<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal Quarter ended June 30, 1997 or
--------------------
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from _________________
Commission file number 0-17591
-------------------
BNN CORPORATION
----------------------------------------------------
(Exact name of small business issuer in its charter)
Nevada 93-0957030
- --------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
345 Park Avenue South, New York, New York 10010
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
212-779-6601
------------------------------------------------
(Issuer's telephone number, including area code)
-----------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
----------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes _X_ No ___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The number of shares outstanding of the issuer's common stock is 25,057,000
(as of June 30, 1997).
Transitional Small Business Disclosure Format: Yes No X
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The following discussion and analysis provides information that the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. The discussion
should be read in connection with the financial statements and footnotes which
appear elsewhere in this report.
On October 22, 1996, BNN Corporation acquired the Kaleidoscope Media Group
Inc., (KMG) through a stock exchange. KMG was itself formed on May 3, 1996,
through the acquisition of the Kaleidoscope Group (primarily Kaleidoscope
Entertainment, Inc. and People and Properties, Inc.) by SeaGull Entertainment,
Inc. For accounting purposes, the acquisition of KMG by the Company was treated
as a recapitalization of KMG, and as such, the surviving entity for reporting
purposes is SeaGull Entertainment The consolidated financial statements provided
in this report for the quarter ended June 30, 1997, include consolidated six
months of SeaGull Entertainment and BNN Corporate, consolidated four months of
Kaleidoscope Group and two months of Kaleidoscope Sports and Entertainment LLC
as an equity investment. These periods of reporting reflect various months of
full ownership or partial ownership in the current fiscal year and are
consistent with the reporting method utilized for the prior fiscal year. The
comparative results reported for the six months ending June 30, 1996 are those
of SeaGull Entertainment for six months and the months of May and June for the
Kaleidoscope Group, subsequent to the creation of KMG.
In the quarter ended June 30, 1997, a new sports and entertainment entity,
called Kaleidoscope Sports and Entertainment LLC, (KS&E) a limited liability
company, was established and all sports and entertainment properties of People
and Properties, a subsidiary of the Company, were transferred into the new
venture. After the transaction, employees of Kaleidoscope Group became employees
of KS&E. Prior to concluding the transaction, Ray Volpe resigned as an officer
of BNN and became chief executive officer of KS&E. Mr. Volpe is a director of
the corporation and until his resignation prior to the transaction, was co-chief
executive officer of the Company.
On May 5, 1997, People & Properties, Inc. sold to Interpublic Group of
Companies, Inc. ("IPG"), an aggregate 51% interest in KS&E. The sale was made
pursuant to an amended and restructured limited liability company agreement (the
"Agreement"). IPG is an unaffiliated public corporation engaged in the
advertising and public relations business. The purchase price was based upon the
earnings of KS&E during the three annual periods immediately subsequent to the
closing ("Earning Period"), with a down payment of $2,200,000 paid at closing.
The Agreement grants IPG a one year option to acquire the remaining 49 percent
of KS&E for a purchase price based on the earnings of KS&E during the Earning
Period with an additional down-payment of $1,900,000 at the option closing date.
The complete Agreement was included as an attachment to the relevant 8K filing
by the Company, dated May 20, 1997.
Subsequent to the close of the quarter, General Motors Corporation executed
a signed agreement with KS&E, to establish a long term relationship. Management,
based upon present and proposed business commitments, pursuant to such
agreement, was able to estimate a minimum profit of the IPG transaction over the
three year Earning Period.
SEC accounting rules provide that with regard to a sale, wherein the final,
actual purchase price is indeterminate, the Company must be able to establish
beyond a reasonable doubt that the reported purchase price will be realized.
That Company has made that determination based upon the contractual guarantees
given to KS&E by General Motors and the provisions within the Agreement with IPG
that restricts cost increases to be pari parsu with increases in income. The
majority of the forecast income is
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based upon the General Motors contract and does not include any assumptions of
new business beyond projects already committed over the term of the Earning
Period. Furthermore, the forecast does not include earnings from the Company's
49% equity participation in KS&E over the three years.
Notwithstanding the foregoing, the Company has taken a substantial reserve
against the future profit. Based upon the foregoing and creditworthiness of
General Motors, in the quarter ended June 30, 1997, the Company booked a
$1,845,000 non-current receivable from IPG, and recorded that amount as
additional income on the sale of the 51% interest. As a related accounting entry
in the same period, the Company has written off 51% of the existing goodwill
associated with the sports properties transferred to KS&E, and has reclassified
the remaining 49% balance to investment at equity. Because goodwill amortization
and write-offs are not allowable as tax deductible expense, the Company is
accruing a tax liability in the amount of $1,600,000 on the gross proceeds from
the sale. The Company has combined state and federal NOL's in excess of
$3,000,000 that will be utilized to reduce the tax liability actually paid. As a
result of NOL utilization, the cash outflow related to the tax expense will be
significantly reduced. Because the NOL's were previously recorded in prior
period income statements, they can not be used to reduce the tax expense shown
on the income statement for the current period.
Subsequent to the sale of the 51% interest, financial results of KS&E
were included in the Company's financial statements pursuant to the equity
method. For the quarter ended June 30, 1997, $162,000 equity income from the
49% share of KS&E has been recognized.
Management continued to be heavily involved in finalizing production and
financing arrangements and business relationships necessary to begin production
of two major entertainment properties, "Merlin" and "Team Xtreme." Production is
expected to begin in the third quarter of this fiscal year, "Merlin" as a two
hour movie, and "Team Xtreme" as a movie and 22 episode series. Both movies are
scheduled for international and U.S. release in the fall of 1997. The "Team
Xtreme" series will be broadcast in markets outside the U.S. starting with fall
1997, and is scheduled for U.S. release in the fall of 1998. Other projects are
under development and may reach commencement as early as the third quarter 1997.
During the second quarter ended June 30, 1997, the Company continued to
invest in the development of entertainment and sports properties intended to
position the Company for long-term growth and fiscal stability. Among these was
the launch in June of the daily transactional television program "Hollywood
Discoveries" (previously titled "Hollywood Connection") and "Boxcino," a
multi-event boxing series featuring Latin American fighters.
Management undertook several initiatives to ensure adequate interim cash
resources. The Company is seeking to obtain necessary funding from (a) equity
and debt financing, (b) arrangements for profit participation in individual
projects and (c) marketing or advertising tie-ins to programs. Management is
currently pursuing several financing proposals through debt and equity
instruments and expects to close several arrangements during the third quarter
of this fiscal year.
On July 22, 1997, several alleged creditors filed an involuntary petition
in bankruptcy in the U.S. Bankruptcy Court, Central District of California,
bearing case number LA97-38036AA, against SeaGull Entertainment, Inc. d/b/a/ The
Hollywood Connection, and d/b/a Hollywood Connection LLC. SeaGull Entertainment
,Inc. denies that it is insolvent and will file its answer September 2, 1997.
Note: Any forward looking statements in these comments are necessarily subject
to risks and uncertainties which may affect the accuracy of such statements and
limit the Company's ability to meet its projections. Such risks may include
unanticipated declines in revenue due to competitive, market and general
economic risk factors.
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<PAGE>
Results of Operations
The Company reported $1,465,412 in pretax profits for the quarter ended June
30, 1997, compared with a loss of ($718,928) for same period in the prior fiscal
year. On a net income basis, the results for the quarter were a profit of
$250,751 compared to a loss in the prior fiscal year of ($718,928). For the six
months ended June 30, 1997, pretax profits were $1,846,894 compared with a loss
of ($847,628) for the prior fiscal year, and on a net income basis $451,833 for
the six months compared with a loss in the prior year of ($847,628).
Net revenues for the second quarter ended June 30, 1997, consist of total
billings, less any agency fees and media costs, that totaled $492,850, compared
with net revenue of $1,085,297 in the comparable three-month period for fiscal
1996. For the six month period ended June 30th 1997, net revenues were
$1,709,431 compared with $1,208,371 in the comparable period in the prior year.
The second quarter revenues for the current fiscal year are largely
attributable to the launch of Boxcino, and fees associated with several sports
properties. Revenues in the comparable prior year period were attributable to
fees associated with sports events and fees associated with distribution of two
television programs. The decline in the current fiscal year compared with the
second quarter in the prior fiscal year is attributable to several factors
including; revenues from distributed television programming not repeated in the
current fiscal year; sports related activity lower as Management and clients
focused efforts on the creation of KS&E; sports sponsorship higher in the
previous fiscal year, related to the 1996 Olympic Games.
Gross profit after direct project costs was $350,116 for the quarter ended
June 30, 1997 compared with $908,969 for the prior year as a result of lower
revenue noted above. Direct costs include costs necessary to create, market and
manage an event, or produce, market and distribute a broadcast or other
entertainment property, but exclude staff salaries, general and administrative
costs. For the six months ended June 30, 1997 gross profit was $1,245,566
compared with $1,032,043 in the comparable period in 1996.
The Company expensed $116,248 of program cost inventory in the quarter
ended June 30, 1997, based on the ratio of the current period's gross revenue to
estimated total gross revenues from all sources on an individual project basis.
For the six months, the entire amount expensed, $334,560, is attributable to
costs that had been capitalized as related to the production of "Tarzan, The
Epic Adventures."
Salaries and related benefit costs were $289,192 for second quarter 1997,
compared with $711,664 for the prior year. The reduction reflects the transfer
of sports-related personnel to KS&E compared to full staffing in the prior year,
and capitalization of some production related costs in SeaGull Entertainment,
related to "Merlin" and "Team Xtreme." At the same time, the Company reduced the
number of consultants and outside service providers, where such reductions were
feasible. For the six months ended June 30, 1997, salaries and related benefit
costs were $1,037,145 compared with $829,340 for the prior year, partly
attributable to a larger number of staff hired to manage administrative and
financial requirements of the Company as well as development of programs.
Total expenses other than direct costs were $865,927 for second quarter
1997 compared to $1,627,897 for 1996. The 1997 expenses include amortization of
goodwill in the amount of $25,517 compared to no amortization of goodwill the
comparable period in the prior year and amortization of capitalized program
costs in the amount of $116,248 compared to no amortization the prior year. For
the six months ended June 30, 1997, total expenses other than direct costs were
$2,247,595 compared with $1,879,671 for the comparable period the prior year.
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<PAGE>
The Company suffered a loss of ($423,100) in equity income for the quarter
ended June 30, 1997, from its participation in a 50%-owned venture that
produces, distributes and licenses the syndicated series, "Tarzan, Epic
Adventures." Income from this property is generated from advertising sales and
licenses for home video, cable television, international broadcast rights, and
merchandising of toys, books and related items. Reported under the rules of FAS
53, income and expense accruals were based upon the delivery of scheduled
episodes against an "ultimate" earnings forecast, less forecast costs over the
viable life of the property. The loss was the result of a downward revision of
the earnings forecast for the first season of Tarzan and reduced the $867,700
profit recorded in the quarter ended March 31, 1997. The downward revision was
necessitated expectation of lower advertising revenues caused by the impact of
lower television program viewer ratings (Nilesen ratings) than forecast. Also
contributing to the loss in the quarter were reductions in foreign license and
U.S. home video fees, associated with deductions against fees permitted by
contractual provisions in various license agreements.
Income Taxes
The provision for state and federal income tax was $1,214,661 for second
quarter 1997, on a pretax basis of $1,465,412 compared with no tax provision for
the second quarter 1996 on a pretax loss of ($718,928). The income tax expense
for 1997 does not bear the expected relationship between pretax income and the
federal corporate tax rate of 34% because of the effect of state and local
income taxes and the fact that the company's amortization of goodwill, the
write-off of $1,640,759 goodwill associated with the 51% sale of KS&E and
certain other expenses are not deductible for income tax purposes.
At June 30, 1997, net operating loss carryforwards ("NOLs") of the Company
amounted to approximately $979,940 for Federal income tax purposes. The
carryforwards are not available for state income tax purposes. The NOLs begin to
expire in varying amounts starting in 2003.
In addition, certain of the Company's subsidiaries have approximately
$1,235,000 of NOL carryforwards that can only be used to offset future taxable
income (for federal and certain state purposes) of the specific subsidiaries to
which they pertain. These carryforwards are further limited by the operation of
Section 382 of the Internal Revenue Code. The subsidiaries are only allowed to
use a maximum of approximately $120,000 of these carryforwards each year.
Additional portions of the carryforwards can be used to offset certain gains on
disposition of assets, and will be fully utilized to offset the gain on the sale
of the 51% interest in KS&E.
Liquidity and Capital Resources
As of June 30, 1997, the Company reported cash of $13,060 compared with
$154,006 reported at December 31, 1996. During the six months ended June 30,
1997, total operating activities of the companies generated a net inflow of
funds of $1,599,351. Despite this cash inflow and additional cash generated by
issuance of warrants and stock, the repayment of $931,984 in short term notes
and the investment activity of $1,274,589 in various projects (e.g. "Boxcino",
"Hollywood Discoveries") there was a net decrease in cash ($140,946) that fully
depleted the cash resources.
Investing activities, primarily use of funds to create programs whose costs
were capitalized, generated a net outflow of ($1,274,589) in the six months
ended June 30, 1997. Entertainment properties including "Tarzan: The Epic
Adventures," "Boxcino", "Merlin", "Team Xtreme" and "Hollywood Discoveries"
(formerly called "Hollywood Connection"), all required extensive funding for
development, promotion and marketing. Although many of these costs were
capitalized for income statement purposes (until the programs are released and
revenue is recognized) they nevertheless represent a significant cash outflow.
Of the
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<PAGE>
properties mentioned, "Tarzan" was released into syndication in 1996, Boxcino
was launched in April 1997, and Hollywood Discoveries was launched in June of
1997. The others remain in development for fall 1997 release. Typically, the
nature of the "television broadcast season" is such that properties are often
not released in the U.S. until the fall season (September), as was the case with
"Tarzan" in 1996, and internationally, properties may not be broadcast until the
following calendar year. The series "Team Xtreme" will be launched a in 1998, a
year after international release. As a result, expenditures are required
significantly in advance of any expected cash inflow, although some pre-payments
from licensees have been received to offset initial marketing and development
costs.
Entertainment properties are accounted for under the revenue and expense
recognition provisions of FAS 53, and no cash was received by the Company in the
quarter ending June 30, 1997 from its 50% participation in the joint venture
that produces and distributes "Tarzan." This largely resulted from the
obligations of the joint venture to its lender to subordinate payments to
others, including the joint venture, until the loan shall be repaid in full.
This is expected to happen later in 1997 and cash from earnings should be
received for distribution or subsequent re-investment. Although income was
accrued on the equity income in the 49% ownership of Kaleidoscope Sports &
Entertainment, no cash was received by the Company during the quarter.
The daily transactional television program "Hollywood Discoveries began in
June. Expected revenue from program advertising and direct sale of products to
viewers has been below expectations and management does not expect positive cash
flows from this project within the third quarter however an agreement with a
third party to participate in the program as a 50% venture partner is expected
to generate operating funds and should reimburse some costs already incurred.
Management believes that as additional entertainment properties are released to
the market, cash flows from these properties will improve the overall Company
cash situation significantly. Although each new project going into production
will require additional financial resources, Management expects that financing
from venture partners and funding from sponsorships and pre-sales of programming
will provide a significant portion of these needs.
Despite overall profitability during the quarter and the receipt of
$2,200,000 from IPG on the sale of the 51% in KS&E noted above, operating cash
flow needs and investment in projects necessitated additional funding being
obtained. Of the amount received by the Company from IPG, approximately
$1,000,000 was utilized to retire short-term, interest-bearing demand notes,
with the balance utilized to reduce various payables. Because early results of
Boxcino, Hollywood Discoveries, and other entertainment properties generated
very little cash, Management undertook several initiatives to ensure adequate
interim cash resources. The Company is seeking to obtain necessary funding from
(a) equity and debt financing, (b) arrangements for profit participation in
individual projects and (c) marketing or advertising tie-ins to programs.
Management is currently pursuing several financing proposals through debt and
equity instruments and expects to close several arrangements during the third
quarter of this fiscal year
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<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL RESULTS
JUNE 30, 1997
(UNAUDITED)
C O N T E N T S
Page
----
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 2-3
CONSOLIDATED STATEMENTS OF OPERATIONS 4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-13
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<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
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1997 1996
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<S> <C> <C>
CURRENT ASSETS
Cash $ 13,060 $ 154,006
Accounts receivable, less allowance for doubtful
accounts of $-0- in both 1997 and 1996 942,147 976,345
Expenditures billable to clients 1,258,848 317,719
Loans receivable--officers and shareholders 187,897 107,031
Program cost inventory - current portion,
net of accumulated amortization 298,729 355,725
Deferred income taxes 907,400 313,700
Other current assets 35,728 117,998
--------- ---------
Total Current Assets 3,643,809 2,342,524
PROGRAM COST INVENTORY, less current portion,
net of accumulated amortization 940,199 567,461
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation 103,483 136,408
INVESTMENT IN JOINT VENTURE 4,173,039 1,134,600
DEFERRED INCOME TAXES 328,600 1,045,300
GOODWILL, net of accumulated amortization -- 3,317,994
OTHER ASSETS, including noncurrent A/R 1,866,316 21,116
--------- ---------
$11,055,446 $ 8,565,403
========== =========
</TABLE>
See notes to financial statements.
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<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities 1,873,968 1,733,664
Notes payable, current portion 532,128 1,114,159
Income taxes payable 1,412,120 166,921
Capitalized lease obligation - current portion 17,166 30,843
Deferred rent - current portion 19,778 39,780
Deferred income and client advances 1,445,189 578,506
--------- ---------
5,300,349 3,663,873
NOTES & LOANS PAYABLE, less current portion -- 80,000
CAPITALIZED LEASE, less current portion -- 2,902
DEFERRED RENT, less current portion 323,048 323,412
--------- ---------
Total Liabilities 5,623,397 4,070,187
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STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value, 50,000,000 and
10,221,462 shares authorized, 25,057,082
and 6,247,868 shares issued, in
1997 and 1996, respectively 158,931 146,731
Additional paid-in-capital 5,432,305 4,959,506
Accumulated deficit (409,939) (611,021)
Stock subscriptions receivable less
allowance for doubtful accounts
of $438,075 in 1997 -- --
Treasury stock 529,000 shares in 1997
at cost -- --
--------- ---------
Total Stockholders' Equity (Deficit) 5,432,049 4,495,216
--------- ---------
Total Liabilities and Stockholders' Equity (Deficit) $ 11,055,446 $ 8,565,403
========== ==========
</TABLE>
See notes to financial statements.
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<PAGE>
BNN CORPORATION AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET REVENUE $ 492,850 $ 1,085,297 $ 1,709,431 $ 1,208,371
DIRECT PROJECT COSTS 142,734 176,328 463,865 176,328
-------- --------- --------- ---------
GROSS PROFIT 350,116 908,969 1,245,566 1,032,043
-------- --------- --------- ---------
EXPENSES
Amortization of program costs 116,248 -- 334,560 --
Salaries and benefits 289,192 711,664 1,037,145 829,340
General and administrative 360,713 856,145 703,309 988,986
Amortization of goodwill 25,517 -- 68,513 --
Interest & Local Taxes 74,257 60,088 104,068 61,345
-------- --------- --------- ---------
Total Expenses 865,927 1,627,897 2,247,595 1,879,671
-------- --------- --------- ---------
LOSS BEFORE EQUITY
IN INCOME OF JOINT VENTURE
AND INCOME TAXES (515,811) (718,928) (1,002,029) (847,628)
EQUITY IN INCOME OF JOINT VENTURE (423,218) -- 444,482 --
INCOME ON SALE OF ASSETS 2,404,441 -- 2,404,441 --
-------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 1,465,412 (718,928) 1,846,894 (847,628)
INCOME TAX EXPENSE 1,214,661 -- 1,395,061 --
-------- --------- --------- ---------
NET INCOME (LOSS) $ 250,751 $ (718,928) $ 451,833 $ (847,628)
======== ========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE
Primary $ 0.01 $ (0.05) $ 0.02 $ (0.06)
======== ========= ========= =========
Fully diluted $ 0.01 $ (0.05) $ 0.02 $ (0.06)
======== ========= ========= =========
</TABLE>
See notes to financial statements.
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<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Shares Common Paid-in Accumulated
Issued Stock Capital Deficit Total
---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Six months Ended June 30, 1996
Balance--January 1, 1996 6,247,868 $ 12 $ 375,988 ($ 846,976) $ (470,976)
Net loss - 6 months YTD -- -- -- (847,628) (847,628)
Issuance of shares for
acquisition of Kaleidoscope
Group 3,814,312 38,143 2,861,857 -- 2,900,000
Various entries related to the
acquisition and consolidation
of Kaleidoscope Group 116,982 620,494 75,795 813,271
---------- ----------- ----------- ---------- ----------
Balance--June 30, 1996 10,062,180 $ 155,137 $ 3,858,339 ($1,618,809) ($2,466,437)
========== =========== =========== ========== ==========
Six months Ended June 30, 1997
Balance--January 1, 1997 23,557,082 $ 146,731 $ 4,959,506 $ (611,021) $ 4,495,216
Issuance of warrants -- -- 125,000 -- 125,000
Issuance of shares for
cash consideration 1,500,000 15,000 345,000 -- 360,000
Reclassification Adjustment (2,800) 2,800
Net income -- -- -- 451,833 451,833
---------- ----------- ----------- ---------- ----------
Balance - June 30, 1997 25,057,082 $ 158,931 $ 5,432,305 $ (159,187) $ 5,432,049
========== =========== =========== ========== ==========
</TABLE>
See notes to financial statements.
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<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months Ended June 30
----------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 451,833 $ (847,628)
Adjustment to reconcile net loss to net
cash provided by used in operating activities:
Amortization and depreciation 92,749 --
Write-off 51% of goodwill on sale of interest to IPG 1,640,759 --
Non-current receivable from sale of interest to IPG (1,845,200) --
Equity in income of joint venture (444,482) --
Executive producer's fee retained by joint venture (141,700) --
Exec Producer Fees 66,000 --
Deferred income tax expense 123,000 --
Deferred rent (20,367) --
Change in assets and liabilities
Accounts receivable 128,198 --
Expenditures billable to clients (941,129) --
Other current assets 82,270 --
Accounts payable and accrued liabilities 140,304 --
Payable to KG prior to acquisition -- --
Income taxes payable 1,245,199 --
Deferred income and client advances 880,217 --
----------- ---------
Net Cash Provided by Operating Activities 1,599,351 --
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans to officers and shareholders (69,899) --
Investments in Equity (586,354) --
Expenditures for program costs (615,742) --
Acquisition of property and equipment (2,594) --
----------- ---------
Net Cash Used in Investing Activities (1,274,589) --
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of loans from BNN -- --
Issuance of warrants 125,000 --
Proceeds from notes payable 229,953 --
Repayments of notes payable (931,984) --
Principal payments on capitalized lease obligations (13,677) --
Issuance of common stock 125,000 --
----------- ---------
Net Cash Provided by Financing Activities (465,708) --
----------- ---------
INCREASE/(DECREASE) IN CASH (140,946) --
CASH
Beginning of period 154,006 --
End of period $ 13,060 $ --
=========== =========
</TABLE>
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<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. MAJOR CUSTOMERS
During the six months ended June 30, 1997, approximately 50% of the
Company's operating revenue was derived from services provided to one
U.S. automobile company. During the six months ended June 30, 1996,
the Company's revenue was derived from the distribution of two
television programs and two months of sports events management fees,
subsequent to the formation of KMG.
2. INCOME SOURCES
The Company's principal source of income for the quarter ended June 30,
1997 were (a) the proceeds from the sale of the 51% interest in
Kaleidoscope Sports and Entertainment LLC, and (b) the accrual on an
equity basis, of the retained 49% interest in KS&E. Entertainment
properties, such as Tarzan: The Epic Adventures, typically generate
income in the fourth and first quarters, linked to delivery of
programming for the television broadcast season. The launch of
"Hollywood Discoveries" in June generated losses in the first month of
operations that were reported under the equity method.
3. PROGRAM COST INVENTORY
Program cost inventory is comprised of capitalized development costs
related to entertainment properties prior to completion of the
properties, and and consisted of the following at:
June 30, December 31,
---------- -----------
1997 1996
---- ----
Current portion 298,729 355,725
Noncurrent portion 940,199 567,461
---------- ----------
Total Program Cost Inventory $1,238,928 $ 923,186
========== ==========
4. INVESTMENT IN KELLER SIEGEL ENTERTAINMENT, JOINT VENTURE
Summarized financial information of KSE as of June 30, 1997 is as
follows:
Assets $12,762,000
Liabilities 8,758,000
-----------
Members capital 4,004,000
===========
Revenue 6,466,000
Net income 887,200
Company's equity in net income 443,600
- 7 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
4. INVESTMENT IN KELLER SIEGEL ENTERTAINMENT, JOINT VENTURE (continued)
During the quarter ended June 30, 1997, the Company booked a
($423,100) downward adjustment to earnings that had been accrued
through the first quarter of the current fiscal year. The downward
revision was necessitated the impact of lower television program viewer
ratings (Nilesen ratings) than forecast, which result in lower domestic
advertising income. There were also reductions in foreign license and
U.S. home video fees, associated with deductions against fees permitted
by contractual provisions in various license agreements.
The production costs for the two part premiere episode of Tarzan:
The Epic Adventures, along with certain pre-release marketing costs
were funded by a third party under an agreement by which the third
party was to fund the production costs for the entire season's episodes
in exchange for significant gross profit participation. The third party
refused to supply the funding for the remaining episodes. As a result,
KSE incurred significant costs in arranging for alternate financing. It
is possible that the third party will advance claims for the return of
the monies advanced and/or a share of the profits allocable to the
two-part premiere. Management believes that such claims have no merit
because of the breach of the agreement by the third party. In addition,
management believes that it has valid counterclaims for damages arising
from the breach of the agreement that exceed the third party's claims.
It is, nevertheless, at least reasonably possible that a material
liability could result, although the amount cannot be estimated.
5. NOTES and LOANS PAYABLE
June 30, December 31,
-------- -----------
1997 1996
---- ----
Note payable arising from the settlement of
the disputes relating to the $500,000 loan
resolved in 1996. The note is payable in monthly
installments of $30,000 without interest 139,220
Note payable arising from the settlement of
the disputes relating to the $500,000 loan
resolved in 1996. The note is payable in monthly
principal installments of $10,000 per month 55,220 200,000
Note payable to an entity controlled by the Company's
Chairman and Co-CEO 200,000 200,000
Note payable to a bank in monthly installments of
$1,422, including interest at 8.89% per annum 6,955 14,969
Note payable to the former parent of KG:
agreement to pay reduced balance in
three installments of $13,333 during 1997 40,000 40,000
- 8 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
5. NOTES and LOANS PAYABLE (continued)
June 30, December 31,
----------- -----------
1997 1996
---- ----
Notes Payable to unaffiliated entities, due upon
demand with interest at 8% per annum
payable quarterly 229,953 600,000
----------- -----------
532,128 1,194,189
Less: current portion (532,128) (1,114,189)
----------- -----------
$ -- $ 80,000
=========== ===========
6. WARRANTS
During the six months ended June 30, 1997, the Company issued
1,500,000 warrants, to an individual who became a Director on April 1,
1997, in exchange for $125,000 cash. Each warrant, which expires March 5,
1998, entitles the holder to purchase one share of common stock for $0.60.
In addition, through June 30, 1997 the Company had issued 4,075,170
warrants, principally as additional consideration to the holders of certain
of the notes payable. Each warrant, expiring in November, 1998, entitles
the holder to receive one share of common stock at $.25 per share.
7. CONTINGENCIES
On June 21, 1996, a suit was filed against two of the Company's
subsidiaries and other unrelated parties in the amount of $21,000,000
alleging that they are successors to the alleged liability for a default
judgment entered against a former affiliate of the subsidiaries in April,
1995 for an alleged action taking place in 1988. The Company intends to
vigorously defend itself in this litigation. Management believes that the
claim against the former affiliate lacks merit and that, in any case, the
subsidiaries have no responsibility for the debts of the former affiliate.
Furthermore, management believes that if any judgment were to be entered
against the subsidiaries it would be able to obtain indemnification from
the prior owner of the former affiliate'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. It is,
nevertheless, at least reasonably possible that a material liability could
result, although the amount cannot be estimated.
On July 22, 1997, several alleged creditors filed an involuntary
petition in bankruptcy in the U.S. Bankruptcy Court, Central District of
California, bearing case number LA97-38036AA, against SeaGull
Entertainment, Inc. d/b/a/ The Hollywood Connection, and d/b/a Hollywood
Connection LLC. SeaGull Entertainment, Inc. denies that it is insolvent and
will file its answer September 2, 1997.
- 9 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> JUN-30-1997 DEC-31-1996
<CASH> 13,060 154,006
<SECURITIES> 0 0
<RECEIVABLES> 942,147 976,345
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,643,809 2,342,524
<PP&E> 103,483 136,408
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 11,055,446 8,565,403
<CURRENT-LIABILITIES> 5,300,349 3,663,873
<BONDS> 0 0
0 0
0 0
<COMMON> 158,931 146,731
<OTHER-SE> 5,432,049 4,495,216
<TOTAL-LIABILITY-AND-EQUITY> 11,055,446 8,565,403
<SALES> 0 0
<TOTAL-REVENUES> 1,709,431 1,208,371
<CGS> 463,865 176,328
<TOTAL-COSTS> 463,865 176,328
<OTHER-EXPENSES> 2,143,527 1,818,326
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 104,068 61,345
<INCOME-PRETAX> 1,846,894 (847,628)
<INCOME-TAX> 1,395,061 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 451,833 (847,628)
<EPS-PRIMARY> .02 (.06)
<EPS-DILUTED> .02 (.06)
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