Cannon Group Discloses Liquidity Crunch

Cannon Group must “immediately” raise adequate working capital in order to continue operations, the independent film company said Wednesday in a filing with the Securities and Exchange Commission.

The Los Angeles company, whose unfolding array of problems are the financial equivalent of an old “Perils of Pauline” serial thriller, also said it does not know if an SEC investigation of the company will be settled in time to “effectively improve” its liquidity crunch.

In a months-overdue 10-K annual report for 1986, Cannon said it intends to raise working capital through more foreign loans, which would enable it to pay off its debt to U.S. banks and free its collateral. But Cannon said it has been advised that any such loans would be subject to prompt resolution of the SEC investigation and shareholder lawsuits over its finances.

The 10-K confirmed Cannon’s announcement in May of an expected $60.4-million loss for the fiscal year ended Jan. 3, but it gave no clues about writedowns on anything but movie profit.

Also, while saying it expects a first-quarter loss, it did not estimate the size of the deficit. As at other times in recent weeks, company officers Wednesday did not return telephone inquiries from The Times. Chairman Menahem Golan is said to be in Europe, and Chief Executive Yoram Globus is also reported to be out of town.

Cannon’s stock, which last year traded as high as $45.50 a share, closed Wednesday at $4.75, down 12.5 cents on the New York Stock Exchange.

Scattered through its 83-page report were some new disclosures. Among them were:

- The company has determined that it is “impracticable” to restate pre-1986 earnings statements “due to constraints of time, cost and availability of accounting records.” Therefore, unrestated financial statements for earlier years “should not be relied upon.”

- The SEC has been investigating the company’s use of the proceeds of about $200 million in so-called junk bonds that it sold with the help of Drexel Burnham Lambert in April, 1986. As previously reported, other matters under investigation include Cannon’s amortization of film costs, financial condition, reported earnings, certain licensing transactions, tax liabilities, record-keeping and internal accounting system.

- Frans Afman, an officer of Cannon’s chief foreign bank, Credit Lyonnais Bank Nederland N.V. of Amsterdam, is paid $75,000 a year to help direct affairs of Cannon’s subsidiary in the Netherlands Antilles, which it uses as a legal tax haven. In addition, he received $100,000 in “consulting fees” in 1986, the report showed.

Afman, who was a Cannon director from June, 1985, until last Dec. 17, also serves on the board of several other Hollywood movie firms. They include Carolco Pictures, where he also is an officer of its Netherlands Antilles affiliate. He also is a director of De Laurentiis Entertainment Group, Hemdale Film and Scotti Bros. Pictures, according to SEC filings.

Although Cannon did not restate earlier years’ results, the report said it made adjustments for prior periods that resulted in a $32-million reduction in its 1986 opening balance of retained earnings. This, in turn, reduced shareholders’ equity to $50.65 million as of Jan. 3. As indicated last month, independent auditors Arthur Young & Co. qualified its opinion on Cannon’s 1986 results. Young’s opinion letter said:

“The company’s ability to continue in existence and the realization of its assets are dependent upon future developments, including the successful restructuring of its liabilities, or significant capital infusions or achieving a level of profitable operations sufficient to enable it to meet its obligations as they become due.”

The auditors’ report included a note stating that, as of June 29, the company had obtained waivers under its agreements with Credit Lyonnais and a U.S. bank consortium led by First National Bank of Boston “with regard to those covenants as to which it was not in compliance at fiscal year end.”

But, it added, those waivers do not apply to periods beyond the end of the second fiscal quarter of 1987, “except for Credit Lyonnais, which extends to July 29, 1987.”

The report had no substantial new information on Cannon’s arrangements reported in early June with Intercorporation S.A., a Luxembourg holding company organized on May 26 to acquire shares of Cannon.

The report did disclose, however, that Cannon has received $13.5 million under an agreement that provided for at least $10 million in loans from Intercorporation. Golan and Globus, each 25% partners with Interpart S.A. in Intercorporation, have pledged their Cannon stock on the loans.

Cannon said last month that Intercorporation has purchased 11% of Cannon’s stock on the open market with the stated intention of undertaking the “financial restructuring” of Cannon. No details on such plans were disclosed in the new filing, but it said that “any proposal which might be made to Cannon’s shareholders and creditors would be contingent upon . . . prompt resolution of the pending SEC inquiry and shareholder litigation against Cannon to the satisfaction of Intercorporation.”

The company has said that the SEC began an informal investigation of Cannon in April, 1986, and expanded it into a formal fact-finding investigation last September. Cannon, which has previously said it is negotiating to settle the matter, said in the filing that it is “hopeful that it will shortly be able to successfully conclude these discussions.”

However, it noted that resolution of the SEC investigation alone will not enable the company to seek capital from the public markets until it has audited financial statements for its three most recent fiscal years.

The report also said that because of “the company’s present financial condition, there can be no assurance” that any uncompleted or unreleased Cannon picture from its 63-film 1987-88 program will be completed or released.