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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended December 31, 1996
OR
|_| TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from to
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Commission file number 0-17591
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BNN CORPORATION
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(Exact name of small business issuer in its charter)
Nevada
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(State or other jurisdiction of incorporation or organization)
93-0957030
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(I.R.S. Employer Identification No.)
345 Park Avenue South, New York, New York 10010
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number 212-779-6601
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
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(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
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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|
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Issuer's revenues for the year ended December 31, 1996 are $6,863,359.
The aggregate market value of the voting stock held by nonaffiliates of the
issuer is $9,502,383 (as of February 14, 1997). The number of shares
outstanding of the issuer's common stock is 23,557,082 (as of February 14,
1997).
DOCUMENTS INCORPORATED BY REFERENCE
Transitional Small Business Disclosure Format: Yes No X
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PART I
Item 1. Description of Business
(a) General Development of Business
BNN Corporation (the "Company"), a publicly traded corporation
without operations, acquired all of the outstanding shares of Kaleidoscope Media
Group, Inc. ("KMG") on October 22, 1996. The transaction was effected by issuing
additional Company shares in an amount that resulted in the original KMG
shareholders receiving approximately 40.3% of the then outstanding shares of
BNN. For financial reporting purposes, the transaction was recorded as a
recapitalization of KMG. KMG is the continuing, surviving, entity for accounting
purposes, but BNN is the continuing entity for legal purposes.
KMG was formed on May 3, 1996 by the issuance of approximately
59.8% (equivalent to 5,685,688 Company shares) of its outstanding shares for
approximately 91% of the outstanding shares of SeaGull Entertainment, Inc.
("SeaGull" and the issuance of approximately 40.2% of its outstanding shares
(equivalent to 3,814,312 BNN shares) for the all of the outstanding shares of
two affiliated corporations (People & Properties, Inc. ("P&P") and Kaleidoscope
Entertainment, Inc. ("KE")) collectively referred to as the Kaleidoscope Sports
Group ("KSG"). For financial reporting purposes, this transaction was recorded
as a purchase of KG by SeaGull. In 1996, SeaGull acquired as treasury stock, the
remaining 9% of its outstanding shares not then owned by KMG.
The Company through subsidiaries is a diversified
entertainment company and operates two divisions:
The Entertainment Division (principally consisting of
SeaGull's business activities) is primarily engaged in the business of the
development, production and domestic and international distribution of
entertainment properties and exploiting the related licensing and merchandising
opportunities. It also provides consulting services in the development of
specialty television programming and is involved in the acquisition and
distribution of entertainment library properties. SeaGull's executives have in
the past syndicated, both domestically and internationally, such televisions
programs as "Fame" and "Baywatch." SeaGull was formed in July 1994 under the
laws of the State of Delaware. During 1996 SeaGull entered into a joint venture
agreement with Keller Entertainment with respect to the Tarzan syndicated
television series which was introduced domestically in 1996 and internationally
in 1997.
The Sports Division (principally consisting of KSG's business
activities) is primarily engaged in sports and event marketing. KE is involved
in the development, production and distribution of sports programming. In
addition, KSG has represented sports properties and the rights
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associated with those properties. That representation has included the
negotiation of rights fees and the negotiation and the development of licensing
and merchandising opportunities in connection with those properties. P&P is
primarily engaged in the business of sports and event marketing. Those
responsibilities have included event management, sponsor and event
representation, event related sales promotions, event related media and
publicity, advertising and sponsorship sales and specialty publishing. P&P has
also created and developed several event marketing properties. P&P manages PGA
tour events sponsored by the Buick Motors Division of General Motors and
provides other marketing and event management services for Buick.
In April 1997 the Company reached an agreement in principle
with the Interpublic Group of Companies, Inc. ("IPG") for the formation of a new
venture. The new venture which will be owned 51% by IPG and 49% by KE and PP,
will acquire all of the sports, entertainment event marketing assets of KE and
PP. All of the operations presently conducted by the KSG division will be
conducted through the new venture. KE and PP will be paid a cash purchase price
for its assets a portion of which will be paid at a closing and the balance over
the next three years in an amount contingent upon the operations of the venture.
The personnel of the KSG division including Ray Volpe, a director of the
Company, will be employed by the venture. It is anticipated that the closing
will occur in April 1997. If the closing occurs the business of KSG described
herein shall be conducted by the new venture controlled by IPG. The Company
would then only have an equity interest in the earnings, if any, of the
venture.
The principal executive offices of the Company are located at
345 Park Avenue South, New York, New York 10010 and its telephone number is
(212) 779-6601.
(b) Business
BUSINESS STRATEGY
The Company believes that the diverse nature of its operations
is an important factor in being able to exploit business opportunities as they
arise and in minimizing the Company's reliance on any one segment of the sports
and entertainment industry.
With respect to its television operations, the Company focuses
primarily on production and distribution of television products. The Company
attempts to use strategic partnerships and pre-sales of distribution rights to
finance production budgets once the Company has identified television properties
to develop and produce. In addition, the Company emphasizes cost-effective
production techniques and the pre-sale of advertising time and foreign
distribution agreements by its television syndication operations to further
attempt to limit or cover the costs of production. This strategy is important in
maximizing the Company's profit from its television production operations and
minimizing the risk of loss of capital. The Company believes that its expertise
in both television production and domestic and foreign syndication is an
important factor in its ability to successfully compete in this area.
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The Company's distribution strategy is to become a leader in
the international distribution of television properties in three categories: (i)
one hour action dramas; (ii) children programming, and (iii) individual sports
programming. In furtherance of achieving its strategic goals, the Company is
seeking to expand its television operations through the acquisition of
distribution and other representation rights to entertainment properties.
In the event the IPG acquisition is not concluded, the Company
will seek to develop additional equity positions in sporting event properties
through strategic acquisition of existing properties and the development of
original properties. The Company uses strategic partnerships with sports
advertisers and media entities together with pre-sales of sports sponsorships to
finance the production and acquisition costs associated with these events.
Through this strategy, the Company is able to develop a broad base of sports
properties while minimizing the company's exposure in incurring rights fees and
production costs. This strategy is important in maximizing the Company's profit
from its sports operations. The Company believes that its expertise in both
sports marketing and event production is an important factor in its ability to
successfully compete in this area. The Company also plans to continue to expand
its services as a sports consultant to major sports advertisers and media
entities. Through this side of the Company's business, the Company is able to
offer advertisers and media entities the opportunity to participate in the broad
range of properties developed and created by the Company. This allows the
Company to utilize its relationships with major advertisers and media components
to offer high quality sports consulting services and to further the development
of the Company's sports properties.
ENTERTAINMENT OPERATIONS
The Company produces and distributes television programming to
domestic and international television stations, cable television networks and
home video markets and sells commercial time to advertisers. In addition, the
Company acquires rights to distribution programming owned by third parties.
The Television Market
The entertainment industry is an approximately $30 billion per
year industry which is presently undergoing strategic changes as new
technologies proliferate in both the development and production of projects and
in the electronic distribution of entertainment programming. The development and
growth of the 500 channel cable system, DBS (Direct Broadcast Satellite), Pay
Cable, home video, CD-ROMs and other interactive multimedia are creating many
more opportunities for the distribution of entertainment programming to the
consumer, while at the same time reducing the overall market share for any one
program. Even with these changes, management believes that the creative content
of the programming will continue to drive the market share. Consequently,
management believes there is, and is likely to continue to be, a growing demand
for quality content-based entertainment products that can be produced more
efficiently.
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The United States television market is served by network
affiliated stations, independent stations and cable TV operators. During prime
time hours (primarily 8 P.M. to 11 P.M. in the Eastern and Pacific time zones
and 7 P.M. to 10 P.M. in the Central and Mountain time zones), network
affiliates primarily broadcast programming produced for the network. In
non-prime time. network affiliates telecast network programming, off-network
programming (reruns), first run programming (programming produced for
distribution on a syndicated basis) and local programming produced by the local
stations themselves. Independent television stations, during both prime and
non-prime time, produce their own programs, telecast off-network programs or
acquire first-run programs from independent producers or "syndicators." A
syndicator is generally a company that sells programming to independent
television stations and network affiliates. Programming acquired by stations on
a syndicated basis is generally acquired either for cash license fees, in
exchange for a certain amount of commercial advertising time within the program
which is retained by the syndicator for sale ("barter") or for a combination of
cash and barter.
The international television market continues to grow as the
continued growth and development of international television distribution
channels increases the demand for quality programming. International sales of
programming are made to television distributors on a cash basis. An initial cash
down payment is made upon the agreement of the international channel to display
the programming. The balance of the cash licensing fee is generally paid upon
the delivery of the programming. Sales of advertising time are retained by the
international television network.
Television Production
The production of a program for first-run syndication begins
with the development of a creative concept. Depending on the type of
programming, the producer will develop a format and, in some instances, a pilot.
The format and the pilot, if any, will be presented by the program's syndicator
to representatives of various television stations around the world, in some
instances accompanied by sales promotion materials created by the producer or
syndicator. Frequently), in order to attract television stations to license
programming for exhibition for the upcoming fall television season, a producer
or syndicator will present its programming at the annual meeting of the National
Association of Television Programming Executives (primarily a domestic
programming exhibition) and at (primarily a foreign programming exhibition),
generally held in January and April, respectively, of each year. Because the
size of the viewing audience of a program for a station can be affected by the
popularity of the programming that precedes and follows it on the station,
syndicators generally attempt to sell their programs to the station in a given
market area with the highest ratings and to arrange for the program to be
broadcast in the most favorable time period and programming environment
possible. If a television station elects to license a program, it generally will
license one year's worth of such programming, subject to that programming being
produced.
The development of programming for first-run syndication may
require significant expenditures before the programming is first broadcast.
Depending on the type of programming, the initial license fees paid by
television stations for the right to broadcast such programming may be
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less than the costs of developing, producing, marketing and distributing such
programming. The Company's strategy is to attempt to use strategic partners to
fund the costs of the programming development significantly reduces the
Company's financial risk in program development. This strategy may also,
however, limit the Company's returns on successful programming. Additionally,
the Company pre-sells the foreign distribution rights to programming to further
cover programming development costs.
The ultimate commercial success of a first-run program will
depend on the program's ratings (including the demographics of its audience),
which are a reflection of the program's popularity with viewers. As a program's
ratings improve, the value of the advertising time during that program and the
amount which can be charged to television stations for licensing that program
generally increase. A program's ratings may improve as a result of its being
moved to a more favorable time period or licensed by a greater number of, or
more successful, stations, i. e., stations with better overall ratings.
Promotional efforts by stations on which a program is broadcast can also help to
improve a program's ratings. The demographic composition of a program's audience
and the popularity of the program scheduled in the time period immediately
preceding the time period in which the program is broadcast are additional
factors that can affect a program's ratings. Finally, the distributor's direct
consumer marketing efforts for a program can substantially affect that program's
ratings. The Company seeks to maximize the strength of its programming by
negotiating desirable time slots, selecting optimal stations, and demanding
effective consumer marketing efforts in its syndication clearance efforts.
In November 1994, a joint venture consisting of SeaGull and
Keller Entertainment acquired the rights to produce one two-hour premier movie
and 20 additional new one-hour television episodes of the action drama, Tarzan,
based on the original stories written by Edgar Rice Burroughs. The joint venture
has retained the domestic and international television and home video rights to
distribute Tarzan, merchandise licensing rights and also receives a fee for
providing executive producer syndication and advertising sales services with
respect to the series. The production of the two-hour premier movie for Tarzan,
The Return of Tarzan, was filmed at a set created on the property of Disney
World in Lake Buena Vista, Florida. Production of the 20 one hour episodes, was
completed in 1996 in Africa. Post-production work for the series is in the
process of being completed. The Company has obtained the domestic distribution
rights to the Tarzan series from the joint venture. In addition, because it
guaranteed the amount of advertising revenues to be received by the series to a
lender, the Company receives five percent (5%) of domestic advertising revenues
derived from Tarzan.
Broadcast of the Tarzan series commenced in September 1996,
domestically and internationally in 1997. As of the date hereof, Tarzan was
broadcast in nearly 85% of the television markets in the United States. Tarzan
has been broadcasted twice weekly in approximately 50% of its United States
markets. The joint venture has also obtained agreements with broadcasters in
over 50 countries to distribute the series internationally. Based upon the
favorable responses, the Company announced that the series will be renewed for a
second season beginning Fall 1997.
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The Company is also in negotiations for the co-production of
an original action/adventure series for domestic and international syndication
called "Team X-treme." "Team X-treme" is a made-for-television drama series
centered around extreme sports. Currently, the Company is made of co-production
projects with several foreign production entities. Assuming the proper
production financing arrangements are negotiated, with respect to Team Xtreme,
the Company will begin production on these projects later in 1997. The Company
also has in early development several other sports, action/adventure and
children's programming projects.
The Company is also currently developing several other sports
and entertainment properties for distribution over the next two years. The
Celebrity Showcase is a specialty television property being developed by the
Company for summer 1997. Celebrity Shopping Network is designed to provide home
shopping programming using stage, screen, television, music and sports
personalities to market merchandise via taped programming to be distributed
domestically and internationally.
Television Distribution
Barter syndication is the process whereby a syndicator obtains
commitments ("clearances") from television stations to broadcast a program at a
certain time; retains advertising time in the program in lieu of receiving a
cash licensing fee and sells such retained advertising time for its own account
to national advertisers at rates based on projected ratings and viewer
demographics. From time to time, certain stations may require cash consideration
from the Company, in addition to programming, in exchange for advertising time.
By placing the program with televisions stations throughout the United States,
the syndicator creates an "ad hoc" network of stations that have agreed to carry
the program. The creation of the "ad hoc" network of stations, normally
representing a penetration of at least 70% of the total United States television
households (calculated by means of a generally recognized system as measured by
A.C. Nielsen), enables the syndicator to sell the commercial inventory to
sponsors desiring national coverage. The rates charged by a syndicator for
advertising time are generally at a lower cost per thousand viewers than those
which national advertisers are normally charged by the networks for similar
demographics.
Fees paid by national advertisers for barter advertising are
established on the basis of household audience ratings or, more frequently, on
the basis for delivery of a certain demographic category of the viewing
audience, but may vary depending on the conditions in the general market for
television advertising. The desired household rating or demographic delivery, as
the case may be, is negotiated in advance with the advertiser or its
representative. In general, if the television program does not deliver at least
the agreed-upon audience, the distributor is obligated to make available
additional advertising time on the same program or other programs at no
additional cost or to refund that portion of the advertising fee attributable to
the failure to deliver the agreed-upon audience.
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Cable Network Licenses
Television programming can be licensed for telecast by cable
networks, such as the ESPN Lifetime, USA and Arts & Entertainment basic cable
networks and the Disney and HBO pay cable networks. The production and
distribution of programming for initial exhibition on cable networks is similar
to that for broadcast networks, although the license fees paid by cable networks
are typically considerably lower than those paid by the broadcast networks.
International Television Production and Distribution
Revenues from the distribution of U.S. television programs to
foreign markets have increased significantly in recent years. Development in the
European television industry, such as the present trend towards increasing the
number of privately owned channels and greater channel capacity, may cause
foreign sales to become a more important component of the distribution of
programs produced in the United States.
Programming Acquisitions
In order to increase its supply of television programming for
distribution, the Company is currently considering potential acquisitions of the
right to distribute various television series and other programming in the
worldwide television market. These new programs, if acquired, will require
substantial operating and capital commitments on the part of the Company.
In general, the Company earns a fee for distributing programs
for others based on a percentage of the license fees paid by television stations
for the right to broadcast particular programs. In certain domestic cases, all
or a portion of such license fee may be payable in television advertising time.
The advertising time is then sold by the Company to national advertisers.
In addition to United States television broadcast rights, the
Company also acquires. where available on acceptable terms, world-wide broadcast
television and non-standard television distribution rights (such as cable and
videocassette rights) to the programs it distributes. These acquisitions are
typically on a long-term exclusive basis, often between three and twelve years,
in some cases with various renewal options, and may provide that the Company has
the right to undertake production of the program in the event the producer fails
to deliver the contracted programming. As an example, the Company has retained
the rights for the worldwide videocassette distribution of the Tarzan series
being produced by the Company. The Company has entered into an agreement with
Buena Vista Home Video, a subsidiary of Disney for the worldwide videotape
distribution of Tarzan.
The development of new material or properties for television,
sports and new multimedia productions is essential to the future growth of the
Company. The Company may obtain new properties from three sources: (i)
acquisition of existing properties; (ii) co-development of new
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properties; and (iii) development of new properties internally. When acquiring
existing properties, the Company may pay a nominal fee for an option against a
more substantial purchase price. This option usually enables the Company to
develop the property on its own during the option period before committing to
its acquisition. Securing an option also enhances the Company's ability to
obtain financing or a production commitment before actually buying the property.
Option periods customarily run for a minimum of one year and contain provisions
that enable the Company to extend the option for additional periods. Terms of
options vary significantly and are dependent upon, among other factors, the
credibility and prior success of the writer/owner of the property, the level of
revenues or profits that the Company estimates can be received from the
exploitation of the property, and the estimated cost of further development and
production of the property. Agreements relating to these projects often provide
for additional payments to writers/owners upon their sale, production and/or
distribution. Certain agreements also provide for participation, at various
percentage levels, and or profits from these projects.
In some cases, where the Company already has a working
relationship with outside creative personnel, the Company will agree to
co-develop a property. Generally, the Company will set up a corporation or
similar entity under which it will develop and possibly produce the property.
Otherwise the Company will enter into an agreement to co-develop the property
with the owner or creator. Like options, the terms of the Company's
co-development agreements can vary significantly.
During the development phase of a project, commitments are
sought from external sources such as the major entertainment studios,
distributors, broadcast networks, production companies and corporate sponsors.
As indicated, it is not the practice of the Company to expend substantial sums
of its own in the development process unless it has reason to believe that there
is a strong likelihood of a financing or production commitment for the project
from such external sources.
Revenue Sources
The Company's television programming business generates two
significant sources of revenue, distribution fees and the sale of advertising
time.
Distribution Fees
In most cases, the Company's distribution revenues are based
on a percentage of the net revenues derived from the sale of advertiser
sponsorships or on cash license fees. Generally, the Company advances all
distribution costs of items such as advertising, promotion, tape shipping and
tape duplication and recovers such expenses from the program revenues. In some
instances, these expenses are assumed by the Company as part of its distribution
fee. The Company's fee for distribution is generally between 30% and 40% of net
revenues and its fee for advertiser sales representation is generally between 5%
and 10% of net revenues. However, each fee arrangement is separately negotiated
and may be subject to variation. The sums in excess of the Company's fees
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and expenses and profit positions (where applicable) are remitted to the
producers of the programs which in certain cases may also be the Company.
Sales of Advertising
Fees for advertising time are established on the basis of a
certain assumed level of audience ratings and, in some cases, an assumed
demographic make-up of the viewing audience. While it is in the interest of the
Company to establish as high an assumed rating and as favorable demographic make
up as possible, there can be no assurance in advance that the actual rating or
demographic make-up of a particular program will support the fee initially
charged for advertising time on such program. If the television program does not
achieve the assumed rating or demographic make up (as deter-mined by A.C.
Nielsen or similar ratings services), the Company may be obligated to offer the
advertiser additional time ("make goods") on the same program or on other
programs to fulfill any short fall in the actual rating or demographic
assumptions. Alternatively, the Company may be obligated to refund a portion of
the advertising fee. "Make goods" are the predominant means whereby the Company
satisfies such obligations to advertisers.
Among the sponsors that regularly purchase participation in
the Company's programs are: General Motors, Proctor & Gamble, Kraft/General
Foods, Hershey and Bristol Meyers. Sales are made through the Company's sales
force and through advertising agencies representing the sponsors. The Company's
barter syndication licenses granted by the Company provide that the Company
retains a negotiated amount of commercial time per program (usually 7 minutes
per hour or 50% of the total commercial time) for sale to national advertisers,
with the remaining commercial time retained by the station for local sale.
Generally, the Company's fee for sales of advertising time is between 5% and 10%
of net revenues.
Sports Operations
KSG is engaged in the acquisition, marketing and management of
sporting event properties. In addition, KSG serves as a sports marketing
consultant to sports leagues, advertisers and broadcast networks. The Company
has reached an agreement in principle with IPG to dispose of the operations of
KSG decision to a venture 51% owned by IPG.
The Sports Marketplace
The sports industry is a multi-billion dollar per year
industry which is constantly changing. The diversity of the sports industry is
overwhelming. Professional sports leagues in baseball, football, basketball and
hockey often receive the most attention in the professional sports marketplace.
However, sports such as tennis, golf and auto racing also receive a significant
amount of media and advertising attention in the United States.
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The sports marketplace today accommodates many different
levels and types of sports. The sports marketplace is primarily divided into two
levels of competitions, amateur and professional. Amateur sports include high
school, college, Olympic and recreational activities. The professional level
includes the major sports leagues and other sports tours and leagues in which
athletes are compensated for their services.
The amateur and the professional sports marketplaces are
continuing their development in the international and domestic marketplace.
Recent international efforts by the National Basketball Association, the
National Football League and the National Hockey League have demonstrated the
increased globalization of the sports leagues previously based in North America.
In addition, the 1994 World Cup Soccer Championship was held in the United
States and in April 1996 Major League Soccer introduced a new professional
soccer league in the United States.
This globalization and increased activity in the sports
marketplace together with the expansion of the television marketplace have
combined to create a new era and many new challenges for sports advertisers,
broadcasters and leagues. In addition, technology and innovation have introduced
new sports to the marketplace including "in-line" skating, snowboarding and
beach volleyball. With these and other new sports come new professional and
amateur leagues and events. This proliferation of sports has also increased the
advertising dollars dedicated to the sports marketplace, the number of
advertisers involved in sports marketing and the opportunity for sports
marketing companies to develop new products, services and relationships.
Event Management
The Company, through P&P, has developed a twenty-year track
record in the marketing and management of sporting events. The development of a
sporting event begins with a creative concept. The concept can be a new event
featuring a new sport or an old sport in a new format, an old event in a new
marketplace or an event that already exists in a successful marketplace that
requires new management. The Company has experience in servicing clients and
developing events in each of these areas.
Traditionally, a professional or amateur sports organization
or a sponsor that has acquired the rights to a sport property will hire the
Company to manage an existing event. The responsibilities involved may include
sponsorship sales, event operations, television production and packaging, public
relations, event hospitality and local marketing. The Company has been managing
the Professional Golf Association events sponsored by the Buick Motor Division
of the General Motors Corporation for several years. These events, the Buick
Classic (Westchester, NY), the Buick Open (San Diego, CA), the Buick
Invitational (Michigan) and the Buick Challenge (Atlanta, GA), have been some of
the most successful events on the PGA tour. In most cases, the Company performs
the full array of event management services listed above in connection with each
of the Buick PGA events. The Company receives an annual fee from Buick for the
performance of these
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management services. In addition, Buick pays for all related operational
expenses incurred in connection with the management of these events.
The Company manages several other golf events including
charity events for NBC Today Show host Bryant Gumbel and ESPN in connection with
the ESPY awards. The Company also manages many non-golf events including several
events for General Motors, the Reno Air Show and the East-West Shrine College
Football game. In connection with these events the Company may also obtain
Sports Consulting
Through P&P and Kaleidoscope, the Company serves as a sports
marketing and management consultant to corporations, sports leagues and
associations and broadcast entities. In this capacity, the Company creates and
evaluates sports properties on behalf of their clients. In certain instances,
the Company receives only a fee for its services; in other instances, the
Company receives both a fee and equity participation in the property in
connection with its consulting services.
The Company, through Kaleidoscope, has served as a sports
consultant to the General Motors Corporation for several years. In this regard,
the Company evaluates sports properties presented to General Motors and provides
advice to General Motors with respect to the viability of these properties and
the most effective means to promote and otherwise utilize these properties.
Often, the Company's consultation services generate work assignments for its
event management division. An example of this is the Company's management of
many of General Motors' promotional events generated in connection with its
sponsorship of the 1996 Summer Olympics in Atlanta. These events include a
kick-off press event at the General Motors showroom in New York City, a one-
month long promotion at the same showroom in December/January 1995/6 and a
two-month traveling tour spreading the GM Olympic message to many UAW-GM plants
throughout the United States. During 1995 and 1994, General Motors Corporation
accounted for 44% and 32% of the Kaleidoscope Group's revenues and the United
States Swimming Association accounted for 13% and 15% of the Kaleidoscope
Group's revenue in 1995 and 1994, respectively.
The Company also serves as a consultant to professional sports
leagues and to amateur sports governing bodies. An example of this service is
the Company's representation of the United States Swimming Association. In that
regard, the Company evaluates and markets sponsorship opportunities, television
packages, licensing opportunities and relationships with governing bodies.
Generally, the Company receives compensation in these relationships through a
retainer fee in addition to fees based on sales by the sponsor.
Competition
Competition in the production and distribution of television
programming is intense. The Company's programming competes with other first-run
programming, network reruns and
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programs produced by local television stations. The Company competes with many
other companies that have been acquiring, producing and distributing programs
for a longer period of time than the Company, and most of these companies have
greater financial resources than those of the Company. These competitors include
large television and film studios such as Paramount Communications Inc.,
Columbia Pictures Television, 20th Century Fox Film Corp., MCA Inc., and Warner
Bros. Inc., as well as other television distribution companies such as King
World Productions, Inc., All-American Television Inc. and Viacom International,
Inc. The Company also competes with other companies for the sale of television
advertising time, including Tribune Broadcasting Co./Entertainment Co., Viacom
International, Inc., All-American and King World.
Competition in the sports consulting and sports event
management business is also intense. The Company competes with other sports
marketing companies as well as certain advertising agencies that have begun to
develop sports marketing and promotion divisions. The Company's competitors
include International Management Group, Advantage International, and DMBB as
well as other sports marketing and advertising companies that may have greater
financial resources than those of the Company
The Company's success is highly dependent upon such various
unpredictable factors as the viewing preferences of television audiences. Public
taste is unpredictable and a shift in demand could cause the Company's
programming to lose its appeal. Television programming also competes for
audiences with many other forms of entertainment and leisure time activities,
some of which include new areas of technology (e.g., video games and home
video), the impact of which on the Company's operations cannot be predicted.
One of the ways the Company can ensure that it maintains
certain ownership interests in its properties, both in the rights to sell
ancillary products and by participating in the direct profitability associated
with the broadcast of the program, is to enter into license fee arrangements
with third parties such as networks or distributors. Under this arrangement, the
licensor, in this case the Company, assumes a greater financial risk as the
costs to produce the program may exceed the negotiated license fee. This type of
arrangement generally gives the network or distributor the Tight to broadcast on
domestic television for a defined period of time. The licensor would retain the
rights to exploit ancillary markets, including foreign distribution of the
program. While the Company has not historically deficit financed productions and
generally would not agree to do so, for selected properties it may agree to such
a licensing arrangement to improve its ownership interest. In these cases, the
Company would assume greater financial risk on the production which could result
in losses to the Company if the project failed or if the Company's production
costs exceeded the licensing fees and revenues generated from ancillary markets.
Principal Customers
During the year ended December 31, 1996, approximately 45% of
the Company's revenue was derived from services provided to General Motors and
its affiliates. Accounts
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receivable from this client amounted to $274,123 at December 31, 1996. Revenue
derived from one U.S. sports association amounted to approximately 10% of the
Company's revenue in the year ended December 31, 1996. Accounts receivable from
this client amounted to $133,200 at December 31, 1996. The revenue from these
two customers was earned in the sports division operations acquired in the KSG
transaction on May 3, 1996.
Employees
At December 31, 1996, the Company employed 40 full-time
persons, of whom two were engaged in sales and marketing, 14 in operations and
16 in management, finance and administration. The Company has no collective
bargaining agreement with its employees and believes that its relationship with
its employees is good.
Item 2. Description of Property
The Company's principal executive offices are located at 345
Park Avenue South, New York, New York and consist of approximately 20,000 square
feet under a lease that expires in 2001. The annual rental for the space was
approximately $440,000 in 1996. The lease expires in October 2002 and is subject
to periodic increase. The Company also leases office space in Los Angeles,
California at an annual rental of $ 83,000 which has increased to $122,00 in
1997, for its SeaGull operations and in Flint and Detroit, Michigan.
Item 3. Legal Proceedings
P&P and KE once wholly owned subsidiaries of Insight
Entertainment Corporation. In August, 1995, Insight Entertainment exchanged all
of the stock of P&P and KE held by Insight for the shares of stock of Insight
held by each of the principles of P&P and KE and a note issued by KE and P&P,
jointly and severally, for $225,000. In October, 1996, Insight filed for
Bankruptcy protection under Chapter 11 of the Bankruptcy Code. KE and P&P have
reached an agreement in principle with the creditors of Insight to repay the
principal and interest on the Note in three monthly payments of $133,333
beginning February 1, 1997 in exchange for the delivery of acceptable releases
from Insight/Ventura to P&P and KE.
KE and its subsidiary Kaleidoscope Holdings ("KH") have been
named as defendants in an action brought by International Sport Marketing
("ISM") alleging that KE and KH were involved (through their former subsidiary
Lifestyle Marketing Group) in conspiring with certain USOC officials to the
detriment of ISM. A default judgment was entered against Lifestyle Marketing
Group in the amount of $10,000,000 for failure to answer the complaint. At the
time that the alleged actions took place, Lifestyle Marketing Group was a trade
name of Saatchi & Saatchi. Subsequent to the alleged actions that took place,
Lifestyle Marketing Group was sold to KH. In that acquisition, KH received a
full indemnity from Saatchi for the prior acts of LMG in the acquisition papers.
The Company believes that the true defendant here is Saatchi and ISM is
proceeding
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accordingly. The Company expects that the indemnity of KE and KH is enforceable
against Saatchi and all legal fees incurred by these companies and any damages
awarded against them as will the responsibility of Saatchi.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year ended December 31, 1996.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) The Company's Common Stock is presently quoted on the OTC Bulletin
Board under the symbol "BNN."
Set forth below are the high and low closing bid quotations
for Company's Common Stock for the periods indicated. Such quotations reflect
interdealer prices without retail mark-up, mark-down or commissions, and may not
reflect actual transactions.
Quarter Ended 1996 High Low
December 31, 1996 $3-3/4 $1
September 30, 1996 7-1/4 3-31/32
June 30, 1996 6 3/8
March 31, 1996 1-1/2 11/32
The Company's stock was not quoted in 1995.
(b) As of December 31, 1996, there were approximately 200 recordholders
of the Company's Common Stock, although the Company believes that there are more
than 300 beneficial owners of its Common Stock.
(c) The Company plans to retain any future earnings for use in its
business and, accordingly, the Company does not anticipate paying dividends in
the foreseeable future. Payment of dividends is within the discretion of the
Company's Board of Directors and will depend, among other factors, upon the
Company's earnings, financial condition and capital requirements.
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Item. 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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.
During the year ended December 31, 1996, the Company took several major
strategic steps to create a dynamic enterprise with opportunities for growth in
the entertainment, consulting and sports marketing fields. Through the
acquisition of companies and the development within those companies of
properties and ventures with multi-year time horizons the Company was
positioning itself for long-term growth and fiscal stability.
On October 22, 1996, the Company acquired the Kaleidoscope Media Group
Inc., (KMG) through a stock transaction described elsewhere within this report.
KMG was itself formed on May 3, 1996, through the acquisition of the
Kaleidoscope Group (primary Kaleidoscope Entertainment Inc. and People and
Properties Inc.) by SeaGull Entertainment, Inc. For accounting purposes, the
acquisition of KMG by the Company has been treated as a recapitalization of KMG,
and as such, the surviving entity for reporting purposes is SeaGull
Entertainment. As such, the consolidated financial statements provided in this
report for the fiscal year ended December 31 1996, include a full twelve month
results of operations for SeaGull Entertainment, activity for the Kaleidoscope
Group for eight months (subsequent to the May 3, 1996 acquisition by SeaGull)
and two months of BNN Corp. activity (subsequent to the October 22, 1996
acquisition). The results reported for the twelve months ending December 31,
1995 are essentially those of SeaGull Entertainment, exclusive of the
Kaleidoscope Group and BNN Corp.
Results of Operations
Gross billings for the fiscal year ended December 31, 1996 totaled
$9,921,594 compared with gross billings for the fiscal year ended December 31,
1995 of $225,492. Gross billings contain amounts billed to agencies for
television advertising placed by these agencies. Billings are done by the
Company on behalf of KSE, the Company's 50% owned joint venture, for whom the
Company distributes programming within the domestic U.S. In fiscal 1996, these
billings totaled $3,058,235. Although the Company issues invoices, establishes
receivables and then collects these amounts (net of fees retained by the
agencies) these amounts are not retained by the Company and are hence not
reported in the audited revenue figures.
Net revenues for the fiscal year ended December 31, 1996, which exclude
agency fees and media costs, for the 1996 fiscal year totaled $6,863,359,
compared with net revenue of $225,492 in the comparable twelve-month period for
fiscal 1995.
This growth primarily reflects the acquisition of the Kaleidoscope Group
companies during the 1996 fiscal year and the consolidation of their results of
operations, whereas there were no equivalent operations reported by the Company
for fiscal 1995. Had the Kaleidoscope Group companies been reported for a full
twelve months, both in fiscal 1996 and in fiscal 1995, the
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comparison of net revenue would have been $8,632,183 for fiscal 1996 compared
with net revenue of $6,681,484 in fiscal 1995.
The Kaleidoscope Group companies generated $5,959,429 in net revenues from
their sports and entertainment activities from May 3, 1996 to the end of the
1996 fiscal year, compared with none reported by the Company for fiscal 1995.
Significantly, Kaleidoscope Entertainment provided consulting and other services
on behalf of Corporate clients that were sponsors of the 1996 Olympic games in
Atlanta, generating more than $2,000,000 in net revenue. People and Properties
golf-related activities generated more than $2,800,000 in net revenues, although
one major event, the Naples Challenge, ended its multiple year association with
People and Properties. Other sports with which the companies were involved
included swimming, football, boxing, ice skating and air races.
Had the Kaleidoscope Group net revenue been reported as a full twelve
months for both the current and prior years, the comparison would be $7,776,400
for fiscal 1996 versus $6,455,900 for fiscal 1995.
SeaGull Entertainment generated $677,343 in net revenue for the year ending
December 31, 1996 from distribution of various entertainment properties,
compared with $225,492 in net revenue for the year ending December 31, 1995.
Although not reported as revenue, SeaGull also generated $1,272,200 in equity
income in fiscal 1996 from its participation in a 50%-owed venture that
produces, distributes and licenses the syndicated series, "Tarzan, The Epic
Adventures." Filmed almost entirely on-location in South Africa, and launched in
the United States in the fall of 1996, this 22 episode series attained
"clearance" in nearly 85% of television markets in the U.S. 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. Broadcast outside the U.S. commences in early 1997.
Gross profit after direct project costs was $3,115,648 for the fiscal year
ended December 31, 1996 compared with $225,492 for the prior year. 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. Had the Kaleidoscope Group
companies been reported for a full twelve months, both in fiscal 1996 and in
fiscal 1995, the comparison of gross profit would have been $4,204,876 for
fiscal 1996 compared with gross profit of $3,351,099 in fiscal 1995.
The Company expensed $323,882 of program cost inventory in fiscal 1996,
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 twelve
months ended December 31, 1996, the entire amount expensed is attributable to
costs that had been capitalized as related to the production of "Tarzan, The
Epic Adventures."
Salaries and related benefit costs were $1,843,403 for fiscal 1996,
compared with $204,769 for the prior year, largely reflecting the costs
associated with the acquisition of the Kaleidoscope Group companies but also the
additions to staff necessitated by the increased size and complexity of the
Company subsequent to the acquisitions. Further, some of the entertainment
projects undertaken during the year required that the Company bring additional
staff on-board to enable the Company to accomplish those projects. At the same
time, the Company reduced the number of consultants and outside service
providers, where such reductions were feasible.
17
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Total expenses other than direct costs were $3,957,103 for fiscal 1996
compared to $791,652 for fiscal 1995. Had the Kaleidoscope Group companies and
BNN Corp. been reported for a full twelve months in fiscal 1996 and in fiscal
1995, the comparison of total expenses, excluding direct costs, would have been
$5,396,604 for fiscal 1996 compared with $4,459,715 in fiscal 1995. The fiscal
1996 expenses include additional amortization of goodwill in the amount of
$61,589 for fiscal 1996 and $183,265 for fiscal 1995 to reflect a full twelve
months amortization, as though the acquisition of the Kaleidoscope Group was
effected on January 1, 1995. Fiscal 1996 also includes additional overhead
expenses associated with BNN Corp. of $174,838 and similar BNN expenses of
$149,427 for fiscal 1995.
The provision for state and federal income tax was $194,790 for fiscal
1996, on a pretax basis of $430,745 compared with no tax provision for the 1995
fiscal year on a pretax loss of ($566,160). The income tax expense for fiscal
1996 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 and
certain other expenses are not deductible for income tax purposes.
As a result of the foregoing factors, the net income to Common Stockholders
for the fiscal year ended December 31, 1996 was $235,955 compared to a net loss
to Common Stockholders of ($566,160) for the twelve months ended December 31,
1995. Had the Kaleidoscope Group companies and BNN Corp. been reported for a
full twelve months in fiscal 1996 and in fiscal 1995, the comparison of net
income would have been $134,682 for fiscal 1996 compared with a loss of
($787,416) in fiscal 1995.
Income Taxes
At December 31, 1996, the Company's tax and book reporting year end, net
operating loss carryforwards ("NOLs") amounted to approximately $980,000 for
Federal income tax purposes. The carryforwards are not available for state
income tax purposes. The NOLs begin expire in varying amounts starting in 2003.
In addition, certain of the Company's subsidiaries have approximately
$1,265,000 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.
For the fiscal year ended December 31, 1996 the Company utilized $750,741
of NOLs to offset Federal income taxes, and subsidiary companies utilized
$80,730 from NOLs to offset various state and Federal taxes.
18
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Liquidity and Capital Resources
As of December 31, 1996, the Company reported cash on hand of $154,006
compared with $139,213 reported at December 31, 1995. During fiscal 1996,
operating activities of the companies generated a net outflow of funds of
($657,658). Although the Company generated a post-tax profit of $235,955 and
there were non-cash costs such as depreciation and amortization totaling
$492,425, equity income of $1,272,200, generated only $100,000 of cash in fiscal
1996.
The negative cash flow generated by operating activities during fiscal 1996
was directly attributable to the start-up nature of the Company's entertainment
properties as well as extraordinary legal and accounting costs associated with
the two mergers described elsewhere, resolution of several outstanding financial
obligations pertaining to prior years, and ongoing efforts to resolve several
remaining legal claims associated with prior year actions, as noted in Item 3
above.
Investing activities, primarily use of funds to create programs whose costs
were capitalized, generated a net outflow of ($1,182,474) in the twelve months
ended December 31, 1996.
Entertainment properties including "Tarzan: The Epic Adventures," "Merlin",
"Team Xtreme" and "Celebrity Showcase" all required extensive funding for
development promotion and marketing. Although many of these costs were
capitalized for income statement purposes, until the programs are to be released
and revenue is to be recognized, they nevertheless represent a significant cash
outflow. Of the properties mentioned, only "Tarzan" was released into
syndication in 1996, while the others remain in development for 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. As such, only a portion of the
22 episodes of this series were delivered for broadcast by the end of the fiscal
year, with the unreleased episodes generating no revenue.
Accounted for under the revenue and expense recognition provisions of FAS
53, as noted previously, only $100,000 in cash was received by the Company in
1996 from its 50% participation in the joint venture that produces and
distributes "Tarzan." Significant among the reasons for the small cash inflow
(as compared to the $1,272,200 reported as income) was a requirement to repay
the loan taken by the joint venture to fund production of the series. Although
domestic and foreign billings for advertising and licenses exceeded several
million dollars, the lender had required that all other payees of the venture
subordinate their interest until the loan was repaid in full. This is expected
to happen early in 1997 and the balance of cash from earnings should be received
for distribution or investment subsequently.
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. Should third
party financing be necessary, Management will seek the most favorable terms
available.
Scheduled for release in 1997 are the broadcast of the daily transactional
television program "Celebrity Showcase," to begin in June; a second season of
Tarzan is expected to commence in
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September 1997 and is to be followed by release of movie versions of "Team
Xtreme" and "Merlin" with episodic series to be produced and released later. In
addition to cash inflows from the first season of "Tarzan" as noted above,
"Celebrity Showcase" revenue from program advertising and direct sale of
products to viewers, is also expected to provide positive project cash flows
within the third quarter of 1997.
In the absence of a cash surplus, the Company must continue to seek
additional sources of funds to finance the Company's operations. The Company
will seek 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.
In fiscal 1996, the combined shortfall from operating and investing
activities was offset by cash inflows from financing activities, primarily loans
totaling $1,336,018 from BNN Corporation to KMG, prior to the October 22, 1996
acquisition. In the fourth quarter 1996, notes payable, totaling $600,000 from
three unrelated entities, provided cash necessary to fund operations. A portion
of the proceeds from these transactions were utilized to repay various other
loans and notes payable, in whole or in part, such repayments totaling $214,281.
Management will continue to evaluate liquidity and capital resources on a
continuing basis. The Company will avail itself of opportunities to utilize
external sources of funding to support operations and investment activities
until the cash flows from projects are realized.
20
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Item 7. Financial Statements
Reference is made to pages F-1 through F-22 comprising a
portion of this Annual Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
There have been no changes in accountants due to disagreements
on accounting and financial disclosure during the 24 months prior to December
31, 1996.
21
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Henry Siegel 55 Chairman of the Board and Co-Chief Executive
Officer and Director
Ray Volpe 56 President and Co-Chief Executive Officer and
Director
Paul Siegel 55 President of Entertainment Division and Director
Bruce Albert 57 Executive Vice President - KMG Group
Anthony Andrea 51 President of Sports Division
Bernard Bushkin 47 Chief Financial Officer
Martin Miller 56 Director
All directors hold office until the next annual meeting of shareholders
and until their successors have been elected. Officers serve at the discretion
of the Board of Directors, subject to the terms of their employment contracts.
Henry Siegel has been Chairman and Co-Chief Executive Officer of the
Company since 1995 and has been an officer of SeaGull since the Company's
inception in 1994. Mr. Siegel began his career at Grey Advertising and in 1974
was placed in charge of its media operation, managing all areas of media
planning, research and execution. In 1976, Mr. Siegel founded Lexington
Broadcasting Services ("LBS"), where he pioneered the concept of barter
syndication (advertiser- supported television). As Chairman and CEO of LBS, he
launched numerous successful television series, including "Fame" and "Baywatch."
In 1988, Mr. Siegel with Warburg, Pincus Capital Company purchased Grey
Advertising's interest in LBS. LBS entered into bankruptcy in 1991 and emerged
from bankruptcy in 1993, soon after merging with All American Communications in
1992. In July 1994, Mr. Siegel formed SeaGull. See "Certain Transactions."
Ray Volpe has served as President, co-Chief Executive Officer and
director of the Company since its inception in 1995. Mr. Volpe, who began his
career at Doyle Dane Bernbach in 1964, was the Executive Vice President of the
National Hockey league and the first commissioner of the Ladies Professional
Golf Association. In 1981, Mr. Volpe and his partner, Don Ohlmeyer formed
Ohlmeyer Communications Company, a sports and entertainment subsidiary of
Nabisco Brands Inc., where, from 1981 to 1990, Mr. Volpe worked as an
independent television producer and media consultant, representing
manufacturers, televisions networks, major syndicators and advertising agencies
engaged in entertainment and sports programming. Mr. Volpe has been the Chief
Executive Officer of Kaleidoscope since 1990. During the period from August 1994
through June 1995, while Kaleidoscope was owned by Ventura, Mr. Volpe was
President, Co-Chief Executive Officer and a Director of Ventura. See "Certain
Transactions."
Anthony B. Andrea has served as the Director of the Sports Division of
the Company since its inception. Mr. Andrea began his career at Doyle, Dane,
Bernbach, working in account management. In 1971 Mr. Andrea became the director
of advertising and promotion for the National Hockey League, and in 1975, he
founded P&P, a sports marketing and television packaging agency, where he
continues to serve as Co-Chief Executive Officer and President.
Bruce Lee Albert has served as the Company's Director of Operations
since its inception. Mr. Albert began his career at Doyle, Dane, Bernbach, where
he spent 21 years in marketing communications, from managing major
packaged-goods accounts to heading merger and acquisition teams. Mr. Albert was
a Managing Director of Lord, Geller, Federico, Einstein and a Partner, Executive
Vice President and Chief Operating Officer of Lord, Einstein and O'Neill from
1985 to March 1991. In January 1992, he joined Kaleidoscope as Executive Vice
President and Chief Operating Officer. From August 1994 through June 1995, Mr.
Albert also served as a Assistant Secretary of Ventura.
Paul Siegel has been a director of the Company since 1995 and an
officer and director of SeaGull since its inception. In 1964, Mr. Siegel started
work at S&S, a direct marketing firm which manufactures and distributed toy and
craft products. Mr. Siegel left S&S in 1982 to establish another direct
marketing toy and hobby company known as Creative Crafts. In 1994, Mr. Siegel
changed the name of his company to Creative Discovery and expanded the product
line to include educational software products. Siegel joined his brother Henry
Siegel at LBS in 1986 to serve as Executive Vice President. LBS entered into
bankruptcy in 1992 and emerged from bankruptcy in 1993. LBS was merged with AAC
in 1992, and Mr. Siegel served as Executive Vice President of its All-American
Television subdivision of until he left in 1994 to form SeaGull.
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Bernard Bushkin has been chief financial officer of the Company since
November 1996. Prior to that he joined KMG in June 1996 as its chief financial
officer. From March 1988 to March 1996 Mr. Bushkin was Vice President of Finance
and Operations for BMG Classics, the classical, crossover and Broadway music
division of BMG Entertainment. He was responsible for worldwide financial
management of Classics, as well as the operating management of the art,
editorial and production departments. From 1980 to 1988 he was employed in
various financial positions for CBS records and its affiliates.
Matthew D. Pace, Esq. has served as Secretary and General Counsel of
the Company since its inception. Mr. Pace was an associate at the law firm of
Milbank, Tweed, Hadley & McCloy from 1988 to 1992. Since 1992, Mr. Pace has
practiced law independently.
Martin Miller has been a director of the Company since February 1995.
Mr. Miller , for the past five years, has been a director of corporate finance
for Millport Ltd., an isle of Jersey based investment advisor.
Officers serve at the discretion of the Board of Directors. Henry
Siegel and Paul Siegel are brothers. There are no other family relationships
among any of the executive officers or directors of the Company.
Item 10. Executive Compensation
The following table sets forth information concerning compensation paid
or accrued by the Company or its subsidiaries for services rendered during the
fiscal years ended December 31, 1996, 1995 and 1994 to the Company's Chief
Executive Officer and to each executive officer whose compensation exceeded
$100,000 during its fiscal year ended December 31, 1996:
Summary Compensation Table
Name and Principal Position Salary
--------------------------- ------
Henry Siegel - Co-Chairman $125,000
Ray Volpe* - Co-Chairman 250,000
Paul Siegel 125,000
Bruce Albert 200,000
Anthony Andrea 200,000
* Paid to an affiliate of Mr. Volpe for consulting services.
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Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
aggregate and percentage ownership of the Company's Common Stock as of December
31, 1996 (i) each person known by the Company to beneficially own more than five
percent of the Company's Common Stock, (ii) each of the Company's directors,
(iii) each of the executive officers named in the Summary Compensation Table
above and (iv) all directors and executive officers as a group.
Name Number Beneficial Ownership
of Shares Percentage
Henry Siegel 3,055,000 13%
Paul Siegel 3,055,000 13%
Ray Volpe 3,055,000 13%
Martin Miller --- ---
All officers and directors as a 9,414,000 40%
group (6 persons)
- ---------------
* Less than 1%.
Mr. Miller's spouse owns 51,520 shares of the Company's common stock.
Mr. Miller denies beneficial ownership of these shares.
Item 12. Certain Relationships and Related Transactions Acquisition or
Disposition of Assets
On October 22, 1996, the Company acquired all the outstanding
shares of Kaleidoscope Media Group, Inc. ("KMG") pursuant to a Plan and
Agreement of Reorganization, executed such date, among the Company and all the
shareholders of KMG ("Acquisition Agreement"). Pursuant to the Acquisition
Agreement the Company issued 9,500,000 shares of its common stock to
shareholders of KMG increasing the outstanding to 23,583,062 shares.
Immediately prior to the acquisition, the Company had no
operations or business activity other than the negotiation of possible business
transactions. During 1996 the company advanced approximately $1,500,000 to KMG
for its operations (on an interest free basis). KMG also was a shareholder of
the Company.
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<PAGE>
Henry Siegel, Paul Siegel and Ray Volpe directors of the
Company and shareholders of the Company each were principal shareholders of KMG
before the acquisition. Each received 2,555,364 shares of the Company's common
stock upon completion of the acquisition. Messrs. Henry Siegel, Paul Seigel and
Ray Volpe each owned 3,055,364 shares of the Company's common stock upon
completion of the acquisition.
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 9,500,00 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.
On May 3, 1996, KMG effected an exchange of shares of Common
Stock for 100% of the issued and outstanding shares of KE and P&P, and 91 % of
the issued and outstanding shares of SeaGull. KMG issued 443,300 shares of its
Common Stock to each of Henry and Paul Siegel and additional shares to a third
person for their 91 % interest in SeaGull. Ray Volpe, Bruce Albert and Anthony
Andrea received 443,300, 49,445 and 49,445 shares of Common Stock of KMG
respectively, for their shares of KE, the sole shareholder of P&P, received
shares of Common Stock of KMG in exchange for his shares in P&P. For accounting
purposes, the Company accounted for this transaction as an acquisition by
SeaGull of KE and P&P since SeaGull's shareholders received the majority of the
shares of Common Stock issued by the Company.
The Company has received loans and advances from foreign clients of
Millport Ltd., a Jersey domiciled investment advisor. These advances have
totaled $600,000 as of December 31, 1996 and $1,018,000 as of March 31, 1997
represented 8% one year notes. These clients have received two year warrants to
purchase an aggregate of approximately 4,074,169 shares of the Company's common
stock at $.25 per share. In addition, clients of Millport have purchased a total
of 4,732,220 shares of common stock. In addition, some of these clients have
made purchase of shares in the open market. Martin Miller is a director of the
Company and a director of corporate finance of Millport Ltd. The clients of
Millport also own an aggregate of 4,732,220 shares of common stock. These
clients are not affiliates of Mr. Miller or Millport Ltd.
In 1996 Mr. Volpe received payment of approximately $130,000 as
repayment of expenses incurred by Volpe in connection with a property in which
the Company received revenues in such amount.
25
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Item 13. Exhibits and Reports on Form 8-K
None
26
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C O N T E N T S
Page
INDEPENDENT AUDITORS' REPORT 2
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3-4
CONSOLIDATED STATEMENTS OF OPERATIONS 5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) 6
CONSOLIDATED STATEMENTS OF CASH FLOWS 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8-21
SUPPLEMENTAL INFORMATION (UNAUDITED)
PRO FORMA CONDENSED STATEMENT OF OPERATIONS--
YEAR ENDED DECEMBER 31, 1996 22
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
BNN Corporation
We have audited the accompanying consolidated balance sheets of BNN Corporation
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BNN Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Paneth, Haber & Zimmerman
-------------------------
New York, NY
March 26, 1997
F-2
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
-----------------
1996 1995
---- ----
CURRENT ASSETS
Cash $ 154,006 $ 139,213
Accounts receivable, less allowance for doubtful
accounts of $-0- in both 1996 and 1995 976,345 175,459
Expenditures billable to clients 317,719
Loans receivable--officers and shareholders 107,031 --
Program cost inventory - current portion,
net of accumulated amortization 355,725 --
Deferred income taxes 313,700 --
Other current assets 117,998 2,882
---------- ----------
Total Current Assets 2,342,524 317,554
PROGRAM COST INVENTORY, less current portion,
net of accumulated amortization 567,461 --
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation 136,408 53,004
INVESTMENT IN JOINT VENTURE 1,134,600 --
DEFERRED INCOME TAXES 1,045,300 --
GOODWILL, net of accumulated amortization 3,317,994 --
OTHER ASSETS 21,116 18,976
---------- ----------
$8,565,403 $ 389,534
========== ==========
See notes to financial statements.
F-3
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
---- ----
CURRENT LIABILITIES
<S> <C> <C>
Notes payable, current portion $ 1,114,159 $ 515,001
Loans payable - stockholders -- 38,470
Accounts payable and accrued liabilities 1,733,664 143,559
Income taxes payable 166,921 --
Capitalized lease obligation - current portion 30,843 --
Deferred rent - current portion 39,780 --
Deferred income and client advances 578,506 148,511
----------- -----------
Total Current Liabilities 3,663,873 845,541
CAPITALIZED LEASE OBLIGATION, less current portion 2,902 --
NOTES PAYABLE, less current portion 80,000 14,969
DEFERRED RENT, less current portion 323,412 --
----------- -----------
Total Liabilities 4,070,187 860,510
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value, 50,000,000 and
10,221,462 shares authorized, 23,557,082
and 6,247,868 shares issued, in
1996 and 1995, respectively 146,731 12
Additional paid-in-capital 4,959,506 375,988
Accumulated deficit (611,021) (846,976)
Stock subscriptions receivable less
allowance for doubtful accounts
of $438,075 in 1996 -- --
Treasury stock 529,000 shares in 1996
at cost -- --
----------- -----------
Total Stockholders' Equity (Deficit) 4,495,216 (470,976)
----------- -----------
Total Liabilities and Stockholders' Equity (Deficit) $ 8,565,403 $ 389,534
=========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
December 31,
-------------------
1996 1995
---- ----
NET REVENUE $ 6,863,359 $ 225,492
DIRECT PROJECT COSTS 3,747,711 --
----------- -----------
GROSS PROFIT 3,115,648 225,492
----------- -----------
EXPENSES
Amortization of program costs 323,882 --
Salaries and benefits 1,843,403 204,769
General and administrative 1,648,097 469,100
Bad debt loss--affiliated entity -- 74,449
Amortization of goodwill 121,676 --
Interest 20,045 43,334
----------- -----------
Total Expenses 3,957,103 791,652
----------- -----------
LOSS BEFORE EQUITY IN INCOME OF JOINT VENTURE
AND INCOME TAXES (841,455) (566,160)
EQUITY IN INCOME OF JOINT VENTURE 1,272,200 --
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 430,745 (566,160)
INCOME TAX EXPENSE 194,790 --
----------- -----------
NET INCOME (LOSS) $ 235,955 $ (566,160)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE $ 0.02 $ (0.10)
=========== ===========
See notes to financial statements.
F-5
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional
Shares Common Paid-in Accumulated
Issued Stock Capital Deficit Total
------ ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance--January 1, 1995 5,672,908 $ 11 $ 989 $ (280,816) $ (279,816)
Issuance of shares for cash
consideration 574,960 1 374,999 -- 375,000
Net loss -- -- -- (566,160) (566,160)
----------- ----------- ----------- ----------- -----------
Balance--December 31, 1995 6,247,868 12 375,988 (846,976) (470,976)
Reacquisition of shares in
legal settlement (562,180) -- -- -- --
Issuance of shares for
acquisition of Kaleidoscope
Group 3,814,312 38,143 2,861,857 -- 2,900,000
BNN recapitalization 14,057,082 108,576 1,721,661 -- 1,830,237
Net income -- -- -- 235,955 235,955
----------- ----------- ----------- ----------- -----------
Balance-December 31, 1996 23,557,082 $ 146,731 $ 4,959,506 $ (611,021) $ 4,495,216
=========== =========== =========== =========== ===========
</TABLE>
529,000 shares of treasury stock were recognized in the BNN recapitalization
without a cost assigned. 500,000 of these shares represent shares issued to
SeaGull Entertainment prior to the recapitalization which are accounted for as
treasury stock in the consolidated financial statements.
See notes to financial statements.
F-6
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 235,955 $ (566,160)
Adjustment to reconcile net loss to net
cash provided by used in operating activities:
Amortization and depreciation 492,425 14,293
Equity in income of joint venture (1,272,200) --
Deferred income tax expense 14,000 --
Deferred rent (27,214) --
Bad debt loss--affiliated entity -- 74,449
Change in assets and liabilities, net
of effects from purchase of KG:
Accounts receivable (148,422) (173,254)
Expenditures billable to clients 122,931 --
Other current assets 251,028 329
Other assets (4,952) (6,612)
Accounts payable and accrued liabilities 128,411 88,703
Payable to KG prior to acquisition 201,939 --
Income taxes payable 150,195 --
Deferred income and client advances (801,754) 148,511
----------- -----------
Net Cash Used in Operating Activities (657,658) (419,741)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Distributions from joint venture 137,600 --
Loans to affiliate -- (74,449)
Loans to officers and shareholders (41,428) --
Expenditures for program costs (1,247,069) --
Acquisition of property and equipment (31,577) (20,908)
Payment of acquisition costs -- (12,364)
----------- -----------
Net Cash Used in Investing Activities (1,182,474) (107,721)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash acquired in stock purchase of Kaleidoscope Group 248,210 --
Proceeds of loans from BNN prior to recapitalization transaction 1,336,018 --
Payment of costs relating to BNN recapitalization transaction (93,781) --
Proceeds from loans payable - shareholders -- 121,500
Repayments of loans payable - shareholders (38,470) (112,000)
Proceeds from notes payable 600,000 300,000
Repayments of notes payable (175,811) (13,730)
Principal payments on capitalized lease obligations (21,241) --
Issuance of common stock -- 375,000
----------- -----------
Net Cash Provided by Financing Activities 1,854,925 670,770
----------- -----------
INCREASE IN CASH 14,793 143,308
CASH
Beginning of year 139,213 (4,095)
----------- -----------
End of year $ 154,006 $ 139,213
=========== ===========
</TABLE>
See notes to financial statements
F-7
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
BNN Corporation ("BNN" or the "Company"), a publicly traded
corporation without significant operations, acquired all of the
outstanding shares of Kaleidoscope Media Group, Inc. ("KMG") on October
22, 1996. The transaction was effected by issuing additional BNN shares in
an amount that resulted in the original KMG shareholders receiving
approximately 40.3% of the outstanding shares of BNN. For financial
reporting purposes, the transaction was recorded as a recapitalization of
KMG. KMG is the continuing, surviving, entity for accounting purposes, but
is adopting the capital structure of BNN which is the continuing entity
for legal purposes. All references to shares of common stock have been
restated to reflect the equivalent number of BNN shares.
KMG was formed in May of 1996, at which time it issued 5,685,688
common shares to acquire approximately 91% of the outstanding shares of
SeaGull Entertainment, Inc. ("SeaGull") and 3,814,312 common shares to
acquire 100%of the outstanding stock of the Kaleidoscope Group ("KG"), a
marketing and consulting company engaged primarily in sports and event
marketing. Since, as a result of the transaction, stockholders of SeaGull
owned a majority of the common stock of KMG, the acquisition of Seagull by
KMG was accounted for as a recapitalization of SeaGull. Accordingly, the
historical financial statements are those of SeaGull. The acquisition of
KG was accounted for as a purchase of KG by SeaGull. The shares issued to
acquire KG were assigned a value of $2,900,000, based upon the fair value
of KG's net assets. At the date of acquisition, KG had a stockholders'
deficit of approximately $539,670, resulting in the recording of goodwill
of $3,439,670. The goodwill is being amortized using the straight line
method over a period of twenty years, and amounted to $121,676 for the
year ended December 31, 1996. KG's results of operations are included in
the consolidated financial statements from May 3, 1996. The following
unaudited pro forma information presents a summary of consolidated results
of operations as if the KG purchase had occurred at the beginning of 1995
with pro forma adjustments to give effect to amortization of goodwill,
certain other adjustments and related income tax effects.
1996 1995
---- ----
Net revenues $8,632,183 $6,681,484
Net income (loss) 134,682 (787,416)
Net income (loss) per share .01 (.03)
The pro forma financial information is not necessarily indicative
of the operating results that would have occurred had the KG acquisition
been consummated as of January 1, 1995, nor are they necessarily
indicative of future operating results.
BNN Corporation and subsidiaries (the "Company") operates two
divisions:
The Entertainment Division (principally consisting of SeaGull's
business activities) is primarily engaged in the business of the
development, production and domestic and international distribution of
entertainment properties and exploiting the related licensing and
merchandising opportunities. It also provides consulting services in the
development of specialty television programming and is involved in the
acquisition and distribution of entertainment library properties.
The Sports Division (principally consisting of KG's business
activities) 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.
F-8
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts
and transactions of BNN and its wholly owned subsidiaries. All
material intercompany accounts and transactions have been
eliminated. BNN's investment in its 50% owned joint venture is
accounted for on the equity method. Accordingly, BNN's share of
the earnings of the joint venture are included in the consolidated
statement of operations.
Program Cost Inventory
Program cost inventory is stated at the lower of amortized
cost or estimated realizable value. Television production and
participation costs are amortized based on the ratio of the
current period's gross revenues to estimated total gross revenues
from all sources on an individual production basis. Estimates of
total gross revenues can change significantly due to the level of
market acceptance of television products. In addition,
uncertainties inherent in the process of estimating costs,
estimates of the ultimate costs of episodic television programming
can change significantly. Accordingly, revenue and cost estimates
are reviewed periodically and amortization is adjusted. Such
adjustments could have a material effect on results of operations
in future periods.
In the case of episodic television programming, the
Company considers each season to be a single product for the
estimation of ultimate revenues and costs.
Revenue Recognition
Revenue from the licensing or distribution of a television
program is recognized when the licensee of the program has the
legal right to exhibit or broadcast the program and the program is
deliverable to the licensee.
Revenue from the barter syndication of television
programming (the sale of television programming in exchange for
advertising time) is recognized when the program has been
licensed, the licensee has the legal right to broadcast the
program, the program is deliverable to the licensee, noncancelable
contracts have been signed with both the station and the purchaser
of the advertising time and appropriate allowances can be
estimated for rating shortfalls ("make goods"). The estimation
process has inherent uncertainties. Accordingly, management's
estimate of the allowance for rating shortfalls may change. Such
changes could have a material effect on results of operations in
future periods.
Revenue is recognized from Company-owned events when the
event takes place. Revenue from consulting and 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.
F-9
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 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.
Net Income (Loss) Per Common Share
Net income (loss) per common share is based upon the
weighted average number of common and common equivalent shares
outstanding during the year. Common equivalent shares are excluded
from the computation in periods in which they have an
anti-dilutive effect.
Inclusion of the contingent shares potentially issuable as
a result of the BNN transaction (see Note 4) would have an
anti-dilutive effect on net income (loss) per share. As a result
it was not used in the earnings per share calculation.
Income Taxes
Income tax expense (benefit) consists of income taxes
currently due or refundable arising from the period's operations
as adjusted by the deferred tax expense (benefit). The deferred
tax expense (benefit) arises from those changes in the Company's
deferred tax assets and liabilities relating to operations.
Deferred tax assets and liabilities result from temporary
differences between the amounts of assets and liabilities recorded
on the financial statements and the amounts recorded for income
tax purposes. Deferred tax assets also result from certain income
tax attributes existing at the balance sheet date that can provide
future income tax benefits including
F-10
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
net operating loss carryforwards which can be used to offset
future taxable income. The deferred tax assets and liabilities are
calculated based the currently enacted tax rates that apply to the
periods that the temporary differences are expected to reverse or
the tax attributes are expected to be utilized. Deferred tax
assets are reduced by a valuation allowance when, in the opinion
of management, it is likely that some portion or all of the
deferred tax assets will not be realized.
SeaGull, with the consent of its shareholders, had 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 applied. For this reason no
federal and only limited state and local income taxes were
provided in the financial statements through May 2, 1996. The
election terminated on May 3, 1996, when SeaGull became a
subsidiary of KMG.
3. MAJOR CUSTOMERS
During the year ended December 31, 1996, approximately 45% of the
Company's revenue was derived from services provided to one U.S.
automobile company. Accounts receivable from this client amounted to
$274,123 at December 31, 1996. Revenue derived from one U.S. sports
association amounted to approximately 10% of the Company's revenue in the
year ended December 31, 1996. Accounts receivable from this client
amounted to $133,200 at December 31, 1996. The revenue from these two
customers was earned in the sports division operations acquired in the KG
transaction on May 3, 1996.
During the year ended December 31, 1995, all of the Company's
(then consisting entirely of the Entertainment Division) 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 (by the Company's 50% owned joint venture) in
the fall of 1996. The Company was also involved in the initial stages of
several other projects that are not yet generating revenue.
4. BNN TRANSACTION/RECAPITALIZATION
As described in Note 1, BNN acquired KMG on October 22, 1996, in a
transaction recorded as a recapitalization of KMG. The transaction was
recorded as an issuance of 13,528,082 shares (14,057,082, less 529,000
treasury shares) in exchange for the cancellation a $1,336,018 payable to
BNN, that had resulted from cash previously advanced, and a $588,000
deferred tax asset. The amount recorded as the capital contribution was
reduced by $93,781 of related costs.
F-11
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1996
4. BNN TRANSACTION/RECAPITALIZATION (Continued)
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.
5. PROGRAM COST INVENTORY
Program cost inventory at December 31, 1996 consists of the following:
Released, less accumulated amortization $ 508,179
In-process 415,007
----------
923,186
Less: Current portion (355,725)
----------
Noncurrent portion $ 567,461
==========
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
Estimated Useful
December 31, Life in Years
--------------------- -------------
1996 1995
---- ----
<S> <C> <C> <C>
Automobile $ 51,543 $ 51,543 5
Furniture and fixtures 51,471 3,453 7
Computers and office equipment 100,138 17,455 5
---------- ---------
203,152 72,451
Less: accumulated depreciation (66,744) (19,447)
---------- ---------
$ 136,408 $ 53,004
========== =========
</TABLE>
Depreciation expense was $46,866 and $14,293 for the years ended
December 31, 1996 and 1995, respectively.
F-12
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1996
7. INVESTMENT IN JOINT VENTURE
The Company has a 50% ownership interest in Keller-Siegel
Entertainment LLC ("KSE"). KSE produces Tarzan: The Epic Adventures, an
hour long action adventure television series that first aired in
September, 1996. Revenue is derived from both domestic and foreign
sources. Production of the series principally occurs in South Africa.
Significant domestic revenue is derived from barter syndication.
Summarized financial information of KSE as of December 31, 1996 is as
follows:
Assets $ 11,762,000
Liabilities (9,493,000)
------------
Members capital $ 2,269,000
============
Revenue $ 8,303,000
Net income $ 2,544,000
Company's equity in net income $ 1,272,000
The Company is the domestic distributor of Tarzan: The Epic
Adventures. During the year ended December 31, 1996, the Company earned
$130,000 of distribution fees (relating to $2,600,000 of KSE advertising
revenues) and $210,000 of executive producer fees from KSE which are
included in revenue in the statement of operations.
The determination of the revenue of KSE involves an estimate by
management of allowances for ratings shortfalls for noncancelable
advertising contracts in force at year end for barter syndication as
described under revenue recognition in Note 2. Determination of KSE's net
income involves the amortization of program cost inventory in the same
manner as described in Note 2. The estimation process has inherent
uncertainties. Accordingly, management's estimates of total gross
revenues, ultimate costs and the allowance for rating shortfalls may
change. Such changes could have a material effect on results of operations
in future periods.
Both the Company and the other 50% owner of KSE provide
production, marketing and administrative services to KSE, the cost of
which exceeds the reimbursements received from KSE. Certain of these
production and marketing costs related to Tarzan: The Epic Adventures have
been capitalized by the Company as program cost inventory. The
amortization of this program cost inventory, as well as the KSE
administrative and noncapitalizable marketing costs are recognized as
expenses in the statement of operations.
F-13
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1996
7. INVESTMENT IN JOINT VENTURE (Continued)
The production costs for the two part premiere episode 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.
8. 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. Total future payments under this lease total $35,028 of which $1,283
represents interest.
9. NOTES PAYABLE
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Note payable arising from the settlement of the disputes relating
to the $500,000 loan described below. 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 described below. The note is payable in
monthly principal installments of $10,000 per month, plus
interest at a bank's prime rate. The note is secured by certain
of the Company's receivables plus shares representing a 4.5%
interest in the Company's SeaGull Subsidiary. 200,000 -
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) with interest payable
monthly. The principal balance was due on December 1, 1996.
There were certain disputes involving this note. Disputed but
unpaid interest was recorded as a liability as of December 31,
1995. A party to the dispute had asserted that because interest
</TABLE>
F-14
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1996
9. NOTES PAYABLE (Continued)
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
has not been paid, the principal is callable by the holder.
During 1996, these disputes were settled, as a result of which
this note was replaced by two new notes (see above). This note
was guaranteed by two individuals to each of whom, 281,090
shares of the Corporation's common stock was issued. No value
was attributed to the stock issued. - 500,000
Note payable to an entity controlled by the Company's Chairman and
Co-CEO. The principal balance was due August 31, 1996. Interest
has been accrued at 3% above a bank's prime rate. The effective
rate on this note was 11.5% at December 31, 1996. The note is
secured by the accounts receivable from, and contracts with, the
Company's automobile corporation client. 200,000 -
Note 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). 14,969 29,970
Note payable to the former parent of KG in three installments of
$13,333 during 1997. 40,000 -
Notes payable to three unrelated entities, due on demand with
interest at 8% per annum payable quarterly. 600,000 -
-------------- -------------
1,194,189 529,970
Less: current portion (1,114,189) (515,001)
-------------- -------------
$ 80,000 $ 14,969
============== =============
</TABLE>
10. LOANS PAYABLE TO STOCKHOLDERS
The loans payable to stockholders at December 31, 1995 bore no
interest and had no definite due date.
F-15
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1996
11. 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 Company
is also the lessee of office space, located in Los Angeles, California,
under a lease also expiring in June 2002. The office leases provide for
future escalation based on certain cost increases.
As of December 31, 1996, the total commitments for future rentals
were as follows:
1997 $ 601,726
1998 589,807
1999 593,090
2000 594,946
2001 613,378
2002 461,845
------------
$ 3,454,792
=============
Rent expense was $343,889 and $39,402 for the years ended December
31, 1996 and 1995 respectively.
12. 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
judgement 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 judgement 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.
F-16
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1996
13. INCOME TAXES
The provision for income taxes for the year ended December 31,
1996 consists of the following components:
Current
Federal $ -
State 180,790
----------
$ 180,790
Deferred
Federal $ 313,000
State 13,000
----------
316,000
Benefit of change from "S"
to "C" Corporation (302,000)
----------
14,000
---------
$ 194,790
=========
There was no provision for income taxes for the year ended
December 31, 1995. The income tax expense for the year, exclusive of the
benefit from the change in tax status, does not bear the expected
relationship between pretax income and the federal corporate income tax
rate of 34% because of the effect of state and local income taxes, the
fact that the company's amortization of goodwill and certain other
expenses are not deductible for income tax purposes.
The reconciliation between the actual and expected federal tax for
the year ended December 31, 1996 is as follows:
Federal corporate tax rate of 34% applied to pretax
income $ 146,453
State and local income taxes, net of federal benefit 127,901
Effect of non-deductible goodwill amortization 41,370
Effect of other nondeductible expenses 28,612
S Corp. deductions prior to May 3, 1996, for which
the Company received no federal benefit. 152,454
Federal benefit of change from S to C corporation. (302,000)
---------
$ 194,790
=========
Deferred income taxes as reported on the balance sheet consists
of:
December 31,
-------------------------
1996 1995
---------- ---------
Deferred tax assets $1,447,000 $ 50,000
Deferred tax liabilities (88,000) (10,000)
Valuation allowance - (40,000)
--------- --------
$1,359,000 $ -
========== =========
F-17
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1996
13. INCOME TAXES (Continued)
Deferred tax asset balances arise principally because of the
following:
Net operating loss carryforwards $ 905,000
Start-up costs capitalized for income
tax purposes but not on the financial
statements 226,000
Deferred rent 155,000
Liability assumed in KG acquisition, not yet
recognized as an expense for tax purposes 34,000
Expenses accrued by subsidiary that is
taxed on the cash basis 127,000
----------
$1,447,000
==========
Deferred tax liability balances arise principally because of the
following:
Revenue earned but not received by the
subsidiary taxed on the cash basis $ 38,000
KG liabilities assumed in the acquisition,
recorded at fair values lower than
their tax basis. 50,000
----------
$ 88,000
----------
$1,359,000
==========
As of December 31, 1996, the Company had net operating loss
("NOL") carryforwards of approximately $980,000 available to offset future
federal taxable income; the carryforwards are not available for state
income tax purposes. These carryforwards begin to expire in 2003.
In addition, certain of the Company's subsidiaries have
approximately $1,265,000 of NOL carryforwards that can only be used to
offset the 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, however, be used to offset certain
gains on the disposition of assets.
As shown above, the company has recorded a deferred tax asset of
$905,000 reflecting the benefit of the NOL carryforwards. Realization is
dependent on generating sufficient taxable income prior to expiration of
the NOL carryforwards. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax asset
will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
F-18
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1996
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments ("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, and the related amounts
recorded on the balance sheet, to which SFAS 107 would be applied include
the following:
<TABLE>
<CAPTION>
Carrying Amount
---------------
Year Ended
December 31,
---------------
1996 1995
---- ----
<S> <C> <C>
Asset:
Cash $ 154,006 $139,213
Loan receivable - officers
and shareholders 107,031 -
Investment in unconsolidated
subsidiary 1,134,600 -
Liabilities:
Notes payable 1,194,159 529,970
Loan payable - officer and shareholder - 38,470
</TABLE>
As a result of the difficulties presented in the valuation of the
loans receivable and payable from the officers and shareholders because of
their related party nature, estimating the fair value of these financial
instruments is not considered practicable. It is not practicable to
estimate the fair value of the investment in the unconsolidated subsidiary
because management believes that the cost of an appraisal exceeds the
benefits of the information considering the subjective nature of such
information. Note 8 sets forth certain information relating to the
unconsolidated subsidiary. The fair values of the cash and notes payable
do not differ materially from their carrying amounts.
None of the above are derivative financial instruments and none
are held for trading purposes.
15. SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE
Interest and Income Taxes Paid
Cash payments for the following were:
December 31,
--------------------
1996 1995
---- ----
Interest $ 27,335 $ 3,334
======== =======
Income Taxes $ 30,595 $ -
======== ========
F-19
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1996
15. SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE (Continued)
Non-Cash Financing Transactions
In connection with the Company's May, 1996 acquisition of
KG, assets were acquired and liabilities assumed as follows:
Fair value of assets acquired
Noncash current assets $ 1,524,861
Property and equipment 98,693
Other noncurrent assets 813,552
Goodwill 3,427,306
------------
5,864,412
Less: liabilities assumed (3,414,561)
------------
Excess of noncash assets assumed over
liabilities assumed 2,449,851
Elimination of Payable to KG 201,939
Net cash acquired 248,210
------------
Stock issued $ 2,900,000
============
$12,364 of costs paid and capitalized in 1995 were
transferred to goodwill as part of the cost of the KG acquisition.
As described in Note 4, on October 22, 1996, the company
issued stock in exchange for the cancellation of a $1,336,018 loan
payable and the receipt of a $588,000 deferred tax asset.
16. SEGMENT INFORMATION
As described in Note 1, the Company's operations have been
classified into two segments, the Entertainment Division and the Sports
Division. Summarized information by business segment for 1996 and is as
follows:
<TABLE>
<CAPTION>
Interest
Entertainment Sports and other Total
------------- ------ --------- -----
<S> <C> <C> <C> <C>
Revenue $ 677,343 $ 5,959,429 $ 226,587 $ 6,863,359
=========== =========== =========== ===========
Operating income $(1,605,476) $ 793,401 $ (29,380) $ (841,455)
Equity in income of KSE 1,272,200 -- -- 1,272,200
----------- ----------- ----------- -----------
Pretax income $ (333,276) $ 793,401 $ (29,380) $ 430,745
=========== =========== =========== ===========
Total identifiable assets $ 1,494,597 $ 4,503,458 $ 107,784 $ 6,105,839
=========== =========== =========== ===========
Depreciation and amortization $ 351,964 $ 137,965 $ 2,496 $ 492,425
=========== =========== =========== ===========
Capital expenditures $ 1,300,849 $ 38,620 $ 9,688 $ 1,349,157
=========== =========== =========== ===========
</TABLE>
For 1995, all of the Company's activities were part of the
Entertainment Division.
F-20
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1996
17. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The accompanying unaudited pro forma condensed statement of
operations of BNN Corporation and subsidiaries for the year ended December
31, 1996 gives effect to the KG acquisition (see Notes 1 and 17) and the
BNN transaction (see Notes 1, 4 and 17) as if they had occurred on January
1, 1996.
The pro forma financial information is not necessarily indicative
of the operating results that would have occurred had the KG acquisition
been consummated as of January 1, 1995, nor are they necessarily
indicative of future operating results.
F-21
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Actual Adjustments Pro Forma
------ ----------- ---------
<S> <C> <C> <C>
NET REVENUE $ 6,863,359 1,768,824 $ 8,632,183
DIRECT PROJECT COSTS 3,747,711 (1) 679,596 4,427,307
--------------- --------------
GROSS PROFIT 3,115,648 4,204,876
--------------- --------------
EXPENSES
Amortization of program costs 323,882 323,882
Salaries and benefits 1,843,403 (1) 492,297 2,335,700
General and administrative 1,648,097 (1) 694,189 2,507,150
(2) 174,838
(5) (9,974)
Amortization of goodwill 121,676 (3) 61,589 183,265
Interest 20,045 (1) 26,562 46,607
--------------- --------------
Total Expenses 3,957,103 5,396,604
--------------- --------------
LOSS BEFORE EQUITY IN INCOME OF
JOINT VENTURE AND INCOME TAXES (841,455) (1,191,728)
EQUITY IN INCOME OF JOINT VENTURE 1,272,200 1,272,200
--------------- --------------
INCOME BEFORE INCOME TAXES 430,745 80,472
INCOME TAX EXPENSE (BENEFIT) 194,790 (1) 21,000 (54,210)
(2) (59,000)
(4) (211,000)
--------------- --------------
NET INCOME $ 235,955 $ 134,682
=============== ==============
NET INCOME PER COMMON SHARE $ 0.02 $ 0.01
=============== ==============
</TABLE>
(1) Results of KG operations January 1 to May 2, 1996
(2) Expenses of BNN Corporation January 1 to October 21, 1996
(3) Amortization of goodwill January 1 to May 2, 1996
(4) Tax benefit of S corporation period losses January 1 to May 2, 1996
(5) Deferred rent amortization January 1 to May 2, 1996
F-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 15th day of April, 1997.
BNN CORPORATION
By: /s/ Henry Siegel
-------------------------------------
Henry Siegel,
Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Capacity Date
- ---------- -------- ----
/s/ Henry Siegel
- --------------------------- Chairman of the Board, April 15, 1997
Henry Siegel Co-Chief Executive
Officer, Director
/s/ Ray Volpe
- --------------------------- President, Co-Chief April 15, 1997
Ray Volpe Executive Officer,
Director
/s/ Paul Siegel
- --------------------------- President of April 15, 1997
Paul Siegel Entertainment
Division, Director
/s/ Martin Miller
- --------------------------- Director April 15, 1997
Martin Miller
/s/ Bernard Bushkin
- --------------------------- Chief Financial April 15, 1997
Bernard Bushkin Officer
