Debt-laden Cannon Group is under new pressure from a small New York investment firm, which Friday mailed a report to clients recommending that Cannon be pushed into bankruptcy "to extract the greatest value from the existing assets." At the same time, the investment firm said a Securities and Exchange Commission investigation is focusing on revenues Cannon reported from a German customer.
The investment firm, Balis Zorn Gerard Inc., estimated that if Cannon paid off its banks, the Los Angeles entertainment company would have only $263 million of assets available to pay $465 million of unsecured debt, or 57 cents on the dollar.
Among Cannon's unsecured debts are $243 million in bonds and $31 million owed to Australian businessman Alan Bond, said Lisbeth R. Barron, the analyst who wrote the report for the research-oriented firm. Barron has closely followed Cannon's fortunes for the past seven months, consistently recommending that investors sell the stock.
"It's better for bondholders to press for immediate liquidation," Barron said in a telephone interview. "The longer the company is allowed to operate, the less the assets will be worth, because they'll be sold off and the cash will be used to fund the operating losses. The company is living now to make its interest payments."
Barron declined to elaborate on her published assertion that the SEC is probing Cannon's report of $45 million in revenue recorded last year from the licensing of films to a German distributor named Video Median Pool, or VMP.
"It is possible that a legitimate sale was not consummated," Barron wrote. "VMP has represented that the agreement with Cannon was merely an option and not a sale, although we have not been able to verify this directly."
"A substantial part of the library had already been licensed in Germany for all media to another German distributor. . . . It is quite possible that VMP licensed titles that had already been licensed in Germany," the report said.
But Cannon President and Chief Executive Yoram Globus vigorously defended the integrity of the German contract in an interview on May 1, telling The Times, "The (VMP) deal is accepted by our auditors. I wish I would have some more deals like that. They're paying like a clock."
As for whether the contract is undergoing SEC scrutiny, Globus said in the same interview, "I am very aware of what the SEC is looking at . . . but I can't discuss it at this point."
Late last week, Globus did not respond to telephone messages left at his Los Angeles office and his hotel headquarters at the Cannes Film Festival in France.
In Cannes, however, the Cannon president has continued to speak optimistically about the company's future as films it has already produced begin to appear in theaters. He also predicted that the company would soon file a long-delayed report on its 1986 results with the SEC.
The company has been conducting a special audit of its books, under pressure of an SEC investigation into the way it has accounted for its film costs. More recently, Cannon said the SEC widened its probe to include the firm's financial disclosures since 1983.
In recent years, Cannon has made a bid to become a major Hollywood movie studio by releasing a large number of films and acquiring the former Thorn-EMI entertainment conglomerate in Britain. Many of its films, however, have not done well at the box office, and Cannon has attempted to regain its financial balance by selling assets and pre-selling so-called ancillary rights such as home video.
For the first nine months of 1986, Cannon reported a net loss of $5.8 million on revenue of $261.3 million. In the same period of 1985, the company had a profit of $8.5 million on revenue of $96.1 million.
Lee Isgur, a PaineWebber analyst long bullish on Cannon stock, said Friday that Cannon expects to release the 1986 results "in the middle of next week." Isgur said he expects the company to report losses in the "tens of millions, under $100 million."
But Isgur still supported the company's chances of survival, predicting that it will avoid bankruptcy or a change of ownership. He belittled the Balis Zorn report, saying it seems designed to encourage short-selling of Cannon stock.
(Speculators who expect a stock's price to fall frequently sell "short"--a process in which shares are borrowed and sold, permitting the investor to buy the shares back when the price falls and pocket the difference.)
But Barron countered: "We only have a few clients who have sold short Cannon stock. Now we are advising the (Cannon) bondholders as to (their) best action." She also said the report is being issued now to urge investors who own the stock to sell it.
Cannon stock closed Friday on the New York Stock Exchange at $5.125 a share, up 12.5 cents from Thursday. In the past 12 months, the stock has been as high as $45.50 and as low as $4.625.
Cannon appeared to ease its financial strain two weeks ago with the $85-million cash sale of most of the British film library it had purchased just a year earlier. The buyer was Weintraub Entertainment Group, a new Los Angeles firm founded by movie producer Jerry Weintraub.
But Barron contends that at least $71 million of that sum went to pay down bank debt, and sources at two of Cannon's five banks confirmed Friday that the banks received most of the Weintraub proceeds, although they declined to disclose the precise sum.
If Barron's estimate is correct, Cannon has at least $212 million remaining in bank debt. Earlier this month, Cannon's Globus declined to say how much the company owes its lenders.