<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 September 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 25,515,082
(as of September 30, 1997).
Transitional Small Business Disclosure Format: Yes No X
----- ---
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL RESULTS
September 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 - 9
MANAGEMENT COMMENTS ............................................ 10 - 15
- 1 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1997 1996
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 464,581 $ 154,006
Accounts receivable, less allowance for doubtful
accounts of $-0- in both 1997 and 1996 781,527 976,345
Expenditures billable to clients 1,505,185 317,719
Loans receivable--officers and shareholders 231,659 107,031
Program cost inventory - current portion,
net of accumulated amortization 1,850,532 355,725
Deferred income taxes 907,400 313,700
Other current assets 97,395 117,998
---------- ----------
Total Current Assets 5,838,279 2,342,524
PROGRAM COST INVENTORY, less current portion,
net of accumulated amortization 1,265,712 567,461
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation 124,498 136,408
INVESTMENT IN JOINT VENTURE 1,671,210 1,134,600
DEFERRED INCOME TAXES 328,600 1,045,300
GOODWILL, net of accumulated amortization 224,667 3,317,994
OTHER ASSETS, including non-current A/R 21,116 21,116
---------- ----------
$9,474,082 $8,565,403
========== ==========
</TABLE>
See notes to financial statements.
- 2 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
------------ -------------
1997 1996
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities 1,077,773 1,733,664
Notes payable, current portion 53,033 1,114,159
Income taxes payable 2,278,460 166,921
Capitalized lease obligation - current portion 8,848 30,843
Deferred rent - current portion 19,704 39,780
Deferred income and client advances 1,069,126 578,506
------------ -------------
4,506,944 3,663,873
NOTES & LOANS PAYABLE, less current portion -- 80,000
CAPITALIZED LEASE, less current portion -- 2,902
DEFERRED RENT, less current portion 322,974 323,412
------------ -------------
Total Liabilities 4,829,918 4,070,187
------------ -------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value, 50,000,000 and
10,221,462 shares authorized, 25,515,082
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 (947,072) (611,021)
------------ -------------
Total Stockholders' Equity (Deficit) 4,644,164 4,495,216
------------ -------------
Total Liabilities and Stockholders' Equity (Deficit) $ 9,474,082 $ 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 Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUE $ (197,100) $ 2,396,837 $ 1,732,300 $ 3,605,208
DIRECT PROJECT COSTS (233,100) 1,096,718 591,900 1,273,046
----------- ----------- ----------- -----------
GROSS PROFIT 36,000 1,300,119 1,140,400 2,332,162
----------- ----------- ----------- -----------
EXPENSES
Amortization of program costs 9,140 -- 343,700 --
Salaries and benefits 280,446 556,548 1,317591 1,397,888
General and administrative 180,118 150,294 883,427 1,139,280
Amortization of goodwill (16,704) -- 51,809 --
Interest & Local Taxes 33,856 169,790 137,924 231,135
----------- ----------- ----------- -----------
Total Expenses 486,856 888,632 2,734,451 2,768,303
----------- ----------- ----------- -----------
(Loss)/Income BEFORE EQUITY
IN INCOME OF JOINT VENTURE
AND INCOME TAXES (450,856) 411,487 (1,594,051) (436,141)
EQUITY IN INCOME OF JOINT VENTURE 272,900 295,600 624,600 295,600
INCOME ON SALE OF ASSETS 490,359 -- 2,894,900 --
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 312,403 707,087 1,925,349 (140,541)
INCOME TAX EXPENSE 784,100 -- 2,261,400 --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (471,697) $ 707,087 (336,051) (140,541)
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE
Primary $ (0.02) $ 0.07 $ (0.01) $ (0.01)
=========== =========== =========== ===========
Fully diluted $ (0.02) $ 0.07 $ (0.01) $ (0.01)
=========== =========== =========== ===========
</TABLE>
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>
Nine months Ended September 30, 1996
Balance--January 1, 1996 6,247,868 $ 12 $ 375,988 ($ 846,976) ($ 470,976)
Net loss - 9 months YTD -- -- -- (140,541) (140,541)
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-Sept. 30, 1996 10,062,180 $ 155,137 $ 3,858,339 ($ 911,722) $ 3,101,754
========== =========== =========== =========== ===========
Nine months Ended September 30, 1997
Balance--January 1, 1997 23,557,082 $ 146,731 $ 4,959,506 $ (611,021) $ 4,495,216
Issuance of warrants 125,000 125,000 125,000
Issuance of shares for
cash consideration 1,500,000 15,000 345,000 -- 360,000
Issuance of shares for 333,000
Reclassification Adjustment (2,800) 2,800
Net income -- -- -- (336,051) (336,051)
---------- ----------- ----------- ----------- -----------
Balance - Sept. 30, 1997 25,515,082 $ 158,931 $ 5,432,305 $ (947,072) $ 4,644,164
========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
- 5 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months Ended September 30
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ($ 336,051) ($ 140,541)
Adjustment to reconcile net loss to net
cash provided by/used in operating activities:
Amortization and depreciation 414,841 152,549
Gain on sale of portion of sports division (2,894,767) --
Equity income from joint venture - Keller/Siegel (351,600) 295,600
Equity income from joint venture - KS&E (272,992) --
Deferred income tax expense 123,000 (21,077)
Deferred rent (20,514) --
Change in assets and liabilities
Accounts receivable 194,818 (1,324,240)
Expenditures billable to clients (124,219) (976,426)
Net advances to affiliates -- 139,656
Other current assets (19,602) 2,882
Other assets -- (3,658)
Accounts payable and accrued liabilities (655,891) 153,485
Income taxes payable 2,111,539 --
Deferred income and client advances 490,620 (174,592)
------------ ------------
Net Cash Used by Operating Activities (1,340,818) (2,487,562)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans to officers and shareholders (124,628) (38,470)
Investments in Equity (185,010) 1,042,600
Distribution from joint venture - KS&E 272,992 --
Proceeds from sale of portion of sports division 6,000,000 --
Cash acquired from purchase of KMG -- 211,036
Expenditures for program costs (3,582,456) --
Acquisition of property and equipment (48,481) --
------------ ------------
Net Cash From Investing Activities 2,332,417 1,215,166
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of warrants 125,000 --
Proceeds from notes payable -- 1,274,828
Repayments of notes payable (1,141,126) (101,126)
Principal payments on capitalized lease obligations (24,897) --
Issuance of common stock 359,999 (13,151)
------------ ------------
Net Cash (Used)/Provided by Financing Activities (681,024) 1,160,551
------------ ------------
INCREASE/(DECREASE) IN CASH 310,575 (111,845)
CASH
Beginning of period 154,006 139,213
End of period $ 464,581 $ 27,368
============ ============
</TABLE>
- 6 -
<PAGE>
BNN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine and three month periods ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
1. INCOME SOURCES
The Company's principal source of income for the quarter ended
September 30, 1997 was proceeds from the sale of Kaleidoscope Sports and
Entertainment. In the quarter, the Company accrued income related to the
second broadcast season of "Tarzan; The Epic Adventures", but other
entertainment properties did not provide income. Entertainment
properties, such as "Tarzan" and "Merlin", typically generate income in
the fourth and first quarters, linked to delivery of programming for the
television broadcast season.
2. REVENUE RECOGNITION
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 Entertainment properties are accounted for under the
provisions of FAS 53 and revenue is recognized when programs are completed
and deliverable to stations or licensees. 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.
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:
September 30, December 31,
------------- ------------
1997 1996
----- ----
Current portion 1,850,532 355,725
Non-current portion 1,265,712 567,461
------------- ----------
Total Program Cost Inventory $ 3,116,244 $ 923,186
============= ==========
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<PAGE>
4. INVESTMENT IN KELLER SIEGEL ENTERTAINMENT LLC, JOINT VENTURE
Siegel Entertainment, Inc., participates in Keller-Siegel
Entertainment, LLC., a joint venture with Keller Entertainment, Inc., an
unaffiliated company. In 1996, the venture produced and distributed a 22
episode dramatic series for television, "Tarzan; The Epic Adventures"
filmed on-location in South Africa. Starting in the quarter ending
September 30, 1997, the venture launched a second season of "Tarzan," more
modest in scope, utilizing previously produced episodes that had been
released to the international market, but not for domestic U.S. broadcast.
During the quarter ended September 30, 1997, $125,000 in fees for the
second season were accrued. For the nine months, the Company booked equity
income from the first season of $351,600. In the quarter ended June 30,
1997 there had been a ($515,000) downward adjustment to earnings that had
been accrued through the first quarter of the current fiscal year. The
downward revision was necessitated by 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 nine months ended September 30,
1997 consists of the following components:
Federal Tax Provision $ 1,449,408
State Tax Provision 811,994
-----------
Total Tax Provision $ 2,261,402
===========
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>
PART II
Item 1 - Legal Proceedings
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 nine months ended September 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 September 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
- 9 -
<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.
Sale of Kaleidoscope Sports and Entertainment
In April 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.
On May 5, 1997, People & Properties, Inc. sold to Interpublic Group of
Companies, Inc. ("IPG"), an aggregate 51% interest in KS&E. On August 20, 1997
People and Properties Inc., assigned to IPG the remaining aggregate of 49%
interest in KS&E. Under the terms of this agreement, the subsidiaries received a
payment of $3,800,000 for their interest in the LLC. The total purchase price
paid to the subsidiaries by IPG was $6,000,000.
For accounting purposes, the assignment was effected as of August 15, 1997
and the Company retained an interest in the profits of the LLC through such
date. The distribution of that profit, $272,900, was paid to the Company by IPG
in the quarter ended September 30, 1997.
As a related accounting entry, the Company has written off the existing
goodwill associated with the sports properties transferred to KS&E. Because
goodwill amortization and write-offs are not allowable as a tax-deductible
expense, the Company is accruing a tax liability in the amount of $2,640,000
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.
Other Activities
During the third quarter ended September 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 daily transactional television program "Hollywood Discoveries" (previously
titled "Hollywood Connection") "Boxcino," a multi-event boxing series featuring
Latin American fighters, and pre-production of "Merlin" and Team Xtreme," two
major entertainment properties licensed for international broadcast.
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<PAGE>
"Hollywood Discoveries" failed to generate the domestic U.S. viewership and
product sales anticipated by Management. The technical quality of the program
met Management's goals and the variety of products selected to be sold was
widely differentiated in type of item and in price. The infrastructure
provided through the agreement with HSN Direct, Inc., an unaffiliated company
specializing in transactional television, for telemarketing and product
fulfillment worked as planned. The talent who hosted the show and promoted the
products were skilled. However in view of the disappointing revenue, Management
decided to reduce the financial exposure. This was accomplished by reducing the
number of episodes actually produced and limiting the broadcast to only eleven
of the planned thirteen weeks. HSN Direct, to broadcast Hollywood Discovery
episodes produced separately by them utilized the remaining two weeks.
Although Management is disappointed in the U.S. domestic results for
Hollywood Discoveries, the program served as the developmental basis for
international licensing that is to commence in January 1998. In a newly
concluded relationship with HSN Direct, the Company anticipates significant
revenue from product sales and licensing in markets where HSN Direct has
demonstrated expertise and success. A significant portion of the episodes
produced by the Company for the U.S. program will be reformatted and utilized
in the international market. Furthermore, as a component of a separate, nearly
concluded arrangement to provide videotape programming to beauty salons around
the U.S., the Company will utilize material from Hollywood Discovery episodes.
Management believes that the revenue from these additional sources will, at a
minimum, recoup all development and production costs from Hollywood Discoveries
within the next fiscal year.
The championship round of the first season of "Boxcino" was broadcast on
ESPN during September. It followed two previous "elimination" boxing matches
that were broadcast on ESPN2 in the second quarter. The technical success of the
program was assured through the expertise provided by Banner Promotions, Inc.,
an unaffiliated company in the boxing promotion business with fighters under
contract. As a venture partner, Banner also shared the financial risk of the
program. The Company has entered into a relationship with Banner Promotions, to
expand the Company's involvement with boxing. Banner Promotions and the Company
will participate in a joint venture encompassing additional seasons of
"Boxcino," selected pay-per-view fights with contracted fighters, boxing events
shown on cable and broadcast television networks, and the development of
"Boxasia."
Subsequent to the close of the quarter ended September 30, 1997, principal
photography began for "Merlin" as a two-hour movie, with delivery of the
finished film expected in December. Fees from international licensees will be
paid upon delivery and broadcasts outside the U.S. are expected to begin in
early 1998. The anticipated success of the movie would lead to production of a
series during 1998.
Production of "Team Xtreme" as a movie and 22 episode series will commence
in the fourth quarter 1997 and delivery of the first episodes is scheduled to
begin in this fiscal year. The "Team Xtreme" movie and series will be broadcast
in markets outside the U.S. starting with in 1997, and is scheduled for U.S.
release in the fall of 1998.
The second season of "Tarzan; The Epic Adventures" was launched in
September through the Company's joint venture with Keller Entertainment. Because
viewer ratings for the first season of Tarzan were lower than anticipated,
domestic U.S. advertising revenues, which are directly tied to ratings, were
lower than forecast. Despite the lower ratings, the program generated sufficient
revenues such that repayment of production loans was completed in the third
quarter and the Company received distribution fees and executive producer fees
in the current year. However, the lower ratings also reduced interest in a
second season for the domestic U.S. and international markets, necessitating a
less costly production format and reduced revenue expectations for the second
season.
- 11-
<PAGE>
Results of Operations
The consolidated financial statements provided in this report for the
quarter ended September 30, 1997, include consolidated nine months of SeaGull
Entertainment and BNN Corporate, consolidated four months of Kaleidoscope Group
and four months of Kaleidoscope Sports and Entertainment LLC as an equity
investment. These periods of reporting reflect various months of full ownership
or partial ownership in the current fiscal year and are consistent with the
reporting method utilized for the prior fiscal year. The comparative results
reported for the nine months ending September 30, 1996 are those of SeaGull
Entertainment for nine months and the months of May through September for the
Kaleidoscope Group, subsequent to the creation of KMG.
The Company reported $312,000 in pretax profits for the quarter ended
September 30, 1997, compared with a profit of $578,387 for same period in the
prior fiscal year. The Company had a net loss of ($472,100) compared to a profit
in the prior fiscal year of $578,387. For the nine months ended September 30,
1997, pretax profits were $1,925,400 compared with a loss of ($140,541) for the
prior fiscal year, and on a net income basis a loss of ($336,000) for the nine
months compared with a loss in the prior year of ($140,541).
Net revenues consist of total billings, less any agency fees and media
costs, and accruals for earned fees. For the third quarter ended September 30,
1997, net revenues were a negative ($197,100). The negative revenue is the
result of the reversal of previous accruals of fees related to "Boxcino" and
"Hollywood Connection," which have subsequently (a) been determined to be
excessive based upon actual earnings and/or (b) needed to be reversed as a
result of a change in accounting methodology for that program. This is compared
with net revenue of $2,396,800 in the comparable three-month period for fiscal
1996, largely attributable to management of corporate sponsorship of sports,
notably the General Motors sponsorship of the Olympic Games in Atlanta. For the
nine-month period ended September 30th 1997, net revenues were $1,732,300
compared with $3,605,200 in the comparable period in the prior year.
Gross profit after direct project costs was $36,000 for the quarter ended
September 30, 1997 compared with $1,300,100 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 nine months ended September 30, 1997 gross profit
was $1,140,400 compared with $2,332,100 in the comparable period in 1996.
The Company expensed $9,140 of program cost inventory in the quarter ended
September 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 nine months, the entire amount expensed, $343,700, is attributable to
costs that had been capitalized as related to the production of "Tarzan, The
Epic Adventures."
Salaries and related benefit costs were $280,446 for second quarter 1997,
compared with $568,500 for the prior year. The reduction reflects the transfer
of sports-related personnel to KS&E compared to full staffing in the prior year,
and capitalization of some production related costs in SeaGull Entertainment,
related to "Merlin" and "Team Xtreme." At the same time, the Company reduced the
number of consultants and outside service providers, where such reductions were
feasible. For the nine months ended September 30, 1997 (including four months
operation of the Sports Group, salaries and related benefit costs were
$1,317,591 compared with $1,397,888 for the prior year.
- 12 -
<PAGE>
Total expenses other than direct costs were $486,600 for third quarter 1997
compared to $888,600 for 1996. The 1997 expenses include amortization of
goodwill in the amount of $51,800 compared to no amortization of goodwill the
comparable period in the prior year and amortization of capitalized program
costs in the amount of $343,700 compared to no amortization the prior year. For
the nine months ended September 30, 1997, total expenses other than direct costs
were $2,734,500 compared with $2,768,300 for the comparable period the prior
year.
Legal and accounting expenses associated with the sale of KS&E LLC, the
Company's year-end audit, and various lawsuits described elsewhere in this
filing, were $425,900 for the nine months ended September 30, 1997.
The Company reported a gain of $272,900 in equity income for the quarter
ended September 30, 1997. This was comprised of the $110,900 balance of the
income distribution from the 49% participation in KS&E and the effect of a
$162,000 reversal of a loss from Hollywood Connection, that had been booked as
an equity loss in the second quarter. In the quarter ended June 30, 1997, the
Company had entered into an agreement with Hollywood Inc. ("HI"), an
unaffiliated company, to be an equal, joint venture partner in the Hollywood
Connection LLC. Under terms of the agreement, HI was to pay $500,000 to the
Company for its participation in the joint venture, with shares of HI issued to
the Company as collateral. As a result of this joint venture agreement, 50% of
losses through the end of the second quarter were reported under the equity
accounting method.
By the end of the third quarter ended September 30, only $20,000 of the
agreed $500,000 had been paid to the Company, and the shares of HI were never
issued. The Company has deemed HI in breach of the agreement, and consistent
with terms of the agreement, has removed HI as a member in the LLC. Since the
Company now owns 100% of the LLC, it is no longer appropriate for the Company to
account for Hollywood Connection under the equity accounting method.
Income Taxes
The provision for state and federal income tax was $784,100 for third
quarter 1997, on a pretax basis of $312,400 compared with no tax provision for
the second quarter 1996 on a pretax income of $707,100. For the nine months
year-to-date, the tax provision is $2,261,400 on pretax income of $1,925,400
compared with no tax provision for 1996, on a loss of ($140,500) for the
comparable period. The income tax expense for 1997 does not bear the expected
relationship between pretax income and the federal corporate tax rate of 34%.
This is caused by (a) the effect of state and local income taxes and; (b) the
fact that the company's amortization of goodwill, the write-off of $3,105,200
goodwill associated with the sale of KS&E and certain other expenses are not
deductible for income tax purposes.
At September 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 as much of the
gain on the sale of the 51% interest in KS&E as possible.
It is expected that utilization of the NOL's should reduce the actual tax
payments to approximately $1,314,000 compared with the total $2,261,400 tax
provision for the nine months year-to-date.
- 13 -
<PAGE>
Liquidity and Capital Resources
As of September 30, 1997, the Company reported cash of $464,581 compared
with $154,006 reported at December 31, 1996. When the affect of the sale of KS&E
is excluded from operating results, in the nine months ended September 30, 1997,
total operating activities generated a net outflow of ($1,340,818). The
principal source of cash was the sale of KS&E, totaling $6,000,000, while the
expense of the related goodwill write-off ($3,105,233) is a non-cash item.
Additional cash was generated by issuance of warrants and stock. The repayment
of ($1,141,100) in short term notes and the investment of ($3,582,456) in
several major programs, operating expenses of the company and clearing of
payable balances combined to reduce cash to the balance noted.
In the quarter ending September 30, 1997, the Company received no cash from
its 50% participation in the joint venture that produced and distributed the
first season of "Tarzan; The Epic Adventures." 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 was repaid in full. Although
repayment of the production loan was completed in the third quarter, the venture
is completing repayment of obligations to vendors in South Africa where the
episodes were filmed. Additionally, obligations to launch the second season of
"Tarzan" required that receipts be reinvested in the venture, rather than
distributed to the partners. During the quarter ended September 30, 1997,
based upon reaching a threshold in domestic advertising payments related to
"Tarzan", $150,000 cash was received by the Company for fees earned on those
sales.
The launch of Hollywood Discoveries, Boxcino, and production of Merlin
required significant Company investments, and with the exception of cash
received from the sale of KS&E, proceeds from operations were negligible.
"Boxcino" was filmed in Costa Rica, Miami and Baton Rouge and $1,060,000 in
costs included the logistics of flying Latin American fighters to a single
location and preparing multiple bouts for broadcast. Development, production,
and broadcast costs of "Hollywood Discoveries" required a total investment of
$1,000,000 through the end of the quarter. As noted earlier, revenue from
Hollywood Discoveries advertising and direct sale of products to viewers was
below expectations and the anticipated operating funds from the participation of
HI never materialized. Furthermore, no revenue from international licensing or
other exploitation is expected until the next fiscal year.
Development and production of "Merlin" have required an investment of
$680,000 to date and additional outlays will be incurred in the fourth quarter
as filming and post production are completed. As noted earlier, the two hour
movie is scheduled to be delivered in December, at which point significant
licensee fees from "Merlin" will be received. At the same time, a portion of the
capitalized expenses will be recognized as expense. Management anticipates that
"Merlin" will represent a significant source of future operating success.
Although most of the program costs were development costs related to future
revenue streams and were capitalized for income statement purposes they
nevertheless represent a significant cash outflow.
As a result of the operating and programming requirements, Management is
continuing to explore initiatives to ensure adequate interim cash resources. The
Company is seeking to obtain necessary funding from (a) equity financing; (b)
arrangements for profit participation in individual projects and (c) marketing
or advertising tie-ins to programs and is exploring other joint venture
relationships that will share the burden of program investment. Efforts to
obtain debt financing during the quarter just ended were halted when the sale of
KS&E occurred.
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.
- 14 -
<PAGE>
Amended 10Q for the Quarter ending June 30, 1997.
Concurrent with the filing of the 10Q for the quarter ended September 30,
1997, the Company is filing an amended 10Q for the quarter ended June 30, 1997.
The changes are necessitated 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 $1,613,400 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.
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 13th day of November, 1997.
BNN CORPORATION
By: /s/ Henry Siegel
-----------------------------------
Henry Siegel,
Chairman & Chief Executive Officer
- 15 -
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<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<CASH> 464,581 154,006
<SECURITIES> 0 0
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<LOSS-PROVISION> 0 0
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<NET-INCOME> (336,051) (140,541)
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