Cannon Has $14.5-Million Loss; Orders Special Audit

Los Angeles-based film maker Cannon Group on Wednesday reported a loss of $14.5 million for the third quarter. It also disclosed that it has hired new outside accountants and ordered a special audit for the nine-month period.

The loss left the entertainment company with a $5.8-million net loss for the nine months ended Sept. 27.

Cannon blamed these results on “disappointing” domestic box-office results for its films, along with large increases in administrative and interest expenses. It also said its income was reduced $8 million by discounting the amounts that it is due from film licensing.

Stock Hits 52-Week Low

After release of the news, Cannon’s stock fell $3.375 a share on the New York Stock Exchange to a 52-week low of $17.75.

The price has fallen about $10 a share since Cannon disclosed a week ago that since Sept. 16, the Securities and Exchange Commission has expanded an informal inquiry into a broad investigation of the company’s finances and accounting practices.

Cannon reported that revenue increased in the third quarter to $77 million from $34.3 million a year earlier and rose in the nine months to $261.3 million from $96.1 million.

Meanwhile, Cannon disclosed that on Oct. 1 it hired Arthur Young & Co., a large accounting firm, to audit its 1986 figures and to do the special audit. Its previous auditors were Mann Judd Landau of Beverly Hills.

The unaudited figures released Wednesday may not be the last word. Cannon revealed Wednesday in its quarterly report to the SEC that its unaudited third-quarter and nine-month results may turn out to be “materially different” as a result of the special audit and its own ongoing examination of various matters.

One factor that could require major adjustment, the report disclosed, is what it called “the process of finalizing the purchase price allocation” in connection with its $270-million purchase last May 1 of Screen Entertainment Ltd.

Cannon management was not available Wednesday for questions or elaboration.

Indications of cash flow problems were scattered through the 25-page filing.

“The company’s first priority continues to be the structuring of improved and expanded financing to meet the company’s immediate and long-term requirements,” it said in discussing its liquidity and capital resources.

The company said it concluded after an intensive, quarter-long review of its asset base that it should sell its recently acquired Commonwealth theater chain because of “the recent dramatic escalation of prices for theaters in the United States” and sell “selected, overlapping” theaters in Great Britain.

Bank Borrowings Climb

Cannon also said it believes that its extensive Cannon and Screen Entertainment Ltd. film libraries have substantial unused rights and that it intends to use them for “asset-based borrowing to supplement existing bank lines . . . as one alternative to enable the company to meet its short- and long-term financial obligations.”

The report disclosed that its domestic bank borrowings rose to $64.9 million as of Sept. 27 from $27.2 million reported at the close of the second quarter ended June 28. The 10Q report showed that the credit line had been increased to $76 million from $65 million during that period. The firm’s U.S. banks are First National Bank of Boston, Bank of America, Chemical Bank and Wells Fargo.

Cannon also said it had borrowed $25.6 million in the third quarter from its foreign bank, Credit Lyonnais Bank Nederland N.V., under a $35-million revolving credit agreement. At June 28, the company had no indebtedness under that line.

The company noted that its policy of amortizing film costs, one of the matters under SEC investigation, is currently under review by its new auditors.

Cannon said it amortized film costs at 70% on motion picture distribution revenue for the third quarter and 66% for the nine months, compared to 54% and 58%, respectively. Both amortization and overall expenses were about triple the size of the comparable 1975 figures.