<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 8-K/A-1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: October 22, 1996
BNN CORPORATION
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in charter)
Nevada 0-17591 93-0957030
- --------------- ------------------- --------------------
(State or Other (Commission File No.) (IRS Employer
jurisdiction of Identification Number)
incorporation)
345 Park Avenue South 10010
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 779-6601
-------------------------
===============================================================================
<PAGE>
Item 7. Financial Statements, Pro-Forma Information and Exhibits
(a) Financial Statements of KMG*
(i) (A) Report of Independent Auditors.
Seagull Entertainment, Inc. 1995
Kaleidoscope Group 1995
(B) Balance Sheets as of December 31, 1994 and 1995 for each
of Seagull Entertainment, Inc. and the KMG Group.
(C) Statements of Operations for Seagull Entertainment, Inc.
and for Kaleidoscope Group for the years ended December
31, 1994 and December 31, 1995.
(D) Statements of Changes in Stockholders' Equity for each of
Seagull Entertainment, Inc. and the KMG Group, for the
years ended December 31, 1995 and December 31, 1994.
(E) Statements of Cash Flows for each of Seagull
Entertainment, Inc. and the KMG Group, for the years
ended December 31, 1995 and December 31, 1994.
(F) Notes to the Financial Statements.
(ii) (A) Consolidated and Combined Balance Sheet for the KMG Group
as of September 30, 1996 (unaudited).
(B) Consolidated and Combined Statement of Operations and
Retained Earnings for the KMG Group for the nine months
ended September 30, 1996 (unaudited).
- ------------
* KMG acquired Seagull Entertainment, Inc. and several companies operating
under the umbrella of KMG hereinafter called the KMG Group.
2
<PAGE>
(C)** Consolidated and Combined Statement of Cash Flows
for the KMG Group for the nine months ended
September 30, 1996 (unaudited).
(D) Notes to Financial Statements.
(b) Pro Forma Financial Statements of Registrant
(i) Pro-Forma Consolidated Balance Sheet as of September 30,
1996.
(ii) Pro-Forma Consolidated Statements of Income for the nine
months ended September 30, 1996.
(iii) Pro-Forma Consolidated Statements of Income for the year
ended December 31, 1995.
(c)*** Exhibits
(i) Agreement and Plan of Reorganization dated October 22,
1996 among the Company and the shareholders of KMG.
- --------
** Registrant's requirements pursuant to Regulation S-X, promulgated by the
Securities and Exchange Commission, to file financial statements and
pro-forma information relating to the Asset Purchase within 15 days after
the Asset Purchase is impracticable. Registrant will file such financial
statements and pro-forma financial information by amendment hereto no
later than 75 days after consummation of the Asset Purchase.
*** Previously filed with this Form 8-K.
3
<PAGE>
SEAGULL ENTERTAINMENT, INC.
FINANCIAL STATEMENTS WITH
INDEPENDENT AUDITORS' REPORT
DECEMBER 31, 1995 AND 1994
<PAGE>
C O N T E N T S
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
BALANCE SHEETS 2
STATEMENTS OF OPERATIONS 3
STATEMENTS OF STOCKHOLDERS' DEFICIT 4
STATEMENTS OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
SeaGull Entertainment, Inc.
We have audited the accompanying balance sheets of SeaGull Entertainment,
Inc. as of December 31, 1995 and 1994, and the related statements of
operations, stockholders' deficit and cash flows for the year ended December
31, 1995, and the period from July 7, 1994 (inception) through December 31,
1994. 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. 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 financial statements referred to above present fairly,
in all material respects, the financial position of SeaGull Entertainment,
Inc. as of December 31, 1995 and 1994, and the results of their operations
and their cash flows for the year ended December 31, 1995, and the period
from July 7, 1994 (inception) through December 31, 1994 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 12 to the
financial statements, the Company had a working capital deficiency of
$527,987, a stockholders' deficiency of $470,976 and had incurred net losses
of $566,159 and $280,816 for the year ended December 31, 1995, and the
period July 7, 1994 (inception) through December 31, 1994, respectively.
Management's plans in regard to these matters are also described in Note 12.
Those conditions raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of the uncertainty.
/s/ Paneth, Haber & Zimmerman LPP
--------------------------------------
New York, NY
April 22, 1996, except for Notes 11 and 12,
as to which the date is October 22, 1996
<PAGE>
SEAGULL ENTERTAINMENT, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash $ 139,213 $ --
Accounts receivable, less allowance for doubtful
accounts of $-0- in both 1995 and 1994 175,459 2,205
Prepaid expenses 2,882 3,211
--------- ---------
Total Current Assets 317,554 5,416
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation 53,004 46,389
LOANS RECEIVABLE--AFFILIATED ENTITY, less allowance
of $94,189 in 1995 and $19,740 in 1994 -- --
OTHER ASSETS 18,976 --
--------- ---------
$ 389,534 $ 51,805
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Bank overdraft $ -- $ 4,095
Loans payable, stockholders 38,470 28,970
Accounts payable 99,559 50,856
Accrued interest 44,000 4,000
Notes payable, current portion 515,001 13,730
Deferred income 28,000 --
Client advance 120,511 --
--------- ---------
Total Current Liabilities 845,541 101,651
NOTES PAYABLE, less current portion 14,969 229,970
--------- ---------
Total Liabilities 860,510 331,621
--------- ---------
STOCKHOLDERS' DEFICIT
Common stock, $0.10 par value, 200 shares authorized,
122.25 and 111 shares issued and outstanding at
December 31, 1995 and 1994, respectively 12 11
Additional paid-in-capital 375,988 989
Accumulated deficit (846,976) (280,816)
--------- ---------
Total Stockholders' Deficit (470,976) (279,816)
--------- ---------
Total Liabilities and Stockholders' Deficit $ 389,534 $ 51,805
========= =========
</TABLE>
See notes to financial statements.
-2-
<PAGE>
SEAGULL ENTERTAINMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
July 7, 1994
(Inception)
Year Ended Through
December 31, December 31,
1995 1994
-------------- ---------
<S> <C> <C>
REVENUE $ 225,492 $ --
--------- ---------
EXPENSES
Salaries and benefits 204,769 73,040
Marketing and promotion 217,876 92,451
General and administrative 251,224 89,475
Bad debt loss--affiliated entity 74,449 19,740
Interest 43,334 6,110
--------- ---------
Total Expenses 791,652 280,816
--------- ---------
NET LOSS $(566,160) $(280,816)
========= =========
NET LOSS PER COMMON SHARE $ (0.10) $ (0.05)
========= =========
</TABLE>
See notes to financial statements.
-3-
<PAGE>
SEAGULL ENTERTAINMENT, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Additional
Shares Common Paid-in Accumulated
Outstanding Stock Capital Deficit Total
----------- ------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance--July 7, 1994
(inception) - -- $ -- $ -- $ -- $ --
Issuance of shares for
cash consideration 100.00 10 990 -- 1,000
Issuance of shares in consideration
of a loan guarantee 11.00 1 (1) -- --
Net loss -- -- -- (280,816) (280,816)
------- ------- ---------- --------- ----------
Balance--December 31, 1994 111.00 11 989 (280,816) (279,816)
Issuance of shares for cash
consideration 11.25 1 374,999 -- 375,000
Net loss -- -- -- (566,160) (566,160)
------- ------- ---------- --------- ----------
Balance--December 31, 1995 122.25 $ 12 $ 375,988 $(846,976) $(470,976)
======= ========== ========= ==========
</TABLE>
See notes to financial statements.
-4-
<PAGE>
SEAGULL ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
July 7, 1994
(Inception)
Year Ended Through
December 31, December 31,
1995 1994
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(566,160) $(280,816)
Adjustment to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation 14,293 5,154
Bad debt loss--affiliated entity 74,449 19,740
Changes in:
Accounts receivable (173,254) (2,205)
Prepaid expenses 329 (3,211)
Other assets (6,612) --
Accounts payable 48,703 50,856
Accrued interest 40,000 4,000
Deferred income 28,000 --
Client advances 120,511 --
--------- ---------
Net Cash Used in Operating Activities (419,741) (206,482)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans to affiliate (74,449) (19,740)
Acquisition of property and equipment (20,908) (51,543)
Payment of merger costs (12,364) --
--------- ---------
Net Cash Used in Investing Activities (107,721) (71,283)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans payable - shareholders 121,500 89,000
Repayments of loans payable - shareholders (112,000) (60,030)
Proceeds from loans payable 300,000 251,544
Repayments of loan payable principal (13,730) (7,844)
Issuance of common stock 375,000 1,000
--------- ---------
Net Cash Provided by Financing Activities 670,770 273,670
--------- ---------
INCREASE (DECREASE) IN CASH 143,308 (4,095)
CASH
Beginning of year (4,095) --
--------- ---------
End of year $ 139,213 $ (4,095)
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 3,334 $ 2,110
========= =========
</TABLE>
See notes to financial statements.
-5-
<PAGE>
SEAGULL ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. DESCRIPTION OF BUSINESS
SeaGull Entertainment (the "Company") is primarily engaged in the
business of the development, production and domestic and international
distribution of entertainment properties and the licensing and
merchandising opportunities associated with such entertainment properties.
It also provides consulting services in the development of specialty
television programming and is involved in the acquisition and
representation of entertainment library properties. During the year ended
December 31, 1995, all of the Company's revenue was derived from the
distribution of two programs. $71,121 included in accounts receivable at
December 31, 1995 relates to one of these programs. A substantial portion
of the Company's efforts during 1995 involved the production, marketing
and promotion of an action/adventure television program scheduled for
airing in the fall of 1996. The Company is also involved in the initial
stages of several other projects that are not yet generating revenue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Program Cost Inventory
Production costs and direct costs of pre-release and early
release marketing and distribution are capitalized as film cost
inventory. Film cost inventory is amortized using the
"individual-film-forecast-computation method". Under this method,
film costs are amortized in the same ratio that the film's current
gross revenue bears to the film's anticipated total gross revenue.
As of December 31, 1995, the Company had not incurred any such
costs that were not reimbursed by others.
Revenue Recognition
Revenue from the licensing or distribution of a film is
recognized when the license of the film has the legal right to
exhibit or broadcast the film and the film is deliverable to the
licensee.
Depreciation
Property and equipment are stated at cost and are
depreciated on straight-line and accelerated methods over the
estimated useful lives indicated in Note 4.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumption that affect certain reported amounts
and disclosures.
-6-
<PAGE>
SEAGULL ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Loss Per Common Share
The calculation of net loss per common share presented in
the statements of operations is based on the weighted average
number of the Company's shares outstanding during the periods
presented, multiplied by the number of Kaleidoscope Media Group,
Inc. ("KMG") shares issued to the Company's shareholders for each
share of the Company exchanged on May 3, 1996, and by the number
of BNN Corporation ("BNN") shares issued to KMG's shareholders for
each share of KMG exchanged on October 22, 1996 (see Note 11).
Income Taxes
The Company, with the consent of its shareholders, has
elected under Section 1362 of the Internal Revenue Code and
certain applicable state statutes, not to be taxed as a
corporation, but rather to have the shareholders report their
share of the corporation's earnings on their individual tax
returns. Certain limited state and local income taxes apply.
3. LOANS RECEIVABLE--AFFILIATED ENTITY
The loans receivable--affiliated entity (amounting to $94,189 and
$19,740 at December 31, 1995 and 1994, respectively) are due from an
entity of which two of the Company's officer/shareholders are also
officer/shareholders. The loans receivable include past due notes in the
amount of $75,700 at December 31, 1995 and $7,500 at December 31, 1994
bearing interest at 8.75%. The remaining loans bear no interest and are
due on demand. Because of the unlikelihood of collection, these amounts
have been reserved.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
Estimated Useful
December 31, Life in Years
-------------------------- ----------------
1995 1994
---- ----
<S> <C> <C> <C>
Automobile $ 51,543 $ 51,543 5
Furniture and fixtures 3,453 - 7
Office equipment 17,455 - 5
----------- ----------
72,451 51,543
Less: accumulated depreciation (19,447) (5,154)
----------- ----------
$ 53,004 $ 46,389
=========== ==========
</TABLE>
-7-
<PAGE>
SEAGULL ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1995
5. OTHER ASSETS
Included in other assets is $12,364 of capitalized costs directly
related to the planned Kaleidoscope transaction (see Note 11). The
capitalized costs will be capitalized as part of the cost of acquiring
Kaleidoscope.
6. LOANS PAYABLE
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
---- ----
<S> <C> <C>
Loan originally borrowed in five $100,000 increments between
December 1994 and February 28, 1995, bearing interest at the
prime rate (8.5% at December 31, 1995 and 1994) with interest
payable monthly upon invoice. The principal balance is due on
December 1, 1996. There are certain disputes involving this note.
Disputed but unpaid interest has been recorded as a liability in
these financial statements. A party to the dispute has asserted
that because interest has not been paid, the principal is
callable by the holder. This note is guaranteed by two
individuals to each of whom, 5.5 shares of the Corporation's
common stock was issued. No
value was attributed to the stock issued. $ 500,000 $ 200,000
Payable to a bank in monthly installments of $1,422, including
interest at 8.89% per annum, through November 1997. The loan is
secured by the Company's automobile and is guaranteed by
the Company's Chairman (who is a shareholder). 29,970 43,700
----------- -----------
529,970 243,700
Less: current portion (515,001) (13,730)
----------- -----------
$ 14,969 $ 229,970
=========== ===========
</TABLE>
The non-current portion at December 31, 1995 is due in 1997.
7. LOANS PAYABLE TO STOCKHOLDERS
The loans payable to stockholders bear no interest and have no
definite due date.
-8-
<PAGE>
SEAGULL ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1995
8. COMMITMENTS
The Company is the lessee of office space, located in Los Angeles,
California, under a lease expiring in June 2000. The base rent is $4,907
per month. The lease provides for future escalation based on certain cost
increases. The Company has an option to review the lease for five years at
the then fair market value.
The Company is also the lessee of certain office equipment and
furniture. As of December 31, 1995, the total commitments for future
rentals were as follows:
1996 $ 61,128
1997 60,380
1998 58,884
1999 58,884
2000 29,442
-------
$268,718
Rent expense was $39,402 for the year ended December 31, 1995. No
rent expense was incurred for the period July 7 (inception) through
December 31, 1994.
9. ISSUANCE OF COMMON STOCK
During the year ended December 31, 1995, 11.25 shares of common
stock were issued for $375,000. During the period July 7 (inception)
through December 31, 1994, 100 shares of common stock were issued for
$1,000 and 11 shares of stock were issued as a guarantee fee (see Note 6)
to which no value was ascribed.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments ("SFAS 107") is effective in the
Company's case for 1995. SFAS 107 requires entities to disclose the fair
values of financial instruments except when it is not practicable to do
so. Under SFAS 107, it is not practicable to make this disclosure when the
costs of formulating the estimated values exceed the benefit when
considering how meaningful the information would be to financial statement
users.
The Company's financial instruments at December 31, 1995 to which
SFAS 107 would be applied include the following:
Carrying Amount
---------------
Asset:
Cash $ 139,213
Loan receivable - affiliate -
Liabilities:
Loan payable - stockholder 38,470
Notes payable 529,970
<PAGE>
-9-
SEAGULL ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1995
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Because of the difficulties presented in the valuation of the
amount due from the affiliate and the loan payable stockholder because of
their related party nature, estimating the fair value of these financial
instruments is not considered practicable. The fair values of the cash and
notes payable do not differ materially from their carrying amounts.
11. SUBSEQUENT EVENTS
On May 3, 1996, certain shareholders of the Company and the
shareholders of the Kaleidoscope Group ("Kaleidoscope"), which consists of
two corporations (Kaleidoscope Entertainment, Inc. and People and
Properties, Inc.) that were affiliated with one another, exchanged their
shares for the shares of a new company, Kaleidoscope Media Group, Inc.
("KMG"). The shareholders of Kaleidoscope received 40.2% of the stock of
KMG and the certain shareholders of the Company received 59.8% of the
stock of KMG in exchange for their 91% of the Company's outstanding
shares. The transaction will be accounted for as a purchase of
Kaleidoscope by the Company. The acquisition was recorded at
Kaleidoscope's estimated fair value of $2,900,000.
Kaleidoscope is primarily engaged in sports and event marketing
and consulting, including event management, sponsor and event
representation, event related sales promotions, event related media and
publicity, advertising and sponsorship sales and specialty publishing.
Most of Kaleidoscope's projects are sports related.
As of December 31, 1995, the Company owed Kaleidoscope $31,219.
This amount is included in accounts payable.
During 1996, the Company executed settlement agreements with the
guarantors (who were also shareholders) of the $500,000 note payable (see
Note 6) who claimed that they had repaid the original creditor. The
Company will repay the note. Principal and interest will be paid to the
guarantors in installments extending into 1997. The guarantors have placed
their 11 shares of the Company's common stock into escrow accounts
securing the Company's obligation. The shares will be surrendered to the
Company at no extra cost upon the Company's fulfillment of its
obligations.
On October 22, 1996, KMG effected a reverse acquisition of BNN
Corporation ("BNN"), an inactive publicly traded company. BNN acquired KMG
by exchanging 9,500,000 common shares of BNN for all of the 1,609,740
outstanding common shares of KMG. For accounting purposes, KMG will be
treated as the continuing entity, and the transaction will be treated as a
recapitalization of KMG. The transaction provided the Company with
approximately $1,300,000 in cash, some of which had been advanced to KMG
at earlier dates.
-10-
<PAGE>
SEAGULL ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1995
11. SUBSEQUENT EVENTS (Continued)
Prior to the BNN transaction certain KMG officers and directors
owned shares of BNN. The relative shareholdings in BNN prior and
subsequent to the October 22, 1996 transaction were as follows:
Prior Subsequent
----- ----------
KMG shareholders -- % 40.3%
Certain KMG officers and directors 10.7% 6.4%
Others 89.3% 53.3%
As part of the acquisition of KMG, BNN agreed to a "Market Value
Adjustment" under which BNN will grant additional shares to the former KMG
shareholders to the extent that the original 9,500,000 shares are worth
less than $50,000,000 on the sixteenth (16th) business day following the
filing of the Company's Form 10K for 1997. The number of additional shares
will be the number whose aggregate market value equals the difference
between $50,000,000 and the aggregate market value of the original
9,500,000 shares. The adjustment will only apply if certain income targets
are met for 1997. There is provision for partial application of the
adjustment at reduced income levels.
The Company is currently negotiating a private placement for the
issuance of convertible preferred shares of BNN for $2,000,000.
12. GOING CONCERN
At December 31, 1995, the Company had a working capital deficiency
of $527,987, a stockholders' deficiency of $470,976 and had incurred net
losses of $566,159 and $280,816 for the year ended December 31, 1995, and
the period July 7, 1994 (inception) through December 31, 1994,
respectively. As described in Note 1, a substantial portion of the
Company's efforts have been related to projects that are not yet producing
revenue. The Company has raised approximately $1,500,000 through the
reverse acquisition by BNN during 1996 and is negotiating to obtain
$2,000,000 in equity financing through a private placement (see Note 11).
Management expects the BNN transaction and the private placement under
negotiation will enable the Company to continue as a going concern. No
assurances can be given that the Company will be successful in realizing
the additional private placement.
-11-
<PAGE>
THE KALEIDOSCOPE GROUP
COMBINED FINANCIAL STATEMENTS WITH
INDEPENDENT AUDITORS' REPORT
DECEMBER 31, 1995 AND 1994
<PAGE>
C O N T E N T S
Page
----
INDEPENDENT AUDITORS' REPORT 1
COMBINED FINANCIAL STATEMENTS
BALANCE SHEETS 2
STATEMENTS OF OPERATIONS 3
STATEMENTS OF STOCKHOLDERS' EQUITY 4
STATEMENTS OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
Boards of Directors
Kaleidoscope Holdings, Inc., People and Properties, Inc.
and Kaleidoscope Entertainment, Inc.
We have audited the accompanying combined balance sheets of the Kaleidoscope
Group as of December 31, 1995 and 1994, and the related combined statements
of operations, stockholders' equity and cash flows for the years then ended.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of The
Kaleidoscope Group as of December 31, 1995 and 1994, and the combined
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 20 to the
financial statements, the Company had a working capital deficiency of
$754,467, a stockholders' deficiency of $1,005,606, and had incurred net
losses of $211,264 and $820,657 for the years ended December 31, 1995 and
1994, respectively. Management's plans in regard to these matters are also
described in Note 20. Those conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of the
uncertainty.
/s/ Paneth, Haber & Zimmerman LLP
---------------------------------
New York, NY
April 25, 1996, except for Notes 19 and 20,
as to which the date is June 21, 1996
<PAGE>
THE KALEIDOSCOPE GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1994
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 393,893 $ 125,440
Accounts receivable, less allowance for doubtful accounts
of $13,000 in 1995 and $-0- in 1994 804,641 400,448
Stock subscription receivable, paid April 25, 1996 710,000 --
Due from Lifestyle Marketing Group, Inc., less allowance
for doubtful account of $223,578 in 1995 and $-0- in 1994 -- 246,312
Expenditures billable to clients 505,459 565,266
Loans receivable--officers and shareholders 57,533 66,940
Prepaid income taxes 9,706 1,800
Other current assets 51,821 63,093
----------- -----------
Total Current Assets 2,533,053 1,469,299
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation and amortization 103,203 132,624
OTHER ASSETS 9,552 9,311
----------- -----------
$ 2,645,808 $ 1,611,234
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable--bank $ 710,000 $ 510,000
Note payable--other 200,000 --
Accounts payable and accrued liabilities 1,148,872 1,053,862
Due to Ventura, Ltd. -- 590,624
Capitalized lease obligation--current portion 31,475 29,358
Deferred rent--current portion 19,058 2,400
Deferred income and client advances 1,178,115 673,937
----------- -----------
Total Current Liabilities 3,287,520 2,860,181
CAPITALIZED LEASE OBLIGATION, less current portion 33,760 65,221
NOTE PAYABLE--SHAREHOLDER -- 1,371,416
NOTE PAYABLE--VENTURA, LTD 150,000 --
DEFERRED RENT 180,134 190,174
----------- -----------
Total Liabilities 3,651,414 4,486,992
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock 155,125 155,125
Additional paid-in-capital 2,892,635 811,219
Accumulated deficit (4,053,366) (3,842,102)
----------- -----------
Total Stockholders' Deficit (1,005,606) (2,875,758)
----------- -----------
$ 2,645,808 $ 1,611,234
=========== ===========
</TABLE>
See notes to financial statements.
-2-
<PAGE>
THE KALEIDOSCOPE GROUP
COMBINED STATEMENTS OF OPERATIONS
Year Ended
December 31,
------------------------------------
1995 1994
----------- ------------
REVENUE $ 6,455,992 $ 5,664,880
----------- -----------
EXPENSES
Direct project costs 3,330,385 3,381,010
Salaries and benefits 1,596,893 1,387,168
General and administrative 1,576,029 1,262,659
Disengagement/merger 78,964 404,250
Interest 84,985 50,450
----------- -----------
Total Expenses 6,667,256 6,485,537
----------- -----------
NET LOSS $ (211,264) $ (820,657)
=========== ===========
See notes to financial statements.
-3-
<PAGE>
THE KALEIDOSCOPE GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Additional Accumulated
Stock Paid-in-Capital Deficit Total
---------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Balance--January 1, 1994 $ 155,125 $ 811,219 $(3,021,445) $(2,055,101)
Net loss -- -- (820,657) (820,657)
----------- ----------- ----------- -----------
Balance--December 31, 1994 155,125 811,219 (3,842,102) (2,875,758)
Issuance of People & Properties, Inc. stock -- 2,081,416 -- 2,081,416
Net loss -- -- (211,264) (211,264)
----------- ----------- ----------- -----------
Balance--December 31, 1995 $ 155,125 $ 2,892,635 $(4,053,366) $(1,005,606)
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
-4-
<PAGE>
THE KALEIDOSCOPE GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------------
1995 1994
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $(211,264) $(820,657)
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 45,614 54,588
Disengagement/merger expense 78,964 404,250
Provision for bad debt - Lifestyle Marketing Group, Inc. 223,578 --
Changes in:
Accounts receivable (404,193) 487,235
Due from Lifestyle Marketing Group, Inc. 22,734 (82,803)
Expenditures billable to clients 59,806 (235,164)
Prepaid income taxes (7,906) 4,131
Other current assets 11,273 108,351
Other assets (241) 856
Accounts payable and accrued liabilities 105,689 156,525
Deferred rent 6,618 63,049
Deferred income and client advances 504,178 (556,597)
--------- ---------
Net Cash Provided by (Used in) Operating Activities 434,850 (416,236)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (16,192) (22,188)
Loans receivable - officers and shareholders - net change 9,407 (112,984)
--------- ---------
Net Cash Used in Investing Activities (6,785) (135,172)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable - bank 200,000 110,000
Proceeds from note payable - other 200,000 --
Principal payments on capitalized lease obligation (29,344) (27,383)
Due to Ventura, Ltd. - net change (519,588) 590,624
Disengagement/merger costs (10,680) (2,097)
--------- ---------
Net Cash Provided by (Used in) Financing Activities (159,612) 671,144
--------- ---------
INCREASE IN CASH 268,453 119,736
CASH
Beginning of year 125,440 5,704
--------- ---------
End of year $ 393,893 $ 125,440
========= =========
</TABLE>
See notes to financial statements.
-5-
<PAGE>
THE KALEIDOSCOPE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. DESCRIPTION OF ORGANIZATION AND BUSINESS
The financial statements consist of the combined accounts of
Kaleidoscope Holdings, Inc. ("Holdings") and the affiliated companies People
and Properties, Inc. ("P&P") and Kaleidoscope Entertainment, Inc.
("Entertainment") and Entertainment's wholly owned subsidiary Kaleidoscope
Television, Inc. ("TV"), collectively referred to as The Kaleidoscope Group
(the "Company").
For significant periods, between January 1, 1994 and December 31,
1995, certain shareholders of each affiliate were also shareholders of the
other affiliates. From August 1, 1994 through June 6, 1995, each affiliate
was a wholly owned subsidiary of Ventura Entertainment, Ltd., a publicly
traded company ("Ventura"), through Kaleidoscope Acquisition Corp.
("Acquisition") (see Note 3).
The Company is primarily engaged in sports and event marketing and
consulting including event management, sponsor and event representation,
event related sales promotions, event related media and publicity,
advertising and sponsorship sales and specialty publishing. Most of the
Company's projects in these areas are sports related. In the normal course
of business the Company extends trade credit to its customers, most of whom
are either major U.S. corporations or sports associations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
All material intercompany accounts and transactions have
been eliminated in combination.
Revenue Recognition
Revenue is recognized from Company owned events when the
production of the event is complete. Revenue from consulting and
from the management of events owned by others is recognized over
the period during which the services are rendered. Revenue from
sponsorship sales and representation for a specific event is
recognized when the event occurs. Revenue from sponsorship sales
and representation for organizations or an ongoing series of
events is recognized as the organization or owner of the events is
entitled to bill the sponsor. Television production revenue is
recognized upon completion of the production.
Expenditures Billable to Clients
Expenditures billable to clients represent direct costs
incurred by the Company, in connection with its various contracts,
that are either specifically billable to the clients under the
contracts, or relate to contracts for which the fees have not yet
been billed or earned. Payroll and related costs, including those
relating to specific client work, are expensed as incurred.
Deferred Revenue
Deferred revenue represents amounts received from or
billed to clients in accordance with certain contracts prior to
the Company's completion of the earning process in accordance with
its revenue recognition policy. Upon completion of the earning
process, the amounts are included in revenue.
-6-
<PAGE>
THE KALEIDOSCOPE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Property and equipment are stated at cost and, except for
leasehold improvements, are depreciated according to accelerated
methods over the estimated useful lives indicated in Note 6.
Leasehold improvements are amortized over the term of the lease.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported
amounts and disclosures.
Merger and Disengagement
Costs incurred in connection with the 1994 merger with
Ventura (Note 3) were expensed in that year. Costs incurred in
connection with the 1995 disengagement were expensed in that year.
The corporations included in the Company continued their
operations and separate corporate identities, throughout the
pre-merger, merger and post-merger period and had only limited
operational interaction with Ventura. No adjustments were made to
the Company's accounts to reflect Ventura's accounting for the
acquisition as a purchase business transaction and accordingly
these financial statements do not reflect "push-down" accounting.
3. VENTURA MERGER AND DISENGAGEMENT
During 1994, certain shareholders of the Company formed Kaleidoscope
Acquisition Corp., a Delaware corporation, ("Acquisition") for the purpose
of acquiring Holdings, Entertainment, P&P and Lifestyle Marketing Group,
Inc. ("LMG"), another company in a similar line of business, a significant
portion of whose shares were owned by shareholders of the Company. The
acquisition of the Company and LMG was completed in a series of transactions
between May, 1994 and August 1, 1994. On that date, the shares of
Acquisition were acquired by Ventura in exchange for Ventura stock.
During 1994, certain of the Company's expenses were paid by Ventura,
resulting in a liability to Ventura of $590,624. Much of this amount was
repaid in 1995.
Pursuant to the acquisition agreement, Ventura agreed that by
February 1, 1995, it would secure releases on behalf of one of the
shareholders from his guarantee of certain of the Company's and LMG's
obligations. Ventura was unable to secure the releases and on June 7, 1995,
one of the Company's former shareholders acquired the shares of Acquisition.
The shares of Holdings, Entertainment and P&P were subsequently transferred
to certain of the former shareholders. The shares of LMG have been
transferred to another of the former shareholders.
4. MAJOR CUSTOMERS
During the years ended December 31, 1995 and 1994, respectively,
approximately 44% and 32% of the Company's revenue was derived from services
provided to one U.S. automobile company. Accounts receivable from this
client amounted to $489,000 at December 31, 1995. Revenue derived
-7-
<PAGE>
THE KALEIDOSCOPE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1995
4. MAJOR CUSTOMERS (Continued)
from one U.S. sports association amounted to approximately 13% and
15% of the Company's revenue in the years ended December 31, 1995 and 1994,
respectively.
5. LOANS RECEIVABLE--OFFICERS AND SHAREHOLDERS
The loans receivable--officers and shareholders bear no interest and
are due on demand.
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
Estimated Useful
December 31, Life in Years
---------------------------- ----------------
1995 1994
------------ -----------
<S> <C> <C> <C>
Furniture $ 214,000 $ 217,600 7
Office equipment and machinery 90,085 87,116 7
Computers 131,714 119,549 5
Leasehold improvements 5,260 5,260 Term of Lease
----------- ----------
441,059 429,525
Less: accumulated depreciation and
amortization (337,856) (296,901)
----------- ----------
$ 103,203 $ 132,624
=========== ==========
</TABLE>
Property held under a capitalized lease amounted to $124,762 and is
included in furniture.
7. NOTES PAYABLE - BANK
The notes payable to a bank were due in January 1995, extended at
approximately 3 month intervals through 1995 and extended again in January
1996. These notes were due under a $710,000 line of credit that was fully
extended as of December 31, 1995. Interest was paid monthly at 1.5% above
the prime rate. (The prime rate was 8.5% at December 31, 1995, and 1994).
The shareholder to whom the Company also had a direct obligation, guaranteed
the notes and provided collateral. The shareholder agreed, effective
December 31, 1995, to assume the notes payable in exchange for additional
P & P stock (see Note 12). The shareholder fulfilled this obligation by
repaying the loans on April 25, 1996.
8. NOTE PAYABLE - OTHER
The note payable - other is owed to an entity controlled by one of
the shareholders of SeaGull Entertainment, Inc. (see Note 19). The principal
balance is due August 31, 1996. Interest is paid quarterly at 3% above a
bank's prime rate. The effective rate on this note was 11.5% at December 31,
1995.
-8-
<PAGE>
THE KALEIDOSCOPE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1995
9. CAPITALIZED LEASE OBLIGATION
The Company is obligated under a capitalized lease requiring
payments of $2,919 per month, including interest at 7.2%, through January
1998. This lease obligation is guaranteed by LMG. Future minimum lease
payments are as follows:
Year Ended
December 31,
------------
1996 35,028
1997 35,028
-----------
70,056
Less amount representing interest (4,821)
-----------
Present value of minimum lease payments 65,235
Less current portion 31,475
-----------
Non-current portion $ 33,760
===========
10. NOTE PAYABLE--VENTURA
The note payable--Ventura, Ltd. (see Note 3) represents the
Company's two-thirds share of a $225,000 note payable to Ventura as a result
of the Disengagement agreement. The other third of the note has been assumed
by LMG. The Company and LMG are jointly and severally liable for the full
amount. The note bears interest at 8% per annum. The note is due in equal
monthly installments over the period from September 1997 through September
2000. The debtors (the Company and LMG) have the option of repaying the note
for $125,000 (the Company's share would be $83,333) if done by August 1997.
11. INCOME TAXES
Through July 31, 1994, Holdings and Entertainment had elected under
Section 1362 of the Internal Revenue Code ("IRC") and certain applicable
state laws not to be taxed as corporations, but rather to have the
shareholders report their share of the corporations' earnings on their
individual tax returns. Holdings and Entertainment were still, however,
subject to income tax in certain jurisdictions.
On August 1, 1994, upon the acquisition by Ventura (see Note 3) the
elections were automatically terminated. From that date through May 31,
1995, the Company was taxed for federal purposes on a consolidated basis
with Ventura. During this period the Company incurred tax losses for which
Ventura did not reimburse the Company. The Company was subject to certain
separate state and local income taxes. Upon disengagement from Ventura, the
individual corporations comprising the Company became individually subject
to corporate income taxes.
-9-
<PAGE>
THE KALEIDOSCOPE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1995
11. INCOME TAXES (Continued)
At the time of the disengagement, certain of the corporations had
net operating loss carryforwards ("NOL") available to offset future taxable
income . The use of these NOLs is, however, severely limited by the
operation of Section 382 of the IRC. The Company is entitled to utilize an
estimated $58,000 of carryforward per year through 2010. In addition, an
estimated $230,000 of NOL was generated during the seven months ended
December 31, 1995. These NOLs will be available to offset future income, on
an unlimited basis, through the year 2010.
Deferred tax assets arise principally from the NOLs. The deferred
rent and the allowance for doubtful accounts recorded for financial
statement purposes but not deductible for income taxes also give rise to
deferred tax assets. Due to the uncertainty of the ability of the Company to
realize the deferred tax assets, these assets have been eliminated by the
provision of a valuation allowance. Deferred tax assets and liabilities
consisted of the following:
December 31,
----------------------------
1995 1994
------------ -----------
Deferred tax assets $ 637,000 $ 618,000
Valuation allowance (637,000) (618,000)
------------ -----------
$ - $ -
============ ============
Income tax expense results from the non-deductibility of certain
expenses for alternative tax purposes in some state and local jurisdictions.
For the years ended December 31, 1995 and 1994 income tax expense was not
material and was included in general and administrative expense. All income
tax expense represents current expense. There is no deferred income tax
expense or benefit.
12. NOTE PAYABLE--SHAREHOLDER AND RELATED COMMON STOCK TRANSACTION
The note payable--shareholder had no particular due date and was
non-interest bearing.
In an agreement signed April 1996, the shareholder agreed effective
December 31, 1995 to forgive the $1,371,416 note and assume the $710,000
notes payable to the bank (Note 7) that the shareholder had guaranteed and
for which he had provided collateral. In exchange, the shareholder received
additional shares of P & P common stock. This transaction has been recorded
as of December 31, 1995 as an issuance of common stock for the $2,081,416
principal amount. The promise to assume the bank loan payable has been
recorded as a stock subscription receivable. This subscription was deemed
paid by the shareholder's repayment of the bank loan on April 25, 1996.
13. COMMITMENTS
The Company leases the space for its principal office in New York,
NY under an agreement expiring in June 2002. The Company is also obligated
under operating lease agreements for certain office equipment. The minimum
rental commitments are as follows:
-10-
<PAGE>
THE KALEIDOSCOPE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1995
13. COMMITMENTS (Continued)
Office Equipment
------ ---------
1996 $ 441,160 $ 49,995
1997 441,160 25,580
1998 444,836 14,160
1999 463,218 2,360
2000 466,894 -
Thereafter 889,673 -
------------ -----------
$ 3,146,941 $ 92,095
============ ===========
A portion of the office rentals are guaranteed by LMG. The lease is
secured by a $220,580 letter of credit extended on the Company's behalf by a
bank. Collateral and a guarantee supporting the letter of credit have been
provided by the shareholder who had guaranteed the notes payable - bank (see
Note 7).
Rent expense, net of reimbursements by LMG (Note 18) amounted to
$335,567 and $271,437 in 1995 and 1994, respectively. Sublease rentals, from
unaffiliated parties, included in the statement of operations as a reduction
of general and administrative expense, amounted to $141,000 and $46,320 in
1995 and 1994, respectively.
14. CONTINGENCIES
The Company is effectively the guarantor of a $75,000 note (plus
accrued interest of $2,500) payable by LMG to Ventura (see Note 10).
The Company is a defendant in a lawsuit by a former employee
alleging that he was a victim of illegal age discrimination. Management
believes that the claim is without merit and that settlement of the claim
will not have a material effect on the Company's financial position.
Nevertheless, it is at least reasonably possible that a material liability
will result, although the amount cannot be estimated.
15. COMMON STOCK
Common stock consists of:
December 31,
-----------------------
1995 1994
-------- --------
Holdings, 200 shares authorized no par value,
100 shares issued and outstanding $ 1,000 $ 1,000
P&P, 200 shares authorized no par value,
100 shares outstanding 152,125 152,125
Entertainment, 200 shares authorized, 100
shares outstanding 2,000 2,000
-------- --------
$155,125 $155,125
======== ========
P & P is also authorized to issue 1,000 shares of 9% cumulative
preferred stock of which none has been issued.
-11-
<PAGE>
THE KALEIDOSCOPE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1995
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments ("SFAS 107") is effective in the
Company's case for 1995. SFAS 107 requires entities to disclose the fair
values of financial instruments except when it is not practicable to do so.
Under SFAS 107, it is not practicable to make this disclosure when the costs
of formulating the estimated values exceed the benefit when considering how
meaningful the information would be to financial statement users.
The Company's financial instruments at December 31, 1995, which SFAS
107 would be applicable, include the following:
Carrying
Amount
------------
Assets:
Cash $ 393,893
Due from LMG -
Loans receivable--officers and shareholders
(Note 5) 57,533
Liabilities:
Note payable - other (Note 8) 200,000
Guarantee of LMG note payable to Ventura (Note 13) -
Note payable--Ventura, Ltd. (Note 10) 150,000
Because of the difficulties presented in the valuation of most of
these financial instruments by their related party and interrelated nature,
and the limited usefulness of such information, estimating the fair value of
these financial instruments, other than cash, is not considered practicable.
The fair value of cash approximates its carrying value.
17. SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE
Interest and Income Taxes Paid
Cash payments for the following were:
December 31,
------------------------------
1995 1994
------------- -------------
Interest $ 77,782 $ 50,224
============ ============
Income Taxes $ 12,523 $ 883
============ ============
Non-Cash Financing Transactions
During the year ended December 31, 1994, the Company incurred
$81,746 of merger related expenses (Note 3) that remained unpaid at
December 31, 1994. $10,680 of these costs were paid in 1995. The
Company has recorded the remaining unpaid costs at the full amount
billed but is disputing certain of the charges.
During the year ended December 31, 1994, the Company disposed of
$320,407 of advances to
-12-
<PAGE>
THE KALEIDOSCOPE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1995
17. SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE (Continued)
officers in connection with the merger (Note 3). This was included
in merger expense in that year.
During the year ended December 31, 1995, the Company incurred
disengagement costs of $78,964 by creating a note payable to Ventura
of $150,000 that replaced a $71,036 payable that had been created
during predisengagement operations.
As described in Note 12, a shareholder forgave $1,371,416 in loans
and agreed to assume a $710,000 debt in exchange for additional
shares of stock.
18. RELATED PARTY TRANSACTIONS
Salaries and benefits and general and administrative expenses are
net of reimbursements by LMG, which shares office space with the Company, in
the amounts of $627,035 ($850,613 of charges less a provision for bad debts
of $223,578) and $900,602 for the years ended December 31, 1995 and 1994,
respectively.
During each of the years ending December 31, 1995 and 1994, $66,667
of the Company's management compensation expense was paid directly by
Ventura without reimbursement by the Company. These expenses are excluded
from the financial statements.
19. SUBSEQUENT EVENTS
On April 25, 1996, all of the shareholders of Holdings except one
redeemed their shares for nominal consideration. The remaining shareholder,
who was also the majority shareholder of Entertainment contributed his
shares to Entertainment, leaving Entertainment and P&P as the two surviving
independent corporations in the Kaleidoscope Group
On May 3, 1996, all of the issued and outstanding shares of
Entertainment and P&P were exchanged for approximately 40.2% of the
outstanding shares of Common Stock of Kaleidoscope Media Group, Inc.
("KMG"), a company formed for the purpose of acquiring all of the
outstanding shares of Entertainment, P&P and 91% of the outstanding shares
of SeaGull Entertainment, Inc. ("SeaGull"). Pursuant to the same
transaction, the holders of 91% of SeaGull's stock received approximately
59.8% of the outstanding shares of KMG in exchange for their SeaGull shares.
The transaction was accounted for as a purchase of the Company by SeaGull at
a price of $2,900,000.
SeaGull is primarily engaged in the business of the development,
production and domestic and international distribution of entertainment
properties and the licensing and merchandising opportunities associated with
such entertainment properties. It also provides consulting services in the
development of specialty television programming and is involved in the
acquisition and representation of entertainment library properties.
At December 31, 1995, $31,219 due from SeaGull was included in
accounts receivable.
On June 21, 1996 a suit was filed in the State of Michigan against
Holdings, Entertainment and
-13-
<PAGE>
THE KALEIDOSCOPE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1995
19. SUBSEQUENT EVENTS (Continued)
other unrelated parties in the amount of $21,000,000 alleging that they are
successors to the alleged liability for a default judgement entered against
LMG in April, 1995 for an alleged tortious interference taking place in
1988. The Company intends to vigorously defend itself in this litigation.
Management believes that the claim against LMG lacks merit and that, in any
case, Holdings and Entertainment have no responsibility for the debts of
LMG. Furthermore, management believes that if any judgement were to be
entered against Holdings or Entertainment it would be able to obtain
indemnification from the former owner of LMG's business, a major advertising
agency. For these reasons, management believes that the litigation will not
have a material effect on the Company's financial position. Nevertheless, it
is at least reasonably possible that a material liability will result,
although the amount cannot be estimated.
20. GOING CONCERN
At December 31, 1995, the Company had a working capital deficiency
of $754,467, a stockholders' deficiency of $1,005,606, and had incurred net
losses of $211,264 and $820,657 for the years ended December 31, 1995 and
1994, respectively.
Management expects that the combination with SeaGull (Note 19)
through KMG, along with future equity financing sought by the Company will
provide sufficient cash flow to allow the Company to continue as a going
concern. No assurances can be given that the Company will be successful in
realizing the equity financing.
-14-
<PAGE>
Kaleidoscope Media Goup, Inc.
Financial Statement
Balance Sheet
September 30, 1996
<TABLE>
<CAPTION>
ASSETS 1996 1995
- ------ ---- ----
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash & cash equivalents 27,368 159,299
Accounts receivable 2,039,248 655,807
Expenditures billable to clients 423,543 418,788
Loans Receivable 126,244 113,408
Prepaid income taxes 9,455 9,455
Other Current Assets 66,484 73,873
Total Current Assets 2,692,342 1,430,630
Equipment, net of accumulated amortization 153,985 149,398
Investments @ Equity 295,600 -
OTHER ASSETS
Capitalized program costs 1,085,473 -
Deposits - 26,207
Other Assets 18,880 23,976
Goodwill 4,084,053 4,138,271
Amortization of Goodwill (153,152) -
Total Other Assets 5,035,254 4,188,454
---------------- ----------------
TOTAL ASSETS 8,177,181 5,768,482
================ ================
Liabilities and Shareholder Equity 1996 1995
- ---------------------------------- ---- ----
CURRENT LIABILITIES
Payable to KSE 1,042,600 -
Note Payable - HSP 200,000 200,000
Accounts payable and accrued liabilities 1,577,042 1,376,299
Note payable - current portion various 31,092 657,567
Note payable - current portion - WRG 345,000 500,000
Deferred rent - current portion 49,484 52,690
Advances from clients 984,714 834,672
Total Current Liabilities 4,229,932 3,621,228
LONG TERM LIABILITIES
Loan/Notes Payable 1,272,828 1,371,416
Note payable - Ventura 150,000 225,000
Note payable - net of current 67,931 41,835
Notes payable - net of current 26,656 20,889
Deferred rent - net of current 319,866 223,861
Total Long Term Liabilities 1,837,281 1,883,001
Total Liabilities 6,067,213 5,504,229
SHAREHOLDER'S EQUITY
Common Stock 2,012 12
Additional Paid in Capital 3,275,988 1,187,207
Accumuated (deficit) (1,168,032) (922,966)
Total Shareholder's Equity 2,109,968 264,253
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDER EQUITY 8,177,181 5,768,482
================ ================
</TABLE>
<PAGE>
Kaleidoscope Media Goup, Inc.
Financial Statement
Statement of Operations
Nine Months Ending September 30, 1996
1996 1995
---------- -----------
Gross Revenue $ 8,202,757 $ 5,626,809
Discounts & Fees 1,236,344 -
---------- -----------
Net Revenue 6,966,413 5,626,809
Expenses
Direct Costs 3,752,848 2,922,847
Salaries and other employee benefits 1,890,185 1,650,270
General and administrative 1,654,702 1,788,243
Interest expenses+Goodwill 231,135 125,981
--------- ---------
Total Expenses 7,528,870 6,487,341
Income on Equity Investment 295,600
-
Pre Tax Income/(Loss) (266,857) (860,532)
Non Operating Expense - Disengagement 534,309
State & Local Tax Provision 19,842 4,617
Total Net Income/(Loss) (286,699) (1,399,458)
--------- -----------
<PAGE>
NOTES TO KMG FINANCIAL STATEMENTS
Note 1. Financial Overview - KMG
The accompanying balance sheet and the income statements of
Kaleidoscope Media Group Inc. (other than such statements for the last fiscal
year) have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position and results of operations and
cash flows at the date and for the period herein have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The results of operations for the
interim periods are not necessarily indicative of the results for the full year.
On May 3, 1996, certain shareholders of SeaGull Entertainment
Inc.("SeaGull") and the shareholders of Kaleidoscope Group ("Kaleidoscope"),
which consists of two corporations (Kaleidoscope Entertainment Inc. and People
and Properties Inc.) that were affiliated with one another, exchanged their
shares for the shares of a new company, Kaleidoscope Media Group, Inc. ("KMG").
The shareholders of Kaleidoscope received 40.2% of the stock of KMG and the
certain shareholders of SeaGull received 59.8% of the stock of KMG in exchange
for their 91% of SeaGull's outstanding shares (at a rate of approximately 8,660
KMG shares for each share of SeaGull. The transaction has been accounted for as
a purchase of Kaleidoscope by SeaGull. The acquisition was recorded at
Kaleidoscope's estimate fair value of $2,900,000.
Kaleidoscope is primarily engaged in sports and event marketing and
consulting, including event management, sponsor and event representation, event
related sales promotions, event related media and publicity, advertising and
sponsorship sales and specialty publishing. Most of Kaleidoscope's projects are
sports related.
SeaGull is primarily engaged in the business of the development,
production and domestic and international distribution of entertainment
properties and the licensing and merchandising opportunities associated with
such entertainment properties. SeaGull has entered into several joint ventures
with other entertainment companies to create and market various properties. A
substantial portion of SeaGull's efforts during 1995 and 1996 involved the
production, marketing and promotion of an action/adventure television program
that was launched in the fall 1996 television broadcast season in the United
States. International broadcasts, for which international license contracts have
been obtained, is expected to commence in early 1997. SeaGull is also working
with other partners to develop a second action/adventure series and a daily home
shopping program for broadcast in the fall 1997 television season.
Note 2. Significant Accounting Principles
Program Cost Inventory
Production costs and direct costs of pre-release and early release
marketing and distribution are capitalized as film cost inventory. Film cost
inventory is amortized using the "individual-film-forecast-computation method."
Under this method, film costs are amortized in the same ratio that the
<PAGE>
film's current gross revenue bears to the film's anticipated total gross
revenue. As of September 30, 1996 costs in the amount of $1,085,473 have been
capitalized.
Revenue Recognition
Entertainment: Revenue from the licensing or distribution of a film is
recognized when the licensee of the film has the legal right to exhibit or
broadcast the film and the film is deliverable to the licensee. Through
September 30, 1996, six of twenty two episodes of the action/adventure series
have been delivered for domestic broadcast, while none of the episodes for
international broadcast were delivered.
Sports/Event Management: Revenue from consulting and management of
events owned by others is recognized over the period during which the services
are rendered. Revenue from Company owned events is recognized when the
production of the event is complete. Revenue from sponsorship sales and
representation for a specific event is recognized when the event occurs.
Expenditures Billable to Clients
Expenditures billable to clients represent direct costs incurred by the
Company, in connection with various contracts, that are either specifically
billable to the clients under the contracts or relate to contracts for which the
fees have not yet been billed or earned. Payroll and related costs, including
those relating to specific client work, are expensed as incurred.
Deferred Revenue
Deferred revenue represents amounts received from or billed to clients
in accordance with certain contracts prior to the Company's completion of the
earning process in accordance with its revenue recognition policy. Upon
completion of the earning process, the amounts are included in revenue.
Property and Equipment
Property and equipment are stated at cost and, except for leasehold
improvements, are depreciated according to accelerated methods over the
estimated useful lives. Leasehold improvements are amortized over the term of
the lease.
Equity Investment
Financial results from the joint venture that produces and distributes
the action/adventure series are not consolidated into the Company's financial
statements, but are instead accounted for through the equity method. For the
nine months ended September 30, 1996 the Company has recorded $295,600 in equity
income.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
<PAGE>
Receivables Billed on Behalf of Clients
Kaleidoscope has been contracted by Keller Siegel Entertainment LLC. (a
joint venture of Keller Entertainment and SeaGull Entertainment) to perform
domestic distribution, sales, billing and credit and collection functions
associated with the broadcast of the action/adventure series. The financial
statements of the Company show billed receivables from various advertising
agencies of $1,042,600 and an offsetting liability to Keller Siegel
Entertainment of $1,042,600.
Loans and Notes Payable
Kaleidoscope has received cash payments from BNN Corporation ("BNN")
during the current fiscal year that are recorded as a loan payable to BNN in the
amount of $1,272,828. Upon completion of the reverse acquisition of BNN by KMG,
(see note 3) the loans will be treated as paid-in capital.
During 1996 the Company executed settlement agreements with guarantors
(who were also shareholders) of a $500,000 note payable, who had repaid the
original creditor. The Company will repay the note principal (the current
balance is $345,000) and associated interest in installments through 1997.
Note 3. Subsequent Event
On October 22, 1996, KMG effected a reverse acquisition of BNN, an
inactive publicly traded company. BNN acquired KMG by exchanging 9,500,000
common shares of BNN for all the outstanding common shares of KMG. For
accounting purposes, KMG will be treated as the continuing entity and the
transaction will be treated as a recapitalization of KMG.
<PAGE>
BNN Corp
Pro Forma Financial Statements
Consolidated Balance Sheet w/ KMG
September 30, 1996
<TABLE>
<CAPTION>
ASSETS 1996 1995
- ------ ---- ----
CURRENT ASSETS
<S> <C> <C> <C> <C>
Cash & cash equivalents $ 27,368 $ 159,299
Accounts receivable 2,039,248 655,807
Expenditures billable to clients 423,543 418,788
Loans Receivable 126,244 113,408
Prepaid income taxes 9,455 9,455
Other Current Assets 66,484 73,873
Total Current Assets 2,692,342 1,430,630
Equipment, net of accumulated amortization 153,985 149,398
Investments @ Equity 295,600 -
OTHER ASSETS
Capitalized program costs 1,085,473 -
Deposits 3,900 30,107
Other Assets 43,880 48,976
Goodwill 4,084,053 4,138,271
Amortization of Goodwill (153,152) -
Total Other Assets 5,064,154 4,217,354
---------------- ----------------
TOTAL ASSETS $ 8,206,081 $ 5,797,382
================ ================
Liabilities and Shareholder Equity 1996 1995
- ---------------------------------- ---- ----
CURRENT LIABILITIES
Payable to KSE 1,042,600 -
Note Payable - HSP 200,000 200,000
Accounts payable and accrued liabilities 1,583,042 1,376,299
Note payable - current portion various 31,092 657,567
Note payable - current portion - WRG 345,000 500,000
Deferred rent - current portion 49,484 52,690
Advances from clients 984,714 834,672
Total Current Liabilities 4,235,932 3,621,228
LONG TERM LIABILITIES
Loan/Notes Payable - 1,371,416
Note payable - Ventura 150,000 225,000
Note payable - net of current 67,931 41,835
Note payable - net of current 26,656 20,889
Deferred rent - net of current 319,866 223,861
Total Long Term Liabilities 564,453 1,883,001
Total Liabilities 4,800,385 5,504,229
SHAREHOLDER'S EQUITY
Common Stock 148,743 82,643
Additional Paid in Capital 4,978,522 1,761,141
Accumuated (deficit) (1,721,569) (1,550,631)
Total Shareholder's Equity 3,405,696 293,153
---------------- ----------------
</TABLE>
<PAGE>
BNN Corp.
Pro Forma Financial Statements
Consolidated Statement of Operations w/KMG
Nine Months Ending September 30, 1996
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Gross Revenue $ 8,202,757 $ -
Discounts & Fees 1,236,344 -
---------- -
Net Revenue 6,966,413 5,626,809
Expenses
Direct Costs 3,752,848 2,922,847
Salaries and other employee benefits 1,890,185 1,650,270
General and administrative 1,825,640 1,915,543
Interest expenses+Goodwill 231,135 205,981
-------- -------
Total Expenses 7,699,808 6,694,641
Income on Equity Investment 295,600 -
Pre Tax Income/(Loss) (437,795) (1,067,832)
Non Operating Expense - Disengagement 534,309
State & Local Tax Provision 19,842 4,617
Total Net Income/(Loss) (457,637) (1,606,758)
--------- -----------
</TABLE>
<PAGE>
BNN Corp
Pro Forma Financial Statements
Consolidated Statement of Operations w/KMG
Fiscal Year ending December 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Revenue $6,681,484
Expenses
Direct Costs 3,548,261
Salaries and other employee benefits 1,801,662
General and administrative 1,976,680
Interest expenses+Goodwill 281,732
---------
Total Expenses 7,608,335
Net Income $(926,851)
=========
12/11/96
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Dated: December 19, 1996 BNN CORPORATION
(registrant)
By: /s/ Henry Siegel
---------------------------------------------
Henry Siegel, Chairman of the Board, Director
(Principal, Financial and Accounting Officer)
