<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal Quarter ended March 31, 1997
--------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________
Commission file number 0-17591
--------------------
BNN CORPORATION
----------------------------------------------------
(Exact name of small business issuer in its charter)
Nevada 93-0957030
- --------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
345 Park Avenue South, New York, New York 10010
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
212-779-6601
------------------------------------------------
(Issuer's telephone number, including area code)
-----------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
----------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes _X_ No ___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
--------------------
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
--- ---
<PAGE>
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.
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 (primary Kaleidoscope
Entertainment Inc. and People and Properties Inc.) by SeaGull Entertainment,
Inc. For accounting purposes, the acquisition of KMG by the Company was treated
as a recapitalization of KMG, and as such, the surviving entity for reporting
purposes is SeaGull Entertainment The consolidated financial statements provided
in this report for the quarter ended March 31, 1997, include consolidated three
months of SeaGull Entertainment, the Kaleidoscope Group and BNN Corporate. The
results reported for the three months ending March 31, 1996 are solely those of
SeaGull Entertainment, exclusive of the Kaleidoscope Group.
During the first quarter ended March 31, 1997, the Company continued to
build upon the strategic positions taken in the prior fiscal year and emphasized
development of several entertainment and sports properties that will position
the Company for long-term growth and fiscal stability. Despite overall
profitability during the quarter, operating cash flow needs and investment in
projects necessitated additional funding being obtained through issuance of debt
and equity instruments.
The Company reported $381,482 in pretax profits for the quarter ended March
31, 1997, compared with a loss of ($128,700) for same period in the prior fiscal
year. On a net income basis, the results for the quarter were a profit of
$201,082 compared to a loss in the prior fiscal year of ($128,700).
Results of Operations
Gross billings for the quarter ended March 31, 1997, totaled $2,285,899
compared with gross billings for the first quarter of the previous fiscal year
of $123,074. Gross billings include amounts billed to agencies on behalf of
third parties for television advertising placed by these agencies. In the first
quarter 1997, these billings totaled $1,069,318. 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 net revenue figures.
<PAGE>
Net revenues for the first quarter ended March 31, 1997, which exclude
agency fees and media costs, totaled $1,216,581, compared with net revenue of
$123,074 in the comparable three-month period for fiscal 1996.
The growth in first quarter revenue versus the first quarter prior year, is
largely attributable to revenues derived from sports properties and the event
management and consulting business of the People and Properties and Kaleidoscope
companies that were acquired during 1996. In the first quarter of the prior
year, SeaGull Entertainment was in a start-up mode that incurred development
costs with no commensurate revenue; further, there were no sports operations.
Had the sports companies been included in the prior year results, the Company
would have reported revenues of $2,961,916 in the first quarter, which included
approximately $1,500,000 from a discontinued golf event, in which the Company
reported a net loss.
Gross profit after direct project costs was $895,450 for the quarter ended
March 31, 1997 compared with $123,074 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 in prior year quarter, the comparison of gross profit would have
been $18,702, due to higher costs a the net loss on the golf event noted above.
The Company expensed $218,312 of program cost inventory in the quarter
ended March 31, 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 three months, 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 $747,953 for first quarter 1997,
compared with $117,676 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.
Total expenses other than direct costs were $1,381,668 for first quarter
1997 compared to $251,774 for 1996. Had the Kaleidoscope Group companies and BNN
Corp. expenses been reported in the restated first quarter 1996, the total
expenses, excluding direct costs, would have been $781,668 in first quarter
1996. The 1997 expenses include amortization of goodwill in the amount of
$42,996 compared to $-0- amortization of goodwill the prior year.
<PAGE>
Although not reported as revenue, SeaGull Entertainment generated $867,700
in equity income for the quarter ended March 31, 1997, from its participation in
a 50%-owned venture that produces, distributes and licenses the syndicated
series, "Tarzan, 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 United
States. 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 19 of 22
scheduled episodes through the end of the quarter, less the amounts accrued
through the end of fiscal 1996.
Income Taxes
The provision for state and federal income tax was $180,400 for first
quarter 1997, on a pretax basis of $381,482 compared with no tax provision for
the first quarter 1996 on a pretax loss of ($128,700). 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 and
certain other expenses are not deductible for income tax purposes.
At March 31, 1997, net operating loss carryforwards ("NOLs") amounted to
approximately $679,000 for Federal income tax purposes. The carryforwards are
not available for state income tax purposes. The NOLs begin to expire in varying
amounts starting in 2003.
In addition, certain of the Company's subsidiaries have approximately
$1,235,000 of NOL carryforwards that can only be used to offset future taxable
income (for federal and certain state purposes) of the specific subsidiaries to
which they pertain. These carryforwards are further limited by the operation of
Section 382 of the Internal Revenue Code. The subsidiaries are only allowed to
use a maximum of approximately $120,000 of these carryforwards each year.
Additional portions of the carryforwards can be used to offset certain gains on
disposition of assets.
For the first quarter, 1997, the Company utilized $301,000 of NOLs to
offset Federal income taxes, and subsidiary companies utilized $30,000 from NOLs
to offset various state and Federal taxes.
<PAGE>
Liquidity and Capital Resources
As of March 31, 1997, the Company reported a cash deficit of ($177,617)
(cash increase of $130,144 less bank overdraft of $307,761) compared with
($16,517) reported at March 31, 1996. During the first quarter 1997, operating
activities of the companies generated a net outflow of funds of ($98,748).
Although the Company generated a post-tax profit of $201,082 and there were
non-cash costs such as depreciation and amortization totaling $273,341, a
significant shortfall resulted because no cash was received from equity income
of $867,700 from the joint venture.
The negative cash flow generated by operating activities during first
quarter 1997 was attributable to the start-up nature of the Company's
entertainment properties as well as professional fees such as legal and
accounting costs associated with prior year and efforts to resolve several
remaining legal claims associated with prior year actions.
Investing activities, primarily use of funds to create programs whose costs
were capitalized, generated a net outflow of ($454,128) in the three months
ended March 31, 1997.
Entertainment properties including "Tarzan: The Epic Adventures," "Merlin",
"Team Xtreme" and "Hollywood Connection" (formerly called "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 released and revenue is 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, an internationally,
properties may not be broadcast until the following calendar year.
Accounted for under the revenue and expense recognition provisions of FAS
53, no cash was received by the Company in the quarter ending March 31, 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.
Scheduled for release later in 1997 are the broadcast of the daily
transactional television program "Hollywood Connection" (originally carrying the
working title of "Celebrity Showcase," as noted in the Company's 10K for 1996)
to begin in June; a second season of Tarzan is expected to commence in 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, "Hollywood
Connection" revenue from program
<PAGE>
advertising and direct sale of products to viewers is also expected to provide
positive project cash flows within the third quarter of 1997.
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.
In the absence of significant capital, the Company has continued 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 the quarter ended March 31, 1997, the combined cash shortfall from
operating and investing activities was offset by cash inflows from financing
activities totaling $714,314. This was attributed to (1) notes payable, totaling
$397,531 from three unrelated entities, (2) warrants and restricted common
shares that were issued to three entities, generating $485,000 in cash. The
proceeds from these transactions were largely utilized for operating purposes as
described above.
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 it has positive cash flow.
In the quarter, Management devoted significant attention to developing and
executing a long-range plan to establish a strategic partnership for the Company
in its sports business. Management finalized plans for a new sports and
entertainment entity, to be called Kaleidoscope Sports and Entertainment, LLC,
and planned the transfer of all the sports and entertainment properties and
personnel of People and Properties, into the new venture. This plan was executed
on May 2, 1997. The Interpublic Group of Companies, Inc. on May 5, 1997, then
purchased a 51% interest in the new entity from the Company. Although the
transaction was not culminated until the second quarter of 1997, and is
therefore a subsequent event to the results reported here, the efforts by
Management to enhance its business opportunities, acquire new sources of
operating capital, and establish favorable conditions for future growth of the
Company were a central activity in the quarter ended March 31, 1997.
The Interpublic Group of Companies, Inc. purchase of the 51% interest was
based upon an earnout over a three year period. The initial down payment
received by BNN Corporation was $2,200,000. BNN Management, based upon present
and proposed
<PAGE>
business commitments, estimates that the profit of the transaction
over the three year period will be in excess of six million dollars. The
Interpublic Group of Companies, Inc. also has a one year option to purchase the
remaining 49% interest, which would give BNN Corporation an additional profit.
BNN Corporation will report its earnings from this venture on a quarterly
basis, as a minority interest equity investment.
Note: Any forward looking statements in this press release 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.
Ray Volpe has resigned as Co-CEO of BNN Corporation and will become CEO of
Kaleidoscope Sports and Entertainment, L.L.C.. Mr. Volpe will continue as a
director of BNN Corporation and remain as a major shareholder of BNN
Corporation. Henry Siegel will remain as CEO of BNN Corporation and assume the
additional responsibilities that were Mr. Volpe's.
In the quarter ended March 31, 1997, the Board of Directors approved an
Employee Stock Option Plan, with an effective date of January 2, 1997. There are
approximately 950,000 shares of restricted common stock anticipated under the
plan, with a vesting period of four years. Implementation of the plan requires
shareholder approval.
<PAGE>
C O N T E N T S
Page
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FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 2-3
CONSOLIDATED STATEMENTS OF OPERATIONS 4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-13
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
March 31,
------------------------
1997 1996
---- ----
CURRENT ASSETS
Cash $ 284,150 $122,642
Accounts receivable, less allowance for doubtful
accounts of $-0- in both 1997 and 1996 1,214,297 59,586
Expenditures billable to clients 526,289 -
Loans receivable--officers and shareholders 126,098 -
Program cost inventory - current portion,
net of accumulated amortization 266,104 156,055
Deferred income taxes 907,400 -
Other current assets 124,314 14,164
----------- --------
Total Current Assets 3,448,652 352,447
PROGRAM COST INVENTORY, less current portion,
net of accumulated amortization 892,898 75,534
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation 136,602 48,247
INVESTMENT IN JOINT VENTURE 2,144,000 -
DEFERRED INCOME TAXES 328,600 -
GOODWILL, net of accumulated amortization 3,274,998 -
OTHER ASSETS 21,116 6,613
----------- --------
$10,246,866 $482,841
=========== ========
See notes to financial statements.
- 2 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
March 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Bank overdraft $ 307,761 $ -
Notes payable, current portion 1,381,690 515,337
Accounts payable and accrued liabilities 1,703,160 142,428
Income taxes payable 197,459 -
Capitalized lease obligation - current portion 25,528 -
Deferred rent - current portion 39,704 -
Deferred income and client advances 1,046,924 245,607
Due to BNN Corp. - 75,000
Due to Kaleidoscope Group - 93,139
----------- ----=-----
4,702,226 1,071,511
NOTES PAYABLE, less current portion 50,000 11,006
DEFERRED RENT, less current portion 313,342 -
----------- ----------
Total Liabilities 5,065,568 1,082,517
----------- ----------
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 161,731 12
Additional paid-in-capital 5,429,506 375,988
Accumulated deficit (409,939) (975,676)
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) 5,181,298 (599,676)
----------- ----------
Total Liabilities and Stockholders' Equity (Deficit) $10,246,866 $ 482,841
=========== ==========
</TABLE>
See notes to financial statements.
- 3 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
---------------------
1997 1996
---- ----
NET REVENUE $1,216,581 $ 123,074
DIRECT PROJECT COSTS 321,131 -
---------- --------
GROSS PROFIT 895,450 123,074
---------- --------
EXPENSES
Amortization of program costs 218,312 -
Salaries and benefits 747,953 117,676
General and administrative 342,596 132,841
Amortization of goodwill 42,996 -
Interest 29,811 1,257
---------- ---------
Total Expenses 1,381,668 251,774
---------- ---------
LOSS BEFORE EQUITY IN INCOME OF JOINT VENTURE
AND INCOME TAXES (486,218) (128,700)
EQUITY IN INCOME OF JOINT VENTURE 867,700 -
---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 381,482 (128,700)
INCOME TAX EXPENSE 180,400 -
---------- ---------
NET INCOME (LOSS) $ 201,082 $(128,700)
========== =========
NET INCOME (LOSS) PER COMMON SHARE
Primary $ 0.01 $ (0.02)
========== =========
Fully diluted $ 0.01 $ (0.02)
========== =========
See notes to financial statements.
- 4 -
<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>
Three Months Ended March 31, 1996
Balance--January 1, 1996 $ 6,247,868 $ 12 $ 375,988 $(846,976) $ (470,976)
Net loss - - - (128,700) (128,700)
----------- -------- ---------- --------- ----------
Balance--March 31, 1996 6,247,868 $ 12 $ 375,988 $(975,676) $ (599,676)
=========== ======== ========== ========= ==========
Three Months Ended March 31, 1997
Balance--January 1, 1997 23,557,082 $146,731 $4,959,506 $(611,021) $4,495,216
Issuance of warrants - - 125,000 - 125,000
Issuance of shares for
cash consideration 1,500,000 15,000 345,000 - 360,000
Net income - - - 201,082 201,082
----------- -------- ---------- --------- ----------
Balance--March 31, 1997 25,057,082 $161,731 $5,429,506 $(409,939) $5,181,298
=========== ======== ========== ========= ==========
</TABLE>
See notes to financial statements.
- 5 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 201,082 $(128,700)
Adjustment to reconcile net loss to net
cash provided by used in operating activities:
Amortization and depreciation 273,341 4,757
Equity in income of joint venture (867,700) -
Executive producer's fee retained by joint venture (141,700) -
Deferred income tax expense 123,000 -
Deferred rent (10,146) -
Change in assets and liabilities, net
of effects from purchase of KG:
Accounts receivable (237,952) 115,873
Expenditures billable to clients (208,570) (156,055)
Other current assets - 1,082
Other assets (6,316) -
Bank overdraft 307,761 -
Accounts payable and accrued liabilities (30,504) (1,131)
Payable to KG prior to acquisition - 93,139
Income taxes payable 30,538 97,096
Deferred income and client advances 468,418 -
--------- ---------
Net Cash Provided by Operating Activities (98,748) 26,061
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans to officers and shareholders (19,067) -
Expenditures for program costs (454,128) (75,535)
Acquisition of property and equipment (12,227) -
--------- ---------
Net Cash Used in Investing Activities (485,422) (75,535)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of loans from BNN - 75,000
Issuance of warrants 125,000 -
Repayments of loans payable - shareholders - (38,470)
Proceeds from notes payable 357,531 -
Repayments of notes payable (120,000) (3,627)
Principal payments on capitalized lease obligations (8,217) -
Issuance of common stock 360,000 -
--------- ---------
Net Cash Provided by Financing Activities 714,314 32,903
--------- ---------
INCREASE IN CASH 130,144 (16,571)
CASH
Beginning of period 154,006 139,213
--------- ---------
End of period $ 284,150 $(122,642)
========= =========
</TABLE>
See notes to financial statements.
- 6 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. MAJOR CUSTOMERS
During the three months ended March 31, 1997, approximately 35% of
the Company's revenue was derived from services provided to one U.S.
automobile company.
During the three months ended March 31, 1996, all of the Company's
(then consisting entirely of the Entertainment Division) revenue was
derived from the distribution of two programs.
2. SEASONAL INCOME
The Company's principal source of income for the quarter ended
March 31, 1997 and the year ended December 31, 1996 was its investment in
KSE. Because of the production schedule of KSE's only product, Tarzan: The
Epic Adventures, a substantial portion of the revenue to be earned in 1997
from the first season's production is earned in the first quarter.
3. PROGRAM COST INVENTORY
Program cost inventory at March 31, consists of the following:
1997 1996
---- ----
Released, less accumulated amortization $ 289,867 $ -
In-process 869,135 231,589
----------- ----------
1,159,002 231,589
Less: Current portion (266,104) (156,055)
----------- ----------
Noncurrent portion $ 892,898 $ 75,534
=========== ==========
4. INVESTMENT IN JOINT VENTURE
Summarized financial information of KSE as of March 31, 1997 is as
follows:
Assets $12,762,000
Liabilities 8,758,000
-----------
Members capital $ 4,004,000
===========
Revenue $ 5,628,000
Net income $ 1,735,000
Company's equity in net income $ 868,000
- 7 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1997
(UNAUDITED)
4. INVESTMENT IN JOINT VENTURE (Continued)
During the quarter ended March 31, 1997, the Company earned
$66,000 of distribution fees (relating to $1,320,000 of KSE advertising
revenues) and $141,700 of executive producer fees from KSE which are
included in revenue in the statement of operations. The receivable from
KSE for the executive producer fee earned is included in the Company's
investment in joint venture.
The production costs for the two part premiere episode of Tarzan:
The Epic Adventures, along with certain pre-release marketing costs were
funded by a third party under an agreement by which the third party was to
fund the production costs for the entire season's episodes in exchange for
significant gross profit participation. The third party refused to supply
the funding for the remaining episodes. As a result, KSE incurred
significant costs in arranging for alternate financing. It is possible
that the third party will advance claims for the return of the monies
advanced and/or a share of the profits allocable to the two-part premiere.
Management believes that such claims have no merit because of the breach
of the agreement by the third party. In addition, management believes that
it has valid counterclaims for damages arising from the breach of the
agreement that exceed the third party's claims. It is, nevertheless, at
least reasonably possible that a material liability could result, although
the amount cannot be estimated.
5. NOTES PAYABLE
<TABLE>
<CAPTION>
March 31,
---------------
1997 1996
---- ----
<S> <C> <C>
Note payable arising from the settlement of
the disputes relating to the $500,000 loan
described below. The note is payable in monthly
installments of $30,000 without interest. $ 49,220 $ -
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. 170,000 -
Loan originally borrowed in five $100,000 increments
between December 1994 and February 28, 1995, bearing
interest at the prime rate with interest payable monthly. - 500,000
Note payable to an entity controlled by the Company's
Chairman and Co-CEO. 200,000 -
Note payable to a bank in monthly installments of
$1,422, including interest at 8.89% per annum. 14,969 26,343
Note payable to the former parent of KG in
three installments of $13,333 during 1997. 40,000 -
</TABLE>
- 8 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1997
(UNAUDITED)
5. NOTES PAYABLE (Continued)
March 31,
-----------------
1997 1996
---- ----
Note payable February, 1998 with interest at
8% per annum. 132,501 -
Notes payable to four unrelated entities,
due on demand with interest at 8% per annum
payable quarterly. 825,000 -
--------- --------
1,431,690 526,343
Less: current portion (1,381,690) (515,337)
---------- --------
$ 50,000 $ 11,006
========== ========
6. WARRANTS
During the three months ended March 31, 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 March 31, 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 no cost.
7. INCENTIVE STOCK OPTIONS
In the quarter ended March 31, 1997, the Board of Directors
approved an Employee Stock Option Plan, with an effective date of January
2, 1997. There are approximately 950,000 shares of restricted common stock
anticipated under the plan, with a vesting period of four years.
Implementation of the plan requires shareholder approval.
8. 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.
- 9 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1997
(UNAUDITED)
9. INCOME TAXES
The provision for income taxes for the three months ended March
31, 1997 consists of the following components:
Current
Federal $ -
State 57,400
--------
$ 57,400
Deferred
Federal 115,000
State 8,000
--------
123,000
--------
$180,400
========
There was no provision for income taxes for the three months ended
March 31, 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 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 three months ended March 31, 1997 is as follows:
Federal corporate tax rate of 34% applied to
pretax income $129,704
State and local income taxes, net of federal benefit 43,104
Effect of non-deductible goodwill amortization 14,619
Changes in estimates and other (7,027)
--------
$180,400
========
Deferred income taxes as reported on the balance sheet consists of:
March 31,
----------------------
1997 1996
---- ----
Deferred tax assets $1,372,000 $ 60,000
Deferred tax liabilities (136,000) (10,000)
Valuation allowance - (50,000)
---------- --------
$1,236,000 $ -
========== ========
- 10 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1997
(UNAUDITED)
9. INCOME TAXES (Continued)
Deferred tax asset balances arise principally because of the
following:
Net operating loss carryforwards $ 787,000
Start-up costs capitalized for income
tax purposes but not on the financial
statements 216,000
Deferred rent 159,000
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 176,000
----------
$1,372,000
==========
Deferred tax liability balances arise principally because of the
following:
Revenue earned but not received by the
subsidiary taxed on the cash basis $ 86,000
KG liabilities assumed in the acquisition,
recorded at fair values lower than
their tax basis. 50,000
----------
$ 136,000
==========
As of March 31, 1997, the Company had net operating loss ("NOL")
carryforwards of approximately $679,000 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 $1,235,000 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.
As shown above, the company has recorded a deferred tax asset of
$787,000 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.
- 11 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1997
(UNAUDITED)
10. 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:
Carrying Amount
March 31,
--------------------
1997 1996
---- ----
Asset:
Cash $ 284,150 $122,642
Loan receivable - officers
and shareholders 126,098 -
Investment in unconsolidated
subsidiary 2,144,000 -
Liabilities:
Bank overdrafts 307,761 -
Notes payable 1,431,690 526,343
Due to BNN - 75,000
Due to KG - 93,134
As a result of the difficulties presented in the valuation,
because of their related party nature, of the loans receivable from the
officers and shareholders and the amounts due to BNN and KG, 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 4 sets forth
certain information relating to the unconsolidated subsidiary. The fair
values of the cash, the bank overdrafts 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.
11. SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE
Interest and Income Taxes Paid
Cash payments for the following were:
March 31,
------------------
1997 1996
---- ----
Interest $ 9,267 $1,257
======= ======
Income taxes $26,862 $ -
======= ======
- 12 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1997
(UNAUDITED)
12. SEGMENT INFORMATION
Summarized information by business segment for the three months
ended March 31, 1997 is as follows:
<TABLE>
<CAPTION>
Interest
Entertainment Sports and other Total
------------- ------ --------- -----
<S> <C> <C> <C> <C>
Revenue $ 221,165 $ 995,416 $ - $1,216,581
========== ========== ======== ==========
Operating income $ (467,305) $ 13,581 $(32,494) $ (486,218)
Equity in income of KSE 867,700 - - 867,700
---------- ---------- -------- ----------
Pretax income $ 400,395 $ 13,581 $(32,494) $ 381,482
========== ========== ======== ==========
Total identifiable assets $1,902,896 $4,599,843 $247,385 $6,105,839
========== ========== ======== ==========
Depreciation and amortization $ 225,370 $ 47,427 $ 543 $ 273,340
========== ========== ======== ==========
Capital expenditures $ 465,530 $ 825 $ - $ 466,355
========== ========== ======== ==========
</TABLE>
For the three months ended March 31, 1996, all of the Company's
activities were part of the Entertainment Division.
13. SUBSEQUENT EVENTS
On May 5, 1997 the Company sold a 51% interest in its new
sports-marketing company, Kaleidoscope Sports and Entertainment L.L.C. to
the Interpublic Group of Companies, Inc. ("IPG") The new company holds
the assets previously held by the Sports Division.
IPG has purchased the 51% interest based upon an earnout over a
three year period. The initial down payment received by the Company was
$2,200,000. IPG also has a one year option to purchase the remaining 49%
interest.
The Company will report its 49% equity in the earnings of this venture on
the equity method.
- 13 -
<PAGE>
EXHIBIT 11
BNN CORPORATION
COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended March 31, 1997
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
Net Income $201,082
PRIMARY EPS
Weighted average
shares outstanding 24,029,304
Additional shares assuming
conversion of warrants 3,723,163
-------- ----------
$201,082 27,752,467 $0.01
======== ========== =====
The contingent shares potentially issuable as a result of the October,
1996 BNN transaction are considered in the fully diluted earnings per share
calculation. A calculation of earnings per share is performed as if the
necessary earnings levels had been achieved and the per share price for
determination of the number of additional shares to be issued was the price at
period end. For the three months ended March 31, 1997, this calculation
determined that the effect would be anti-dilutive. As a result it was not used
in the earnings per share calculation.
For the Three Months Ended March 31, 1996
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
PRIMARY EPS
Net loss $(128,700) 6,247,868 $(0.02)
========== ========== =======
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 284,150 122,642
<SECURITIES> 0 0
<RECEIVABLES> 1,214,297 59,588
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,448,652 352,447
<PP&E> 215,379 72,451
<DEPRECIATION> 78,777 24,204
<TOTAL-ASSETS> 10,246,866 482,841
<CURRENT-LIABILITIES> 4,702,226 1,071,511
<BONDS> 0 0
0 0
0 0
<COMMON> 161,731 12
<OTHER-SE> 5,019,567 (599,888)
<TOTAL-LIABILITY-AND-EQUITY> 10,246,866 482,841
<SALES> 0 0
<TOTAL-REVENUES> 1,216,581 123,074
<CGS> 0 0
<TOTAL-COSTS> 321,131 0
<OTHER-EXPENSES> 1,381,666 251,774
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 29,811 1,257
<INCOME-PRETAX> 381,482 (128,700)
<INCOME-TAX> 180,400 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 201,082 (128,700)
<EPS-PRIMARY> .01 (.02)
<EPS-DILUTED> .01 (.02)
</TABLE>
