds
from the conversion of any Series A or Series B Preferred Stock into Common
Stock.
The Company was obligated to pay to the holders of Bridge Notes
$1,060,000 plus accrued interest at June 30, 1997. The Company requested an
extension from its noteholders and intended to pay this obligation out of
proceeds of its litigation against Coleman and Company, Inc. or out of
broadcasting
15
<PAGE>
revenues. If funds are not available from either of these sources, the Company
was required to seek additional equity capital or bank financing to satisfy this
obligation.
The Company may, when and if the opportunity arises, acquire other
businesses compatible with the Company's business. If such opportunity arises,
the Company may use a portion of the proceeds, if any, from the exercise of its
outstanding Warrants, as well as other funds for such purpose. While the Company
regularly evaluates possible acquisition opportunities, there can be no
assurance that the Company will ultimately effect any acquisition.
Pending expenditure of the proceeds from the offering, the Company may
make temporary investments in interest bearing savings accounts, certificates of
deposit, or short term United States government obligations.
SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial
data derived from the financial statements of the Company, and is qualified in
its entirety by the more detailed consolidated financial statements included
elsewhere herein.
<TABLE>
<CAPTION>
Operating Statement Data
Three months Three months Year ended Six months ended Year ended
ended March 31, ended March 31, December 31, December 31, June 30,
1998 1997 1997 1996 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $ 708,778 $ 573,515 $ 2,981,260 $ 1,239,418 $ 672,108
Operating expenses 3,032,179 1,738,995 7,147,770 4,056,367 4,351,869
Net loss (2,454,090) (1,096,390) (3,347,067) (2,778,608) (4,149,682)
Net loss per share $ (0.38) $ (0.41) $ (2.12) $ (1.08) $ (2.01)
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data
March 31, 1998 December 31, 1997 December 31, 1996
-------------- ----------------- -----------------
<S> <C> <C> <C>
Current assets $ 3,173,779 $ 2,101,582 $ 2,240,980
Current liabilities 5,092,521 3,925,737 4,811,954
Working capital (1,918,742) (1,824,155) (2,570,974)
Total stockholders' equity 19,919,149 728,166 (510,749)
</TABLE>
16
<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 Hungarian stations, MSAT and Sziv TV distribute to
approximately 1.4 million and 1.2 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 and 44%
ownership of MAC TV, Ltd. ("MAC TV") in the Slovak 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, the Czech Republic and the Slovak 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 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, in addition to its AM-Micro transmission, 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 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 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. In addition, Global owns a
chatline service in the United States.
17
<PAGE>
The new management is currently overhauling the two Hungarian 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
and then increase to approximately $900,000 per month. Revenues from the
Company's two Hungarian 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 rose 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. Once the impact of the new
stations is absorbed in the market, management believes that the Company's
growth in sales will continue. It now operates two stations with the potential
for cross promotion, improved marketing and more efficiency.
18
<PAGE>
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 approximately $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 and MAC TV in the Slovak
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, Czech and Slovakian law and foreign
currency regulations in Hungary and in the Czech Republic and MAC TV in the
Slovak 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, Czech kroner and Slovak koruna. 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 Slovakian
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
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
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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.
As of December 31, 1996, the Company changed its fiscal year end from June 30 to
December 31. Accordingly, the Company has audited statements for the six months
period ended December 31, 1996 and for the year ended June 30, 1996. The
comparison below uses unaudited financial statements for the year ended December
31, 1996 and unaudited financial statements for the six months ended December
31, 1995.
Year ended December 31, 1997 compared to the year ended December 31, 1996
The Company's revenues increased by $1,453,405 or 95% to $2,981,260 in the
year ended December 31, 1997 from $1,527,855 in the year ended December 31,
1996. The increase is attributable to the general increase in advertising volume
and improved reach at the station, particularly since the station's relaunch in
April 1996.
Other operating costs and expenses, including amortization of deferred
program costs, increased by $444,882 to $4,341,340 in the year ended December
31, 1997 from $3,896,458 in the year ended December 31, 1996. This increase
reflects the increased costs of the station, including a full year of higher
quality programming.
Amortization of broadcast license costs of $423,048 and $435,116 for the
two periods, respectively, reflects the amortization of the initial costs of the
licenses over the remaining life of the licenses ending in July 2000. In
September 1997, a 24-hour license of indefinite duration was awarded to HBC Rt.
Selling, general and administrative expenses increased $158,678 to
$2,383,382 for the year ended December 31, 1997 from $2,224,704 in the year
ended December 31, 1996. This increase reflects a larger sales and management
staff and the increased cost of their support offset somewhat by more efficient
operation.
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In 1997, the Company received a contract cancellation fee of $1,370,000
from Nethold, B.V. as a result of that company closing its business activities
in Hungary. $200,000 was placed in reserve to settle contractual commitments
with Orion Atlantic. The Company contracted with alternative satellite service
using uplink facilities of Antenna Hungaria to the Amos 1 satellite.
Interest and other income declined by $77,596 to $116,086 for the year
ended December 31, 1997 from $193,682 for the year ended December 31, 1996. This
resulted primarily from higher Company cash balances for 1996 after its initial
public offering in December 1995.
Interest expense decreased $81,318 to $262,156 for the year ended December
31, 1997 from $343,474 for the year ended December 31, 1996. This reflected
borrowings in 1996 prior to the February 1997 secondary securities offering.
Six months ended December 31, 1996 compared to six months ended December 31,
1995
The Company's revenues increased by $855,747 or 223% to $1,239,418 in the
six months ended December 31, 1996 from $383,671 in the six months ended
December 31, 1995. The increase is attributable to the general increase in
advertising at the station. In the prior six months period, the station had a
limited format and generated revenues largely by sponsored segments. Advertising
revenues have grown since the Company's initial public offering in December 1995
and the relaunch of the station in April 1996 as a Western-oriented,
entertainment channel. Barter revenues for the period were approximately
$225,000 compared to negligible barter revenues in the earlier period. Prior to
December 21, 1995, the Company was in development stage,
Other operating costs and expenses, including amortization of deferred
program costs, increased by $1,737,261 to $2,415,859 in the six months ended
December 31, 1996 from $678,598 in the six months ended December 31, 1995. This
increase reflects the higher programming and production costs inherent in an
entertainment station compared to the music, sponsored segment and civic formats
of the earlier period.
Amortization of broadcast license costs of $211,526 and $199,462 for the
two periods, respectively, reflects the amortization of the initial licenses
over the remaining lives of the licenses ending in July 2000.
Selling, general and administrative expenses increased $584,715 to
$1,428,982 for the six months ended December 31, 1996 from $844,267 in the six
months ended December 31, 1995. This increase reflects larger sales and
management staffs and a new headquarters building.
Changes in Accounting Policies
In March 1997, the Company changed it fiscal year to a calendar year to
follow the practices of other broadcasters and to match the reporting periods
for its Hungarian subsidiaries. The Company adopted SFAS 128 for the first
quarter ended March 31, 1997. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the Company's Stock Option Plan.
Liquidity and Capital Resources
The Company has historically derived its cash for capital expenditures,
working capital and operations primarily from the sale of securities to and
borrowings from investors. As the Company's first
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broadcasting station has established itself in the market and as its
broadcasting reach has expanded through satellite-to-cable distribution, the
Company's revenues and cash flows 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, $480,824, $1,531,455 and
$3,223,645 for the year ended December 31, 1997, for the six months ended
December 31, 1996 and for the fiscal year ended June 30, 1996, respectively.
Starting in Spring 1996, the Company made significant expenditures in providing
an entertainment format and, beginning Fall 1996, in gaining satellite-to-cable
distribution.
Net cash used in investing activities was $1,413,205, $957,953 and
$851,252 for the year ended December 31, 1997, for the six months ended December
31, 1996 and for the fiscal year ended June 30, 1996, respectively. The year
ended December 31, 1997 investing activities were less on a monthly basis than
in the six months ended December 31, 1996 primarily due to a lower commitment to
Western series in favor of a greater commitment to Western films secured in the
Hungarian market. 1997 expenditures were increased by $228,648 primarily from
the cash portion of the purchase price of Studio 2 Kft.
Net cash provided by financing activities was $2,084,577, $1,408,144 and
$5,242,270 for the year ended December 31, 1997, for the six months ended
December 31, 1996 and for the fiscal year ended June 30, 1996, respectively. As
mentioned above, the Company is frequently in the market to raise funds from
investors. Because it is in its early stages of development and because new
management is following a very aggressive growth strategy, the Company expects
to raise significantly greater funds in the future. In the year ended December
31, 1997 funds were primarily raised in an equity underwriting in February 1997.
For the six months ended December 31, 1996 funds were raised in a private
placement plus bridge financing for the 1997 underwriting. And for the year
ended June 30, 1996, most of the money raised was from the December 1995 initial
public offering.
Program rights costs as of December 31, 1997 were $687,614, a decrease of
$454,386 or 40% from $1,142,000 as of December 31, 1996. This reflects a reduced
commitment to Western series as requested by the new management group as they
prepare new programming strategies. The 1998 programming commitments tended to
end prior to June 30, 1998.
With the exception of acquisitions, the Company has only limited capital
spending requirements. It rents its operations building. While its current MSAT
studio equipment is rented, the Company through its acquisition of Global owns
the studio equipment of Sziv TV, subject to a bank loan. The Company has
tentatively secured equipment financing and plans to make a major addition and
upgrade to its broadcasting and editing equipment.
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
receivable is secured by 300,000 shares of the Company's common stock held in
escrow.
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
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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 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 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.
The Company is conducting a full review of its computer systems to
identify the systems that could be affected by the Year 2000 issue and is
developing a plan to resolve the issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. The Company presently believes that the Year 2000 problem will
not pose significant operational problems for the Company's computer systems.
Management believes that the Year 2000 compliance costs and related effect on
the Company's earnings, if any, will be minimal.
May 1998 Private Placement
On May 4, 1998 (the "Closing"), the Company completed a private placement
(the "Private Placement") of 12 shares of Series B Preferred Stock ("Series B
Preferred"), for an aggregate purchase price of $6 million. Thirty days after
the date of this prospectus, the Company has the right to put to the investors
an additional 2 shares of Series B Preferred Stock, for an aggregate purchase
price of $1 million, and, sixty days after the date of this prospectus, the
Company has the right to put to the investors an additional 2 shares of Series B
Preferred, for an aggregate purchase price of $1 million. Jesup & Lamont
Securities Corporation, the placement agent for the Series B Preferred Stock
will be paid a commission equal to 7% of the aggregate capital raised plus a 1%
accountable expense allowance. The net proceeds of the Private Placement will be
used by the Company for working capital, acquisition of stations and
programming, expansion and general corporate purposes.
The shares of Series B Preferred Stock are convertible, starting 120 days
after the Closing or the date of this prospectus, whichever is sooner, in whole
or in part, at the option of the holder thereof and upon notice to the Company,
into a number of shares of Common Stock equal to the Stated Value of such share
or shares of Series B Convertible Preferred Stock ($500,000) divided by the
lesser of:
(i) 85% of the average closing bid price of the Common
Stock for the fifteen consecutive trading days prior to the trading day on which
a notice of conversion is received by the Corporation (the "Average Closing
Price"), as reported by the Nasdaq SmallCap Market or NASDAQ Electronic Bulletin
Board during the period of five trading days immediately preceding the date of
conversion (the "Conversion Date"), or
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(ii) 130% of the closing market 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 bid price of the Corporation's Common Stock is $4.00 per share
or less (the "Conversion Limitation"), the Conversion Price for any 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 Corporation's Common Stock, at a price
equal to 101% of the Average Closing Price on the date of such conversion, equal
to 15% of the value of Series B Convertible Preferred Stock converted, divided
by the Average Closing Price on the date of such conversion.
Therefore, the lower the market price for the Common Stock, the greater
the number of shares of Common Stock that the converting holder of Series B
Preferred Stock will be able to receive, and the greater consequent dilution to
existing stockholders in the event shares of Series B Preferred Stock are
converted. See "Description of Securities-Series B Preferred Stock."
In connection with the Private Placement, the Company agreed to file a
registration statement with the Commission within 30 days after the Closing in
order to register the shares of Common Stock underlying the Series B Preferred
Stock. The shares of Common Stock underlying the Series B Preferred are included
in the Registration Statement of which this prospectus is a part. In the event
the Registration Statement is not declared effective within 120 days from the
Closing, the Company has agreed to pay a 2% per month cash penalty to each
holder of Series B Preferred Stock. The Company is obligated to keep the
Registration Statement effective for at least two years.
The Company believes that its existing cash balances, cash from future
operations and the proceeds from a planned securities offering will be
sufficient to fund the Company's operations for the next twelve months. However,
there is no assurance that the planned offering will be consummated, or that
revenues will increase as expected. If the planned offering is delayed or
canceled, the Company may need to raise funds from financial institutions or
from other investors.
In particular, the Company has notes from investors that are due on June
30, 1998 of approximately $620,000 (exclusive of $400,000 owed to a related
party that is offset by a similar loan to the related party with similar terms
for $350,000) plus interest. The Company plans to repay these notes out of
proceeds of the offering mentioned above, or from financing from other sources.
Foreign Currency
The Company's broadcasting operations in Hungary incur both revenues and
operating expenses in Hungarian forints. A portion of the Company's expenses,
primarily programming, is denominated in United States dollars. Asset and
liability accounts are translated from Hungarian forints into United States
dollars at the period-end exchange rate; income and expense accounts are
translated at the average exchange rate for the period. The resulting
translation adjustment is reflected as a separate component of stockholders'
equity. Currency translation adjustments relating to transactions of the Company
and its subsidiaries in currencies other than the functional currency of the
entity involved are reflected in the operating results of the Company. Similar
principals will be applied in the future with respect to the Company's recently
acquired operations in the Czech Republic and the Slovak Republic.
The Company does not hedge against foreign currency exchange risks.
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BUSINESS
Hungarian Broadcasting Corp. ("HBC" or the "Company") was
incorporated in the State of Delaware on September 14, 1994 to acquire interests
in companies that have commercial broadcasting licenses to own, develop, expand
and operate television stations in Hungary. In 1998, the Company expanded the
scope of its operations by acquiring additional interests in television stations
in Central Europe. The Company currently operates two stations in Hungary which
broadcast using both MMDS and satellite-to-cable, one terrestrial station in the
Czech Republic and one terrestrial station in the Slovak Republic. All such
operations are conducted through subsidiaries in compliance with local laws and
are sometimes referred to herein as "Licensees."
The three basic methods of television transmission are (i)
over-the-air (terrestrial) broadcasting, which can be either local or national
in scope, (ii) MMDS, or microwave transmission and (iii) satellite-to-cable
broadcasting. In over-the-air broadcasting, the station operator broadcasts its
signal at an established frequency and power via one or more land-based
transmitters, each with a limited geographic range, directly to homes and other
receivers. Such signal can be picked up by home antenna as well as by cable
heads in the area. MMDS transmission requires a small antenna for reception. In
satellite-to-cable broadcasting, the programming signal is transmitted to a
satellite which redirects the signal to cable system heads or other receivers.
In September 1996, in addition to its AM-Micro transmission, the
Company began transmitting its signal from the Astra 1E Satellite to cable
headends, and in October 1996, the station was renamed "MSAT." In July 1997, the
Company switched its satellite transmission service from the Astra satellite to
the Amos satellite. 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. This
new agreement improves and supersedes the Company's prior contract that provided
for limited broadcasting time with a termination date of July 1, 2000. Terms of
the new contract provide for broadcasting rights indefinitely into the future.
In November 1997, ORTT, the television regulatory body in Hungary,
awarded the Company's subsidiary, HBC Rt., a national license to broadcast via
satellite. Accordingly, cable television companies can receive the signal
without having to acquire expensive decoders.
Approximately 80% of the cable networks in Hungary currently receive
and carry MSAT's signal. These cable companies reach about 1,100,000 television
households. In addition to cable subscribers, the Company's broadcast signal is
received by about 300,000 customers of the AM-Micro service in Budapest. SZIV TV
currently reaches approximately 1,200,000 television households through the
AM-Micro transmission system in Budapest and via satellite distribution in
Hungary combined. Over the next several months, the Company expects to broadcast
to virtually all cable subscribers and AM-Micro subscribers in Hungary, a
current market of about 1,500,000 households, or about 40% of all television
households. This market is expected to grow both with the growth of cable and,
also, as improved cable technology catches cable pirates and converts them to
customers. Although in its infancy, an important market in satellite
direct-to-home service may also develop. In addition, the Company is in the
process of expanding its distribution through the approximately 140 local
television stations in Hungary.
Sziv received an AM Micro license in March 1994 for the period
ending July 1, 2000. Discussions with Antenna Hungaria, the state-owned entity
that provides this Budapest service, and with the Hungarian National Radio and
Television Commission ("ORTT"), suggest that Sziv's right to use this
broadcasting transmission system will be extended into the future. However,
there can be no assurance that Sziv's license will in fact be renewed or
extended. Pursuant to the Media Law of 1996, Sziv declared in writing to ORTT in
the summer of 1997 that it would commence satellite-to-cable broadcasting. The
Media Law permits satellite-to-cable broadcasting after notice to ORTT provided
that that regulatory body does not
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object within sixty days after the filing. ORTT made no objection to Sziv's
filing.
Prior to April 1994, all radio and television broadcasting stations
in Hungary were owned and operated by the State. The State permitted commercial
advertising commencing in 1990 on State owned stations. Based on a report
prepared by Saatchi & Saatchi/Zenith Media World Wide, TV advertising
expenditures in Hungary increased from approximately $45 million in 1991 to
approximately $200 million in 1997. According to the same report, until 1997,
when two state-owned stations were privatized, most of this television
advertising money was spent on the three state owned stations. The Company
expects TV advertising expenditures to continue to grow in Hungary as
advertisers increasingly use television as an integral part of their advertising
strategy and as consumer oriented multi-national companies market their products
to satisfy the emerging demand for basic goods as well as convenience products.
The Company's operating results are primarily dependent upon the sale of
commercial advertising time.
Advertising billing in Hungary is determined by the specific program
ratings provided by AGB-Hungarian Meter System ("AGB"), an independent audience
rating service. As the Company's distribution increases, its advertising rates
should increase proportionally, and as the coverage broadens, the station should
be of increasing interest to national and international advertisers. AGB is
currently giving the Company a rating of 34% coverage. However, the Company is
in negotiation with AGB to increase its coverage rating to 48%, which management
believes is a more accurate number.
Since its inception, the Company has run at a deficit in each month
of its operations. The Company's current expansion plans suggest that deficits
will continue until the year 2001. There can be no assurance that the Company
can generate enough revenues after that time to cover its expenses.
Specific goals of the Company's operating strategy with respect to
its existing and new markets include (i) obtaining appropriate specialized or
other high quality programming for each market in which the Company operates,
(ii) developing effective marketing strategies for each market in which the
Company operates, (iii) controlling station operating costs, (iv) hiring key
personnel with local expertise, and (v) developing an effective advertising
sales and marketing staff.
Company History
---------------
In 1994, based on a decree enacted by the Hungarian Parliament in
July 1993, the Hungarian Ministry of Culture and Education made a tender offer
open only to holders of studio licenses for a license to broadcast over Channel
A3 using AM-Micro technology over an area of Budapest plus 30 km (18 miles).
Fourteen contenders applied for the license. The licenses were given to three of
the contenders as follows, each for the time period specified below, from July
1, 1994 to July 1, 2000.
VI-DOK: Mondays, Wednesdays, Fridays and Sundays from 6:00 a.m.--
5:00 p.m. and 7:30 p.m.--6:00 a.m.
DNTV: Tuesdays, Thursdays and Saturdays from 6:00 a.m.--5:00 p.m.
and 7:30 p.m.--6 a.m.
NAP TV: daily from 5:00 p.m.--7:30 p.m.
VI-DOK and DNTV had no prior television broadcasting experience.
DNTV was organized in February 1994 and VI-DOK was organized in December 1991.
The Ministry granted licenses to DNTV and to VI-DOK in March 1994. VI-DOK then
organized Pest-Buda Televizio Kft ("Pest-Buda") in April 1994 as a vehicle from
which to conduct the broadcasting operations under the license. Between the date
of grant and the commencement of broadcasting on A3 (since renamed "MSAT") in
September 1994, DNTV and VI-DOK devoted their energies to seeking an equity
partner. The two companies started broadcasting in September 1994 as a music
channel using broadcasting facilities of others rather than their own studios to
provide programming and technical personnel.
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VI-DOK and DNTV, acting jointly thereafter sought an equity partner. In
November 1994, the Company commenced negotiations to acquire majority interests
in each of the two companies. At the same time, the Company agreed to provide
loans aggregating approximately $2.1 million to VI-DOK and DNTV to help finance
their operating and programming costs (which loans were to be deemed capital
contributions in the event the acquisitions were completed) until it could
complete its due diligence in connection with the acquisitions. The Company then
recruited a management staff, a sales staff and a station operating staff and
completed its acquisition of DNTV in May 1995, and of VI-DOK in June 1995. The
Company acquired 90% and 80% of the capital interests of VI-DOK and DNTV for
$240,000 and $176,000, respectively, from the existing owners of VI-DOK and DNTV
and contributed the loans to the capital of the two companies as additional
acquisition costs, and assumed operational control in May 1995.
In September 1996, the Company added satellite-to-cable broadcasting. In
September 1997 the Company's wholly owned subsidiary, Hungarian Broadcasting
Corporation Televizio Rt. ("HBC Rt."), was awarded a new 24-hour per day channel
for MSAT on the Budapest AM-Micro system (MMDS) for an indefinite period of
time. In October 1997, MSAT was awarded a national satellite license of
indefinite duration.
On January 5, 1998, pursuant to a Reorganization Agreement (the
"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, excluding Sziv, meeting certain
performance measures (See "Management Discussion and Analysis - Introduction").
On January 5, 1998 Global and Hungarian Broadcasting Project Kft ("HBP")
purchased 24% and 76%, respectively, of Sziv, a national satellite-to-cable
broadcaster currently reaching approximately 1.2 million television households
through the AM Micro transmission system in Budapest and satellite distribution
in Hungary combined. 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 the
payment of $15,000. Global is a distributor of paid adult television
programming, holding exclusive 10-year contracts with NTV Plus DBS operators in
Russia and contracts with United Phillips cable operators in Vienna and
Amsterdam.
Broadcasting Operations
The Company's over-the-air signal in Hungary is broadcast on the AM Micro
system, which transmits over microwave frequencies and is a low cost system for
consumers. The receiving equipment is limited to a dish antenna (smaller than a
comparable satellite receiver) and a converter. The equipment costs average $150
per receiver. However, equipment for one receiver can service up to four
households in the same building. Equipment for cable networks costs $200 per
receiver and for satellite antenna systems $350 per receiver. A monthly fee of
less than $1.00 is charged directly to households by Antenna Hungaria for
AM-Micro access. Cable systems charge between $3.00 and $10.00 per month
depending upon the package of channels subscribed for.
At the present time, MSAT's satellite transmissions are conducted by
Antenna Hungaria uplink to the Amos 1 satellite in accordance with an eight-year
agreement entered into in June 1997. Receiving cable companies reach about 1.5
million television households, in Hungary. Some of these cable companies make
MSAT available only on their premium service, so that MSAT's currently reach is
about 1.1 million television households. Sziv began its satellite broadcasting
through Antenna Hungaria and using the Amos 1 satellite in September 1997. In
addition to cable subscribers, the Company's broadcast signals for both channels
are received by about 300,000 households via AM-Micro service in Budapest. These
viewers receive programming identical and simultaneous with the programming
distributed via satellite. The cable and AM-Micro markets are expected to grow
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both with general economic growth and, also, as improved cable technology
catches cable pirates and converts them to customers.
Sziv currently requires a more expensive receiving box than does MSAT
and, accordingly, many of the smaller cable operators have yet to make that
investment. The Company believes that over time Sziv will approach the
broadcasting reach of MSAT.
It is estimated that 3.8 million households in Hungary (or 97% of total
households) have television and that of such total approximately 1.6 million
households or 42%, are connected to some form of cable network.
In April 1998, the Company acquired 44% of the voting stock of Galaxie TV
Network ("Galaxie TV"). The Company is entitled to receive 76.5% of all profits,
and has the option to increase its ownership of voting stock to 67%. Total
consideration consisted of an interest free loan of one million dollars.
Galaxie has a Regional Terrestrial License in the Czech Republic reaching
200,000 households, in the area around Hradec Kralove, the country's second
largest city, for one hour daily between the hours of 6:30 - 8:30 A.M., and for
two hours daily between the hours of 3:00 - 6:00 P.M., and a National Satellite
License to broadcast five hours daily, with which it plans to launch cable
programming at the end of April 1998, adding distribution to 800,000 households.
This will be equivalent to 3.1 million viewers, or nearly 30% of the Czech
population. In addition, Galaxie has applied to the Council for TV and Radio
Broadcasting for the Czech Republic to enable Galaxie to combine several
regional terrestrial licenses which would give Galaxie, with the Company as its
new strategic partner, approximately 72% total coverage and the opportunity to
become the leading competitor to Nova TV and Prima TV. The Company will require
approximately $3 million to realize this opportunity.
Galaxie TV will compete for audience, programming and advertising with
Nova TV, with CT1 and, on a more limited basis with CT2, a public network of
regional frequencies which reaches approximately 83% of the Czech Republic's
population and Prima TV, a privately owned and operated television station
serving approximately 55% of the country's population. There are no other
significant television stations broadcasting Czech language programming in the
Czech Republic.
Prior to 1992, television advertising in the Czech Republic was limited to
two public channels. Currently, there are four over-the-air television stations
in the Czech Republic: two public stations which reach 98% and 83% of the
population, respectively, and two private commercial stations, Nova TV and Prima
TV, which reach 99% and 55% of the population, respectively. Since the onset of
privatization activities in 1992, the television advertising market in the Czech
Republic has expanded to approximately $163 million in 1997, according to
industry estimates.
In May 1998 the Company acquired 44% of the voting stock of MAC TV, Ltd.,
a terrestrial television broadcaster in the Slovak Republic. The Company is
entitled to receive 76.5% of all profits, and has the option to increase its
ownership of voting stock to 67%. Total consideration consisted of an interest
free loan of two hundred thousand dollars to MAC TV, Ltd.
MAC TV has a Regional Terrestrial License and reaches about 250,000
television households. The license expires by its terms on June 23, 2007. It
gives MAC TV the right to broadcast 18.5 hours per day during the week, 16 hours
on Saturday and 17 hours on Sunday, in Eastern Slovakia for the city of Kosice.
The license limits advertising time to 10% of the daily broadcast, not to exceed
12 minutes per hour. MAC TV plans to launch satellite-to-cable distribution
shortly to reach approximately 700,000 households. This will be equivalent to
about 2.1 million viewers, or about 40% of the Slovakian population. In
addition,
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MAC TV has applied to the Council of Slovak Republic for Radio and TV
Broadcasting to combine several regional terrestrial licenses which would give
MAC TV up to 80% total coverage of all television households.
The Slovak Republic has a population of 5.4 million and 98% of the
households have television. Per capita GDP was an estimated $3,570 in 1997. The
economy of the Slovak Republic has recently begun to respond to economic reform,
with estimated GDP growth of 5% in 1997. The Company believes that as a market
economy develops in the Slovak Republic, television advertising spending has the
potential to grow significantly. Television advertising increased approximately
20% in 1997 to $47 million, according to industry estimates, yet television
advertising spending per capita in the Slovak Republic in 1997 still was
approximately half of that of the Czech Republic. The main competitors of MAC TV
will be two national public stations, both with reach nearly all of the Slovak
population, Markiza TV, which reaches approximately 88% of the Slovak population
and CVTV, which reaches 50% of the population.
Animated Film Production
In April 1997, the Company acquired 77% of the issued and outstanding
stock of Studio 2 Kft., a Budapest based animation studio. This company was
purchased from M&A Management Kft., a company wholly owned by the former
President and Chief Executive Officer of the Company, for $743,819, of which
$300,000 was paid in cash and $443,819 was represented by an unsecured note with
annual simple interest of 8 1/2 % due December 31, 1997. The acquisition has
been accounted for as a purchase and, accordingly, the results of Studio 2 Kft.
have been included in the Company's consolidated financial statements from the
date of acquisition. The purchase price of $743,819 has been fully allocated to
the underlying assets of Studio 2 Kft. based upon their respective fair values
at the time of acquisition. The excess of the purchase price over the equity of
Studio 2 Kft has been allocated to copyrights totaling $311,434. The feature
length animation film Mishy & Mushy, which is the sole significant animation
project of Studio 2 Kft, has not completed production. Accordingly, the
amortization of the production costs and copyrights have not begun. The
unsecured note was subsequently converted into equity in July 1997, when M&A
Management Kft. received 173,266 shares of unregistered common stock in the
Company with a fair market value of $605,368 at the conversion date, resulting
in an extraordinary loss of $151,449 from the early retirement of debt. The
Company sold Studio 2 Kft in June 1998. See "Certain Transactions."
Strategy
The Company's strategy is to improve the operating results and market
share of MSAT, Sziv, Galaxie and MAC TV and to acquire additional channels
elsewhere in Eastern and Central Europe. Specific elements of the Company's
operating strategy include:
+Expand Reach of the Stations Throughout Hungary ---
provide service to every cable TV household. In
addition, the Company is exploring the possibility of
working with certain local terrestrial stations to carry
MSAT's and Sziv's broadcasts.
+Develop Niche Programming --- capture advertising
expenditures directed to specialized channels such as
movies and children's programming.
+Increase Advertising Sales --- expand, motivate and
train the sales force.
+Control Station Operating Costs --- focus on
fundamental cost controls and operating efficiencies.
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+Utilize Viewer Oriented Scheduling --- make it
easier for viewers to find the programs they prefer
to watch by regular and consistent scheduling of
programming.
+Promote Programs --- advertise and promote its
programming, on MSAT, Sziv, Galaxie and MAC TV and in
other media, to increase ratings and viewer
identification.
+Expand the Company --- Expand in Hungary and in other
countries in Central and Eastern Europe through
strategic acquisitions of new stations, such as Galaxie
TV and MAC TV.
Programming
The Company's programming strategy for Hungary is to broadcast
specialized programming targeted to specific groups such as children and movie
viewers. Specialized programming attracts similar audience demographics so as to
retain as many viewers as possible from one program to the next. These
scheduling practices are used widely in the United States and help build viewer
loyalty and overall market share.
In April 1998, the Company entered into an agreement with Nickelodeon, a
division of Viacom, Inc., which grants the Company exclusive rights to cable
distribution of Nickelodeon in Hungary (the "Nickelodeon Agreement"). The
Company's station MSAT will be renamed Nickelodeon Hungary. The Nickelodeon
Agreement gives the Company the right to use Nickelodeon logos and character
likenesses for advertising tie-ins.
Sziv broadcasts 24 hours per day. Its programming presently consists of
general entertainment with an emphasis on movies during prime time. Management
is in negotiation with major Hollywood studios to acquire rights to programming
which management believes will significantly improve the quality of programming
on Sziv.
Advertising Sales
Advertising sales to international, national and local advertisers is the
principal source of revenue for the Company. The Company has been able to
implement a number of sales practices that have been effectively used in the
United States market and in other more developed television broadcasting
markets. The Company has cooperated with other broadcasters to implement
accurate, independent rating surveys in each of its markets. The Company's sales
efforts also focuses on educating the media buying market on how to use
television as an effective advertising medium.
In Hungary, AGB-Hungarian Meter System began providing ratings
information in 1993 on a national basis and has been providing rating
information for certain local areas including Budapest since 1996. The Company
believes that accurate ratings information accelerates the development of
commercial television markets because advertisers with more accurate ratings
information are more willing to allocate a greater percentage of their
advertising budget to television advertising.
The Company employs an experienced advertising sales force under the
direction of a sales manager.
In addition to advertising sales and programming sponsorship, the Company
collects a small annual fee from each cable operator at the time the cable
operator contracts to carry MSAT's and Sziv's broadcasts.
Competition
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MSAT and Sziv compete with MTV1, a government owned and operated national
television terrestrial stations, and with MTV2 and DUNA-TV, government owned and
operated satellite-to-cable stations, for audience, for programming and for
advertising. In addition, the Company's Hungarian stations compete with two
national terrestrial stations, TV2 and RTL Klub. In the satellite-to-cable
market, the Company's stations compete with TV3, a privately owned commercial
station with an AM-Micro license similar to those of the Company. Other
competitors include localized stations in Budapest that broadcast to parts of
the Budapest area sporadically and have insignificant audiences.
Competition for viewers also comes from foreign stations transmitting
satellite-to-cable and satellite-to-home TV. These stations broadcast in
English, German or French. Currently, none of these foreign stations broadcast
regularly in Hungarian. The Company does not consider such stations to be
significant competitors.
MSAT and Sziv also compete for revenues with other forms of media, such
as newspapers, radio, magazines, outdoor advertising, telephone directory
advertising and direct mail.
The increased competition following privatization may be somewhat offset
by an expanding advertising market and by more transparent and merit based
pricing practices. The high sales prices paid for the privatized stations
suggest significant future increases in advertising prices.
European Regulations
Private commercial television stations (those which derive the majority of
their revenues from the sale of advertising and are owned by entities other than
government entities) generally began broadcasting in the United States in the
1940s, in parts of Western Europe in the 1950s, in Germany in the 1980s, and in
Scandinavia and Central Europe (including Hungary) in the 1990s. Commercial
television has become an important medium for advertisers in the more developed
advertising markets. For example, in 1996, television advertising expenditures
totaled about $38 billion in the United States and about $23 billion in 16
countries of Western Europe.
Access to the available frequencies is controlled by regulatory bodies in
each country in which the Company operates. New awards of licenses to use
broadcast frequencies occur infrequently.
The European Union
If any Central or Eastern European country in which the Company operates
becomes a member of the European Union (the "EU"), the Company's broadcast
operations in such country would be subject to relevant legislation of the EU,
including programming content regulations. The Czech Republic, Hungary, and the
Slovak Republic have entered into or signed Association Agreements with the EU.
The EU's Television Without Frontiers directive (the "EU Directive") sets forth
the legal framework for television broadcasting in the EU. It requires
broadcasters, where "practicable and by appropriate means," to reserve a
majority proportion of their transmission time for "European works." Such works
are defined as originating from an EU member state or a signatory to the Council
of Europe's Convention on Transfrontier Television, as well as written and
produced mainly by residents of the EU or Council of Europe member states. News,
sports, games, advertising, teletext services and teleshopping are excluded from
the calculation of this quota. In addition, the EU Directive provides for a 10%
quota of either broadcast time or programming budget for programs made by
European producers who are independent of broadcasters. Further, the EU
Directive provides for regulations on advertising, including limits on the
amount of time that may be devoted to advertising spots. Member states are free
to introduce stricter
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content requirements than those in the EU Directive. The Company intends to
align its broadcast operations with any applicable EU legislation. The Company
believes that the EU Directive, as currently drafted, will not have a material
adverse effect on its operations. If any of the countries in which the Company
operates becomes a member of the European Union, the Company will be subject to
additional regulation.
Council of Europe
The Company's broadcast operations are all located in countries which are
members of the Council of Europe, a supranational body through which
international conventions are negotiated. In 1990, the Council of Europe adopted
a Convention on Transfrontier Television, which provides for European
programming content quotas similar to those in the EU Directive. This Convention
has been ratified by some of the countries in which the Company operates
(including Hungary), but all countries in which the Company operates have
already implemented its principles into their national media legislation.
Republic of Hungary
Hungary is a parliamentary democracy of 10.2 million people and had an
estimated per capita GDP of $4,350 in 1997. The two national public channels,
MTV1 and MTV2, reach 98% and 55% of the population. Two commercial national
stations were launched in October 1997. TV2 reaches 93% of the population. RTL
Klub reaches 86% of the population. Cable and satellite penetration are
currently at 40% and 19% respectively. The 39% of the Hungarian population
reached by MSAT and 35% reached by Sziv are predominately in urban areas,
including Budapest, which represent approximately 66% of the country's
purchasing power.
Until 1988, the economy of Hungary was tightly controlled by Communist
governments and composed almost exclusively of state-owned enterprises.
Accordingly, this country faces many challenges arising from decades of
Communist rule. Although Hungary has initiated a number of market-oriented
reforms, there can be no assurance that these reforms will persist. Hungary
lacks a recent history of operating in a market-oriented system.
In order to improve communication with the populace, the state commenced
building a trunk network of television transmitter stations in 1956. Since the
opening of the Budapest transmitter station in 1957, 17 transmitter stations
were built with 19 main transmitters in operation. The state subsidized the sale
of television sets and made it easy for households to purchase them so that the
households could watch the two state owned stations, MTV1 and MTV2, which
broadcast very few programs that were of interest to the general population and
fewer that were of interest to the 14 to 35 year old age group. The State also
started to experiment with satellite broadcasting transmission and commenced
building an AM-microwave network in the 1970s and encouraged and subsidized
cities and towns to build local cable systems throughout Hungary so that they
could receive programs broadcast over AM microwave frequencies and by satellite
transmission. As a result, most Hungarian cities and towns currently have
operating cable systems.
Hungary has three state owned and operated television channels - Magyar
Television I ("MTV 1"), which started broadcasting in 1957, Magyar Television 2
("MTV 2"), which started broadcasting in 1972 and DUNA TV, which started to
broadcast via satellite in 1993. The signals of MTV 1 are broadcast over-the-air
(terrestrial) and are transmitted by Antenna Hungaria, a state owned company
which built, owns and operates a trunk network consisting of 19 transmitter
stations and 90 relay stations. In addition to transmitting by satellite, MTV 2
and DUNA TV transmit by terrestrial microwave transmission. It is estimated that
MTV 1 reaches 98% of the television households of Hungary, MTV 2, approximately
35%
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and DUNA TV, approximately 48%. The signals of MTV 1 can be received by
conventional home antennas. However, a satellite dish is required to receive the
satellite transmission of MTV 2 and DUNA TV, or a dish type microwave antenna is
required to receive their microwave transmissions.
The commercial national stations, TV2 and RTL Klub, were launched in
October 1997. TV2 reaches 93% of the population and RTL Klub reaches 86%. In
addition, the Company's station, MSAT, competes with two other
satellite-to-cable stations that are also carried by Budapest's MMDS
(multichannel multipoint distribution service) microwave system, TV3 with a
reach of about 35% and Sziv TV ("Sziv") with a reach of about 35%. In January
1998, the Company purchased Sziv.
An advertising industry has been developing in Hungary since 1991. Based
on a report published by Saatchi & Saatchi/Zenith Media World Wide, television
advertising expenditures increased from $45 million in 1991 to $191 million in
1996. In a February 1998 newsletter, Zenith Media stated that television
advertising expenditures in Hungary for 1997 were $267 million, an increase of
40% from the year earlier. This estimate has not been confirmed. Based on a
report prepared by Saatchi & Saatchi/Zenith Media World Wide, TV advertising
expenditures in Hungary increased from approximately $45 million in 1991 to
approximately $200 million in 1997. Members of the industry expect television
advertising expenditures in Hungary to increase at double-digit rates into the
future.
Cable television growth in Hungary initially occurred in the most heavily
populated areas and has been extended to less populated areas. Households with
cable service in the most heavily populated areas in Hungary are sought after by
advertisers because these households tend to have higher disposable incomes and
greater access to advertised goods and services.
The Company is required to be licensed to broadcast in Hungary, and it is
licensed to do so. MSAT is recognized as a national satellite broadcaster by the
ORTT. The national satellite license permits MSAT to broadcast its
satellite-to-cable signal without encoding which allows the cable companies to
receive MSAT's broadcasting signal with an inexpensive receiver. Sziv has an AM
Micro license and indefinite regulatory authority to broadcast by satellite to
Hungarian cable companies.
Under the Media Act, which was enacted in December 1995, the Company is
required to comply with a number of restrictions on programming and advertising.
The Company believes that it is currently complying with all the restrictions
provided for in the Act and that none of the restrictions has a material adverse
effect on its operations. Advertisements on MSAT and on Sziv may not exceed 15%
of daily broadcast time and 12 minutes per hour. At least 15% (20% beginning in
1999) of total broadcast time must be Hungarian produced. At least 10% (15%
beginning in 1999) of total broadcast time must be programming commissioned or
purchased from an independent Hungarian producer that is not more than five
years old. Six percent of total annual advertising revenues must be used for the
creation of new Hungarian films, or, in the alternative, 3% of annual
advertising revenues may be donated to a Hungarian film production fund.
There are no specific environmental regulations in Hungary to which the
Company is subject, and the Company has not expended and does not expect to
expend any funds on environmental compliance costs.
Czech Republic
U.S./Czech relations are excellent and reflect strong historical ties. The
U.S. and Czech Republic cooperate on a wide range of issues, for example in the
United Nations and in European fora like the OSCE and NATO`s Partnership for
Peace. The Czechs have contributed forces to the stabilization force in Bosnia.
U.S. Secretary of State Madeleine Albright visited Prague in July 1997, shortly
after NATO Heads
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of State invited the Czech Republic to begin negotiations to join the alliance.
The U.S. supports Czech participation in Western economic and political
institutions and has played a major role in facilitating the country`s
transformation from communism through a 150 Million USD economic assistance
program.
The Czech Republic is a parliamentary democracy of approximately 10.3
million people, which the Company believes has developed a stable market
economy. Per capita GDP was an estimated $4,750 in 1997.
The Foreign Exchange Law of The Czech Republic, effective on October l,
1995, provides full convertibility of the Czech Crown for current account
transactions and the partial liberalization for capital account transactions.
Between early 1991 and May 1997 the exchange rate was pegged to a basket
(previously made up 65% by the D-Mark and 35% by the US-Dollar.) To meet its
inflation target, the Central Bank had to widen the fluctuation band around the
central parity from +/- 7.5% at the end of February 1996. On May 28, 1997 the
Central Bank was forced to abandon the band and allow the currency to float
freely but only after an effective devaluation of some 14 % since the start of
the year 1997.
The exchange rate is updated and published daily by the Czech National
Bank in a list that includes European convertible currencies, the ECU,
Australian Dollar, Japanese Yen, Canadian Dollar, New Zealand Dollar and USD. It
was established at CZK 28 per USD in December 1990 and now it is oscillating
between CZK33.00-36.00 per USD and CZK18.00-20.00 per DEM. As of July 1997, the
exchange rate was roughly 31 crowns to the U.S. dollar and 17 to 19.50 per 1
DEM.
The legal decisive criterion in the determination of the foreign exchange
entitlements of both physical and legal persons involved in foreign exchange
operations is not citizenship but the possession of a permanent residence
permit. Restrictions on investing out of the country and borrowing limits have
been removed.
Czech foreign exchange regulations and investment protection agreements
guarantee the transfer of profits and capital abroad
According to a 1997 U.S. Department of Commerce report, approximately 15%
of all Czech Republic households currently have cable television and
approximately 18% receive direct-to-home satellite television. The media
authorities in the Czech Republic have licensed several companies to provide
cable television services to the Czech Republic. The largest is Kable Plus, with
over 435,000 subscribers. Czech authorities have required cable operators to
carry all over-the-air broadcasting within their areas free of charge.
In May 1997, the television association in the Czech Republic launched an
initiative to gather data automatically on television viewing statistics.
Metering devices commonly known as "people meters" have been placed in a
representative number of television homes and the data collected is distributed
to interested parties. The Company believes that the availability of detailed
data on viewing patterns will increase future advertising expenditures.
The Council for Radio and Television Broadcasting in the Czech Republic
(the "Czech Radio and Television Council") and the Act on the Operation of Radio
and Television Broadcasting make certain distinctions between private and public
broadcasters. For example, private broadcasters, such as CNTS, are permitted to
interrupt programming with advertising, while public broadcasters may not.
Galaxie TV is a private broadcaster.
Slovak Republic
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According to the Slovak Information Agency, "Watching television is surely
the number one free-time activity in Slovakia. With a total of l,840,000
households, there are over l,820,000 TV sets, which means that 98% of the
country's inhabitants have at least one television receiver, 88 percent of them
color. An average daily audience is around 60 percent, while 27 percent of the
adult population watches several programs weekly. A very popular show will
attract 75 percent of viewers."
Television was first broadcast in the former Czechoslovakia in l953, in
Slovakia itself from l956 when the Bratislava studio went on the air. Regional
studios were opened in l962 in Kosice in eastern Slovakia, and in Banska
Bystrica in l991, all under the umbrella of Czechoslovak Television. Following
the l968 formation of the Czechoslovak Federation, the second channel was
designed to carry more regional (i.e. Slovak) programs, but this goal was not
attained until after the fall of Communism. Color broadcasting began in l970 and
was made standard in l973, using the SECAM system.
Programming is required to be consistent with the Slovak Constitution and
not promote violence, hate, intolerance, or immoral behavior or intentionally
use indecent language. In addition, the news may not be sponsored and news staff
may not appear in advertisements; tobacco advertising is prohibited; advertising
for children or in which children perform and which promotes behavior
endangering the health, psychological or moral development of children is
prohibited; and advertising which endangers the viewer's morality, health,
safety and environmental protection are also prohibited. The advertisement of
beer is permitted; however, advertisement of other alcoholic beverage remains
prohibited. There are also restrictions on the frequency of advertising breaks
within a program.
Employees
As of December 31, 1997, the Company had three executive officers and a
central staff of 33 full-time employees, consisting of 21 in production and in
programming, six in sales and six in finance and administration. None of the
Company's employees are covered by a collective bargaining agreement. The
Company also employs from time to time, on an as-needed basis, additional
temporary personnel drawn from a pool of approximately 61 production
professionals, such as directors, camera or lighting operators, and engineers
and 19 dubbing and voice over professionals. The Company believes that its
relations with its employees are good. Studio 2 Kft. has 11 employees.
In April 1998, the Sziv operations were integrated into the operations of
MSAT at the Company's headquarters location. The Company currently has
approximately 12 more employees than at December 31, 1997 of which six formerly
worked with Sziv. The other Global operations have no employees.
Property
The Company entered into a five year lease as of July 1, 1996 for
approximately 12,000 square feet on four floors at 1118 Budapest, Kelenhegyi ut
39, Hungary at a rental fee of $144,000 per year plus a 25% VAT and maintenance
fees. The Company may terminate the lease on six months notice. The Company is
using the third floor for its executive offices, the second floor for sales and
other offices, the first floor as a broadcast studio and offices for the
production group and the basement floor for archives, and an editing suite. The
basement floor also houses the master control.
Studio 2 Kft leases its offices from a company owned by the Chairman of
the Board on a month-to-month basis for a monthly rent of $2,800.
Both MSAT and Sziv lease transponder space on the Amos 1 satellite
through contracts with Antenna
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Hungaria, and the Company leases transponder space on the Astra 1E satellite
through a contract with Orion Atlantic.
Sziv owns fixed assets (primarily broadcasting equipment) with a book
value as of December 31, 1997 of $370,764.
In January 1998, the Company signed a five-year lease with EuroWeb
International Inc., an affiliate of the Chairman of the Board, at a monthly rent
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. The President, the
Chief Operating Officer and the General Manager of the station use these
apartments. 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 for the Company has moved
into the building and will pay rent at the same 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.
Legal Proceedings
License Proceeding
TV 3, a competitor of the Company, which was granted a six year, 24 hour
per day microwave license, applied to the Ministry of Culture to overturn the
grant of the A3 license to the Licensees and NAP TV made on March 29, 1994 on
the ground that proper procedures were not followed because the authority of the
committee that awarded the licenses had expired prior to the date the licenses
were granted. The Ministry of Culture denied the application and held that even
if a new committee were acting, it would also have granted the licenses to the
Licensees and to NAP TV. TV 3 thereafter instituted a legal action on December
1, 1994 against the Ministry of Culture, but not against either of the
Licensees, to overturn its decision in awarding the licenses in the Metropolitan
Court of Budapest. At a hearing held on December 1, 1994, the Municipal Court
ordered the Ministry to follow prescribed procedures and make a new decision.
The Ministry appealed this decision to the Appeals Court of Budapest. On April
25, 1995, the Company received a letter from the Ministry confirming that the
licenses had been granted to the Licensees and the Licensees may operate in
accordance with the terms of the licenses. On November 6, 1995, the Appeals
Court vacated the decision of the Metropolitan Court on the ground that no
notice of the hearing had been given to the Licensees (which had not had an
opportunity to appear at that hearing). The Appeals Court ruled that the only
issue to be decided by the Metropolitan Court is whether the Ministry's
committee was properly constituted to grant the licenses and remanded the matter
for a hearing in the Fall 1996 term. In particular, the Appeals Court ruled that
the Metropolitan Court does not have jurisdiction to revoke the grant of the
licenses or otherwise modify the decision of the Ministry's committee and,
accordingly, the Licensees may continue to operate under the licenses, pending a
final determination by the Ministry committee. In its ruling dated June 24,
1996, the Metropolitan Court ruled in favor of the Company. Subsequently, TV 3
has requested a review of this matter, which is currently pending. If this
ruling is overturned, this would have no adverse effect on the Company's ability
to continue broadcasting because the Company began broadcasting under a new
contract, granted by Antenna Hungaria, on a new AM Micro channel in September
1997.
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 twenty-five ($25)
dollars. The Company had previously paid a nominal judgment. The
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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.
Listing Requirements
The Company is aware that, as of February 22, 1998, the listing
requirements for the NASDAQ Small Cap market were raised. In response to an
inquiry from the NASDAQ regarding compliance with such raised listing
requirements, the Company provided additional information to the NASDAQ. On May
4, 1998, the Company was notified by the NASDAQ in writing that the Company was
in compliance with its listing requirements.
Relative to the acquisition of Global Television Networks, Inc. on January
5, 1998, 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, NASDAQ has requested the Company to provide other data related to
documents previously filed by the Company. On June 3, 1998 the Company filed the
required additional information with the SEC in an amendment to Form 8K. 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. The Company
believes that it will satisfactorily resolve the remaining issues, if any, with
the SEC and with the NASDAQ.
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MANAGEMENT
Executive Officers and Directors of the Company
As of May 15, 1998, the directors and executive officers of the Company
were:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Offer Assis 36 President, Chief Executive Officer, and Director
Peter E. Klenner 39 Chairman of the Board and Director
Shai Bar-Lavi 39 Chief Operating Officer and Director
James H. Season 54 Chief Financial Officer, Treasurer and Director
Frederick E. Smithline 66 Director
Ronald Scott Moss 40 Secretary
</TABLE>
Offer Assis has served as President, Chief Executive Officer and director
of the Company since January 5, 1998. From 1997 to 1998 Mr. Assis was President
and Chief Executive Officer of Global Television Networks, Inc., a New York
based television programming distributor operating in Russia, Vienna and
Amsterdam. Mr. Assis was previously a principal in a number of businesses
involving television and film production, television subscription channels,
telecommunications and the Internet. From 1984 to 1993 Mr. Assis was President
and Chief Executive Officer of M.D.S. Stores, Inc., a children's wear retail
chain. Mr. Assis attended Tel Aviv University. He devotes his full time to the
affairs of the Company.
Peter E. Klenner is Chairman of the Board of Directors. He previously also
served as President and Chief Executive Officer since the Company's inception in
1994. Mr. Klenner is President and Chief Executive Officer of Central European
Satellite Corp. since January 1, 1998. Mr. Klenner has also served as President,
Chief Executive Officer and a director of Hungarian Teleconstruct Corp.
("Teleconstruct"), a publicly traded construction corporation from 1993 to
October 1996. In February 1992, Mr. Klenner founded Hungarian Telephone and
Cable Corp. ("HTCC"), an owner of local telephone exchanges, and served as
President, Chief Executive Officer, and Chief Financial Officer from February
1992 until May 1995. From June 1991 to May 1992 he served as Chairman of the
Board of Montavid Engineering AG, a Budapest based building and engineering
firm. Mr. Klenner attended the University of Munich.
Shai Bar-Lavi has served as Chief Operating Officer and director of the
Company since January 5, 1998. From 1991 to 1998 Mr. Bar-Lavi was President of
Top-Line Communications, Inc., a television production company in New York City.
He devotes his full time to the affairs of the Company.
James H. Season was appointed Chief Financial Officer in August 1996. He
was elected a director and appointed Treasurer in April 1997. Mr. Season was
managing director of RHL Management Group, Inc. from 1990 to August 1996, which
was engaged in financial consulting. From 1986 to 1990, Mr. Season was a Group
Vice President and Chief Investment Officer of Golodetz Trading Corporation, an
international trading firm. Prior to 1986, Mr. Season was a Managing Director of
Chase Manhattan Bank, N.A. He also serves as a director of Hungarian Telephone
and Cable Corp. Mr. Season holds a J.D. degree
38
<PAGE>
from the University of Virginia and an M.B.A. from the University of Michigan.
Mr. Season devotes his full time to the affairs of the Company.
Frederick E. Smithline was elected a director on January 5, 1998. He has
practiced law in New York since 1957 and has been an associate and a partner in
several New York City law firms, specializing in corporate and finance law. He
is currently Chairman of the Board of Directors of DVL Corporation, a
publicly-traded real estate company, a founding shareholder of International
Isotopes, a publicly-traded company, director of Robin Medical, Inc., a heart
device monitoring company. Mr. Smithline is a graduate of New York University
and The Harvard Law School.
Ronald Scott Moss was appointed Secretary in April 1997. From 1994 to
1997, Mr. Moss was General Counsel to Integrated Media, Inc., an Internet
applications developer in New York City. From 1993 to 1994, he was a consultant
to the Motorola Software Group in Beijing, China. From 1988 to 1993, he was
General Counsel to Total Solutions. Inc., a computer-aided-design services
company in New York City. Mr. Moss graduated from the University of Miami School
of Law and is admitted to practice in New York and Florida. Mr. Moss devotes
substantially all his time to the affairs of the Company.
Directors are elected annually and hold office until the next annual
meeting of the stockholders of the Company and until their successors are
elected and qualified. Officers are elected annually and serve at the discretion
of the Board of Directors. Officers do not receive any compensation for serving
as directors.
Executive Compensation
- ----------------------
Prior to January 1996, no officer or director received any compensation
from the Company.
The following table sets forth the compensation earned by or paid to the
officers and directors of the Company for the calendar years 1997, 1996 and
1995:
<TABLE>
<CAPTION>
Name and Principal Position Year Salary Options
- --------------------------- ---- ------ -------
<S> <C> <C> <C>
Peter E. Klenner, Chairman, President, CEO 1997 $122,500 ---*
and Director 1996 120,000 95,000
1995 --- 50,000
James H. Season, Treasurer and Director 1997 96,000 20,000
1996 49,000 ---
1995 --- ---
Ronald Scott Moss, Secretary 1997 72,000 20,000
1996 --- ---
1995 --- ---
</TABLE>
* Excludes 100,000 Common Stock Purchase Warrants received for a $300,000 loan
commitment to the Company.
In July 1995, the Company entered into a five-year employment agreement
with Peter E. Klenner, effective January 1, 1996, providing for a monthly salary
of $10,000. He is entitled to receive reimbursement of ordinary and necessary
business expenses. Beginning December 1, 1997, Mr. Klenner's salary was
increased to $12,500 per month.
In August 1996, the Company retained James H. Season as its Chief
Financial Officer. In April 1997, he became Treasurer. He is receiving a fee of
$8,000 per month on a month to month basis plus living expenses. In January
1998, Mr. Season's salary was increased to $10,000 per month and he was issued
30,000 unregistered shares of the Company's Common Stock.
In April 1997, the Company retained Ronald Scott Moss as a consultant for
a fee of $6,000 per
39
<PAGE>
month for a period of two years. He is entitled to receive reimbursement of
ordinary and necessary business expenses. In December 1997 Mr. Moss' fee was
increased to $8,000 per month and the term of his agreement extended to five
years. In May 1998 Mr. Moss' fee was increased to $10,000 per month. Mr. Moss
has options to purchase 100,000 shares of the Company's Common Stock at a price
of $5.00 per share.
In January 1998, the Company entered into an employment agreement with
Offer Assis, whereby Mr. Assis agreed to serve as President and Chief Executive
Officer of the Company, for a salary of $300,000 per year until January 2, 2000,
and which granted Mr. Assis a signing bonus consisting of 2.4 million five-year
warrants to purchase shares of the Company's common stock for a price of $10.00
per share.
In January 1998, the Company entered into an employment agreement with
Shai Bar-Lavi, whereby Mr. Bar-Lavi agreed to serve as Chief Operating Officer
of the Company, for a salary of $300,000 per year until January 2, 2000, and
which granted Mr. Bar-Lavi a signing bonus consisting of 360,000 five-year
warrants to purchase shares of the Company's common stock for a price of $10.00
per share.
In January 1998, the Company entered into a consulting agreement with
Frederick E. Smithline, whereby Mr. Smithline will be paid $150,000 per year
until January 2, 2000, and which granted Mr. Smithline a signing bonus
consisting of 180,000 five-year warrants to purchase shares of the Company's
common stock for a price of $10.00 per share.
Limitation of Liability for Directors
The Company's Certificate of Incorporation provides that its directors
shall not be liable for monetary damages for breach of the directors' fiduciary
duty of care to the Company and its stockholders as a director except in the
case of (i) any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) payments of
dividends or approvals of stock repurchases or redemptions that are unlawful
under Delaware law, or (iv) any transactions from which the directors derived an
improper personal benefit. Currently under Delaware law, such provisions do not
eliminate the duty of care, and in appropriate circumstances, equitable remedies
such as injunctive or other forms of relief will remain available under Delaware
law. This provision does not affect a director's responsibilities under federal
securities laws. Pursuant to the Company's Certificate of Incorporation, current
and former directors and officers are indemnified to the maximum extent
permitted, from time to time, by the Delaware General Corporation Law.
In addition, the By-laws of the Company provide that the Company shall
indemnify any and all of its Directors and Officers or former Directors and
Officers or any person who may have served at its request as a Director or
Officer of another corporation in which it owns shares of capital stock or of
which it is a creditor against expenses actually and necessarily incurred by
them in connection with the defense of any action, suit or proceeding in which
they, or any of them, are made parties, or a party, by reason of being or having
been Directors or a Director or Officer of the Company, or such other
corporation, except, in relation to matters as to which any such Director or
Officer or person shall be adjudged in such action, suit or proceeding to be
liable for negligence or misconduct, in the performance of duty.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and persons controlling the
Company pursuant to the foregoing provisions or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
40
<PAGE>
Stock Option Plan
In 1994, the Company adopted a Stock Option Plan (the "Plan"). An
aggregate of 350,000 shares of Common Stock are authorized for issuance under
the Plan. The Plan provides that incentive and non-qualified options may be
granted to officers, employees, directors and consultants to the Company for the
purpose of providing an incentive to those persons to work for the Company. The
Plan is administered by the Board of Directors. The Board of Directors
determines, among other things, the persons to whom stock options are granted,
the number of shares subject to each option, the date or dates upon which each
option may be exercised and the exercise price per share.
Options granted under the Plan are exercisable for a period of up to ten
years from the date of grant. Options terminate upon the optionee's termination
of employment or consulting arrangement with the Company, except that under
certain circumstances an optionee may exercise an option within the three-month
period after such termination of employment. An optionee may not transfer any
options except that an option may be exercised by the personal representative of
a deceased optionee within the three-month period following the optionee's
death. Incentive options granted to any employee who owns more than 10% of the
Company's outstanding Common Stock immediately before the grant must have an
exercise price of not less than 110% of the fair market value of all underlying
stock on the date of the grant and the exercise term may not exceed five years.
The aggregate fair market value of Common Stock (determined at the date of
grant) for which any employee may exercise incentive options in any calendar
year may not exceed $100,000. In addition, the Company will not grant a
non-qualified option with an exercise price less than 85% of the fair market
value of the underlying Common Stock on the date of the grant. Options to
purchase an aggregate of 348,500 shares of Common Stock have been granted and
are outstanding under the Plan. Options for 181,000 shares of common stock are
exercisable at $5 per share and the other options are exercisable at prices
between $5 and $6 per share.
The Company also granted an option to Mr. Robert Genova, former Chairman
of the Board, for 40,000 shares of Common Stock, which option expired upon his
leaving the Company. Mr. Genova acts as a consultant to the Company at a monthly
fee of $3,000 ending December 31,1998.
The following table sets forth information regarding exercised options and
the value of unexercised options held by the former President of the Company as
of December 31, 1997:
<TABLE>
<CAPTION>
Value of
Number of Securities In-the-Money
Underlying Unexercised Options at Fiscal Period
Name Shares Acquired Options at Fiscal Period End
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1997
- -----------------
Peter E. Klenner --- 145,000* $217,500
</TABLE>
- -------------------------
* Excludes 100,000 Common Stock Purchase Warrants received as a commitment fee
for a $300,000 loan facility to the Company.
The Company has no pension or profit sharing plan. The Company has not
obtained any key-man life insurance covering the life of Mr. Assis or any of its
other officers.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Common Stock as of April 3, 1998 by (i) each person known by
the Company to own beneficially more than 5% of the outstanding Common Stock;
(ii) each director of the Company; and (iii) all directors and officers as a
group. Except as otherwise indicated below, each of the entities or persons
named in the table has sole voting and investment powers with respect to all
shares of Common Stock beneficially owned by it or him as set forth opposite its
or his name:
<TABLE>
<CAPTION>
Name and Address Shares Beneficially Owned
- ---------------- -------------------------
Number Percent
------ -------
<S> <C> <C>
Offer Assis (3) 4,700,000 45.19%
Kelenhegyi ut. 39
Budapest, Hungary
Shai Bar-Lavi (3) 660,000 7.89%
Kelenhegyi ut. 39
Budapest, Hungary
Frederick E. Smithline (3) 330,000 4.03%
250 Park Avenue
New York, New York
Peter E. Klenner (1)(2) 275,266 3.43%
Kelenhegyi ut. 39
Budapest, Hungary
Ronald Scott Moss (2) 100,000 1.23%
445 Park Avenue
New York, NY 10022
All officers and directors as a group (5 persons)(2) 6,065,266 54.87%
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Klenner may be deemed to be a "promoter" or "parent" of the Company,
as those terms are defined in the rules and regulations as adopted under
the Securities Act of 1933, as amended.
(2) Messrs. Klenner and Moss, the Company's Secretary, hold options for 12,000
and 100,000 shares, respectively. Such options are presently exercisable
and, accordingly, such shares are included in this table.
(3) Messrs. Assis, Bar-Lavi and Smithline hold options to purchase options for
2,400,000, 360,000 and 180,000 shares, respectively. Such options are
presently exercisable at $10.00 per share, and, accordingly, such shares
are included in this table. Messrs. Assis, Bar-Lavi and Smithline have
ownership interests in shares held in escrow of 1,150,000, 150,000 and
75,000 shares, respectively. These shares are to be released from escrow
only if the price of the Company's common stock exceeds $10.00 per share,
if the Company earns $0.50 per share or if Global, excluding Sziv, is sold
for at least $10 million. Such shares are therefore excluded from this
table.
CERTAIN TRANSACTIONS
The Company maintains a policy of not entering into any transaction
with any officer, director, principal stockholder or affiliate of the Company,
unless such transaction is approved by a resolution of at least a majority of
the non-interested members of the Board of Directors of the Company. Any
transaction with an affiliate will be on terms no less favorable to the Company
than could be obtained from an independent third party. The Company believes
that all previous transactions with affiliates were on terms no less favorable
to the Company than could be obtained from an independent party.
On September 14, 1994, the Company sold 480,000 shares to Peter E.
Klenner, the President of the Company for $4,800 ($.01 per share); 320,000
shares to Robert Genova, formerly Chairman of the Board for $3,200 ($.01 per
share); and 50,000 shares to Frank R. Cohen, Secretary, Treasurer, Director and
Counsel to the Company for $500 ($.01 per share) for an aggregate of $8,500.
42
<PAGE>
In December 1994 and March 1995, the Company borrowed $800,000 from
Hungarian Teleconstruct Corp. ("HTEL"), an affiliate of the Chairman of the
Board, at 6% per annum interest. Fifty percent of the loan was repaid in January
1996. As an additional consideration, the Company issued 100,000 shares of its
Common Stock to HTEL and granted HTEL an option to purchase 150,000 additional
shares of Common Stock at $3 per share. HTEL exercised its option to purchase
150,000 additional shares in March 1995.
In February 1996, the Company licensed, for $750,000, the exclusive
rights to programming for MSAT for the period April through December 1996 from
Power Television Limited ("Power TV"), a company owned by Justin Bodle, then one
of the Company's directors. The programming included rights to the TV series
"Beauty and the Beast," "Sirens," "Pacific Blue," "Benny Hill Show" and others.
In July 1996, the Company agreed to license for $1,378,000 the exclusive rights
to programming for the period October 1, 1996 through December 31, 1997 from
Power TV. The programming included rights to such series as "LA Law," "Murder
One," "Cops" and "Homicide." In October 1997, the Company contracted for
programming with Power TV for the period January 1, 1998 through June 30, 1998
at a cost of $467,500.
In October 1996, in order to provide working capital to the Company,
Mr. Klenner loaned the Company $200,000 at bank interest rates and Mr. Bodle
deferred payments for the programming. In consideration of the foregoing,
Messrs. Klenner and Bodle were granted options to purchase 95,000 and 40,000
shares, respectively, from the Company's 1994 Stock Option Plan exercisable at
$5 per share, which was the closing price of the shares of Common Stock on the
date of grant.
In addition to the $200,000 loan made in October, 1996, Mr. Klenner
had previously made loans from time to time to the Company for general working
capital purposes, which aggregated $165,000 at December 31, 1996 (in addition to
the loan mentioned above). These loans were repaid in February 1997.
In July 1997, the Company agreed to issue 173,266 shares of
unregistered common stock with a fair market value of $605,368 to M&A Management
Kft ("M&A"), a company wholly owned by Peter Klenner, in exchange for
cancellation a debt of $454,822 owed by the Company to M&A, resulting in an
extraordinary loss of $151,449 from the early retirement of debt.
In July 1997, James Season, the Company's Chief Financial Officer,
and Beatrix Bedo, the Company's Chief Accountant, were awarded options to
purchase 20,000 and 10,000 shares, respectively, of the Company's Common Stock
at a price of $3.50 per share.
In November 1997, the Company entered into an agreement with M&A
whereby M&A agreed to provide a loan facility of up to $300,000 to the Company
at an interest rate of 2% over LIBOR and due December 31, 1998. The Company paid
M&A a commitment fee consisting of 100,000 of the Company's Common Stock
Purchase Warrants exercisable at $6.00 per share. In October, November and
December 1997, M&A advanced $250,000 to the Company and an additional $25,000 to
Studio 2 Kft pursuant to this loan commitment. These advances were used to fund
operations. The loan was repaid in June 1998.
In November 1997, the Company transferred its right to participate
in a joint venture with plans to launch a communications satellite to serve
Central Europe to Central European Satellite Corp. ("CESAT") in exchange for 4.0
million shares in that company. This company is controlled by the Company's
Chairman of the Board. All but 70,778 of these shares of common stock of CESAT
were then distributed on a one-for-one basis to stockholders of record of the
Company as of December 31, 1997.
43
<PAGE>
The former owners/executives of Global, who are now the senior
operating management of the Company, also own Top-Line Communications, Inc.
("Top-Line"), a television production studio in New York. 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 transaction, including the investigation of
broadcasting opportunities elsewhere in Europe. The Company agreed to reimburse
Top-Line for expenditure made in the due diligence process only if the Company
purchased Global. After the closing, Top-Line was reimbursed $54,300 for these
expenses. In addition, approximately $73,200 of legal expenses incurred by the
sellers has been be paid by the Company. Top- Line has continued to advance
expenses directly related to the Company's activities.
In January 1998, the Company entered an agreement with Top Line
Communications, Inc. ("Top Line"), a company owned by the Chief Operating
Officer of the Company, to reimburse Top Line for certain expenses had been
incurred on behalf of the Company and to hire Top Line to perform certain
consulting services for the Company at a rate of $60,000 per month, including
Mr. Bar-Lavi's salary of $25,000 per month.
In January 1998, the Company signed a five-year lease with EuroWeb
International Inc., a related party, at a monthly rent 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 15-unit building was leased to an independent company.
The Company is in contact with the new lessee about subleasing additional space.
The marketing department for the Company has moved into the building and will
pay rent at the same 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.
In December 1995, three of the Company's officers contributed stock
to the Company for no consideration at the demand of Coleman Securities, Inc.
("Coleman") which was then attempting an offering of the Company's securities.
In January 1998, 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 to complete a firm commitment underwriting (the "Founder's Agreement").
The Company has an action pending against Coleman in the Supreme Court of 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 settled with one of these founders,
Peter E. Klenner to give him $500,000 of credit toward his purchase of studio 2
Kft. See "Certain Transactions." With respect to the other two founders, the
Company has an oral agreement to pay them $300,000 in stock in full settlement
of their claims. Should, prior to June 1, 1999, the Company settle with Coleman
and Company Securities Corp. For more than a net of $500,000, the Company will
give an option to the two founders to exchange their stock for a $300,000 cash
payment. If on June 1, 1999, the Coleman litigation has not been settled or has
been settled for less than $500,000 and if the market value of the Company's
common stock is less than the price when the Board of Directors approves the
above transaction, additional share will be issued to give the transaction a
value of $300,000.
Pursuant to the Reorganization Agreement with Global, the Company
entered into three-year employment or consulting agreements (the "Employment
Agreements") with five owners/executives/consultants 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. Offer Assis ("Assis") and Shai
Bar-Lavi ("Bar-Lavi"), who each became directors of the Company and were
appointed Chief Executive Officer and Chief Operating Officer, respectively.
Pursuant to the Reorganization Agreement, the Company also entered into a
Registration Rights Agreement (the "Registration Rights Agreement") giving the
Global stockholders the right, starting 24 months after the closing of the
Reorganization Agreement, to require the Company to register the shares granted
to them thereunder with the Securities and Exchange Commission.
In a transaction related to the acquisition of Global, Global agreed to
allow Peter Klenner, former President, and director, 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.
44
<PAGE>
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. In April 1998,
Mr. Shafrir resigned as a director.
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
100,000 five-year options exercisable into common shares in the Company at $5.00
per share.
In January 1998, the Company entered a consulting agreement with Tibro
Corporation ("Tibro") to provide consultation services to the Company for a
period of five years at a rate of $10,000 per month and 125,000 shares of the
Company's common stock and warrants to purchase 50,000 shares of the Company's
common stock at a price of $10.00 per share, plus an additional 20,000 shares of
common stock, up to a total of 105,000 shares, for each year Tibro is engaged by
the Company, all such shares to be held by the Company in escrow to be released
only upon Tibro remaining with the Company for the full five-year term of the
agreement.
In March 1998, the Company retained hiring Avastar Media ("Avastar") and
Ruder Finn to provide investor relations services for the Company at a rate of
$8,000 per month and options to were granted to Avastar purchase 20,000 shares
of the Company's Common Stock at a price of $5.00 per share, 1/12 of said
options to vest each month during the term of the agreement.
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 June 1998, the Company sold its interest in Studio 2
to Peter E. Klenner, the Company's Chairman of the Board, in exchange for
cancellation of an option held by Mr. Klenner to put, prior to September 31,
1998, to the Company 100,000 shares of the Company's Common Stock at a price
$7.50, transfer to the Company by Klenner of 27,000 shares of the Company's
Common Stock, and an agreement that in the event Studio was taken public and
valued at more than $1.5 million, the Company would receive 20% of the shares of
Studio held by Mr. Klenner. In addition, Mr. Klenner surrendered his rights
under the Founders Agreement.
DESCRIPTION OF SECURITIES
The Company's authorized capitalization consists of 15,000,000 shares of
Common Stock, par value $.001 per share and 5,000,000 shares of Preferred Stock,
par value $.001 per share, which may be issued in one or more series. As of the
date of this Prospectus, the Company had 8,000,372 shares of Common Stock,
22,830 Series A Preferred Stock and 12 Series B Preferred Stock outstanding. The
following is a summary description of the Common Stock, Common Stock Purchase
Warrants and Preferred Shares. All securities are qualified in their entirety by
reference to the Company's Certificate of Incorporation, as amended.
Common Stock
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by stockholders. The holders of shares of Common Stock
are entitled to dividends when and as declared by the Board of Directors from
funds legally available therefore, and, upon liquidation, are entitled to share
pro rata in any distribution to stockholders after payments to creditors and
after paying or providing for any liquidation preferences to the Preferred
Stock. There are no conversion or redemption privileges, nor sinking fund
provisions with respect to the Common Stock, and stockholders have no preemptive
rights to acquire shares of Common Stock issued by the Company in the future.
All of the outstanding shares of Common Stock are validly issued, fully paid and
non-assessable.
Preferred Stock
Preferred Stock may be issued in one or more series, to be determined and
to bear such title or designation as may be fixed by resolution of the Board of
Directors prior to the issuance of any shares thereof. Each series of Preferred
Stock will have such voting powers, if any, preferences, and other rights as
determined by the Board of Directors, with such qualifications, limitations or
restrictions as may be stated in the resolutions of the Board of Directors
adopted prior to the issuance of any shares of such series of Preferred Stock.
Because the terms of each series of Preferred Stock may be fixed by the
Company's Board of Directors without Stockholder action, Preferred Stock could
be issued with terms calculated to defeat a proposed takeover of the Company, or
to make the removal of the Company's management more difficult. Under certain
circumstances, this could have the effect of decreasing the market price of the
Preferred Shares, the publicly held Warrants and the Common Stock. Management of
the Company is not aware of any such threatened transaction to obtain control of
the Company.
Series A Convertible Cumulative Preferred Stock
The Board of Directors has filed a Certificate of Designation designating
1,000,000 shares of
45
<PAGE>
Preferred Stock as "Series A Convertible Cumulative Preferred Stock" (the
"Series A Preferred Stock") with the following rights, preferences and
privileges:
Conversion. Unless previously redeemed by the Company, the holders of the
Series A Preferred Stock are entitled to convert each Series A Preferred Share
into two (2) shares of Common Stock subject to adjustment as described below. In
lieu of issuing fractional shares upon conversion, the Company may pay an
equivalent amount in cash. No adjustment for dividends will be made on
conversion of any Series A Preferred Stock. Accordingly, accrued dividends will
not be paid on a Series A Preferred Share if it is converted between a dividend
payment date and the next record date for dividend payments. If any holder
surrenders a Series A Preferred Share for conversion after the close of business
on the record date for the payment of a dividend and prior to the opening of
business on the next dividend payment date, then, notwithstanding such
conversion, the dividend payable on such dividend date will be paid to the
registered holder of such share on such record date. In the case of Series A
Preferred Stock called for redemption, conversion rights will expire at the
close of business on the redemption date.
The conversion rate is subject to adjustment upon the occurrence of
certain events, including the issuance of stock of the Company as a dividend or
distribution on the Common Stock but not as dividends on the Preferred Shares;
sub-divisions and combinations of Common Stock; certain reclassifications,
consolidations, mergers and sales of property of the Company; the issuance to
all holders of Common Stock of certain rights or warrants; and the distribution
to all holders of Common Stock of evidence of indebtedness of the Company or of
assets (excluding cash dividends or distributions from retained earnings).
Except as stated above, the Conversion Price will not be adjusted for the
issuance of Common Stock or any securities convertible into or exchangeable for
Common Stock, or carrying the right to purchase any of the foregoing, in
exchange for cash, property or services.
Dividends. Each Series A Preferred Share is entitled to cumulative annual
dividends of $1.20 payable on September 15 of each year commencing September 15,
1997. Unpaid dividends will accumulate and be payable prior to the payment of
dividends on the Common Stock. The Company may, at its option, pay dividends in
shares of Common Stock, in lieu of cash. Shares used for such purpose will be
valued at the average closing bid price during the ten trading days ending on
the tenth day before the dividend payment date, subject to certain conditions.
For the foreseeable future, the Company expects to make dividend payments on the
Series A Preferred Stock in shares of Common Stock.
Redemption. The Series A Preferred Stock are redeemable at the option of
the Company, on not less than 30 days' written notice to registered holders at
the redemption price of $12 per share plus accumulated dividends, provided the
Company may not redeem the Series A Preferred Stock unless the closing price of
the Common Stock equals or exceeds $10 per share for at least 20 of the 30
consecutive trading days ending within five trading days prior to the date the
redemption notice is mailed.
Voting Rights. Series A Preferred Stock are entitled to one vote per
share voting together with the Common Stock as one class, except as otherwise
provided by the Delaware General Corporation Law provided, however, that if
dividends payable on the Series A Preferred Stock shall have been unpaid for two
dividend periods, the holders of the Preferred Shares, voting as a class, shall
be entitled to elect two directors to the Board of Directors.
Preference on Liquidation. Series A Preferred Stock will be entitled to a
preference on liquidation equal to $10 per share, plus accumulated unpaid
dividends.
No Sinking Fund. The Company is not required to provide for the
retirement or redemption of the Series A Preferred Stock through the operation
of a sinking fund.
46
<PAGE>
Series B Convertible Preferred Stock
The Board of Directors has filed a Certificate of Designation designating
16 shares of Preferred Stock as "Series B Convertible Preferred Stock" (the
"Series B Preferred Stock"), of which 12 shares are issued and outstanding and
the Company has the right to require three investors to purchase the remaining
four authorized Shares for $2,000,000 subject to certain conditions. See
"Management's Discussion and Analysis - Liquidity and Capital Resources May 1998
Private Placement" The Series B Preferred Stock have the following rights,
preferences and privileges:
Conversion. The shares of Series B Preferred Stock are convertible,
starting 120 days after the Closing (May 4, 1998) or upon the date of this
prospectus, whichever is sooner, in whole or in part, at the option of the
holder thereof and upon notice to the Company, into a number of shares of Common
stock equal to the Stated Value of such share or shares of Series B Convertible
Preferred Stock ($500,000) divided by the lesser of:
(i) 85% of the average closing bid price of the Common
Stock for the fifteen consecutive trading days prior to the trading day on which
a notice of conversion is received by the Company (the "Average Closing Price"),
as reported by the Nasdaq SmallCap Market or NASDAQ Electronic Bulletin Board
during the period of fifteen trading days immediately preceding the date of
conversion (the "Conversion Date"), or
(ii) 130% of the closing market 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")
(May 4, 1998, which price was $7.00 per share (the "Conversion Price").
However, in the event that as of any Conversion Date the
average closing bid price of the Company's Common Stock is $4.00 per share or
less (the "Conversion Limitation"), the Conversion Price for any conversions
will be the closing bid price on the day prior to the trading day on which the
conversion notice is received by the Company. Provided that, holders converting
at the Conversion Limitation shall receive three-year warrants to purchase such
number of shares of the Company's Common Stock, at a price equal to 101% of the
Average Closing Price on the date of such conversion, equal to 15% of the value
of Series B Convertible Preferred Stock converted, divided by the Average
Closing Price on the date of such conversion.
Dividends. The holders of shares of Series B Convertible Preferred Stock
are 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 Company, only
when, as and if declared by the Board of Directors of the Company out of the
funds legally available for that purpose, dividends, which shall accrue and be
payable semi-annually, in cash or Common Stock, at the option of the Board of
Directors of the Company. The dividends shall accrue in an amount equal to six
(6%) percent per annum of the Stated Value of the shares of Series B Convertible
Preferred Stock outstanding on the last day of each fiscal half-year of the
Company (June 30 and December 31). If the Company exercises its option to pay a
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 half-year in which
the dividend accrued.
Redemption. At any time, and from time to time, on and after the
expiration of certain restrictions on conversion, the Company may, but is not
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
47
<PAGE>
the Series B Convertible Preferred Stock, plus any accrued but unpaid dividends,
subject to certain adjustments.
Voting Rights. Shares of Series B Preferred Stock are not entitled to
vote.
Preference on Liquidation. Series B Preferred Stock will be entitled to a
preference on liquidation equal to $500,000 per share (the "Stated Value"), plus
accumulated unpaid dividends.
No Sinking Fund. The Company is not required to provide for the
retirement or redemption of the Series B Preferred Stock through the operation
of a sinking fund.
Common Stock Purchase Warrants
The Company has outstanding 2,376,110 Common Stock Purchase Warrants (the
"Warrants"). Each Warrant entitles the holder to purchase until December 20,
2000 one share of Common Stock at an exercise price of $6.00. The Warrants are
subject to redemption by the Company at any time after April 20, 1997 on 30 days
notice at $.25 per Warrant provided that the closing sale price, or if none, the
closing bid price of the Common Stock is $8.50 per share on at least 20 days of
the 30 trading days ending within 15 days of the date on which the notice of
redemption is mailed. Holders of Warrants shall have exercise rights until the
close of the business day preceding the date fixed for redemption.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price in certain events, such as stock
dividends and distributions, stock splits, recapitalizations, mergers and
consolidations. No adjustment exists for the issuance of shares of Common Stock,
among other circumstances, upon exercise of any of the Warrants or options
granted under any stock option plan. The Company is not required to issue
fractional shares. The holder of a Warrant does not possess any rights as a
stockholder of the Company unless he exercises his Warrant and obtains Common
Stock. The Warrants have been issued in registered form under a Warrant
Agreement dated as of December 20, 1995 and amended by agreement dated as of
February 5, 1997 between the Company and American Stock Transfer & Trust Company
as Warrant Agent. The shares of Common Stock issued upon exercise of a Warrant
will be fully paid and non-assessable. A Warrant may be exercised upon the
surrender of a duly completed warrant certificate on or prior to its expiration,
accompanied by cash or certified bank check for the exercise price.
Registration Rights
Pursuant to the acquisition of Global, the Company entered into a
Registration Rights Agreement (the "Registration Rights Agreement") giving the
Global stockholders the right, starting 24 months after the closing of the
Reorganization Agreement, to require the Company to register the shares granted
to them thereunder with the Securities and Exchange Commission.
Pursuant to the issuance of the Series B Preferred Stock, the Company
entered into a Registration Rights Agreement requiring the Company to register
with the Securities and Exchange Commission the shares of Common Stock into
which the Series B Preferred Stock is convertible.
Transfer Agent
The transfer agent for the Common Stock, the Warrants and for the Series
A Preferred Stock is American Stock Transfer & Trust Co., 40 Wall Street, New
York, New York 10005.
48
<PAGE>
Reports to Stockholders
The Company furnishes its Stockholders with annual reports
containing financial statements audited and reported upon by its independent
accounting firm and other reports as it determines or is required by law.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has 6,670,372 shares of Common Stock outstanding as of
the date of this prospectus, of which 3,489,291 shares are not freely
transferable as being "restricted securities" as that term is defined under Rule
144 under the Securities Act of 1933. In general, under Rule 144 as currently in
effect, subject to the satisfaction of certain other conditions, a person,
including an affiliate of the Company, who has owned restricted shares of Common
Stock beneficially for at least one year, is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the total number of outstanding shares of the same class, or the average weekly
trading volume of the Common Stock during the four calendar weeks preceding the
sale, as reported by all national securities exchanges on which the Common Stock
is traded and/or the automated quotation system of a registered securities
association. A person who has not been an affiliate of the Company for at least
the three months immediately preceding the sale and who has beneficially owned
shares of Common Stock for at least two years is entitled to sell such shares
under Rule 144 without regard to the volume limitations described above. Of such
3,489,291 restricted shares, the holders of 2,500,000 shares have entered into
agreements not to sell or transfer such shares prior to January 5, 2000. The
possibility that substantial amounts of Common Stock may be sold in the public
market may have an adverse effect on prevailing market prices for the Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities. See "Description of Securities."
PLAN OF DISTRIBUTION
The Common Stock issuable upon exercise of the Warrants is being
offered directly by the Company pursuant to the terms of the Warrant Agreement.
A Warrant holder who desires to exercise any Warrants should execute the
Subscription Form on the Warrant certificate and submit it, together with a
check for the appropriate amount made payable to "Hungarian Broadcasting Corp."
to American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005.
The Common Stock issuable upon conversion of the Series A and Series
B Preferred Stock may be resold from time to time as market conditions permit in
the over-the-counter market, or otherwise, at prices and terms then prevailing
or at prices related to the then current market price, or in negotiated
transactions, unless acquired by an affiliate of the Company.
Warrant Solicitation Fee
In connection with its initial public offering of securities in
1995, the Company entered into an underwriting agreement (the "Underwriting
Agreement") with J.W. Barclay & Co., Inc. ("Barclay"), pursuant to which Barclay
acted as the Underwriter for the Company's offer and sale of 1,150,000 shares of
Common Stock and 1,610,000 Common Stock Purchase Warrants.
The Underwriting Agreement provides that upon the exercise of any
Warrants after April 20, 1997, the Company may, to the extent permitted by
applicable law and the rules of the Securities and Exchange Commission and the
NASD, pay Barclay a fee of up to 10% of the aggregate exercise price if: (i) the
49
<PAGE>
market price of the Common Stock on the date each Warrant is exercised is
greater than the then exercise price of such Warrants; (ii) the exercise of such
Warrant was solicited by a member of the NASD; (iii) such Warrant is not held in
a discretionary account; (iv) disclosure of compensation arrangements was made
both at the time of the offering and at the time of exercise of such Warrants,
and (v) the solicitation of such Warrant was not in violation of Rule l0b-6
promulgated under the 1934 Act. In addition, unless an exemption by the
Commission is granted from the provisions of Regulation M, Barclay will be
prohibited from engaging in any market-making activities or solicited brokerage
activities with regard to the Company's securities during the periods prescribed
by Regulation M (two business days before the solicitation of the exercise of
any Warrants) until the latter of: (i) the termination of such solicitation
activity; or (ii) the termination by waiver or otherwise of any right Barclay
may have to receive a fee for the exercise of the Warrants following such
solicitations.
LEGAL MATTERS
Certain legal matters have been passed upon by for the Company by Ronald
Scott Moss, Esq., 445 Park Avenue, New York, New York 10022. Ronald Scott Moss
is Secretary of the Company. He holds options to purchase 100,000 shares of the
Company's Common Stock.
EXPERTS
The consolidated balance sheets of Hungarian Broadcasting Corp. and its
subsidiaries (the "Company") as of December 31,1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1997, the six month period ended December 31, 1996
and the year ended June 30, 1996 appearing in this Prospectus have been included
herein in reliance on the report of Coopers & Lybrand, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
The discussion contained in the Prospectus under the headings
"Business," and "Dividends" relating to Hungarian laws and conditions and the
legal proceedings involving the broadcast licenses have been reviewed by the law
firm of Lendvai & Nyiri, of Budapest, Hungary, Hungarian special counsel to the
Company.
CHANGE IN ACCOUNTANTS
On April 11, 1996, the Board of Directors of the Company selected
Coopers & Lybrand, as its new independent auditor. Todman & Co., CPAs, P.C. had
served as the Company's independent auditor until that time. The Company made
the change because Coopers & Lybrand has an auditing staff in the Republic of
Hungary, the Czech Republic and Slovakia, while Todman & Co., CPAs, P.C. does
not. The Company believes that such a local auditing presence in Hungary will
serve the Company better during its anticipated growth period. The Board of
Directors approved the decision to change public accountants based on the
reasons stated above. The Board of Directors did not dismiss Todman & Co., CPAs,
P.C., nor did Todman & Co., CPAs, P.C. resign or decline to serve if
reappointed. None of Todman & Co., CPAs, P.C. reports on the financial
statements for any year contained an adverse opinion or disclaimer of opinion,
or was qualified or modified as to uncertainty, audit scope or accounting
principle. There were no disagreements with Todman & Co., CPAs, P.C. on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure in connection with the audits of the Company at any
time.
50
<PAGE>
HUNGARIAN BROADCASTING CORP.
Financial Statements
Contents
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Consolidated balance sheets as of March 31, 1998 (unaudited) and December 31, 1997 ...................................... F-2
Consolidated statements of operations for the three months ended March 31, 1998 (unaudited) and 1997 (unaudited) ........ F-3
Consolidated statements of cash flows for the three months ended March 31, 1998 (unaudited) and 1997 (unaudited) ........ F-4
Notes to consolidated financial statements for the three months ended March 31, 1998 (unaudited) and 1997 (unaudited) . . F-5-F-11
Report of Independent Accountants ....................................................................................... F-12
Consolidated balance sheets as of December 31, 1997 and 1996 ............................................................ F-13
Consolidated statements of operations for the year ended December 31, 1997, for the six months ended
December 31, 1996 and for the year ended June 30, 1996 .................................................................. F-14
Consolidated statements of stockholders' equity for the year ended June 30, 1996, for the six months ended
December 31, 1996 and for the year ended December 31, 1997 .............................................................. F-15
Consolidated statements of cash flows for the year ended December 31, 1997, for the six months ended
December 31, 1996 and for the year ended June 30, 1996 .................................................................. F-16
Notes to consolidated financial statements for the year ended December 31, 1997, for the six months ended
December 31, 1996 and for the year ended June 30, 1996 .................................................................. F-17-F-32
Sziv TV Rt. financial statements ........................................................................................ F-33
Global Television Network, Inc. financial statements .................................................................... F-44
Pro forma consolidated financial statements ............................................................................. F-54
</TABLE>
F-1
<PAGE>
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 $4,653,903
=========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in US$, 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) $ (0.41)
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
F-3
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in US$)
<TABLE>
<CAPTION>
Three Months Three Months
Ended March 31, Ended March 31,
1998 1997
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
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.
F-4
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
For the Three Months Ended
March 31, 1998 (unaudited) and 1997 (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 subsidiaries 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."
F-5
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
For the Three Months Ended
March 31, 1998 (unaudited) and 1997 (unaudited) (Continued
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 which will be delivered only upon
Global meeting certain performance measures. 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 long-term
contracts with United Phillips cable operators in Vienna and Amsterdam. In
addition, Global owns a chatline service in the United States. The value of this
purchase, exclusive of the escrowed shares, is approximately $21.1 million,
including $19.4 million for broadcast licenses. 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. No pro-forma results have been provided for the comparative period
of the preceding year, as Global did not commence operations until 1997.
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 subsidiarywith 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
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.
F-6
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
For the Three Months Ended
March 31, 1998 (unaudited) and 1997 (unaudited) (Continued
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.
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 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 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
F-7
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
For the Three Months Ended
March 31, 1998 (unaudited) and 1997 (unaudited) (Continued
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 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 of the original investors' notes. In May 1998, the
Company raised $6.0 million in an equity offering. See Note 10 -- "Subsequent
Events."
5. Change in Accounting Standards
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information." From inception to March 31, 1998, the Company has not met any of
the quantitative criteria that would require segment reporting as prescribed by
SFAS No. 131.
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.
F-8
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
For the Three Months Ended
March 31, 1998 (unaudited) and 1997 (unaudited) (Continued
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 a receivable of the Company. 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. 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
F-9
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
For the Three Months Ended
March 31, 1998 (unaudited) and 1997 (unaudited) (Continued
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 assure 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, these actions would have a negative
impact on the trading markets for the stock.
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 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.
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 cost 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
F-10
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
For the Three Months Ended
March 31, 1998 (unaudited) and 1997 (unaudited) (Continued
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 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 up to 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.
At its next annual meeting, management plans to recommend to stockholders that
the Company change its name to Global Television Networks, Inc.
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.
F-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Hungarian Broadcasting Corp.
We have audited the accompanying consolidated balance sheets of Hungarian
Broadcasting Corp. and its subsidiaries (the "Company") as of December 31,1997
and 1996 and the related consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1997, the six month period
ended December 31, 1996 and the year ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Hungarian Broadcasting Corp. and its subsidiaries, as of December 31, 1997 and
1996, and the results of its operations and its cash flows for the year ended
December 31, 1997, the six month period ended December 31, 1996 and the year
ended June 30, 1996, in conformity with generally accepted accounting principles
in the United States of America.
Without qualifying our opinion, we draw to your attention, as explained
more fully in Note 17 to the financial statements describing certain subsequent
events, that the Company is not fully in compliance with the NASDAQ and the SEC
filing requirements. If the matters described in Note 17 are not successfully
resolved and ultimate confirmation obtained that the Company meets its listing
requirements, the Company's ability to obtain the required funds to finance its
operations and development would be impaired.
Coopers & Lybrand
Konyvvizsgalo es Vezetesi Tanacsado Kft.
Budapest, Hungary
April 14, 1998, except for Note 18, as to which the date is June 9, 1998
F-12
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
December 31
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 406,733 $ 375,823
Accounts receivable, net of allowance of $43,237
and $28,546 469,163 605,826
Program rights costs, net of accumulated amortization
of $0 and $236,000 687,614 1,142,000
Prepaid expenses and other current assets 177,026 117,331
Due from related parties 361,046 --
---------- ----------
Total current assets 2,101,582 2,240,980
---------- ----------
Property, plant and equipment, net of accumulated
depreciation of $112,939 and $44,080 401,178 443,633
Production costs 432,886 --
Copyrights 401,434 --
Broadcast license costs, net of accumulated
amortization of $1,092,979 and $669,931 1,057,535 1,480,583
Deferred financing and other intangibles,
net of accumulated amortization of $1,130
and $28,870 7,683 46,329
Other 251,605 89,680
---------- ----------
Total assets $4,653,903 $4,301,205
========== ==========
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 $ 1,027,306 $ 1,867,700
Accounts payable 676,191 763,821
Accrued expenses 945,538 387,844
VAT payable 97,185 --
Due to related parties 932,123 1,731,737
Other 247,394 60,852
------------ -----------
Total liabilities 3,925,737 4,811,954
------------ -----------
Commitments and contingencies (Note 15)
Stockholders' equity:
Preferred stock, $.001 par value----shares
authorized 5,000,000; issued and outstanding
38,530 and 100,000; aggregate liquidation
preference approximately $385,000 39 100
Common stock, $.001 par value--shares authorized
15,000,000; issued and outstanding 3,929,281
and 2,583,600 3,930 2,583
Additional paid-in capital 11,693,680 7,119,001
Accumulated deficit (11,105,715) (7,758,648)
Cumulative translation adjustment 136,232 126,215
------------ -----------
Total stockholders' equity 728,166 (510,749)
------------ -----------
Total liabilities and stockholders' equity $ 4,653,903 $ 4,301,205
============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-13
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended
December 31 December 31 June 30
----------- ----------- -------
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Net revenues $ 2,981,260 $ 1,239,418 $ 672,108
Expenses:
Other operating costs and expenses 3,397,336 1,679,859 2,038,828
Amortization of deferred program costs 944,004 736,000 250,000
Amortization of broadcast license costs 423,048 211,526 423,052
Selling, general and
administrative expenses 2,383,382 1,428,982 1,639,989
----------- ----------- -----------
7,147,770 4,056,367 4,351,869
----------- ----------- -----------
Operating loss (4,166,510) (2,816,949) (3,679,761)
Income from contract cancellation 1,200,000 -- --
116,086 146,968 11,317
Interest expense (262,156) (78,588) (481,238)
(83,038) (30,039) --
----------- ----------- -----------
Foreign currency exchange rate loss --
Loss before extraordinary item (3,195,618) (2,778,608) (4,149,682)
Extraordinary item from early
extinguishment of debt (151,449) -- --
Net loss $(3,347,067) $(2,778,608) $(4,149,682)
=========== =========== ===========
Basic loss per share:
Loss Attributable to common
stockholders $ (2.07) $ (1.08) $ (2.01)
Extraordinary item (0.05) -- --
Net loss $ (2.12) $ (1.08) $ (2.01)
Weighted average number of
common shares outstanding 2,807,097 2,583,600 2,067,008
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-14
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1996, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Total
Preferred Stock Common Stock Additional Accumu- Currency Stock-
--------------- ------------ paid-in lated translation holders'
Shares Amount Shares Amount capital deficit adjustment equity
------- ------ --------- ------ ---------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995 1,265,000 1,265 862,545 (830,358) 10,130 43,582
Issuance of common stock--July 1995 182,500 182 499,818 500,000
Issuance of common stock--Aug. 1995 200,000 200 549,612 549,812
Shares contributed by officers
for cancellation- (220,000) (220) 220 --
Initial public offering in Dec. 1995 1,150,000 1,150 5,990,590 5,991,740
Public offering costs (1,150,286) (1,150,286)
Exercise of warrants during year 6,100 6 36,530 36,536
Foreign currency translation
adjustment 120,266 120,266
Net loss (4,149,682) (4,149.682)
--------- ------ ---------- ----------- -------- ----------
Balance, June 30, 1996 2,583,600 2,583 6,789,029 (4,980,040) 130,396 1,941,968
Issuance of preferred units 100,000 100 329,972 330,072
Net loss for period (2,778,608) (2,778,608)
Foreign currency translation
adjustment (4,181) (4,181)
------- ---- --------- ------ ---------- ----------- -------- ----------
Balance, December 31, 1996 100,000 $100 2,583,600 $2,583 $7,119,001 $(7,758,648) $126,215 $ (510,749)
------- ---- --------- ------ ---------- ----------- -------- ----------
Public offering of preferred units 426,500 427 3,289,692 3,290,119
Dividends declared (631,800) (631,800)
Issuance of shares as payment of
dividends to preferred unit holders 131,625 132 631,668 631,800
Shares issued for services 12,000 12 71,988 72,000
Shares issued upon exercise
of warrants 16,290 16 97,642 97,658
Shares issued upon exercise of options 36,500 37 168,963 169,000
Conversion of preferred stock
to common stock (487,970) (488) 976,000 976 (488) --
Issuance of shares upon cancellation
of note Payable 173,266 174 606,338 606,512
Issuance of warrants to private
placement 96,876 96,876
Issuance of warrants as additional
consideration for loan
facility 243,800 243,800
Net loss for period (3,347,067)
Foreign currency translation
adjustment (3,347,067) 10,017 10,017
------- ---- --------- ------ ---------- ----------- -------- ----------
Balance, December 31, 1997 38,530 $39 3,929,281 $3,930 $11,693,680 $(11,105,715) $136,232 $ 728,166
------- ---- --------- ------ ---------- ----------- -------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-15
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997, FOR THE SIX MONTHS
ENDED DECEMBER 31, 1996 AND FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31 December 31 June 30
1997 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,347,067) $(2,778,608) $(4,149,682)
Adjustments to reconcile net loss to net cash used in
operating operating activities:
Amortization of intangibles 1,413,078 1,044,264 724,757
Provision for doubtful accounts 22,637 82,253 82,536
Depreciation 102,077 30,913 13,798
Foreign exchange losses 91,900 30,039 120,266
Amortization of discount on notes payable 42,300 -- --
Gain on repayment of notes payable (16,600) -- --
Provision for contingencies 86,017 -- --
Loss on sale of fixed assets 3,193 -- --
Extraordinary loss 151,449 -- --
Issuance of equity instruments for services 161,070 -- --
Minority interest (27,995) -- --
Changes in operating assets and liabilities, net of business acquired:
Increase in accounts receivable (11,972) (513,874) (186,653)
Decrease in other receivables 15,215 -- --
(Increase)decrease in VAT receivable -- 169,905 (39,746)
Increase in prepaid expenses and other current assets (86,616) (76,902) (37,383)
Increase in other assets -- (89,680) --
Increase in accounts payable 35,172 505,467 214,935
Increase in accrued expenses 661,834 283,362 39,644
Increase(decrease) in VAT payable 104,751 -- --
Increase(decrease) in other liabilities 256,651 (218,594) (6,117)
Increase in production costs (122,545) -- --
----------- ----------- -----------
Net cash used in operating activities (465,451) (1,531,455) (3,223,645)
----------- ----------- -----------
Cash flows from investing activities: -- -- --
Purchase of fixed assets, net of disposal (127,432) (346,054) (91,532)
Purchase of investments -- -- (653)
Purchase of program and film rights (1,072,498) (611,899) (750,000)
Net increase in deferred financing costs -- -- (9,067)
Acquisition of business, net of cash acquired (228,648) -- --
----------- ----------- -----------
Net cash used in investing activities (1,428,578) (957,953) (851,252)
----------- ----------- -----------
Cash flows from financing activities:
Increase(decrease) in advances from related parties (590,198) 178,070 148,725
Proceeds from issuance of common stock . -- -- 5,927,802
Proceeds from issuance of preferred stock 4,265,000 450,000 --
Proceeds from issuance of notes payable 7,999 850,000 --
Payments of notes payable, net of issue discount (890,000) -- (874,583)
Exercise of warrants and options 266,657 -- --
Payments for offering costs (974,881) (69,926) --
Increase in liability to minority stockholders -- -- 40,326
Net cash provided by financing activities 2,084,577 1,408,144 5,242,270
----------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents (159,638) (5,292) --
Net change in cash and cash equivalents 30,910 (1,086,556) 1,167,373
----------- ----------- -----------
Cash and cash equivalents at beginning of period 375,823 1,462,379 295,006
----------- ----------- -----------
Cash and cash equivalents at end of period $ 406,733 $ 375,823 $ 1,462,379
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 32,550 $ -- $ 64,118
Non-cash investing and financing activities:
Capitalized program rights costs payable in installments through December 1997 $ 599,266 $ 768,000 $ --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-16
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED JUNE 30, 1996
1. Organization and Business
Hungarian Broadcasting Corp. (the "Company") which was incorporated in the
State of Delaware on September 14, 1994, was organized to acquire interests in
companies that have commercial broadcasting licenses to own, develop, expand and
operate television stations in Hungary. The Company 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 Rt ("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 the
purchase price over the fair value of net assets acquired is classified as
broadcast license costs. The Licensees effectively ceased operations shortly
after their acquisition and the Company's wholly-owned subsidiary HBC 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.
The operations of the Company are essentially in Hungary where the
majority of revenues and expenditures are incurred. At December 31, 1997 and
December 31, 1996, respectively, 76% and 62% of total assets, and 30% and 24% of
total liabilities of the Company were maintained in the Company's Hungarian
subsidiaries accounts.
In April 1997, the Company acquired a 77% interest in Studio 2 Kft,
incorporated in Budapest, Hungary. See Note 3 -- "Acquisition."
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.
2. Summary of Significant Accounting Policies
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and all its subsidiaries (which are all majority owned and in which
the Company has control over their operations). All material intercompany
transactions and balances have been eliminated in consolidation. Minority
interests arising upon consolidation have not been separately disclosed, as they
are immaterial.
F-17
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED JUNE 30, 1996 (Continued)
The subsidiaries of the Company are as follows:
<TABLE>
<CAPTION>
Country of
Name Incorporation Percentage Owned
---- ------------- ----------------
<S> <C> <C>
HBC Kft................ Hungary 100%
VI-DOK Rt ............. Hungary 90%
DNTV Rt ............... Hungary 80%
HBC Rt................. Hungary 100%
Studio 2 Kft........... Hungary 77%
</TABLE>
(b) Fiscal Year
Effective March 14, 1997, the Company changed its fiscal year-end from
June 30 to December 31.
(c) Revenue Recognition
Revenue primarily results from the sale of advertising time. Advertising
revenue is recognized at the time the commercials are broadcast.
(d) Barter Transactions
Revenue from barter transactions (television advertising time provided in
exchange for goods and services) is recognized when commercials are broadcast;
merchandise or services received are charged to expense (or capitalized, as
appropriate) when received or used. The Company records barter transactions at
the estimated fair market value of the services and merchandise received unless
not readily determinable in which case the transaction is recorded at the
estimated fair market value of the advertising time provided. If services or
merchandise are provided prior to the broadcast of a commercial, a liability is
recorded. Likewise, if a commercial is broadcast first, a receivable is
recorded. There were no barter gains or losses, receivables or payables at
December 31, 1997, December 31, 1996 and June 30, 1996, respectively.
(e) Program and Film Rights
Program and film rights acquired under license agreements and the related
obligations incurred are recorded as assets and liabilities when the license
period begins, the cost of each program is determinable, and the program is
available for telecast. The capitalized costs are amortized using the
straight-line method based upon the estimated period of usage generally ranging
from nine to fifteen months. Program rights are reported at lower of unamortized
cost or estimated net realizable value.
(f) Production Costs
Production costs for self-produced programs are capitalized and expensed
when the program is first broadcast, except where the program has potential to
generate future revenues. In that case, production costs are capitalized and
amortized on the same basis as programming obtained from third parties. For
animation production, costs are capitalized for each film and expensed based
upon estimated future revenues.
(g) Copyrights
Copyrights represent compensation to professional filmmakers in Hungary
under employment contracts, which transfer copyrights to the Company upon the
fulfillment of the employment contracts based on Hungarian law. These costs are
capitalized for each film and expensed based upon estimated future revenues.
F-18
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED JUNE 30, 1996 (Continued)
(h) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is recorded
following a straight-line method over the estimated useful lives of the assets,
which is five years for television broadcasting and production equipment, three
to five years for office equipment, fixtures and fittings and five years for
automobiles. The Company reviews for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company evaluates recoverability using an undiscounted cash
flow approach over the remaining life of the assets. Leasehold improvements are
amortized over the life of the lease or the related asset, whichever is shorter.
When assets are retired or disposed of, the costs and accumulated depreciation
or amortization are removed from the respective accounts and any related gain or
loss is recognized. Maintenance and repairs are charged to expense when
incurred. Significant expenditures, which extend useful lives of assets, are
capitalized.
(i) Broadcast License Costs
The costs of acquiring licenses to broadcast are capitalized and amortized
over the life of the related licenses. Broadcast license costs acquired for
$2,150,514 are being amortized over the life of the relevant licenses which
terminate in July 2000. Broadcast license costs are reported at the lower of
unamortized cost or estimated net realizable value.
(j) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). This Statement requires a liability approach for measuring deferred taxes
based on temporary differences between the financial statement and income tax
bases of assets and liabilities existing at each balance sheet date using
enacted rates for the years in which the taxes are expected to be paid or
recovered.
(k) Deferred Financing Expenses
Deferred financing expenses represent the costs associated with the debt
portion of a consummated private placement financing and are being amortized on
a straight-line basis over the expected term of the related borrowing.
(l) Foreign Currency Translation
The functional currency is the United States dollar for the Company and
the Hungarian forint for its five Hungarian subsidiaries. Assets and liabilities
in foreign currencies are translated to each company's functional currency using
the corresponding exchange rate in effect at the balance sheet date with any
resulting gain or loss included in net income. Assets and liabilities of the
subsidiaries are translated into the reporting currency (U. S. dollar) using the
rate in effect at the balance sheet date and equity accounts using the
historical rate. The statement of operations and cash flows are translated using
the weighted average rate in effect for the period. Gains and losses from these
translations are recorded in a separate component of stockholders' equity. Gains
and losses resulting from transactions by the companies in currencies other than
their functional currency are included in net income.
(m) Cash Equivalents
The Company classifies as cash equivalents all highly liquid investments
with a maturity of three months or less at the time of purchase.
(n) Dividend Policy
The Company is dependent upon payment of dividends by its Hungarian
subsidiaries as the source of its own dividends. Dividends are payable to
foreign investors such as the Company in forints, which may be converted into U.
S. dollars at the official rate of exchange announced by the National Bank of
Hungary. At December 31, 1997,
F-19
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED JUNE 30, 1996 (Continued)
there were no significant distributable reserves in the Hungarian subsidiaries
of the Company
In September 1996 and in February 1997, the Company issued shares of
Series A Convertible Cumulative Redeemable Preferred Stock. The Company may pay
dividends on this Preferred Stock either in cash or in shares of Common Stock.
(o) Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash and trade
receivables. The Company places its temporary cash and investments with high
quality financial institutions. At times, demand deposits and cash equivalents
may be in excess of the FDIC and National Depository Insurance Fund in Hungary
insurance limits. Concentration of credit risk with respect to trade receivables
are significant due to the Company's largest advertising customer representing
approximately 32%, 27% and 10% of total revenue and 48% and 25% of total
receivables at December 31, 1997, December 31 1996 and June 30, 1996,
respectively. Generally, the Company does not require collateral or other
security to support contract receivables.
(p) Loss Per Share
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." This statement simplifies the existing
computational guidelines, revising the disclosure requirements, and increasing
the comparability of earnings per share data on an international basis. Basic
loss per share has been calculated based on the weighted average number of
common shares outstanding. Where appropriate earnings and shares outstanding are
adjusted to include the effects of dilution of the interests of common
stockholders that might be caused by the ultimate conversion of warrants,
options and preference shares, except where such an effect would be
antidilutive.
(q) Litigation
The Company provides for contingent liabilities in connection with pending
legal matters when losses are both probable and estimable.
(r) Reclassifications
Certain reclassifications were made to prior period amounts to conform to
current period classifications.
(s) Change in Accounting Standards
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," is effective for fiscal years beginning after December
15, 1997, including interim periods. This statement establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general-purpose financial statements. The Company intends to adopt SFAS 130
for the quarter ended March 31, 1998, but has not yet determined the impact of
the implementation of this statement.
3. Acquisition
In April 1997, the Company acquired 77% of the issued and outstanding
stock of Studio 2 Kft., a Budapest based animation studio. This company was
purchased from M&A Management Kft., a company wholly owned by the President and
Chief Executive Officer of the Company, for $743,819, of which $300,000 was paid
in cash and $443,819 was represented by an unsecured note with annual simple
interest of 8 1/2 % due December 31, 1997. The acquisition has been accounted
for as a purchase and, accordingly, the results of Studio 2 Kft have been
included in the Company's consolidated financial statements from the date of
acquisition. The purchase price of $743,819 has been fully allocated to the
underlying assets of Studio 2 Kft based upon their respective fair values at the
time of acquisition. The excess of the purchase price over the equity of Studio
2 Kft totaling $311,434 has been allocated to copyrights. The feature length
animation film Mishy & Mushy, which is the sole significant animation project of
F-20
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED JUNE 30, 1996 (Continued)
Studio 2 Kft, has not completed production. Accordingly, the amortization of the
production costs and copyrights have not begun. The unsecured note was
subsequently converted into equity in July 1997, when M&A Management Kft
received 173,266 shares of unregistered common stock in the Company with a fair
market value of $605,368 at the conversion date, resulting in an extraordinary
loss of $151,449 from the early retirement of debt.
4. VAT Receivable/Payable
Value-added taxes paid in Hungary for which a reimbursement claim was
submitted by the Company, have been included in current assets. When at a period
close VAT balances net to a payable, such balances are included in current
liabilities.
5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31 December 31
1997 1996
--------- ---------
<S> <C> <C>
Television broadcasting and
production equipment $ 173,028 $ 133,709
Office equipment, fixtures and fittings 133,814 160,457
Leasehold improvements 170,419 186,278
Vehicles 36,856 7,269
--------- ---------
514,117 487,713
Less: Accumulated depreciation (112,939) (44,080)
--------- ---------
$ 401,178 $ 443,633
========= =========
</TABLE>
6. Provision for Income Taxes
The Company and its subsidiaries had approximate cumulative deferred tax
assets of $2,759,350 and $1,810,000 at December 31, 1997 and 1996, respectively,
arising from net operating losses from the current and prior periods. The
cumulative net operating losses of $10,797,336, at December 31, 1997, since the
Company's inception can be carried forward and applied to reduce taxable income
in the future. There are no deferred tax liabilities to be offset by those
future tax deductions, the future tax deductions cannot be realized by loss
carryback because no taxes have been paid, and the companies have had pretax
losses since their inception. Therefore, as there is not sufficient positive
evidence, as defined by SFAS 109, to overcome the negative evidence discussed
above regarding the recoverability of the deferred tax assets, the Company has
fully provided for the deferred tax asset of $2,759,350 and $1,810,000 at
December 31, 1997 and 1996, respectively.
7. Notes Payable
From November 1994 through March 1995, the Company sold (in a private
placement) units consisting of $2,120,000 aggregate principal amount of
unsecured promissory notes and 265,000 shares of common stock for an aggregate
purchase price of $2,120,000. The Company incurred $153,789 of financing
expenses relating to the private placement, of which $122,100 and $31,689 has
been allocated to debt and equity, respectively. The $153,789 includes legal
fees of $28,200 paid to the Company's secretary/stockholder. The notes bear
simple interest at 6% per annum and were originally due upon the earlier of
December 31, 1995 or the successful consummation of the initial public offering,
which was rescinded during November 1995. The revised terms require that only
one-half of the notes were due upon the earlier of December 31, 1995 or the
successful consummation of the subsequent initial public offering. The balance
of the notes were due on June 30, 1997. Consequently, the amortization expense
F-21
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED JUNE 30, 1996 (Continued)
relating to the original issue discount and deferred financing expenses were
recomputed over the revised expected term of the notes. Total original issue
discount of $437,000 (an imputed interest rate of 19% per annum) has been
recorded and is being amortized over the expected term of the notes, along with
the $122,100 of financing expenses related to the debt portion of the private
placement. During January 1996, $1,060,000 of the notes were repaid.
In December 1996, the Company borrowed $850,000 by issuing promissory
notes payable upon the earlier of one year from the date of issuance or the
consummation of a public offering of securities by the Company with interest at
18% per annum. These notes were collateralized by a pledge of 370,000 shares of
common stock owned by the President of the Company, Peter E. Klenner, and 30,000
shares owned by Frank R. Cohen, Treasurer of the Company at that time. In
February 1997, these borrowings were repaid from proceeds of the February 1997
public offering by the Company.
On June 30, 1997, promissory notes totaling $1,060,000 were due. The
Company offered the note holders compensation to extend the notes for one year
to June 30, 1998. Note holders representing $740,000 of the outstanding debt
agreed in writing to extend the maturity date on the notes. Note holders
representing $40,000 of the outstanding debt requested immediate repayment and
the note holders comprising the remaining balance either agreed orally to the
extension or have not responded to the Company's inquiries. The Company agreed
to pay the note holders accepting the extension 50% of the interest accrued as
of June 30, 1997. All note holders, except a certain related party, received
2,500 Common Stock Purchase Warrants per unit on November 1, 1997; the market
value which equaled $2.00 per warrant at their date of grant. This additional
consideration totaling approximately $97,000 is being amortized over the
extension period of the notes. At December 31, 1997, the unamortized portion of
$48,438 is included in other assets. Note holders requiring immediate repayment
were paid at a price below the notes carrying value. The Company has recognized
a gain of $16,600 from the debt repayment.
8. Preferred Stock and Common Stock Purchase Warrants
In September 1996, the Company sold 100,000 shares of Series A Convertible
Cumulative Redeemable Preferred Stock ("Preferred Stock") and 100,000 common
stock purchase warrants for $450,000 in a private offering. Proceeds of the
private placement, net of issuance costs, were $329,972.
Common stock purchase warrants ("Warrants") have the same terms as the
Common Stock Purchase Warrants issued during the initial public offering in
December 1995. Each Warrant entitles the holder to purchase until December 20,
2000 one share of Common Stock at an exercise price of $6.00. The Warrants are
subject to redemption at the Company's option after an initial period provided
that the closing price of the underlying Common Stock equals or exceeds $8.50
per share on at least 20 of 30 consecutive trading days prior to notice of
redemption.
In February 1997, the Company, in a public securities offering, sold
426,500 units of Preferred Stock and Warrants for $10.00 per unit. Net proceeds
to the Company after expenses from the Offering were $3,290,119. The fair market
value of these units, as represented by the underlying securities, was $14.62
per unit as at the date of the issue, resulting in an effective preferred
dividend of $1,970,000.
Each share of Preferred Stock is convertible into two shares of Common
Stock and is entitled to cumulative annual dividends of $1.20 payable on
September 15 of each year. The Company may, at its option, pay dividends in
shares of Common Stock, in lieu of cash. The Preferred Stock is redeemable at
the Company's option for a redemption price of $12.00 per share plus accumulated
dividends, but only after the closing price of the Common Stock equals or
exceeds $10.00 per share for 20 of 30 consecutive trading days prior to
redemption notice. Shares of Preferred Stock are entitled to one vote per share
voting together with the Common Stock. If dividends payable on the Preferred
Stock have been unpaid for two dividend periods, the holders of the Preferred
Stock, voting as a class,
F-22
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED JUNE 30, 1996 (Continued)
shall be entitled to elect two directors to the Board of Directors. Preferred
Stock will be entitled to a preference on liquidation equal to $10 per share,
plus accumulated unpaid dividends.
In September 1997, the Company issued 131,625 shares of unregistered
common stock with a fair market value of $631,800 at date of issue as payment in
full for the dividends due. As of December 31, 1997, 487,970 shares of Series A
convertible preferred stock were converted into common stock, leaving a balance
of 38,530 shares of Series A convertible preferred stock outstanding.
As of December 31, 1997 and December 31, 1996, the issued and outstanding
Warrants were 2,384,860 and 1,703,900, respectively.
9. Common Stock
In July 1995, the Company sold 182,500 of common stock at a price of $3
per share for an aggregate of $547,500 ($500,000 net) of which 30,000 shares
were sold to a director and officer of the Company. In August 1995, the Company
sold 200,000 shares of common stock at a price of $3 per share for an aggregate
of $600,000 (approximate $550,000 net). The remaining stock subscription
receivable at September 30, 1995, of $100,000, was received on October 4, 1995.
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 17 below, 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 Securities, Inc. ("Coleman") to complete a firm commitment
underwriting. The Company has an action against Coleman in the Supreme Court of
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 will pay these founders
$250,000 in cash and $150,000 in stock at the time of a future 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 of the original investors' notes.
On December 20, 1995 the Company completed an initial public offering of
1,150,000 shares of its common stock at $5.00 per share and 1,610,000 Warrants
at $0.15 per warrant. The Company also issued to the underwriter other warrants
for the purchase of 100,000 shares of common stock at $8.25 per share and
140,000 common stock purchase warrants at $0.225 per warrant. The proceeds of
this offering amounted to $4,995,338, net of underwriting commissions and
expenses.
On June 21, 1996, the Company increased the number of authorized shares of
common stock from 5,000,000 to 15,000,000; authorized the issuance of up to
5,000,000 shares of preferred stock; and increased the number of shares of the
common stock available under the Company's 1994 Incentive Stock Option Plan, as
amended, from 100,000 shares to 350,000 shares for use as incentive awards to
certain key employees, directors and consultants. The Company has a policy to
retain sufficient authorized but unissued common shares to meet its conversion
and exercise obligations for convertible preferred shares, warrants and options.
10. Dividends -- Distribution of Shares of Central European Satellite Corp. to
Stockholders
On December 31, 1997, the Company distributed shares of its wholly-owned
subsidiary, Central European Satellite Corp. ("CESAT"), to the shareholders of
Hungarian Broadcasting Corp. on a one share for one share basis. The fair market
value of the dividend is insignificant due to the absence of a market for CESAT
stock. The only asset of
F-23
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED JUNE 30, 1996 (Continued)
CESAT is a letter of intent signed with Magyarsat Kft in November 1997
authorizing the Company to finance and launch an Amos-class communications
satellite into the same terrestrial position as the current Amos 1 satellite.
Magyarsat Kft is owned on a 50:50 basis by state-owned Antenna Hungaria and
Israel Aircraft Industries Ltd. ("IAI"), Israel's state-owned aerospace company.
Terms for the venture are for CESAT to raise approximately $39 million of equity
capital and approximately $100 million of debt financing in exchange for an
approximate 94% ownership interest prior to raising new equity. The state of
Hungary is contributing its terrestrial space for the satellite and IAI will
contribute $1.0 million of cash. Existing Central European traffic on the Amos 1
satellite (except for one transponder) will be transferred to the new satellite.
The Company's former Chief Executive Officer (and current Chairman of the Board)
is now Chief Executive Officer of this new business. The Company has no
continuing economic interest in this corporation.
11. Earnings per Share
Earnings per share are calculated as follows:
<TABLE>
<CAPTION>
For the year ended December 31, 1997
Number Per share
Earnings of shares amount
---------- --------- ---------
<S> <C> <C> <C>
Loss before extraordinary item ............ $(3,195,618)
Less: preferred stock dividends ........... (2,601,800)
----------
Basic earnings per share
Loss attributable to common stockholders .. (5,797,418) 2,807,097 $(2.07)
</TABLE>
Basic earnings per share for the six months ended December 31, 1996 and
the year ended June 30, 1996 are not included in the reconciliation above as
there were no reconciling items to the Earnings or Number of shares for those
periods.
Dilutive earnings per share were not calculated as the effects of
including the common equivalent shares for the outstanding options, warrants and
convertible preferred stock would be antidilutive for loss periods.
12. Stock Option Plan
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
Company's Stock Option Plan ("the Plan").
This Plan provides that incentive and non-qualified options may be granted
to officers, employees, directors and consultants to the Company for the purpose
of providing an incentive to those persons to work for the Company. Options are
generally fully vested upon granting. The Plan is administered by the Board of
Directors. The Board of Directors determines, among other things, the persons to
whom stock options are granted, the number of shares subject to each option, the
date or dates upon which each option may be exercised and the exercise price per
share. Options granted under the Plan are exercisable for a period of up to ten
years from the date of the grant. Options terminate upon the optionee's
termination of employment or consulting arrangement with the Company, except
that, under certain circumstances, an optionee may exercise an option within the
three-month period after such termination of employment. An optionee may not
transfer any options except that an option may be exercised by the personal
representative of a deceased optionee within the three-month period following
the optionee's death. Incentive options granted to any employee who owns more
than 10% of the Company's outstanding common stock immediately before the grant
must have an exercise price of not less than 110% of the fair market value of
all underlying stock on the
F-24
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED JUNE 30, 1996 (Continued)
date of the grant and the exercise term may not exceed five years. The aggregate
fair market value of common stock (determined at the date of the grant) for
which any employee may exercise incentive options in any calendar year, may not
exceed $100,000. In addition, the Company will not grant a non-qualified option
with an exercise price less than 85% of the fair market value of the underlying
common stock on the date of the grant.
Had compensation cost for the Company's Plan been determined based on the fair
value at the grant date of awards in 1995, 1996 and 1997 consistent with the
provisions of SFAS No. 123, the Company's net loss and net loss per share would
have been increased to the pro forma amounts indicated below: The effects of
applying SFAS 123 in this pro forma disclosure are not indicative of future
amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards
in future years are anticipated.
<TABLE>
<CAPTION>
Period As reported Pro forma
------ ------------- -------------
<S> <C> <C>
Year ended
December 31, 1997
- -----------------
Net loss ....................... $ (3,347,067) $ (3,428,397)
Basic net loss per share:
Loss attributable to
common stockholders ............ $ (2.07) $ (2.09)
Extraordinary item ............. (2.05) (2.05)
Net loss ....................... $ (2.12) $ (2.14)
Six months ended
December 31, 1996
- -----------------
Net loss ....................... $ (2,778,608) $ (3,222,808)
Basic net loss per share ....... $ (1.08) $ (1.25)
Year ended
June 30, 1996
- -------------
Net loss ....................... $ (4,149,682) $ (4,742,932)
Basic net loss per share ....... $ (2.01) $ (2.29)
</TABLE>
A summary of the status of the Company's stock options as of December 31,
1997, December 31, 1996 and June 30, 1996 and changes during the periods ended
on those dates is presented below:
<TABLE>
<CAPTION>
Year ended Six months ended Year ended
December 31, 1997 December 31, 1996 June 30, 1996
----------------------- ------------------------ -----------------------
Wgtd. ave. Wgtd. ave. Wgtd. ave.
Shares exer. price Shares exer. price Shares exer. price
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of period 345,000 $5.44 185,000 $7.91 -- $ --
Granted 50,000 4.10 285,000 5.53 225,000 7.39
Exercised (36,500) 4.63 -- -- -- --
Cancelled (90,000) 6.00 (125,000) 9.30 (40,000) 5.00
------- ---- -------- ---- ------- ----
Outstanding at end of period 268,500 $5.11 345,000 $5.44 185,000 $7.91
Options exercisable at end of period 268,500 $5.11 345,000 $5.44 185,000 $7.91
Options available for future grant 81,500 5,000 165,000
Weighted average fair value of options
Granted during the period $1.63 $2.67 $3.67
</TABLE>
F-25
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED JUNE 30, 1996 (Continued)
The fair value of each option granted during 1995, 1996 and 1997 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following average assumptions: (i) dividend yield 0%, (ii) expected
volatility of 50%, (iii) 6.21% interest rate, and (iv) expected term of three
years.
In 1997, the model was applied using criteria different from those used in
computing figures in 1996. In particular, vesting is now assumed to occur upon
the initial grant of the option and it is assumed there will be zero
forfeitures. As a consequence, the pro-forma net loss disclosed above for the
six months ended December 31,1996 and for the year ended June 30, 1996 have been
increased by $293,080 and $249,228, respectively, compared to relevant figures
disclosed in the financial statements drawn up as at December 31, 1996.
The following table summarizes information about the Company's stock
options outstanding at December 31, 1997 and December 31, 1996, respectively.
<TABLE>
<CAPTION>
Exercise prices Options outstanding Option exercisable
- --------------- ------------------- ------------------
Number Wgtd. ave. Wgtd. ave. Number Wgtd. Ave.
outstanding remain. life exerc. price exercisable exer. price
----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
At December 31, 1997:
$3.50 10,000 4.5 $3.50 10,000 $3.50
$5.00 215,000 3.6 5.00 215,000 5.00
$6.00 43,500 3.5 6.00 43,500 6.00
At December 31, 1996:
$5.00 195,000 4.6 $5.00 195,000 $5.00
$6.00 150,000 4.5 6.00 150,000 6.00
</TABLE>
13. Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments for which it is
practical to estimate that value:
Cash and cash equivalents
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates their fair values due to the short-term maturity of
those instruments.
Notes payable
The carrying amount of the Company' s borrowings under its notes payable
approximates its fair value since the imputed interest rate on the notes payable
is comparable to the interest rate the Company could currently obtain on
borrowings with similar terms.
14. Related Party Transactions
Mr. Klenner, Chairman of the Board of the Company, was formerly Chief Executive
Officer of EuroWeb International Corp. ("EuroWeb"), which purchased $800,000 of
unsecured promissory notes and 100,000 shares of common stock in the November
1994 private placement (Note 7). As additional compensation, EuroWeb received an
option (which was exercised in March 1995) to purchase 150,000 shares of common
stock at $3 per share and the right of first refusal for a three-year period to
act as general contractor for all broadcast facilities to be built by the
Company. The amount outstanding relating to the unsecured promissory notes was
$400,000 as of December 31,
F-26
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED JUNE 30, 1996 (Continued)
1997 and has been included in notes payable in the balance sheet. In February
1997, the Company loaned EuroWeb $350,000 bearing 6% interest due June 30, 1998
secured by the above-mentioned outstanding note to the Company. Prior to
December 31, 1996, EuroWeb made interest free short-term loans to the Company
for operational purposes. The total amount due to EuroWeb pursuant to these
loans was approximately $57,000 and $64,000 at December 31, 1997 and 1996,
respectively.
On June 30, 1995, the minority shareholders of two of the Company's
subsidiaries were owed $416,000, as a result of the Company's purchase of their
stock in those subsidiaries. In February 1996, $189,800 was paid and in March
1997 an additional $50,000 was paid leaving a balance due of $176,200 at
December 31, 1997.
In February 1996, the Company purchased a license, for $750,000, for the
exclusive Hungarian rights to certain programming for MSAT for the period April
through December 1996 from Power Television Limited ("Power TV"). This company
is owned by Justin Bodle, a director of the Company until January 1998. In July
1996, the Company agreed to license, for $1,378,000, the exclusive rights to
additional programming for the period October 1, 1996 through December 31,1997
from Power TV. In October 1997, the Company agreed to license, for $467,500, the
exclusive rights for additional programming for the period January 1, 1998
through December 31, 1998 from Power TV. Amounts payable totaling $373,500 and
$1,151,500 are included in due to related parties at December 31, 1997 and
December 31, 1996, respectively, relating to the purchase of program rights from
Power TV.
Beginning in July 1996, the Company hired Justin Bodle as a consultant for
a two-year period at a fee of 1,000 shares of non-registered common stock per
month. Beginning in January 1997, the monthly payment was 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. Compensation expense relating to these consultant services totaled
$30,000 for the six-month period ended December 31, 1996 and $60,000 for the
year ended December 31, 1997. The Company has fully provided for this amount, as
these securities were not paid to the consultant as of December 31, 1997. Mr.
Bodle was paid in full for these services in January 1998.
In November 1996, Justin Bodle was granted options to purchase 40,000
share of Common Stock at $5.00 per share as partial inducement to defer
approximately $700,000 due to Power TV under the July 1996 license agreement
described above.
The amount due to related parties at December 31, 1996 includes $40,000
due to Mr. Klenner. This amount was repaid in February 1997.
In November 1996, Mr. Klenner advanced $200,000 as short-term financing to
the Company. As partial inducement for this loan, the Company awarded to this
officer/director five-year options to purchase 95,000 shares of Common Stock at
$5.00 per share. The Company had approximately $201,000 outstanding in
connection with this loan, including accrued interest at December 31, 1996. This
amount was repaid from proceeds of the Company's public offering in February
1997.
In November 1997, the Company entered into a loan facility due December
31, 1998 with a company owned by Mr. Klenner for up to $300,000 at an interest
rate of 6% per year. As partial inducement for this loan, the Company awarded
Mr. Klenner 100,000 unregistered Warrants with a fair market value of $243,800
at date of grant. This amount is being amortized over the loan term. At December
31, 1997, the unamortized portion of $203,167 is included in other assets. As of
December 31, 1997, $275,000 was outstanding pursuant to this loan facility.
In July 1997, the Company granted the Chief Accountant and the Chief
Financial Officer 10,000 and 20,000 stock options, respectively, pursuant to the
Company's stock option plan as amended in June 1996. The options,
F-27
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED JUNE 30, 1996 (Continued)
which have a five-year expiration, were granted at their fair market value of
$3.50. Each option may be exchanged for one share of the Company's common stock.
15. Commitments and Contingencies
Consulting and Compensation Agreements
The Company has an employment agreement with Mr. Klenner for the period
ending December 31, 2000 at $120,000 per year.
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 September 1997, the Company contracted with an investment-banking firm
to manage and arrange the private placement of a convertible debt offering of up
to $5.0 million. As a result of its purchase of Global Television Networks, Inc.
in January 1998, the Company suspended the offering. Discussions with the
investment bank by the new management are continuing.
As compensation to outside directors, the Company pays directors' fees
equal to $2,000 per meeting, minimum of four meetings per year, and reimburses
their travel and other out-of-pocket expenses. Officers do not receive any
compensation for serving as directors.
Leases
The Company formerly had a five year lease agreement with Nethold Central
Europe B.V. ("Nethold"), ending October 6, 2001, whereby Nethold transmitted the
Company's program signals by satellite throughout Hungary. During the first
quarter of 1997, Nethold notified the Company of its plan to reduce its
activities in Hungary and expressed its desire to terminate the satellite
contract. In May 1997, the Company and Nethold entered into an agreement whereby
Nethold's services ended on June 30, 1997. Pursuant to the contract Nethold paid
$1,200,000 in cash to the Company and $200,000 in forgiveness of service charges
for the period January 1, 1997 through June 30, 1997. The Company paid $30,000
to Nethold for the late return of their equipment. To replace this service, the
Company contracted with Antenna Hungaria for satellite-to-cable broadcast
services using the Amos satellite, which began in late-June 1997.
The Company has a nine year lease agreement with Orion Atlantic Satellite
Services ("Orion Atlantic"), commencing on August 31, 1996 and extending through
August 31, 2005, at a monthly rental fee of $27,240, whereby Orion Atlantic
provides the Company with space on its Satellite to transmit its broadcast
signal to Nethold's uplink facilities in the Netherlands. In May 1997, Nethold
and the Company agreed to terminate Nethold's services and thus the Company no
longer has any use for the channel leased from Orion Atlantic. The Company is
exploring possibilities for others to take over the Orion Atlantic contract.
The Company leases office facilities in Budapest, Hungary under an
operating lease, with monthly payments of $12,000, plus value added tax,
expiring June 30, 2001.
In May 1997, the Company signed an eight-year contract with Antenna
Hungaria for transmission of MSAT's
F-28
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED JUNE 30, 1996 (Continued)
broadcasting signal via the Amos 1 satellite and also transmission on the AM
Micro system in Budapest for a monthly rental fee of $67,000.
At December 31, 1997, the aggregate minimum rental payments required under
all operating leases that had initial or remaining terms in excess of one year
were as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $ 1,367,496
1999 1,367,496
2000 1,352,880
2001 1,339,380
2002 1,334,880
Thereafter 3,391,680
-----------
$10,153,812
</TABLE>
Total rent expense for all operating leases amounted to $1,617,764,
$641,538 and $762,135 for the year ended December 31, 1997, the six months ended
December 31, 1996 and the year ended June 30, 1996, respectively.
License Proceeding
TV3, a competitor of the Company, which was granted a six year, 24 hour
per day microwave license on the AM Micro system in Budapest, applied to the
Ministry of Culture to overturn the grant of the licenses to the Licensees and
NAP TV made in March 1994 on the ground that proper procedures were not followed
because the authority of the committee that awarded the licenses had expired
prior to the date that the licenses were granted. The Ministry of Culture denied
the application and held that even if a new committee were acting, it would also
have granted the licenses to the Licensees and to NAP TV. TV3 thereafter
instituted a legal action in December 1994 against the Ministry of Culture, but
not against either of the Licensees, to overturn its decision in awarding the
licenses in the Metropolitan Court of Budapest. At a hearing, the Municipal
Court ordered the Ministry to follow prescribed procedures and make a new
decision. The Ministry appealed this decision to the Appeals Court of Budapest.
In April 1995, the Company received a letter from the Ministry confirming that
the licenses had been granted to the Licensees and that the Licensees may
operate in accordance with the terms of the licenses. In November 1995, the
Appeals Court vacated the decision of the Metropolitan Court on the ground that
no notice of the hearing had been given to the Licensees (which had not had an
opportunity to appear at the hearing). The Appeals Court further ruled that the
only issue to be decided by the Municipal Court is whether the Ministry's
committee was properly constituted to grant the licenses and remanded the matter
for a hearing in the Fall 1996 term. In particular, the Appeals Court ruled that
the Metropolitan Court does not have jurisdiction to revoke the grant of the
licenses or otherwise modify the decision of the Ministry's committee and,
accordingly, the Licensees may continue to operate under the licenses, pending
final determination by the Ministry committee. In its ruling in June 1996, the
Metropolitan Court ruled in favor of the Company. Subsequently, TV3 has
requested a review of this matter by the Supreme Court, which is currently
pending. If this ruling is overturned, this would have no adverse effect on the
Company's ability to continue broadcasting because the Company began
broadcasting under a new contract, granted by Antenna Hungaria, on a new AM
Micro channel in September 1997.
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
F-29
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED JUNE 30, 1996 (Continued)
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 in the next few
weeks. This event has had no material impact on the operations or financial
condition of the Company.
16. Comparison of Year Ended December 31, 1997 with December 31, 1996
(unaudited) and Six Months Ended December 31, 1996 with Six Months Ended
December 31, 1995 (unaudited)
In March 1997, the Company changed its fiscal year-end from June 30 to
December 31. The following figures for the year ended December 31, 1997 and
1996(unaudited) and the six months ended December 31, 1996 and 1995 (unaudited)
for the transition period resulting from the change in fiscal year-end are
presented for comparative purposes:
<TABLE>
<CAPTION>
Year ended Year ended Six months ended Six months ended
December 31 December 31 December 31 December 31
----------- ----------- ----------- -----------
1997 1996 1996 1995
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues $ 2,981,260 $ 1,527,855 $ 1,239,418 $ 383,671
Expenses
Other operating costs and expenses 3,397,336 2,910,458 1,679,859 678,598
Amortization of deferred program costs 944,004 986,000 736,000 --
Amortization of broadcast license costs 423,048 435,116 211,526 199,462
Selling, general and administrative expenses 2,383,382 2,224,704 1,428,982 844,267
----------- ----------- ----------- -----------
7,147,770 6,556,278 4,056,367 1,722,327
----------- ----------- ----------- -----------
Operating loss (4,166,510) (5,028,423) (2,816,949) (1,338,656)
Income from contract cancellation 1,200,000 -- -- --
Interest and other income 116,086 193,682 146,968 2,957
Interest expense (262,156) (343,474) (78,588) (254,706)
Foreign currency exchange rate loss (83,038) (30,039) (30,039) --
Write-off of deferred offering costs -- -- -- (129,631)
----------- ----------- ----------- -----------
Loss before extraordinary item (3,195,618) (5,208,254) (2,778,608) (1,720,036)
Extraordinary item (151,449) -- --
Net loss $(3,347,067) $(5,208,254) $(2,778,608) $(1,720,036)
=========== =========== =========== ===========
</TABLE>
17. Subsequent Events
Acquisition of Global Television Networks, Inc.
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 which will be delivered only upon
Global meeting certain
F-30
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED JUNE 30, 1996 (Continued)
performance measures. The value of this purchase, exclusive of the escrowed
shares, is approximately $16.5 million. On January 5, 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. Global is also
a distributor of paid adult television programming, holding exclusive long-term
contracts with NTV Plus, DBS (direct broadcasting system) operators in Russia,
and long-term contracts with United Phillips cable operators in Vienna and
Amsterdam. In addition Global owns a chatline service in the United States.
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.
Pursuant to the acquisition of Global, the Company also entered into
three-year employment agreements with five owners/executives/consultants 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, President and director 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.
The former owners/executives of Global own Top-Line Communications, Inc.
("Top-Line"), a television production studio in New York. 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 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. As of March 25, 1998 Top-Line has been reimbursed
$285,000 for expenses incurred on the Company's behalf. In addition,
approximately $70,000 of legal expenses incurred by the sellers have been or
will be paid by the Company.
Employment agreement
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.
Rental agreements
In January 1998, the Company signed a five-year lease with EuroWeb
International Inc., a related party, at a monthly rental 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
F-31
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED JUNE 30, 1996 (Continued)
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 for the Company has
moved into the building and will pay rent at the same 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.
Planned issuance of securities
In March 1998, the Company contracted with a New York-based investment
banker to sell on a "best efforts" basis from $3 million to $6 million of 6%
Convertible Preferred stock. In the event that the issue is not completed, the
Company would need to seek alternative sources of financing to fund the
continued development and operations of the Company.
Listing requirements
The Company is aware that, as of February 22, 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 that it meets the new requirements, and
that subject to a review of documents to be filed in respect to the 1997
financial position of the Company, the NASDAQ would notify the Company in
writing of this decision.
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, NASDAQ has
requested the Company to 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 assure 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 seek alternative sources of financing to
fund its continuing development and operations would be severely impaired.
18. Events subsequent to filing 10K in respect of December 31, 1997
financial statements.
Subsequent to the filing of the financial statements of the Company in
respect of its financial year ended December 31, 1997 the following events
occurred:-
(a) On May 4, 1998 NASDAQ wrote to the Company to indicate that the Nasdaq
Listing Qualification Panel, in its Decision 1945CL-98 had determined to
continue the Company's listing on the Nasdaq SmallCap Market.
(b) On May 4, 1998 the Company completed a private placement for an
aggregate purchase price of USD 6,000,000
(c) On June 3, 1998 an amendment to the Company's Report on Form 8K was
filed with the Securities and Exchange Commission in respect to certain
financial data relevant to its acquisitions of Global Televisions Networks
Inc.
F-32
<PAGE>
Sziv TV Rt.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996
F-33
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of Sziv TV Rt.:
We have audited the accompanying balance sheets of Sziv TV Rt. (the "Company")
as of December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform our audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sziv TV Rt. as of December 31,
1997 and 1996 and the results of its operations for the years then ended, in
conformity with generally accepted accounting principles in the United States of
America.
Coopers & Lybrand Konyvvizsgalo
es Vezetesi Tanacsado Kft.
Budapest, Hungary
May 22, 1998
F-34
<PAGE>
Sziv TV Rt.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS December 31, December 31,
1997; 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $220,295 $ 18,761
Accounts receivable (net of allowance
for doubtful accounts of $13,528
and $9,456) 174,964 242,711
Program rights cost (net of accumulated
amortization of $53,052) 121,874 0
Prepaid expenses and other assets 76,293 17,298
VAT receivable 16,040 0
-------- --------
Total current assets 609,466 278,770
-------- --------
Property, plant, and equipment (net of
accumulated depreciation of $89,369
and $43,895) 370,764 345,525
Intangible assets (net of accumulated
amortization of $14,631 and $888) 12,198 12,785
-------- --------
Total assets $992,428 $637,080
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $190,259 $ 0
Accounts payable 273,040 55,924
Accrued expenses 82,050 31,914
VAT payable 0 30,093
Other liabilities 36,053 45,038
-------- --------
Total current liabilities 581,402 162,969
-------- --------
Long term portion of notes payable 0 220,946
Total liabilities 581,402 383,915
-------- --------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock 6,727 6,727
Retained earnings 419,286 246,438
Cumulative translation adjustment (14,987) 0
-------- --------
Total stockholders' equity 411,026 253,165
-------- --------
Total liabilities and stockholders' equity $992,428 $637,080
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
Sziv TV Rt.
Statements of Operations
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996
<S> <C> <C>
Net revenue $ 2,483,572 $ 1,210,157
Operating costs and expenses 1,160,670 755,803
Selling, general and administrative expenses 1,065,314 292,606
----------- -----------
2,225,984 1,048,409
----------- -----------
Operating income 257,588 161,748
----------- -----------
Interest and other income 71,606 142,058
Interest expense (84,421) (17,895)
Exchange rate loss (3,666) 0
----------- -----------
(16,481) 124,163
----------- -----------
Net income before tax 241,107 285,911
Tax provision 68,259 52,450
----------- -----------
Net Income $ 172,848 $ 233,461
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
1Sziv TV Rt.
Statements of Cash Flows
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 172,848 $ 233,461
Adjustment to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 122,929 34,826
Write-down of fixed assets 63,307 0
Provision for doubtful accounts 15,048 967
(Gain) loss on sale of fixed assets 1,183 0
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 59,604 (190,799)
(Increase) decrease in VAT receivable (17,564) 0
(Increase) decrease in prepaid and other assets (64,599) (14,499)
Increase (decrease) in accounts payable 114,709 (43,369)
Increase (decrease) in accrued expenses 54,895 0
Increase (decrease) in VAT payable (32,950) 0
Increase (decrease) in other liabilities (9,838) 72,996
--------- ---------
Net cash provided by (used in) operating activities 479,572 93,583
--------- ---------
Cash flows from investing activities:
Purchase of property, plant, and equipment (160,389) (366,981)
Purchase of program rights (68,512) 0
Proceeds from sale of fixed assets 3,597 0
--------- ---------
Net cash provided by (used in) investing activities (225,304) (366,981)
--------- ---------
Cash flows from financing activities:
Proceeds from the issuance of notes payable 208,322 220,946
Payments of notes payable (241,922) 0
Proceeds from the issuance of common stock 0 859
Dividends paid 0 (3,422)
--------- ---------
Net cash provided by (used in) financing activities (33,600) 218,383
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (19,134) 0
Net increase (decrease) in cash 201,534 (55,015)
Cash and cash equivalents, beginning of year 18,761 73,776
--------- ---------
Cash and cash equivalents, end of year $ 220,295 $ 18,761
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 62,378 $ 23,731
Taxes $ 82,108 $ 33,738
Noncash investing and financing activities:
Capitalized program rights costs $ 22,883 $ 0
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
Sziv TV Rt.
Statements of Stockholders' Equity
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Cumulative
Common Retained Translation
Stock Earnings Adjustment Total
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 5,868 $ 16,399 $ 0 $ 22,267
Issuance of common stock 859 859
Net income 233,461 233,461
Dividend (3,422) (3,422)
Currency translation adjustment 0 0
--------- --------- -------- --------
Balance, December 31, 1996 6,727 246,438 0 253,165
--------- --------- -------- --------
Net income 172,848 172,848
Currency translation adjustment (14,987) (14,987)
--------- --------- -------- --------
Balance, December 31, 1997 $ 6,727 $ 419,286 $(14,987) $411,026
========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
Sziv TV Rt.
Notes to Financial Statements
1. Organization and Operations:
Sziv TV Rt. (the "Company") was formed on November 9, 1990, to operate in
the television and radio business in Hungary. In January 1997, the Company
was transformed to a Rt., a corporate structure for larger companies in
Hungary, in order to meet the requirements of the Hungarian media
legislation. The Company operates a television station, Sziv TV (through a
license granted by the Hungarian government for no consideration), that
broadcasts a satellite-to-cable channel throughout Hungary in addition to
transmission on the MMDS microwave system in Budapest. At December 31,
1997 and 1996, the Company was a closely held, private company.
2. Summary of Significant Accounting Policies:
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(a) Revenue Recognition
Revenue primarily results from the sale of advertising time. Advertising
revenue is recognized at the time the commercials are broadcast.
(b) Cash and Cash Equivalents
The Company classifies as cash equivalents all highly liquid investments
with a maturity of three months or less at the time of purchase.
(c) Barter Transactions
Revenue from barter transactions (television advertising time provided in
exchange for goods and services) is recognized when commercials are
broadcast; merchandise or services received are charged to expense (or
capitalized, as appropriate) when received or used. The Company records
barter transactions at the estimated fair market value of the services and
merchandise received unless not readily determinable in which case the
transaction is recorded at the estimated fair market value of the
advertising time provided. If services or merchandise is provided prior to
the broadcast of a commercial, a liability is recorded. Likewise, if a
commercial is broadcast first, a receivable is recorded. There were no
barter gains or losses, receivables or payables as of and for the years
ended December 31, 1997 and 1996.
F-39
<PAGE>
Notes to Financial Statements, continued
(d) Program and Film Rights
Program and film rights acquired under license agreements and the related
obligations incurred are recorded as assets and liabilities when the
license period begins, the cost of each program is determinable, and the
program is available for telecast. The capitalized costs are amortized
using the straight-line method based upon the estimated period of usage
ranging from 3 to 24 months. Program rights are reported at lower of
unamortized cost or estimated net realizable value.
(e) Production Costs
Production costs for self-produced programs are capitalized and expensed
when the program is first broadcast, except where the program has
potential to generate future revenues. In that case, production costs are
capitalized and amortized on the same basis as programming obtained from
third parties.
(f) Property, Plant and Equipment
Property, plant and equipment are stated at historical cost. Depreciation
is recorded following a straight-line method over the estimated useful
lives of the assets, which is five years for television broadcasting and
production equipment, three to five years for office equipment and
fixtures and fittings and five years for automotive equipment. The Company
reviews for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company evaluates recoverability using an undiscounted cash flow approach
over the remaining life of the assets. Leasehold improvements are
amortized over the life of the lease or the related asset, whichever is
shorter. When assets are retired or disposed of, the costs and accumulated
depreciation or amortization are removed from the respective accounts and
any related gain or loss is recognized. Maintenance and repairs are
charged to expense when incurred. Significant expenditures, which extend
useful lives of assets, are capitalized.
(g) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS No. 109"). This Statement requires a liability approach for
measuring deferred taxes based on temporary differences between the
financial statement and income tax bases of assets and liabilities
existing at each balance sheet date using enacted rates for the years in
which the taxes are expected to be paid or recovered.
(h) Foreign Currency Translation
The Company's functional currency is the Hungarian forint. Assets and
liabilities in foreign currencies are translated to the Company's
functional currency using the corresponding exchange rate in effect at the
balance sheet date with any resulting gain or loss included in the
statement of operations. Gains and losses resulting from transactions of
the Company in currencies other than
F-40
<PAGE>
Notes to Financial Statements, continued
their functional currency are included in the statement of operations.
Assets and liabilities are translated into the reporting currency (U. S.
dollar) using the rate in effect at the balance sheet date and equity
accounts using their historical rates. The statement of operations and
cash flows are translated using the weighted average rate in effect for
the period. Gains and losses from translations are recorded in a separate
component of stockholders' equity.
(i) Dividend Policy
As a Hungarian company, the Company must comply with local legislation
regarding the distribution of earnings. Hungarian statutory accounts
prevail in the determination of the amount of profit available for
distribution.
(j) Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash. The
Company places its temporary cash and investments with high quality
financial institutions. At times, demand deposits and cash equivalents may
be in excess of the National Depository Insurance Fund in Hungary
insurance limits.
(k) Litigation
The Company provides for contingent liabilities in connection with pending
legal matters when losses are both probable and estimable.
3. VAT Receivable/ Payable:
Value-added taxes paid in Hungary for which a reimbursement claim was
submitted by the Company, have been included in current assets. When at a
period close VAT balances net to a payable, such balances are included in
current liabilities.
4. Property, Plant and Equipment:
Property, plant, and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Television broadcasting and production equipment $ 424,231 $ 375,578
Office equipment, fixtures, and fittings 31,827 13,842
Vehicles 4,075 0
--------- ---------
460,133 389,420
Less: Accumulated depreciation (89,369) (43,895)
--------- ---------
$ 370,764 $ 345,525
========= =========
</TABLE>
F-41
<PAGE>
Notes to Financial Statements, continued
Depreciation expense was $60,147 and $33,593 for the years ended December
31, 1997 and 1996, respectively.
5. Intangible Assets:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Film rights $ 23,704 12,259
Software 3,125 1,414
-------- --------
26,829 13,673
Less: Accumulated amortization (14,631) (888)
-------- --------
$ 12,198 $ 12,785
======== ========
</TABLE>
Amortization expense was $4,693 and $472 for the years ended December 31,
1997 and 1996, respectively.
6. Notes Payable:
On September 26, 1996, the Company issued notes payable (denominated in
Hungarian forints) totaling approximately $220,000, due July 21, 1997, to
finance the purchase of broadcasting and production equipment. The loan
was collateralized by approximately $365,000 of the Company's assets as of
December 31, 1996.
On July 21, 1997, the Company repaid the outstanding notes by issuing
additional notes (denominated in Hungarian forints) for approximately
$220,000, bearing interest at 25%, with equal monthly principal and
interest payments with the remaining loan balance (approximating 70% of
the total loan) due July 21, 1998. The loan is collateralized by
approximately $300,000 of the Company's assets as of December 31, 1997.
7. Capital Stock
The Company's capital stock consists of quota stock of 1,370 THUF (6,727
USD).
8. Commitments and Contingencies
Commitments
The Company had an agreement with Antenna Hungaria ("AH"), commencing on
June 20, 1995, whereby AH provided the Company with AM Micro broadcasting
services at an annual fee of
F-42
<PAGE>
Notes to Financial Statements, continued
approximately $97,000 for as long as the Company had the legal right to
broadcast its signal in Hungary.
On September 15, 1997, the parties agreed to cancel the existing contract
and replace it with a seven year rental agreement, at a monthly fee of
approximately $45,000, whereby AH would provide the Company with a channel
and satellite up-link service. In addition, the Company is obligated to
pay an annual fee of approximately $75,000 to AH for AM Micro broadcasting
services for as long as the Company has the legal right to broadcast its
signal in Hungary.
Contingencies
In December 1997, Hungarian LP Editors Association ("Mahasz"), a music
production company, filed a copyright claim against the Company to recover
royalties relating to revenues earned while broadcasting music produced by
Mahasz. The case is in a preliminary stage and Mahasz has yet to claim a
specific amount for recovery. Management and the Company's outside legal
counsel are unable to predict at this time the final outcome of this
proceeding. However, it is the opinion of the Company's management, based
on the information available at this time, that the expected outcome of
this matter will not have a material adverse affect on the results of
operations and financial condition of the Company.
9. Subsequent Events:
On January 5, 1998, the Company was purchased by Global Television
Networks, Inc. ("GTN") and Hungarian Broadcasting Project Kft. ("HBP").
GTN and HBP obtained a 24% and 76% interest in the Company, respectively.
GTN is entitled to 99% of all profits from the Company and HBP is entitled
to the remaining 1%. In addition, GTN has an option to purchase HBP at any
time for $15,000 or to appoint another investor to hold HBP upon the
payment of $15,000. Although the legal ownership structure of the Company
indicates HBP having majority ownership, the economic substance of this
structure is that GTN is the controlling shareholder and HBP is a nominee
shareholder. Subsequent to the purchase of the Company, GTN's management
has determined that the former management of Sziv had not fully and
completely accounted for transactions entered into for the period ending
March 31, 1998. Management is currently investigating this situation, but
is confident that no material effect will occur upon the ultimate
resolution of the issue.
F-43
<PAGE>
Global Television Network, Inc.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
F-44
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of Global Television Network, Inc.:
We have audited the accompanying consolidated balance sheet of Global Television
Network, Inc. (the "Company") as of December 31, 1997, and the related
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform our audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Global Television
Network, Inc. as of December 31, 1997, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles in the United States of America.
Coopers & Lybrand Konyvvizsgalo
es Vezetesi Tanacsado Kft.
Budapest, Hungary
May 22, 1998
F-45
<PAGE>
Global Television Network, Inc.
Consolidated Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
ASSETS 1997
--------
<S> <C>
Current assets:
Cash and cash equivalents $ 22,929
Accounts receivable (net of allowance for doubtful accounts of $0) 29,251
Program rights cost (net of accumulated amortization of $0) 8,999
--------
Total current assets 61,179
--------
Total assets $ 61,179
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 60,319
Income taxes payable 12,233
--------
Total liabilities $ 72,552
--------
Stockholders' equity:
Common stock, $0.01 par value, shares authorized, $ 5
issued and outstanding 500
Accumulated deficit (12,233)
Additional paid in capital 855
--------
Total stockholders' equity (11,373)
--------
Total liabilities and stockholders' equity $ 61,179
========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-46
<PAGE>
Global Television Network, Inc.
Consolidated Statement of Operations
for the year ended December 31, 1997
<TABLE>
<CAPTION>
1997
<S> <C>
Net revenue $355,095
Operating costs and expenses 226,345
Selling, general and administrative expenses 92,863
--------
319,208
--------
Operating income 35,887
--------
Interest and other income 94
--------
Net income before tax 35,981
Tax provision 12,233
--------
Net Income $ 23,748
========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-47
<PAGE>
Global Television Network, Inc.
Consolidated Statement of Cash Flows
for the year ended December 31, 1997
<TABLE>
<CAPTION>
1997
<S> <C>
Cash flows from operating activities:
Net income $ 23,748
Adjustments to reconcile net income to net cash
provided by operating activities:
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (29,251)
Increase (decrease) in accounts payable 60,319
Increase (decrease) in income taxes payable 12,233
--------
Net cash provided by (used in) operating activities 67,049
Cash flows from investing activities:
Purchase of program rights (8,999)
--------
Net cash provided by (used in) investing activities (8,999)
Cash flows from financing activities:
Proceeds from the issuance of common stock 12,035
Advances to shareholders (47,156)
--------
Net cash provided by (used in) financing activities (35,121)
Net increase (decrease) in cash 22,929
Cash and cash equivalents, beginning of year 0
--------
Cash and cash equivalents, end of year $ 22,929
========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-48
<PAGE>
Global Television Network, Inc.
Consolidated Statement of Stockholders' Equity
for the year ended December 31, 1997
<TABLE>
<CAPTION>
Additional
Common Paid in Retained
Stock Capital Earnings Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ 0 $ 0 $ 0 $ 0
Issuance of shares 5 12,030 12,035
Net income 23,748 23,748
Advances to shareholders $(11,175) $(35,981) (47,156)
-------- -------- -------- --------
Balance, December 31, 1997 $ 5 $ 855 $(12,233) $(11,373)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-49
<PAGE>
Global Television Network, Inc.
Notes to Consolidated financial Statements
1. Nature of Business:
Global Television Network, Inc. (the "Company"), a Delaware corporation,
was incorporated on June 27, 1997. The Company acts as a holding company,
maintaining 100% ownership interests in C.D.I. Productions Corp., a
Delaware corporation; Bare Necessities NV, a Netherlands Antilles
corporation; and Chatline Corp. NV, a Netherlands Antilles corporation.
Bare Necessities in turn maintains a 100% ownership interest in Mersa
Holdings, a Dutch corporation; which in turn maintains a 99% ownership
interest in RPPV Services Ltd., a Cyprus corporation and APPV Services,
Ltd, a Hungarian corporation. These Companies each began operations during
1997. Although the legal structure has Mersa Holdings maintaining a 99%
ownership interest in these entities, the economic substance of this
structure is that Mersa Holdings is the controlling shareholder and the
minority shareholder, the nominee shareholder. Accordingly, the entities
are consolidated as if they were 100% owned by Mersa Holdings. In January
1998, the Company acquired 100% ownership of Sziv TV Rt, a television
station operating in Hungary (See Note 7). Chatline Corp. NV was inactive
for the year ended December 31, 1997.
The Company has two primary lines of business. One is the distribution of
videos to cable and direct broadcasting system operators, which distribute
them to viewers on a subscription or pay-per-view basis, paying the
Company a percentage of all revenues derived from such distributions. The
other business, which was discontinued in 1998, was to act as an agent to
sell advertising time on prerecorded videotapes sold or rented to third
parties. The Company received a percentage of the revenues derived from
the sales of services thus advertised. Following are descriptions of the
Company's operating subsidiaries:
Russia
RPPV Services, Ltd. ("RPPV")
RPPV, in March 1997, signed a ten-year, renewable contract with NTV PLUS
to be the exclusive provider of adult movies for NTV PLUS's direct
broadcasting system monthly subscription television channels in Russia. At
December 31, 1997, the channels had approximately 15,000 paid subscribers.
RPPV receives 25% of all subscriptions paid to NTV PLUS. Two suppliers are
under contract to supply movies to the channel in exchange for 33 1/3% and
20% of RPPV's gross revenues received from NTV PLUS, respectively.
Western Europe
APPV Services, Ltd. ("APPV")
APPV has a long-term contract with United Phillips Corporation ("UPC") to
broadcast movies on an adult channel in Vienna. UPC has approximately
600,000 cable subscribers in this market of which about 6,000 customers
have addressable converters which can receive APPV's pay-per-view
programming. UPC pays APPV 25% of the gross revenues received from each
film. XY Video ("XY") is under contract to supply the movies for the
channel in exchange for 20% of APPV's gross revenues from each film.
F-50
<PAGE>
Notes to Consolidated financial Statements, continued
Bare Necessities NV ("BN")
BN has a long-term contract with UPC to broadcast movies on an adult
channel in Amsterdam. UPC has about 100,000 cable subscribers in this
market of which approximately 3,000 customers have addressable converters
which can receive BN's pay-per-view programming. UPC pays BN 25% of the
gross revenues it receives from each film. XY is under contract to supply
the movies for the channel in exchange for 20% of BN's gross revenues from
each film.
United States
C.D.I. Productions Corp. ("CDI")
CDI has a contract to advertise chatline commercials on the adult movie
videos produced and distributed by Caballero. Amtec Audiotext provides the
chatline service. Amtec pays CDI 39% of the gross revenue received from
chatline calls. CDI in turn pays 33 1/3% of the gross revenues by Amtec
(85.5% of CDI's revenues) to Caballero. This contract was canceled by the
parties as of December 31, 1997.
2. Summary of Significant Accounting Policies:
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(a) Principles of consolidation
During 1997, the beneficial owners of the Company established a number of
separate operations in the field of distribution of television programs.
Various corporate entities in several countries were created to hold the
different operations under the overall ownership of the Company. The
consolidated financial statements have been prepared on the basis that
operations commenced as of January 1, 1997 and that the Company held a
majority investment and control in all operations as from this date as
this reflects the economic substance of their operations for the year
ended December 31, 1997.
(b) Revenue Recognition
The Company recognizes revenues from royalty income, according to the
terms of the license agreements. Revenue is recognized at the time when
the films are broadcast.
(c) Cash and Cash Equivalents
The Company classifies as cash equivalents all highly liquid investments
with a maturity of three months or less at the time of purchase.
F-51
<PAGE>
Notes to Financial Statements, Continued
(d) Program and Film Rights
Program and film rights, acquired under license agreements, are
capitalized at their cost upon their purchase and expensed upon their
redistribution to cable and direct broadcasting system operators.
(e) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS No. 109"). This Statement requires a liability approach for
measuring deferred taxes based on temporary differences between the
financial statement and income tax bases of assets and liabilities
existing at each balance sheet date using enacted rates for the years in
which the taxes are expected to be paid or recovered.
(f) Litigation
The Company provides for contingent liabilities in connection with pending
legal matters when losses are both probable and estimable.
(g) Concentrations of Credit Risk
A significant portion of the Company's operations are outside of the
United States of America. During 1997, approximately 40% of the Company's
revenues and 47% of the Company's expenses were recognized by subsidiaries
operating in Europe. In addition, 49% of the Company's total assets and
100% of its total liabilities were maintained by these foreign
subsidiaries.
3. Advances to shareholders
The amounts distributed to the Company's shareholders during 1997 exceeded
the accumulated profits of the Company. As the advances are not expected
to be recovered, they have been included as a reduction to the Company's
equity.
4. Commitments
The Company's subsidiaries, BN and APPV have three year commitments with
XY, a film distributor, commencing on September 7, 1997 and April 15,
1997, respectively, whereby XY has agreed to supply the subsidiaries with
a predetermined number of films per month in exchange for 5% of the
revenues generated from the films broadcast.
F-52
<PAGE>
Notes to Financial Statements, Continued
5. Risks and Uncertainties
The Company's operating subsidiaries are reliant upon both a few number of
customers and suppliers of videos. See "Nature of Business" footnote.
6. Related party transactions
During 1997, Top-Line Communications, Inc. ("Top-Line"), a television
production studio, which is majority owned by the current owners of the
Company, financed certain expenses including travel and lodging incurred
in connection with costs of expanding the business. The total amount of
expenses paid by Top-Line, on behalf of the Company, which is included in
selling, general and administrative expenses in the Company's consolidated
statement of operations, was approximately $18,780 for the year ended
December 31, 1997. The outstanding amount payable to Top-Line of $1,858 at
December 31, 1997 has been included in accounts payable in the Company's
balance sheet.
7. Subsequent Events:
On January 5, 1998, the Company was acquired by Hungarian Broadcasting
Corp. ("HBC") for 3.75 million shares in HBC in exchange for all the
outstanding common stock of the Company. 1.25 million of the 3.75 shares
are currently held in escrow and will be delivered only upon the Company
meeting certain performance measures. The value of this sale, exclusive of
the escrowed shares, was approximately $16.5 million.
On January 5, 1998, immediately prior to the above transaction, the
Company purchased a 24% interest in Sziv TV Rt. ("Sziv"). The purchase
agreement entitles the Company to 99% of all profits generated by Sziv and
provides the Company with an option to purchase Hungarian Broadcasting
Project Kft.'s ("HBP") 76% interest in Sziv at anytime for $15,000 or to
appoint another investor to hold HBP upon the payment of $15,000. Although
the legal ownership structure of Sziv indicates HBP with majority
ownership, the economic substance of this structure is that the Company is
the controlling shareholder and HBP is a nominee shareholder.
In January 1998, the operations of CDI, which comprised 60% of the
Company's revenue and approximately 50% of the Company's operating profit
in 1997, were terminated.
F-53
<PAGE>
HUNGARIAN BROADCAST CORP.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The Pro Forma Consolidated Balance Sheet as of December 31, 1997 and the Pro
Forma Consolidated Statement of Operations for the year ended December 31, 1997
are based on the historical consolidated financial statements of Hungarian
Broadcasting Corporation (the "Company"), Sziv TV Rt. (" Sziv"), and Global
Television Network, Inc. ("GTN"). The Pro Forma Consolidated Balance Sheet has
been prepared assuming the acquisition of Sziv by GTN followed by the
acquisition of GTN by the Company occurred on December 31, 1997.
The Pro Forma Consolidated Statement of Operation for the year ended December
31, 1997 has been prepared assuming the acquisitions of Sziv by GTN followed by
the acquisition of GTN by the Company occurred on January 1, 1997. For purposes
of the Pro Forma Consolidated Statement of Operation for the year ended December
31, 1997, the Statements of Operations for the year ended December 31, 1997 for
both Sziv and GTN have been combined with the Consolidated Statement of
Operations of the Company for the year ended December 31, 1997. The Pro Forma
Consolidated Statement of Operation also reflect the issuance of 2,500,000
shares of Common Stock in connection with the acquisition of GTN by the Company.
These shares are assumed to have been issued at the beginning of the period
presented.
The Pro Forma Consolidated Financial Statements do not purport to represent what
the Company's actual results of operations or financial position would have been
had the acquisitions occurred as of such dates, or to project the Company's
results of operations or financial position for any period or date, nor does it
give effect to any matters other than those described in the notes thereto. In
addition, the allocation of the purchase price to the assets and liabilities of
Sziv and GTN, respectively, is preliminary and the final allocation may differ
from the amounts reflected herein. The Pro Forma Consolidated Financial
Statements should be read in conjunction with the Company's audited consolidated
financial statements for the year ended December 31, 1997 filed on Form 10-KSB
with the Securities and Exchange Commission and the audited financial statements
of Sziv and GTN for the year ended December 31, 1997 included herein.
F-54
<PAGE>
HUNGARIAN BROADCAST CORP.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
To date, all of the Company's acquisitions have been accounted for under the
purchase method of accounting with the results of the acquired companies
included in the Company's Statements of Operations beginning on the date of the
acquisition. The pro forma amounts are based upon certain assumptions and
estimates, and do not reflect any benefit from economies of scale which might be
achieved from combined operations. The pro forma results do not necessarily
represent results which would have occurred if the acquisitions had taken place
on the basis assumed below, nor are they indicative of the results of future
combined operations.
(1) Gives effect to the acquisition of Sziv TV Rt. ("Sziv") by Global
Television Network, Inc. ("GTN") for $1.5 million, as if such acquisition
occurred on December 31, 1997. The adjustments reflect: (i) an additional
$1.0 million cash infusion by GTN's major shareholder, (ii) an additional
due from shareholder amount of $1.75 million, (iii) the payment of the
cash portion of the purchase price for the acquisition of Sziv of $1.0
million and (iv) the assumption of $500,000 of additional liabilities
associated with the involuntary termination of Sziv's management. The
allocation of the purchase price to the estimated fair value of the assets
and liabilities assumed will result in the recognition of approximately
$1.1 million in broadcast licenses by GTN.
(2) Gives effect to the acquisition of GTN by Hungarian Broadcasting Corp.
("HBC") for approximately $21.1 million, as if such acquisition occurred
on December 31, 1997. The adjustments reflect: (i) the issuance of 2.5
million common shares with a fair market value of $16.6 million and (ii)
the issuance of 3.0 million warrants with a fair market value of $4.5
million. The allocation of the purchase price to the estimated fair value
of the assets and liabilities assumed will result in the recognition by
HBC of $18.3 million in broadcast licenses.
(3) Gives effect to (i) the amortization of approximately $1.4 million for
the year ended December 31, 1997 of broadcast licenses acquired as part of
the acquisition of Sziv by GTN and the subsequent acquisition of GTN by
HBC. The value assigned to the individual licenses acquired will be based
on the length of term of each license, management's estimate of viewership
for each license and the fact that cable viewers have approximately twice
the value to HBC compared to AM Micro viewers. Broadcast licenses will be
amortized on a straight line basis over the estimated useful lives of the
individual licenses, ranging from 8 to 15 years.
(4) Pro forma basic loss per share was computed by dividing the pro forma
loss attributable to common stockholders for the year ended December 31,
1997 by the pro forma weighted average number of common shares outstanding
for the period. The pro forma loss attributable to common stockholders
includes the effect of preferred stock dividends totaling $2,601,800. Pro
forma weighted average common shares outstanding includes the retroactive
effects as of January 1, 1997 for the issuance of common shares for the
acquisition of GTN by HBC.
F-55
<PAGE>
Dilutive earnings per share were not calculated as the effects of
including the common equivalent shares for the warrants issued in
connection with the purchase price of GTN by HBC would be antidilutive for
the period presented.
F-56
<PAGE>
HBC Pro Forma
Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
December 31, 1997
================================================================================
Actual
======================================= ============ ============
HBC GTN Sziv TV Acquisition
USD USD USD Adjustments Pro Forma
============ ======== ========= ============ ============
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 406,733 $ 22,929 $ 220,295 $ -- (1) $ 649,957
Accounts receivable, net 469,163 29,251 174,964 673,378
Other receivable -- -- 16,040 16,040
Program rights costs, net 687,614 8,999 121,874 818,487
Prepaid expenses and other current assets 177,026 -- 76,293 253,319
Due from related parties 361,046 -- -- 1,750,000(1) 2,111,046
------------ -------- --------- ------------ ------------
Total current assets 2,101,582 61,179 609,466 1,750,000 4,522,227
Property plant and equipment, net 401,178 -- 370,764 771,942
Production costs 432,886 -- 12,198 445,084
Movie copyrights 401,434 -- -- 401,434
Broadcast license, net 1,057,535 -- -- 18,042,435(1,2,3) 19,099,970
Deferred financing, net 7,683 -- -- 7,683
Other 251,605 -- -- 251,605
------------ -------- --------- ------------ ------------
Total assets $ 4,653,903 $ 61,179 $ 992,428 $ 19,792,435 $ 25,499,945
============ ======== ========= ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of notes payable $ 1,027,306 $ -- $ 190,259 $ $ 1,217,565
Accounts payable 676,191 60,319 273,040 1,009,550
Accrued expenses 945,538 12,233 82,050 1,039,821
Due to related parties 932,123 -- -- 500,000(1) 1,432,123
VAT payable 97,185 -- -- 97,185
Other 247,394 -- 36,053 283,447
------------ -------- --------- ------------ ------------
Total current liabilities 3,925,737 72,552 581,402 500,000 5,079,691
Commitments and contingencies -- -- -- -- --
Stockholders' equity
Preferred stock (non-redeemable) 39 -- -- -- 39
Common stock 3,930 5 6,727 (4,232)(1&2) 6,430
Additional paid in capital 11,693,680 855 -- 21,059,145 (1&2) 32,753,680
Retained earning (accumulated deficit) (11,105,715) (12,233) 419,286 (1,762,478)(3) (12,461,140)
Cumulative foreign currency
translation gain/(loss) 136,232 -- (14,987) -- 121,245
------------ -------- --------- ------------ ------------
Total stockholders' equity 728,166 (11,373) 411,026 19,292,435 20,420,254
------------ -------- --------- ------------ ------------
Total liabilities and stockholders' equity $ 4,653,903 $ 61,179 $ 992,428 $ 19,792,435 $ 25,499,945
============ ======== ========= ============ ============
</TABLE>
F-57
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of Delaware ("DGCL")
provides, in general, that a corporation incorporated under the laws of the
State of Delaware, such as registrant, may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than a derivative action by or in
the right of the corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another enterprise, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if such person acted
in good faith and in a manner such person reasonable believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such director,
officer, employee or agent of the corporation person's conduct was unlawful. In
the case of a derivative action, a Delaware corporation may indemnify any such
person against expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection with the defense or settlement of such
action or suit if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery of the State of Delaware or any other court in which such action was
brought determines such person is fairly and reasonably entitled to indemnity
for such expenses. Section 10 of the Company's Certificate of Incorporation, and
Article X of the Company's By-laws provide that the Company shall indemnify its
officers, directors, employees and agents to the extent permitted by the DGCL.
In addition, Section 9 of the company's Certificate of Incorporation provides,
in general, that no director of the Company shall be personally liable to the
Company or its stockholders for monetary damages for beach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL (which provides that under certain
circumstances, directors may be jointly and severally liable for willful or
negligent violations of the DGCL provisions regarding the payment of dividends
or stock repurchases or redemptions), or (iv) for any transaction from which the
director derived an improper personal benefit.
Item 25. Other Expenses of Issuance and Distribution.
The expenses of the registrant, other than underwriting discounts and
commissions, to be incurred in connection with the issuance and distribution of
the securities being registered hereby are estimated to be as follows:
Printing Fee $
Accounting fees and expenses*
Legal Fees and expenses
Blue sky fees and expenses (including counsel fees and expenses)*
Transfer agent and Warrant agent fees and expenses*
Miscellaneous*
Total*
*Estimated
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
During the past three years, the Registrant has sold securities to a limited
number of persons, as described below. Except as indicated, there were no
underwriters involved in the transactions and there were no underwriting
discounts or commissions paid in connection therewith. The purchasers of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
certificates for the securities issued in such transactions. All purchasers of
securities in each such transaction had adequate access to information about the
Registrant.
(1) In July 1995, Registrant sold 182,500 shares to 11 persons at a price of
$3 per share, totaling $547,500 (the "July 1995 Bridge Financing"). One of the
persons purchasing shares was Peter E. Klenner who purchased 30,000 shares for
$90,000 and no commissions were paid in connection with this sale. Sales of the
shares were made by an unaffiliated NASD broker who received $1,500 as
commissions and by a European company which acted as a finder and received a fee
of $30,000. Each of the purchasers signed a letter indicating an agreement to
hold the shares for investment. The issuance of such securities was exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) thereof
and Regulation D promulgated thereunder. The names of the persons purchasing
shares pursuant to the private placement are as follows:
<TABLE>
<CAPTION>
Name Shares Purchased Amount Paid
- ---- ---------------- -----------
<S> <C> <C>
Joseph H. Dowling 5,000 $ 15,000
John A. Miller 7,500 $ 22,500
Christopher P. Baker 10,000 $ 30,000
CP Baker Venture Fund I LP 5,000 $ 15,000
Dr. Elias J. Lehaf 5,000 $ 15,000
Walter Abt 5,000 $ 15,000
James Schindler 5,000 $ 15,000
Peter Rosenbauer 10,000 $ 30,000
Arabella S.A 66,667 $200,000
World Media Group Limited 33,333 $100,000
Peter B. Klenner 30,000 $ 90,000
</TABLE>
(2) In August 1995, Registrant sold 200,000 shares to three persons for a
price of $3 per share ($600,000 aggregate) (the "August 1995 Bridge Financing").
Sales of these shares were effected in Europe through a European broker who
received a 10% commission. Each of the purchasers signed a letter indicating an
agreement to hold the shares for investment. The issuance of these securities
was considered exempt from registration under Section 4(2) of the Securities Act
of 1933 and the regulations promulgated thereunder. The names of the three
investors, the number of shares purchased and the amounts paid are as follows:
<TABLE>
<CAPTION>
Name Shares Purchased Amount Paid
- ---- ---------------- -----------
<S> <C> <C>
M.M. Warburg & Co. KgaA 140,000 $420,000
European Value Fund LP 50,000 $150,000
Stephan Eilesbrecht-Kemena 10,000 $ 30,000
</TABLE>
(3) In September 1996, the Company sold 100,000 Shares of Series A Convertible
Cumulative Redeemable Preferred Stock (the "Preferred Stock") to seven persons
for a price of $4.50 per share ($450,000 aggregate). Each of the purchasers
signed a letter indicating an agreement to hold the shares for investment. The
issuance of these securities was considered exempt from registration under
Section 4(2) of
II-2
<PAGE>
the Securities Act of 1933, and Regulation D promulgated thereunder. The names
of the seven investors, the number of shares of Preferred Stock purchased and
the amounts paid are as follows:
<TABLE>
<CAPTION>
Name Shares Purchased Amount Paid
- ---- ---------------- -----------
<S> <C> <C>
Dean Rivera 10,000 $45,000
Patricia Weremeychik 10,000 $45,000
Mark Lyons 10,000 $45,000
Joan Downey 20,000 $90,000
Louis Spadafora 10,000 $45,000
Matthew Langdon 20,000 $90,000
John Delgaizo 20,000 $90,000
</TABLE>
J.W. Barclay & Co., Inc. was the underwriter of such offering and received
a fee of $45,000 for its services in the offering. Such shares were sold to
accredited investors only in an aggregate offering limited to 100,000 shares
without any form of general advertising, who acquired such securities for
themselves with knowledge that such securities cannot be resold without being
registered under the Securities Act or unless an exemption from registration is
then available. Exemption from any registration was claimed in reliance upon the
Rule 506 of Regulation D as well as Section 4(6) of the Securities Act of 1933.
The Company subsequently issued one Common Stock Purchase Warrant to such
purchasers for each share purchased for no additional cash consideration in
order to permit them to own and offer Units.
(4) The Company issued 4 promissory notes in an aggregate principal amount of
$850,000 to four persons in December 1996, which are repayable at the earlier of
December 31, 1997 or the closing of any public offering of securities with
interest at the rate of 18% per annum. Exemption from registration with respect
to the issuance of such notes is claimed under Section 4(2) of the Securities
Act of 1933 as a transaction not involving a public offering. The notes were
repaid in February 1997.
(5) On May 4, 1998, the Company issued 12 shares of Series B Preferred Stock
("Series B Preferred") for an aggregate purchase price of $6 million. Jesup &
Lamont Securities Corporation was paid a commission equal to 7% of the aggregate
capital raised plus a 1% accountable expense allowance. The net proceeds will be
used by the Company for working capital, acquisition of stations and
programming, expansion and general corporate purposes. Exemption from
registration was claimed in reliance upon the Rule 506 of Regulation D as well
as Section 4(6) of the Securities Act of 1933. The names of the investors, the
number of shares of Series B Preferred Stock purchased and the amounts paid are
as follows:
<TABLE>
<CAPTION>
Name Shares Purchased Amount Paid
- ---- ---------------- -----------
<S> <C> <C>
Thomson Kernaghan & Company Limited, 6 $3,000,000
as Agent for Dominion Capital Fund Limited
Thomson Kernaghan & Company Limited, 5 $2,500,000
as Agent for Sovereign Partners, L.P.
Thomson Kernaghan & Company Limited, as Agent 1 $ 500,000
for Canadian Advantage Limited Partnership
</TABLE>
The certificates representing all of the aforesaid securities bear
appropriate legends restricting their sale and have stop transfer orders placed
thereon.
In permitting this Registration Statement to become effective, the
Commission shall not have been understood as having ruled that the claimed
exemptions are available in the circumstances set forth.
II-3
<PAGE>
<TABLE>
<CAPTION>
Item 27. Exhibits(1)
<S> <C> <C>
(1)
(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)
(5) (a) Opinion of Ronald Scott Moss, Esq. as to legality of shares being
offered(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)
(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) Agreement with Galaxie TV Network (8)
II-4
<PAGE>
(cc) Agreement with MAC TV (8)
(16) Letter from prior accountants Todman & Co. (7)
(21) Subsidiaries of the Registrant(3)
(23) (a) Consent of Ronald Scott Moss, Esq. (2)
(b) Consent of Coopers & Lybrand(2)
(c) Consent of Lendvai and Nyiri (2)
(25) Power of Attorney (included on signature page)
</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
Item 28. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3)
of the Securities Act;
(ii) to reflect in the prospectus any facts or events which
individually or together represent a fundamental change
in the information in the registration statement; and
(iii) to include any additional or changed material on the
plan of distribution.
(2) That, for determining any liability under the Securities Act,
it will treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the securities at
that time to be the initial bona fide offering;
(3) To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
The undersigned registrant hereby undertakes that:
(1) For determining any liability under the Securities Act it will
treat the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(l) or
(4) or 497(h) under the Securities Act as part of this registration
statement as of the time it was declared effective.
II-5
<PAGE>
(2) For determining any liability under the Securities Act, it
will treat each post-effective amendment that contains a form of
prospectus as a new registration statement relating to the securities
offered therein, and the offering of such securities at that time as the
initial bona fide offering of these securities.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2, and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of New
York, State of New York, on June 9, 1998.
HUNGARIAN BROADCASTING CORP.
By: Offer Assis
-------------------------
Offer Assis, President
Each of the undersigned do hereby appoint Ronald Scott Moss its and his
true and lawful attorney to execute on behalf of the undersigned any and all
amendments(including post-effective amendments) to this Registration Statement
and to file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed below by the following persons in the
capacities and on the dates stated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Peter E. Klenner
- ---------------------- Chairman of the Board ,1998
Peter E. Klenner
/s/ Offer Assis
- ---------------------- President CEO and Director ,1998
Offer Assis
/s/ James H. Season
- ---------------------- Chief Financial Officer, Treasurer ,1998
James H. Season and Director
/s/ Shai Bar-Lavi
- ---------------------- Chief Operating Officer, Director ,1998
Shai Bar-Lavi
/s/ Frederick E. Smithline
- --------------------------- Director ,1998
Frederick E. Smithline
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit Index
Exhibit
No. Page No.
<S> <C> <C> <C>
(1)
(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)
(5) (a) Opinion of Ronald Scott Moss, Esq. as to legality of shares being
offered(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)
(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)
(x) Agreement between the Company and Orion Atlantic, L.P., dated July
31, 1996(1)
(y) Settlement Agreement with Nethold Development BV, dated May 22,
1997 (1)
(z) 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)
<PAGE>
(bb) Agreement with Galaxie TV Network (8)
(cc) Agreement with MAC TV (8)
(16) Letter from prior accountants Todman & Co. (7)
(21) Subsidiaries of the Registrant(3)
(23) (a) Consent of Ronald Scott Moss, Esq. (2)
(b) Consent of Coopers & Lybrand(2)
(c) Consent of Lendvai and Nyiri (2)
(25) Power of Attorney (included on signature page)
</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
[Letterhead of Ronald Scott Moss]
June 5, 1998
To Whom It May Concer:
I hereby consent to the use of my name in the Form SB-2 Registration
Statement being filed by Hungarian Broadcasting Corp.
Yours truly,
/s/ Ronald Scott Moss, Esq.
[Letterhead of Coopers & Lybrand]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2, dated
June 9, 1998, of our report, dated April 14, 1998, except for Note 18, as to
which the date is June 9, 1998, on our audit of the financial statements of
Hungarian Broadcasting Corp. and subsidiaries (the "Company") as of December 31,
1997 and 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1997, the
six month period ended December 31, 1996 and the year ended June 30, 1996. We
also consent to the reference to our firm under the caption "Experts".
/s/ Coopers & Lybrand
Coopers & Lybrand
Konyvvizsgalo es Tanacsado Kft.
Budapest, Hungary
June 9, 1998
[Letterhead of Lendvai & Nyriri]
June 5, 1998
To Whome It May Concern:
We hereby consent to the use of our name in the Form SB-2 Registration
Statement being filed by Hungarian Broadcasting Corp.
Yours truly,
/s/ Vicktor Nyriri
Vicktor Nyriri
