Cannon Has Loss; Says Auditors Are Likely to Qualify Results

Cannon Group, the financially troubled movie company under Securities and Exchange Commission investigation, Thursday issued its long-delayed results for 1986, reporting a net loss of $60 million for the year ended Jan. 3.

At the same time, the Los Angeles firm said its outside accountants have advised Cannon that their opinion on the 1986 financial statements is likely to be qualified in three areas: the company’s ability to continue operations as a “going concern,” the outcome of shareholder lawsuits and the effect of the SEC inquiry.

Telephone calls to Cannon officials were not returned, and efforts were unsuccessful to reach a spokesman for the Arthur Young & Co. accounting firm, which is conducting Cannon’s annual audit.

Shareholders’ equity--total assets minus liabilities--plummeted to $50.7 million as of Jan. 3, down from $126.8 million reported for the nine months ended Sept. 27.

In a prepared release, Cannon said it “continues to be committed to the restructuring of its debt and the refinancing of the company,” although it offered no details. The company said it expects to release its formal annual report to the SEC the first week of June and its results for the first quarter of 1987 the week of June 29.

Cannon said it is also “hopeful” that it will soon conclude settlement discussions with the SEC staff. As reported, the SEC broadened an earlier investigation into Cannon’s film cost accounting practices to include the firm’s financial public disclosures since 1983.

Revenue of $352.7 million was reported for 1986, compared to $150.8 million in 1985. The $60-million loss for 1986 compares to net income of $15.2 million previously reported for 1985.

Although Cannon did not issue restated results for 1985, it said Thursday that it had “changed the opening balances for its 1986 financial statements to reflect certain adjustments for prior periods.” Those adjustments, Cannon said, reduced shareholders’ equity by about $32 million as of Dec. 28, 1985.

The adjustments include increased writeoffs on two motion pictures and a reduction of previously recognized revenue and adjustments of “certain accruals and expenses through 1985,” the company said, without further elaboration.

Lisbeth R. Barron, a research vice president at Balis Zorn Gerard Inc. in New York, sharply challenged the value of assets listed by Cannon among its “selected balance sheet data.”

In particular, Barron questioned $222.4 million in “film costs--not released,” as of Jan. 3.

“If they insist on these numbers being correct, they are letting themselves in for a large writeoff in the future, when and if the films are released, based on their poor box-office track record,” Barron said.

Last week, Barron’s firm recommended a bankruptcy proceeding as the best solution for Cannon bondholders.

Barron noted that payment of 10% of the face value of $207 million in Cannon bonds will be due if Cannon’s shareholder equity drops below $37.5 million for two consecutive quarters. The payment would be due the quarter following the default, she said.

Unless the company dramatically changes its statement of assets or liabilities, Barron predicted, “They are in default if they continue to lose at this 1986 rate of $15 million per quarter.”

Other than an operating loss, a sale of assets significantly below book value could also trigger a default, since the shareholder equity hovers just $13.2 million above the threshold of default, Barron said.

On the New York Stock Exchange, Cannon shares rose 25 cents to $4.875, just above its 12-month low of $4.125.