<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A-1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal Quarter ended June 30, 1997
--------------------
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________
Commission file number 0-17591
--------------------
BNN CORPORATION
----------------------------------------------------
(Exact name of small business issuer in its charter)
Nevada 93-0957030
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
345 Park Avenue South, New York, New York 10010
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
212-779-6600
------------------------------------------------
(Issuer's telephone number, including area code)
-----------------------
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 ___
The number of shares outstanding of the issuer's common stock is 25,057,000
(as of June 30, 1997).
Transitional Small Business Disclosure Format: Yes No X
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL RESULTS
JUNE 30, 1997
(UNAUDITED)
C O N T E N T S
Page
-------
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS ................................... 2-3
CONSOLIDATED STATEMENTS OF OPERATIONS ......................... 4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ............... 5
CONSOLIDATED STATEMENTS OF CASH FLOWS ......................... 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .................... 7 - 10
MANAGEMENT COMMENTS ............................................ 11 - 15
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<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
------------- --------------
1997 1996
------ ------
<S> <C> <C>
CURRENT ASSETS
Cash $ 13,060 $ 154,006
Accounts receivable, less allowance for doubtful
accounts of $-0- in both 1997 and 1996 800,946 976,345
Expenditures billable to clients 1,258,848 317,719
Loans receivable--officers and shareholders 187,897 107,031
Program cost inventory - current portion,
net of accumulated amortization 298,729 355,725
Deferred income taxes 907,400 313,700
Other current assets 35,728 117,998
------------- --------------
Total Current Assets 3,502,608 2,342,524
PROGRAM COST INVENTORY, less current portion,
net of accumulated amortization 940,199 567,461
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation 103,483 136,408
INVESTMENT IN JOINT VENTURE 4,080,039 1,134,600
DEFERRED INCOME TAXES 328,600 1,045,300
GOODWILL, net of accumulated amortization - 3,317,994
OTHER ASSETS, including non-current A/R 1,845,200 21,116
------------- --------------
$ 10,821,245 $ 8,565,403
============= ==============
</TABLE>
See notes to financial statements.
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<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
----------- -------------
1997 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities 1,873,968 1,733,664
Notes payable, current portion 532,128 1,114,159
Income taxes payable 1,494,359 166,921
Capitalized lease obligation - current portion 17,166 30,843
Deferred rent - current portion 19,778 39,780
Deferred income and client advances 1,445,189 578,506
----------- -------------
5,382,588 3,663,873
NOTES & LOANS PAYABLE, less current portion - 80,000
CAPITALIZED LEASE, less current portion - 2,902
DEFERRED RENT, less current portion 323,048 323,412
----------- -------------
Total Liabilities 5,705,336 4,070,187
----------- -------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value, 50,000,000 and
10,221,462 shares authorized, 25,057,082
and 6,247,868 shares issued, in
1997 and 1996, respectively 158,931 146,731
Additional paid-in-capital 5,432,305 4,959,506
Accumulated deficit (475,627) (611,021)
Stock subscriptions receivable less
allowance for doubtful accounts
of $438,075 in 1997 - -
Treasury stock 529,000 shares in 1997
at cost - -
----------- ------------
Total Stockholders' Equity (Deficit) 5,115,609 4,495,216
----------- ------------
Total Liabilities and Stockholders' Equity (Deficit) $10,821,245 $ 8,565,403
=========== ============
</TABLE>
See notes to financial statements.
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<PAGE>
BNN CORPORATION AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET REVENUE $ 351,650 $ 1,085,297 $ 1,568,231 $1,208,371
DIRECT PROJECT COSTS 142,734 176,328 463,865 176,328
---------- ----------- ----------- ----------
GROSS PROFIT 208,916 908,969 1,104,366 1,032,043
---------- ----------- ----------- ----------
EXPENSES
Amortization of program costs 116,248 - 334,560 -
Salaries and benefits 289,192 711,664 1,037,145 829,340
General and administrative 360,713 856,145 703,309 988,986
Amortization of goodwill 25,517 - 68,513 -
Interest & Local Taxes 74,257 60,088 104,068 61,345
---------- ----------- ----------- ----------
Total Expenses 865,927 1,627,897 2,247,595 1,879,671
---------- ----------- ----------- ----------
LOSS BEFORE EQUITY
IN INCOME OF JOINT VENTURE
AND INCOME TAXES (657,011) (718,928) (1,143,229) (847,628)
EQUITY IN INCOME OF JOINT VENTURE (516,218) - 351,482 -
INCOME ON SALE OF ASSETS 2,404,441 - 2,404,441 -
---------- ---------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 1,231,212 (718,928) 1,612,694 (847,628)
INCOME TAX EXPENSE 1,296,900 - 1,477,300 -
---------- ---------- ----------- ----------
NET INCOME (LOSS) $ (65,688) $ (718,928) 135,394 (847,628)
========== ========== =========== ==========
NET INCOME (LOSS) PER COMMON SHARE
Primary $ 0.00 $ (0.07) $ 0.01 $ (0.08)
========== ========== =========== ==========
Fully diluted $ 0.00 $ (0.07) $ 0.01 $ (0.08)
========== ========== =========== ==========
</TABLE>
See notes to financial statements.
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<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Shares Common Paid-in Accumulated
Issued Stock Capital Deficit Total
------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Six months Ended June 30, 1996
Balance--January 1, 1996 6,247,868 $ 12 $ 375,988 ($ 846,976) ($ 470,976)
Net loss - 6 months YTD - - - (847,628) (847,628)
Issuance of shares for
acquisition of Kaleidoscope
Group 3,814,312 38,143 2,861,857 - 2,900,000
Various entries related to the
acquisition and consolidation
of Kaleidoscope Group 116,982 620,494 75,795 813,271
Balance--June 30, 1996 10,062,180 $ 155,137 $ 3,858,339 ($ 1,618,809) ($2,466,437)
============== ======== ========== ========= ==========
Six months Ended June 30, 1997
Balance--January 1, 1997 23,557,082 $ 146,731 $ 4,959,506 $ (611,021) $4,495,215
Issuance of warrants - - 125,000 - 125,000
Issuance of shares for
cash consideration 1,500,000 15,000 345,000 - 360,000
Reclassification Adjustment (2,800) 2,800
Net income - - - 135,394 135,394
-------------- -------- ---------- ----------- -------------
Balance - June 30, 1997 25,057,082 $ 158,931 $ 5,432,305 $ (475,627) $5,115,609
============== ======== ========== =========== =============
</TABLE>
See notes to financial statements.
- 5 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months Ended June 30
-------------------------
1997
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 135,394
Adjustment to reconcile net loss to net
cash provided by used in operating activities:
Amortization and depreciation 92,749
Gain on sale of 51% interest in KS&E (2,404,441)
Equity in income of joint venture (351,482)
Deferred income tax expense 123,000
Deferred rent (20,366)
Change in assets and liabilities
Accounts receivable 166,399
Expenditures billable to clients (941,129)
Other current assets 4,040
Accounts payable and accrued liabilities 140,304
Payable to KG prior to acquisition -
Income taxes payable 1,204,438
Deferred income and client advances 866,683
---------
Net Cash Provided by Operating Activities (984,411)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans to officers and shareholders (80,866)
Investments in Equity (1,086,055)
Non-current receivable from sale of interest to IPG (1,845,200)
Proceeds on sale of 51% KS&E 4,045,200
Expenditures for program costs 18,818
Acquisition of property and equipment (14,821)
---------
Net Cash Used in Investing Activities 1,037,076
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock 359,999
Issuance of warrants 125,000
Proceeds from notes payable -
Repayments of notes payable (662,031)
Principal payments on capitalized lease obligations (16,579)
---------
Net Cash Provided by Financing Activities (193,611)
---------
INCREASE/(DECREASE) IN CASH (140,946)
CASH
Beginning of period 154,006
End of period $ 13,060
=========
</TABLE>
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<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
Amended 10Q for the Quarter ending June 30, 1997.
PART I
Organization and Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six and three month periods ended June 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
Concurrent with the filing of the 10Q for the quarter ended September 30,
1997, the Company is filing this amended 10Q for the quarter ended June 30,
1997. The changes are necessary primarily to correct an under-accrued tax
liability and to reverse a duplicate accrual for advertising revenue. The
net affect of the adjustments is to reduce pretax income for the six-month
period from the originally reported $1,846,600 to $1,612,694 and to increase
the tax accrual from $1,395,100 to $1,477,300. The original tax calculation
failed to adequately provide for estimated state tax liabilities on the sale
of the 51% interest in KS&E.
1. MAJOR CUSTOMERS
During the six months ended June 30, 1997, approximately 50% of the
Company's operating revenue was derived from services provided to one
U.S. automobile company. During the six months ended June 30, 1996,
the Company's revenue was derived from the distribution of two
television programs and two months of sports events management fees,
subsequent to the formation of KMG.
2. INCOME SOURCES
The Company's principal source of income for the quarter ended June
30, 1997 were (a) the proceeds from the sale of the 51% interest in
Kaleidoscope Sports and Entertainment LLC, and (b) the accrual on an
equity basis of the retained 49% interest in KS&E. Entertainment
properties, such as Tarzan: The Epic Adventures, typically generate
income in the fourth and first quarters, linked to delivery of
programming for the television broadcast season. The launch of
"Hollywood Discoveries" in June generated losses in the first month
of operations that were reported under the equity method.
3. PROGRAM COST INVENTORY
Program cost inventory is comprised of capitalized development costs
related to entertainment properties prior to completion of the
properties, and consisted of the following at:
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<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
3. PROGRAM COST INVENTORY (cont.)
June 30, December 31,
1997 1996
---- ----
Current portion 298,729 355,725
Non-current portion 940,199 567,461
----------- ----------
Total Program Cost Inventory $ 1,238,928 $ 923,186
========= ========
4. INVESTMENT IN KELLER SIEGEL ENTERTAINMENT, JOINT VENTURE
During the quarter ended June 30, 1997, the Company booked a
($515,800) downward adjustment to earnings that had been accrued
through the first quarter of the current fiscal year. The downward
revision was necessitated the impact of lower television program viewer
ratings (Nielsen ratings) than forecast, which result in lower domestic
advertising income. There were also reductions in foreign license and
U.S. home video fees, associated with deductions against fees permitted
by contractual provisions in various license agreements.
The production costs for the two part premiere episode of Tarzan: The
Epic Adventures, along with certain pre-release marketing costs were
funded by a third party under an agreement by which the third party was
to fund the production costs for the entire season's episodes in
exchange for significant gross profit participation. The third party
refused to supply the funding for the remaining episodes. As a result,
KSE incurred significant costs in arranging for alternate financing. It
is possible that the third party will advance claims for the return of
the monies advanced and/or a share of the profits allocable to the
two-part premiere. Management believes that such claims have no merit
because of the breach of the agreement by the third party. In addition,
management believes that it has valid counterclaims for damages arising
from the breach of the agreement that exceed the third party's claims.
It is, nevertheless, at least reasonably possible that a material
liability could result, although the amount cannot be estimated.
5. INCOME TAXES
The provision for income taxes for the six months ended June 30, 1997
consists of the following components:
Federal Tax Provision $ 946,834
State Tax Provision 530,439
__________
Total Tax Provision $ 1,477,274
There was no provision for income taxes for the nine months ended
September 30, 1996. The income tax expense for the period 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 write-off and
amortization of goodwill and certain other expenses are not deductible
for income tax purposes.
- 8 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
6. NOTES and LOANS PAYABLE
<TABLE>
<CAPTION>
June 30, December 31,
------------- ---------------
1997 1996
---- ----
<S> <C> <C>
Note payable arising from the settlement of
the disputes relating to the $500,000 loan
resolved in 1996. The note is payable in monthly
installments of $30,000 without interest 139,220
Note payable arising from the settlement of
the disputes relating to the $500,000 loan
resolved in 1996. The note is payable in monthly
principal installments of $10,000 per month. 55,220 200,000
Note payable to an entity controlled by the Company's
Chairman and Co-CEO. 200,000 200,000
Note payable to a bank in monthly installments of
$1,422, including interest at 8.89% per annum. 6,955 14,969
Note payable to the former parent of KG:
agreement to pay reduced balance in
three installments of $13,333 during 1997. 40,000 40,000
Notes Payable to unaffiliated entities, due upon
demand with interest at 8% per annum
payable quarterly 229,953 600,000
--------- ----------
532,128 1,194,189
Less: current portion (532,128) (1,114,189)
---------- ----------
$ - $ 80,000
========== ==========
</TABLE>
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<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
PART II
Item 1 - Legal Proceedings
On June 21, 1996, a suit was filed against two of the Company's
subsidiaries and other unrelated parties in the amount of $21,000,000
alleging that they are successors to the alleged liability for a default
judgment entered against a former affiliate of the subsidiaries in April,
1995 for an alleged action taking place in 1988. The Company intends to
vigorously defend itself in this litigation. Management believes that the
claim against the former affiliate lacks merit and that, in any case, the
subsidiaries have no responsibility for the debts of the former
affiliate. Furthermore, management believes that if any judgment were to
be entered against the subsidiaries it would be able to obtain
indemnification from the prior owner of the former affiliate's business,
a major advertising agency. For these reasons, management believes that
the litigation will not have a material effect on the Company's financial
position. It is, nevertheless, at least reasonably possible that a
material liability could result, although the amount cannot be estimated.
On July 22, 1997, several alleged creditors filed an involuntary
petition in bankruptcy in the U.S. Bankruptcy Court, Central District of
California, bearing case number LA97-38036AA, against SeaGull
Entertainment, Inc. d/b/a/ The Hollywood Connection, and d/b/a Hollywood
Connection LLC. SeaGull Entertainment, Inc. retained counsel in
California, denied that it was insolvent and filed its answer in August,
seeking dismissal of the petition. The request for dismissal was denied,
but the Company has subsequently prevailed against a further motion by
the petitioners seeking a summary judgement against SeaGull. Management
is vigorously contesting the petition and is evaluating other legal
remedies as may be available to conclude this matter in the Company's
favor. Twenty-six of the original claimants, who had worked as
independent contractors for Hollywood Connection, have agreed to resolve
their individual claims against SeaGull, and in exchange for payment of
legitimate invoices have signed releases and dismissals of their claims.
Item 2 - Changes in Securities
During the six months ended June 30, 1997, the Company issued
1,500,000 warrants, to an individual who became a Director on April 1,
1997, in exchange for $125,000 cash. Each warrant, which expires March 5,
1998, entitles the holder to purchase one share of common stock for
$0.60.
In addition, through June 30, 1997 the Company had issued 4,075,170
warrants, principally as additional consideration to the holders of
certain of the notes payable. Each warrant, expiring in November, 1998,
entitles the holder to receive one share of common stock at $.25 per
share.
Exemption from registration under the Securities Act is claimed for
such issuance upon the exemption afforded by Section 4 (2) of the
Securities Act.
Item 6 - Exhibits
(a) Exhibits
Exhibit 27 - Financial Data Schedule
- 10 -
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The following discussion and analysis provides information that the
Company's management believes is relevant to an assessment and understanding
of the Company's results of operations and financial condition. The discussion
should be read in connection with the financial statements and footnotes that
appear elsewhere in this report.
On October 22, 1996, BNN Corporation acquired the Kaleidoscope Media
Group Inc., (KMG) through a stock exchange. KMG was itself formed on May 3,
1996, through the acquisition of the Kaleidoscope Group (primarily
Kaleidoscope Entertainment, Inc. and People and Properties, Inc.) by SeaGull
Entertainment, Inc. For accounting purposes, the acquisition of KMG by the
Company was treated as a recapitalization of KMG, and as such, the surviving
entity for reporting purposes is SeaGull Entertainment.
In the quarter ended June 30, 1997, a new sports and entertainment
entity, called Kaleidoscope Sports and Entertainment LLC, (KS&E) a limited
liability company, was established and all sports and entertainment properties
of People and Properties, a subsidiary of the Company, were transferred into
the new venture. After the transaction, employees of Kaleidoscope Group became
employees of KS&E. Prior to concluding the transaction, Ray Volpe resigned as
an officer of BNN and became chief executive officer of KS&E. Mr. Volpe is a
director of the corporation and until his resignation prior to the
transaction, was co-chief executive officer of the Company.
On May 5, 1997, People & Properties, Inc. sold to Interpublic Group
of Companies, Inc. ("IPG"), an aggregate 51% interest in KS&E. The sale was
made pursuant to an amended and restructured limited liability company
agreement (the "Agreement"). IPG is an unaffiliated public corporation
engaged in the advertising and public relations business. The purchase price
was based upon the earnings of KS&E during the three annual periods
immediately subsequent to the closing ("Earning Period"), with a down payment
of $2,200,000 paid at closing. The Agreement grants IPG a one year option to
acquire the remaining 49 percent of KS&E for a purchase price based on the
earnings of KS&E during the Earning Period with an additional down-payment of
$1,900,000 at the option closing date. The complete Agreement was included
as an attachment to the relevant 8K filing by the Company, dated May 20, 1997.
Subsequent to the close of the quarter, General Motors Corporation
executed a signed agreement with KS&E, to establish a long-term relationship.
Management, based upon present and proposed business commitments, pursuant to
such agreement, was able to estimate a minimum profit of the IPG transaction
over the three-year Earning Period.
SEC accounting rules provide that with regard to a sale, wherein the
final, actual purchase price is indeterminate, the Company must be able to
establish beyond a reasonable doubt that the reported purchase price will be
realized. That Company has made that determination based upon the
contractual guarantees given to KS&E by General Motors and the provisions
within the Agreement with IPG that restricts cost increases to be pari parsu
with increases in income. The majority of the forecast income is based upon
the General Motors contract and does not include any assumptions of new
business beyond projects already committed over the term of the Earning
Period. Furthermore, the forecast does not include earnings from the Company's
49% equity participation in KS&E over the three years.
Notwithstanding the foregoing, the Company has taken a substantial
reserve against the future profit. Based upon the foregoing and
creditworthiness of General Motors, in the quarter ended June 30, 1997, the
Company booked a $1,845,000 non-current receivable from IPG, and recorded that
amount as additional income on the sale of the 51% interest. As a related
accounting entry in the same period, the Company has written off 51% of the
existing goodwill associated with the sports properties transferred to
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<PAGE>
KS&E, and has reclassified the remaining 49% balance to investment at
equity. Because goodwill amortization and write-offs are not allowable as tax
deductible expense, the Company is accruing a tax liability in the amount of
$1,600,000 on the gross proceeds from the sale. The Company has combined
state and federal NOL's in excess of $3,000,000 that will be utilized to
reduce the tax liability actually paid. As a result of NOL utilization, the
cash outflow related to the tax expense will be significantly reduced.
Because the NOL's were previously recorded in prior period income statements,
they can not be used to reduce the tax expense shown on the income statement
for the current period.
Subsequent to the sale of the 51% interest, financial results of KS&E
were included in the Company's financial statements pursuant to the equity
method. For the quarter ended June 30, 1997, $162,000 equity income from the
49% share of KS&E has been recognized.
Management continued to be heavily involved in finalizing production
and financing arrangements and business relationships necessary to begin
production of two major entertainment properties, "Merlin" and "Team Xtreme."
Production is expected to begin in the third quarter of this fiscal year,
"Merlin" as a two hour movie, and "Team Xtreme" as a movie and 22 episode
series. Both movies are scheduled for international and U.S. release in the
fall of 1997. The "Team Xtreme" series will be broadcast in markets outside
the U.S. starting with fall 1997, and is scheduled for U.S. release in the
fall of 1998. Other projects are under development and may reach commencement
as early as the third quarter 1997.
During the second quarter ended June 30, 1997, the Company continued
to invest in the development of entertainment and sports properties intended
to position the Company for long-term growth and fiscal stability. Among these
was the launch in June of the daily transactional television program
"Hollywood Discoveries" (previously titled "Hollywood Connection") and
"Boxcino," a multi-event boxing series featuring Latin American fighters.
Management undertook several initiatives to ensure adequate interim
cash resources. The Company is seeking to obtain necessary funding from (a)
equity and debt financing, (b) arrangements for profit participation in
individual projects and (c) marketing or advertising tie-ins to programs.
Management is currently pursuing several financing proposals through debt and
equity instruments and expects to close several arrangements during the third
quarter of this fiscal year.
Note: Any forward looking statements in these comments are
necessarily subject to risks and uncertainties which may affect the accuracy
of such statements and limit the Company's ability to meet its projections.
Such risks may include unanticipated declines in revenue due to competitive,
market and general economic risk factors.
Results of Operations
The Company reported $1,231,212 in pretax profits for the quarter
ended June 30, 1997, compared with a loss of ($718,928) for same period in the
prior fiscal year. On a net income basis, the results for the quarter were a
loss of ($65,688) compared to a loss in the prior fiscal year of ($718,928).
For the six months ended June 30, 1997, pretax profits were $1,612,694
compared with a loss of ($847,628) for the prior fiscal year, and on a net
income basis $135,394 for the six months compared with a loss in! the prior
year of ($847,628).
- 12 -
<PAGE>
Net revenues for the second quarter ended June 30, 1997, consist of
total billings, less any agency fees and media costs, that totaled $351,650,
compared with net revenue of $1,085,297 in the comparable three-month period
for fiscal 1996. For the six-month period ended June 30th 1997, net revenues
were $1,568,231 compared with $1,208,371 in the comparable period in the prior
year.
The second quarter revenues for the current fiscal year are largely
attributable to the launch of Boxcino, and fees associated with several sports
properties. Revenues in the comparable prior year period were attributable to
fees associated with sports events and fees associated with distribution of
two television programs. The decline in the current fiscal year compared with
the second quarter in the prior fiscal year is attributable to several
factors. Revenue from distributed television programming was not repeated in
the current fiscal year; sports related activity is lower as Management and
clients focused efforts on the creation of KS&E; sports sponsorship was higher
in the previous fiscal year related to the 1996 Olympic Games.
Gross profit after direct project costs was $208,916 for the quarter
ended June 30, 1997 compared with $908,969 for the prior year as a result of
lower revenue noted above. Direct costs include costs necessary to create,
market and manage an event, or produce, market and distribute a broadcast or
other entertainment property, but exclude staff salaries, general and
administrative costs. For the six months ended June 30, 1997 gross profit was
$1,104,366 compared with $1,032,043 in 1996.
The Company expensed $116,248 of program cost inventory in the
quarter ended June 30, 1997, based on the ratio of the current period's gross
revenue to estimated total gross revenues from all sources on an individual
project basis. For the six months, the entire amount expensed, $334,560, is
attributable to costs that had been capitalized as related to the production
of "Tarzan, The Epic Adventures."
Salaries and related benefit costs were $289,192 for second quarter
1997, compared with $711,664 for the prior year. The reduction reflects the
transfer of sports-related personnel to KS&E compared to full staffing in the
prior year, and capitalizati! on of some production related costs in SeaGull
Entertainment, related to "Merlin" and "Team Xtreme." At the same time, the
Company reduced the number of consultants and outside service providers, where
such reductions were feasible. For the six months ended June 30, 1997,
salaries and related benefit costs were $1,037,145 compared with $829,340 for
the prior year, partly attributable to a larger number of staff hired to
manage administrative and financial requirements of the Company as well as
development of programs.
Total expenses other than direct costs were $865,927 for second
quarter 1997 compared to $1,627,897 for 1996. The 1997 expenses include
amortization of goodwill in the amount of $25,517 compared to no amortization
of goodwill the comparable period in the prior year and amortization of
capitalized program costs in the amount of $116,248 compared to no
amortization the prior year. For the six months ended June 30, 1997, total
expenses other than direct costs were $2,247,595 compared with $1,879,671 for
the comparable period the prior year.
The Company suffered a loss of ($516,218) in equity income for the
quarter ended June 30, 1997, from its participation in a 50%-owned venture
that produces, distributes and licenses the syndicated series, "Tarzan, Epic
Adventures." Income from this property is generated from advertising sales
and licenses for home video, cable television, international broadcast rights,
and merchandising of toys, books and related items. Reported under the rules
of FAS 53, income and expense accruals were based upon the delivery of
scheduled episodes against an "ultimate" earnings forecast, less forecast
costs over the viable life of the property. The loss was the result of a
downward revision of the earnings forecast for the first season of Tarzan and
reduced the $867,700 profit recorded in the quarter ended March 31, 1997. The
downward revision was necessitated expectation of lower advertising revenues
caused by the impact of lower television program viewer ratings (Nielsen
ratings) than forecast. Also contributing to the loss in the quarter were
reductions in foreign license and U.S. home video fees, associated with
deductions against fees permitted by contractual provisions in various
license agreements.
- 13 -
<PAGE>
Income Taxes
The provision for state and federal income tax was $1,116,500 for
second quarter 1997, on a pretax basis of $1,231,212 compared with no tax
provision for the second quarter 1996 on a pretax loss of ($718,928). The
income tax expense for 1997 does not bear the expected relationship between
pretax income and the federal corporate tax rate of 34% because of the effect
of state and local income taxes and the fact that the company's amortization
of goodwill, the write-off of $1,640,759 goodwill associated with the 51%
sale of KS&E and certain other expenses are not deductible for income tax
purposes.
At June 30, 1997, net operating loss carryforwards ("NOL's") of the
Company amounted to approximately $979,940 for Federal income tax purposes.
The carryforwards are not available for state income tax purposes. The NOL's
begin to expire in varying amounts starting in 2003.
In addition, certain of the Company's subsidiaries have approximately
$1,235,000 of NOL carryforwards that can only be used to offset future taxable
income (for federal and certain state purposes) of the specific subsidiaries
to which they pertain. These carryforwards are further limited by the
operation of Section 382 of the Internal Revenue Code. The subsidiaries are
only allowed to use a maximum of approximately $120,000 of these carryforwards
each year. Additional portions of the carryforwards can be used to offset
certain gains on disposition of assets, and will be fully utilized to offset
the gain on the sale of the 51% interest in KS&E.
Liquidity and Capital Resources
As of June 30, 1997, the Company reported cash of $13,060 compared
with $154,006 reported at December 31, 1996. During the six months ended June
30, 1997, operating activities generated a net outflow of funds of ($984,411).
Cash was generated by issuance of warrants and stock, however the repayment
of ($662,031) in short term notes led to a negative overall cash flow from
financing activities. The sale of 51% of KS&E generated $2,200,000 in cash,
but Company operating needs and investment activity in entertainment
properties all required extensive funding for development, production,
promotion and marketing. Although many of the "Boxcino, "Hollywood
Discoveries," "Merlin" and "Team Xtreme" costs were capitalized for income
statement purposes (until the programs are released and revenue is
recognized) they nevertheless represent a significant cash outflow.
Boxcino was launched in April 1997. Although Boxcino generated
revenue in the quarter ended June 30, 1997, production funding requirements of
the initial two broadcasts were higher than anticipated when a venture partner
failed to provide contracted services and cash.
Expected revenue from "Hollywood Connection" advertising and direct
sale of products to viewers has been below expectations. Management does not
expect positive cash flows from this project within the third quarter, however
an agreement with a third party to participate in the program as a 50%
venture partner is expected to generate operating funds and should reimburse
some costs already incurred.
Costs associated with pre-sales, marketing and pre-production of
"Xtreme" and "Merlin" have already been incurred. "Xtreme" will start full
production as a 22-episode series in the fourth quarter of this fiscal year,
as will the two-hour movie for Merlin. Entertainment properties typically
require outlays well in advance of any expected revenue from licensing or
advertising and the nature of the "television broadcast season" is such that
properties are often not released in the U.S. until the fall seas on
(September). "Xtreme" and Merlin are different in that they will be launched
in the U.S. subsequent to International release. Although international
license payments will commence with initial delivery of programming in the
fourth quarter of 1997, a significant portion of expected revenues will not
be received until 1998 or beyond.
- 14 -
<PAGE>
Entertainment properties are accounted for under the revenue and
expense recognition provisions of FAS 53, and no cash was received by the
Company in the quarter ending June 30, 1997 from its 50% participation in the
joint venture that produces and distributes "Tarzan." This largely resulted
from the obligations of the joint venture to its lender to subordinate
payments to others, including the joint venture, until the loan shall be
repaid in full. This is expected to happen later in 1997 and cash from
earnings should be received for distribution or subsequent re-investment.
Although income was accrued on the equity income in the 49% ownership of
Kaleidoscope Sports & Entertainment, no cash was received by the Company
during the quarter.
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.
Because early results of Boxcino, Hollywood Discoveries, and other
entertainment properties generated very little cash, Management undertook
several initiatives to ensure adequate interim cash resources. The Company is
seeking to obtain necessary funding from (a) equity and debt financing, (b)
arrangements for profit participation in individual projects and (c) marketing
or advertising tie-ins to programs. Management is currently pursuing several
financing proposals through debt and equity instruments and expects to close
several arrangements during the third quarter of this fiscal year.
SIGNATURE
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 26th day of November, 1997.
BNN CORPORATION
By: /s/ Henry Siegel
---------------------------------
Henry Siegel,
Chairman & Chief Executive Officer
- 15 -
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