SEC Expands Investigation Into Cannon Film Finances

Federal regulators have expanded an informal inquiry into Cannon Group into a sweeping formal investigation of the film maker’s public disclosures since 1983 on an array of matters, including its financial condition, it was revealed Wednesday.

The Los Angeles firm has become increasingly controversial as its operations have grown rapidly in recent years under Chairman Menahem Golan and President Yorum Globus.

That growth was aided by public sales of securities, including $207 million raised last spring with the aid of underwriter Drexel Burnham Lambert. Now Cannon’s use of the cash raised in the offerings is cited in a Cannon filing as one of the subjects of the Securities and Exchange Commission probe.

“The company,” Cannon said in a public filing, “has been advised that since Sept. 16, 1986, the SEC has been conducting a formal fact-finding investigation with respect to certain disclosures made by the company since 1983 in connection with its business activities.”

These include, the 8K filing added, “its amortization of film costs, its financial condition, its reported earnings, certain licensing transactions, its tax liabilities and the use of proceeds from its 1986 public offering of debentures, as well as its system of internal accounting controls and its book and record keeping.”

Cannon’s stock plunged $4.25 a share on Wednesday, closing at $22.50 on the New York Stock Exchange. The price had already fallen several dollars last week.

Cannon’s disclosure of the bigger SEC investigation since Sept. 16 was made in a new 8K report. Although it was signed Oct. 30 and filed last Thursday, it was not available until Wednesday in SEC public files in Washington.

Three months ago, Cannon first reported the “informal” SEC inquiry about “information relating principally to the amortization of film costs.” That was in a 10Q filing covering Cannon’s second-quarter financial results. A day before the filing was made public, Cannon had announced increased earnings in a news release that did not mention the SEC inquiry.

The new disclosure of the expanded investigation was made as Wall Street was awaiting the filing of Cannon’s third-quarter results. No one in Cannon’s top management could be reached Wednesday to say whether the third-quarter report would be delayed, but it appeared to be in question.

Cannon’s new filing said the company “is cooperating with the SEC and is continuing to review its amortization policies as they relate to past periods and related accounting issues.”

Since Cannon first disclosed the SEC inquiry into the way it writes off film costs, stockholders have filed several lawsuits--including at least two class actions--accusing the company of misrepresenting its finances and artificially inflating its stock price. Cannon has said that such allegations were without merit and would be contested vigorously.

As previously reported, Cannon has been the subject of much skepticism by the major studios for its claims of success in financing movies at lower average costs in the industry and with protection against downside risk, despite a lack of box-office hits.

Besides expanding its movie output and its average cost per film, Cannon this year embarked on a $270-million acquisition of Screen Entertainment, formerly Thorn-EMI, comprising a major British movie theater chain and a London movie studio with a large film library. Since then, it also acquired a U.S. chain, Commonwealth Theaters, for a reported $23 million.

Last August, the company announced that it had licensed its British film library for European distribution in television and home video in deals that it valued at “over $150 million.”