UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number: 33-42498
SUN NETWORK GROUP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-024624
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1440 CORAL RIDGE DRIVE, # 140
CORAL SPRINGS, FL 330771
(954) 360-4080
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK - 22,448,487 shares outstanding as of September 30, 2002.
EXPLANATORY NOTE
The purpose of this amendment to the company's quarterly report on Form
10-Q and 10-Q/A Amendment No. 1, is to restate the company's financial
statements to reflect interest expense for a beneficial conversion feature of
the convertible debentures.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Financial Statements for the quarter ending September 30, 2002 are attached
hereto as Exhibit F.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ORGANIZATION
The Company acquired all of the assets of RadioTV Network, Inc ("RTV") on July
16, 2001 in a transaction treated as a recapitalization of RTV. RTV has been
developing and operating, for the past few years, a new television network that
produces and distributes TV adaptations of top rated radio programs.
RECENT DEVELOPMENTS
On June 27, 2002 the Company entered into agreement with four (4) institutional
investors to provide the Company $750,000 in capital through a Secured
Convertible Debenture Offering ("Debenture"). The Company has filed a SB-2
Registration Statement and, subsequently, a SB-2A amended Registration Statement
in connection with the Debenture and anticipates receiving the full funding from
the Debenture by the end of 2002. As of September 30, 2002 the Company had
received $500,000 of the Debenture financing.
2
On June 28, 2002 the Company entered into an Option Agreement and Plan of Merger
("Agreement") to acquire all of the assets of Live Media Enterprises, Inc
("Live"), a west coast based independent producer of consumer lifestyle events.
On September 3, 2002 the Company elected to terminate the Agreement with Live
and will not proceed with the acquisition even on modified terms. In connection
with the Agreement the Company has loaned Live the sum of $56,000. This loan is
documented in two Promissory Notes and is collateralized by, substantially, all
of the assets of Live and personally guaranteed by Live's principal shareholder
and officer.
On September 5, 2002 the Company entered into agreement with Sports Byline USA,
L.P. to own and operate a new, national radio network, Radio X. Radio X intends
to develop, produce, license, broadcast and distribute radio programs, targeted
to young males, that will be distributed via traditional terrestrial stations,
via satellite and over the Internet. The Company has contributed the fixed sum
of $100,000 to this business plus certain management services.
The Company intends to use the net proceeds from the Debenture to develop,
operate and expand the businesses of RTV and Radio X and to continue to seek
other opportunities for the Company. The Company believes that if it
successfully completes the Debenture, on a timely basis, it will have sufficient
capital to operate in the near-term. The Company will, however, continue to seek
additional capital to fund further development, expansion and operation of its
businesses. Upon conversion of the Debentures into the Company common stock
there will be substantial shareholder dilution.
RESULTS OF OPERATIONS
Nine and Three Months Ended September 30, 2002 Compared To Nine and Three Months
Ended September 30, 2001
Revenues
Revenues for the nine months ended September 30, 2002 were $1,100 as compared to
revenues for the nine months ended September 30, 2001 of $0. The $1,100 revenues
were derived from the new consolidated subsidiary, Radio X Network. There were
no revenues in the comparable period of 2001 since the Company was restructuring
and seeking capital to continue its business plan. Revenues for the three months
ended September 30, 2002 were the $1,100 that were earned in the first few weeks
of existence of the Company's subsidiary Radio X Network.
Operating Expenses
Compensation was $118,516 for the nine months ended September 30, 2002 compared
to $52,250 for the comparable period in 2001. Compensation in 2002 relates
solely to compensation under our employment agreement with our president
aggregating $112,500 plus payment of certain of his personal expenses totaling
$6,016. Compensation in the comparable period of 2001 was also to our president
of $21,000 in the period prior to our July 16, 2001 employment agreement and
$31,250 accrued under his employment agreement. Compensation for the three
months ended September 30, 2002 was $37,500 compared to $31,250 in 2001 with
both relating to the employment contract and the difference related to the
period of July 1 to July 15 2001 prior to the employment contract date of July
16, 2001.
3
Advertising expense of $24,425 in the three months ended September 30, 2002
relates to the usage of advertising minutes obtained by us in a settlement with
a customer in May 2001 which had been recorded on our balance sheet as prepaid
advertising. The minutes were used to advertise one of our programs for which we
expect future revenues. There was no advertising expense for the three or nine
months period ending September 30, 2001.
Amortization of radio programs of $1,027 in the three months ended September 30,
2002 results from amortizing the radio programs intangible asset that resulted
from the investment in our new subsidiary, Radio X Network. The intangible asset
is being amortized using the straight line method over the expected useful life
of the program of one year. There was no asset being amortized in year 2001 as
the new subsidiary was formed in September 2002.
Consulting expense for the three months ended September 30, 2002 was $68,799
compared to $0 in the three months ended September 30, 2001. The $68,799
consists of $22,700 of expense relating to 300,000 common shares issued to a
consultant, $35,100 of cash consulting fee to that same consultant and cash
consulting fees to other consultants of $10,999. There were no consulting fees
in the three months ended September 30, 2001. Consulting fees in the nine months
ended September 30, 2002 were $187,899, which consisted of $106,700 of expense
relating to 600,000 common shares issued to a consultant, $70,200 of cash fees
paid to that same consultant plus $10,999 of cash fees to other consultants. The
comparable 2001 nine month period relates primarily to cash consulting fees.
Professional fees for the three months ended September 30, 2002 were $13,495
compared to $3000 for the three months ended September 30, 2001. The fees relate
primarily to accounting, and legal, audit and registration statement related
services regarding our recently filed Form SB-2/A and quarterly reports. Our
expenses were less in the comparable period since we were generally inactive at
that time. For the nine months ended September 30, 2002 the fees were $27,119
compared to $23,088 in the comparable 2001 period. Fees were higher in the first
half of fiscal 2001 since we were implementing our recapitalization at that
time.
General and administrative expenses were $37,668 and $69,329 for the three and
nine months ended September 30, 2002 compared to $4,726 and $30,980 in the
comparable 2001 periods. These expenses in 2002 consist of the amortization of
$5,000 of deferred debt issuance costs relating to the debentures, phone and
telecommunication expenses, travel, meals and entertainment expenses, office
expenses, expenses in connection with obtaining a listing on the Berlin Stock
Exchange, and other miscellaneous expenses. General and administrative expenses
for the comparable period of 2001 were nominal due to our inactive status at
that time.
Interest expense was $252,598 and $493,168 for both the three and nine months
ended September 30, 2002 respectively and relate to $12,329 interest on the
convertible debentures, $5,044 of amortization of the discount of our
convertible debentures, and $475,795 of non-cash interest expense relating to
the beneficial conversion feature of the convertible debentures. The discount
results from the value of the warrants issued with our debentures. The discount
is being amortized into interest expense over the debenture term of one year.
Other income was $0 for the three and nine months ended September 30, 2002
compared to $0 for the three months ended September 30, 2001 and $35,100 for the
nine months ended September 30, 2001. In May 2001 we settled a dispute with a
customer and received advertising minutes from them valued at $35,100.
4
As a result of these factors, we reported net loss of $433,032 or $0.02 per
share for the three months ended September 30, 2002 as compared to a net loss of
$41,080 or nil per share for the three months ended September 30, 2001. We
reported net loss of $919,003 or $0.04 per share for the nine months ended
September 30, 2002 compared to a net loss of $114,842 or $0.01 per share for the
nine months ended September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, we had a stockholders' deficit of $297,342 . Our
operations have funded by an equity investor in our common stock where we issued
183,088 common shares for $82,390 cash during 2002 and by the sale of
convertible debentures of $500,000 through September 30, 2002. These funds were
used primarily for working capital, capital expenditures, advances to third
parties in anticipation of entering into a merger or acquisition agreement and
to pay down certain related party loans. The cash balance at September 30, 2002
was $279,303.
We have no other material commitments for capital expenditures. We expect an
additional $250,000 in convertible debenture financing upon effectiveness of our
Form SB-2/A registration statement. We may also receive financing from the
exercise of 500,000 outstanding warrants which would provide a maximum.funds of
$75,000 or less depending upon the market price of our shares. Other than cash
generated from our operations, debenture proceeds and warrant exercise proceeds
we have no external sources of liquidity. Accordingly, we may not have
sufficient cash flow from operations to sufficiently meet all of our cash
requirements for the next 12 months. Our future operations and growth is
dependent on our ability to raise capital for expansion, and to seek additional
revenue sources.
Net cash used in operations during the nine months ended September 30, 2002 was
$196,387 and was substantially attributable to net loss of $443,208 offset
primarily by non-cash stock based expenses of $106,700, non-cash advertising
expense of $24,425, accrued compensation of $92,500, accrued expenses of
$13,315, non-cash debt discount amortization of $5,044 and amortization of debt
issuance costs of $5,000. In the comparable period of 2001 we had net cash used
in operations of $82,011 primarily relating to the net loss of $114,842 and
non-cash settlement income of $35,200 primarily offset by stock based consulting
expense of $33,395 and accrued compensation of $31,250
Net cash used in investing activities during the nine months ended September 30,
2002 was $66,000 relating to a loan to a potential acquiree of $56,000 and a
convertible loan of $10,000. The prior year comparable period had nominal
investing activity.
Net cash provided by financing activities for the nine months ended September
30, 2002 was $536,369 as compared to net cash provided by financing activities
of $80,000 for the nine months ended September 30, 2001. During the nine months
ended September 30, 2002, we received proceeds from a common stock sales to an
investor of $82,390, proceeds from convertible dentures of $500,000 offset by
debt issuance costs of $20,000 and repayment of related party loans of $26,021.
In the comparable period of 2001 we received a loan from stockholder of $20,000
and equity proceeds from stockholders of $60,000.
5
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 1 to the
audited financial statements included in our Annual Report on Form 10-K for the
year ended December 31, 2001 as filed with the United States Securities and
Exchange Commission. We believe that the application of these policies on a
consistent basis enables us to provide useful and reliable financial information
about our operating results and financial condition.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
Revenue Recognition
We account for film revenues in accordance with the AICPA Accounting Standards
Executive Committee Statement of Position No. 00-2, "Accounting by Producers or
Distributors of Films" ("SOP 00-2").
We generally produce episodic television series and generates revenues from the
sale of broadcast licenses. The terms of the licensing arrangement may vary
significantly from contract to contract and may include fixed fees, variable
fees with or without nonrefundable minimum guarantees, or barter arrangements.
We recognize monetary revenues when evidence of a sale or licensing arrangement
exists, the license period has begun, delivery of the film to the licensee has
occurred or the film is available for immediate and unconditional delivery, the
arrangement fee is fixed or determinable, and collection of the arrangement fee
is reasonably assured. The Company recognizes only the net revenue due to the
Company pursuant to the formulas or amounts stipulated in the customer
contracts.
We recognize revenues from barter arrangements in accordance with the Accounting
Principles Board Opinion No. 29 "Accounting for Non-Monetary Exchanges," ("APB
29") as interpreted by EITF No. 93-11 "Accounting for Barter Transactions
Involving Barter Credits." In general, APB 29 and it related interpretation
require barter revenue to be recorded at the fair market value of what is
received or what is surrendered, whichever is more clearly evident. We recognize
revenues from the sale of radio program advertising when the fee is determinable
and after the commercial advertisements are broadcast. Any amounts received from
customers for radio advertisements that have not been broadcast during the
period are recorded as deferred revenues until such time as the advertisement is
broadcast. We recognize radio program license fee revenues when evidence of a
licensing arrangement exists, the license period has begun, delivery of the
program to the licensee has occurred or is available for immediate and
unconditional delivery, the arrangement fee is fixed or determinable, and
collection of the arrangement fee is reasonably assured.
Stock Based Compensation
We account for stock transactions with employees in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees." In accordance with Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation," we adopted the pro forma disclosure requirements of
SFAS 123.
6
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
The Company and its Chief Executive Officer have been named in a lawsuit filed
in the Southern District of Florida captioned Florida Securities Funding
Partnership v. Sun Network Group, Inc et al, case no. 02-80360 in connection
with a stock purchase of Company shares from a third party. The Partnership
alleges that the Company was involved in a conspiracy with an outside
shareholder to sell shares at an unfavorable price to the Partnership. No
damages have been specified or claimed. The Company has filed a motion to
dismiss the claims and believe the lawsuit is without merit and frivolous.
Item 2 Changes in Securities and Use of Proceeds.
On June 27, 2002 the Company entered into agreement with four (4) institutional
investors for $750,000 in Secured Convertible Debentures and 750,000 warrants.
The Company has filed a Form SB-2A Registration Statement with the SEC
describing the details of this transaction, which, upon conversion, will result
in substantial dilution to current Company shareholders. The Company shall use
any proceeds derived from the Debenture or sale of warrants for general
operating purposes.
Item 3. Defaults Upon Senior Securities.
NONE.
Item 4. Submission of Matters to a Vote of Security Holders.
NONE.
Item 5. Other Information.
NONE.
Item 6. Exhibits and Reports on Form 8-K
99.1 Certifying Statement of the Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
7
SIGNATURES*
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUN EXPRESS GROUP, INC.
(Registrant)
Date: May 8, 2003 /s/ T. Joseph Coleman
----------------------------
T. Joseph Coleman, President,
Director and Ceo
Date: May 8, 2003 /s/ William H. Coleman
----------------------------
William H. Coleman,
Secretary and Director
8
CERTIFICATION
I, T. Joseph Coleman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sun Network Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 8, 2003 /S/ T. Joseph Coleman
T. Joseph Coleman
Chief Executive Officer , President and Director
9
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
F-1 to F-11 Consolidated Financial Statements
99.1 Certifying Statement of the Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
10
Sun Network Group, Inc.
and Subsidiaries
Consolidated Financial Statements
(Unaudited)
September 30, 2002
Contents
Page(s)
-------
Consolidated Balance Sheets ............................................. F-2
Consolidated Statements of Operations ................................... F-3
Consolidated Statements of Cash Flows ................................... F-4
Notes to Consolidated Financial Statements .............................F-5 - 11
F-1
Sun Network Group, Inc. and Subsidiaries
Consolidated Balance Sheets
Assets
September 30,
2002
(Unaudited)
(as restated, December 31,
Note 12) 2001
----------- -----------
Current Assets
Cash ............................................... $ 279,303 $ 5,321
Accounts receivable ................................ 1,100 -
Notes receivable ................................... 56,000 -
Interest receivable ................................ 1,380 -
Deferred debt issuance cost, net ................... 15,000 -
----------- -----------
Total Current Assets ............................... 352,783 5,321
----------- -----------
Other Assets
Prepaid advertising ................................ 10,775 35,200
Convertible note receivable ........................ 10,000 -
Facility usage rights and management services ...... 35,000 -
Radio programs, net ................................ 13,973 -
----------- -----------
Total Other Assets ................................. 69,748 35,200
----------- -----------
Total Assets ....................................... $ 422,531 $ 40,521
=========== ===========
Liabilities and Stockholders' Deficiency
Current Liabilities
Accounts payable ................................... $ 11,227 $ 9,937
Accrued interest and other ......................... 13,315 -
Accrued compensation, related party ................ 161,250 68,750
Due to stockholders' ............................... 3,242 29,263
----------- -----------
Total Current Liabilities .......................... 189,034 107,950
----------- -----------
Long Term Liabilities
Convertible debenture, net of discount ............. 480,839 -
----------- -----------
Total Liabilities .................................. 669,873 107,950
----------- -----------
Minority Interest .................................. 50,000 -
----------- -----------
Stockholders' Deficiency
Common stock, $0.001 par value,
100,000,000 shares authorized, 22,148,487 and
21,665,399 issued and outstanding, respectively . 22,148 21,665
Common stock issuable (300,000) shares ............. 300 -
Additional paid-in capital ......................... 1,175,041 486,734
Accumulated deficit ................................ (1,494,831) (575,828)
----------- -----------
Total Stockholders' Deficiency ..................... (297,342) (67,429)
----------- -----------
Total Liabilities and Stockholders' Deficiency ..... $ 422,531 $ 40,521
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
Sun Network Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2002
(as restated, (as restated,
Note 12) 2001 Note 12) 2001
------------ ------------ ------------ ------------
Revenues ............................. $ 1,100 $ - $ 1,100 $ -
------------ ------------ ------------ ------------
Operating Expenses
Compensation ......................... 37,500 31,250 118,516 52,250
Advertising .......................... 24,425 - 24,425 -
Amortization of radio programs ....... 1,027 - 1,027 -
Consulting ........................... 68,799 - 187,899 33,395
General and administrative ........... 37,668 4,726 69,329 30,980
Professional fees .................... 13,495 3,000 27,119 23,088
Travel and entertainment ............. - 2,104 - -
Exploitation costs ................... - - - 10,329
------------ ------------ ------------ ------------
Total Operating Expenses ............. 182,914 41,080 428,315 150,042
------------ ------------ ------------ ------------
Loss from Operations ................. (181,814) (41,080) (427,215) (150,042)
------------ ------------ ------------ ------------
Other Income (Expense)
Settlement income .................... - - - 35,200
Interest income ...................... 1,380 - 1,380 -
Interest expense ..................... (252,598) - (493,168) -
------------ ------------ ------------ ------------
Total Other Income (Expense), net .... (251,218) - (491,788) 35,200
------------ ------------ ------------ ------------
Net Loss ............................. $ (433,032) $ (41,080) $ (919,003) $ (114,842)
============ ============ ============ ============
Net Loss Per Share - Basic and Diluted $ (0.02) $ - $ (0.04) $ (0.01)
============ ============ ============ ============
Weighted Average Shares Outstanding
- Basic and Diluted ................ 21,344,139 20,125,778 22,024,055 15,368,590
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
Sun Network Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
---------------------
2002
(as restated,
Note 12) 2001
--------- ---------
Cash Flows from Operating Activities:
Net loss ...................................................... $(919,003) $(114,842)
Adjustments to reconcile net loss to net cash used in operating
activities:
Settlement income ............................................. - (35,200)
Stock for services ............................................ - -
Stock based consulting expense ................................ 106,700 33,395
Amortization of radio programs ................................ 1,027 -
Amortization of debt discount to interest expense ............. 5,044 -
Amortization of deferred debt issuance costs to general and
administrative expense ..................................... 5,000 -
Amortization of prepaid advertising to advertising expense .... 24,425 -
Interest expense .............................................. 475,795 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable ........................................... (1,100) 300
Interest receivable ........................................... (1,380) -
Prepaid expenses .............................................. - 385
Increase (decrease) in:
Accounts payable .............................................. 1,290 2,701
Accrued expenses .............................................. 13,315 -
Accrued compensation .......................................... 92,500 31,250
--------- ---------
Net Cash Used in Operating Activities ......................... (196,387) (82,011)
--------- ---------
Cash Flows from Investing Activities:
Loan disbursement ............................................. (56,000) -
Convertible note disbursement ................................. (10,000) -
Cash overdraft in SunExpress Group, Inc. at acquisition date .. - (855)
--------- ---------
Net Cash Used in Investing Activities ......................... (66,000) (855)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from sale of common stock ............................ 82,390 -
Loan proceeds from stockholder ................................ - 20,000
Proceeds from convertible debentures .......................... 500,000 -
Debt issuance cost ............................................ (20,000) -
Repayment of loans from stockholders .......................... (26,021) -
Equity proceeds from stockholders' ............................ - 60,000
--------- ---------
Net Cash Provided by Financing Activities ..................... 536,369 80,000
--------- ---------
Net Increase (Decrease) in Cash ............................... 273,982 (2,866)
Cash at Beginning of Period ................................... 5,321 3,088
--------- ---------
Cash at End of Period ......................................... $ 279,303 $ 222
========= =========
Supplemental Schedule of Non-Cash Investing and Financing Activities:
In September 2002, the Company recorded $50,000 of intangible assets under the purchase
accounting method relating to its formation and acquisition of 50% interest in Radio X
Network.
See accompanying notes to consolidated financial statements.
F-4
Sun Network Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2002
(Unaudited)
Note 1 Basis of Presentation
The accompanying unaudited consolidated financial statements of Sun Network
Group, Inc. and Subsidiaries (the "Company") have been prepared in accordance
with accounting principles generally accepted in the United States of America
and the rules and regulations of the United States Securities and Exchange
Commission for interim financial information. Accordingly, they do not include
all the information and footnotes necessary for a comprehensive presentation of
consolidated financial position and results of operations.
It is management's opinion, however, that all material adjustments (consisting
of normal recurring adjustments) have been made which are necessary for a fair
consolidated financial statements presentation. The results for the interim
period are not necessarily indicative of the results to be expected for the
year.
For further information, refer to the audited financial statements and footnotes
of Sun Network Group, Inc. and Subsidiaries for the years ended December 31,
2001, 2000 and 1999 included in the Annual Report on Form 10-K, as amended.
Note 2 Nature of Operations and Significant Accounting Policies
A complete set of accounting policy Notes are contained in the audited financial
statements and footnotes of Sun Network Group, Inc. and Subsidiaries for the
years ended December 31, 2001, 2000 and 1999 included in the Annual Report on
Form 10-K, as amended. The following information represents significant
additions to those Notes due to the consolidation of the recently formed
subsidiary, Radio X Network:
(A) Nature of Operations
On September 5, 2002, the Company formed a general partnership with one
other partner (see Note 7). The partnership, Radio X Network, was
formed to independently create, produce, distribute, and syndicate
radio programs. The Company offers radio programs to radio stations in
exchange for advertising time on those stations, which the Company then
sells to advertisers. This is known in the media industry as "barter
syndication." In return for providing the radio stations with
programming content, the Company receives advertising minutes, which
the Company then sells to advertisers. The amount of advertising
minutes received is based on several factors, including the type and
length of the programming and the audience size of the radio station
affiliate. In some instances, the Company may also receive a monthly
license fee in addition to or in lieu of the commercial inventory and
may derive revenues from sponsorship and merchandising.
(B) Principles of Consolidation
The consolidated financial statements include the accounts of Sun
Network Group, Inc., its wholly owned subsidiary, Radio TV Network,
Inc., and its controlled subsidiary Radio X Network. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
F-5
(C) Intangible Assets
Intangible assets consist of purchased or acquired investments in
programming, and facility usage rights and management services.
Facility usage rights and management services were acquired upon
formation of the Company's subsidiary, Radio X Network and recorded
pursuant to SFAS 142. Facility usage rights and management services are
considered to have an indefinite life pursuant to SFAS 142 and
accordingly are not amortized until its useful life is determined to be
no longer indefinite. The Company evaluates the remaining useful life
of intangible assets that are not being amortized each reporting period
to determine whether events and circumstances continue to support an
indefinite useful life. If an intangible asset that is not being
amortized is subsequently determined to have a finite useful life, the
asset is tested for impairment in accordance with SFAS144. That
intangible asset shall then be amortized prospectively over its
estimated remaining useful life and accounted for in the same manner as
other intangible assets that are subject to amortization.
Investments in internally developed radio programs are expensed in
accordance with SFAS 142. Purchased or acquired investments in
programming, including the initial investment acquired are amortized
using the straight-line method over the estimated useful life of each
program.
(D) Long-Lived Assets
Effective January 1, 2002, the Company accounts for the impairment of
long-lived assets in accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for Impairment or Disposal of Long-Lived
Assets". Impairment is the condition that exists when the carrying
amount of a long-lived asset (asset group) exceeds its fair value. An
impairment loss is recognized only if the carrying amount of a
long-lived asset (asset group) is not recoverable and exceeds its fair
value. The carrying amount of a long-lived asset (asset group) is not
recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset
(asset group). That assessment is based on the carrying amount of the
asset (asset group) at the date it is tested for recoverability,
whether in use or under development. An impairment loss shall be
measured as the amount by which the carrying amount of a long-lived
asset (asset group) exceeds its fair value.
(E) Revenue Recognition
The Company recognizes revenues from the sale of radio program
advertising when the fee is determinable and after the commercial
advertisements are broadcast. Any amounts received from customers for
radio advertisements that have not been broadcast during the period are
recorded as deferred revenues until such time as the advertisement is
broadcast.
The Company recognizes radio program license fee revenues when evidence
of a licensing arrangement exists, the license period has begun,
delivery of the program to the licensee has occurred or is available
for immediate and unconditional delivery, the arrangement fee is fixed
or determinable, and collection of the arrangement fee is reasonably
assured.
F-6
(F) Minority Interest
The minority interest in the net income or loss of the Company's
consolidated subsidiary, Radio X Network is reflected in the
consolidated statements of operations after distribution to the
Company of its initial $100,000 capital investment in the subsidiary.
Accordingly, no minority interest allocation of the net income of Radio
X Network is recorded as of September 30, 2002. At September 30, 2002,
the minority interest reflected on the balance sheet represents the
historical book value of the minority partner's initial interest in
Radio X Network.
Note 3 Convertible Note Receivable
On September 17, 2002, the Company loaned $10,000 to a third party limited
liability company ("LLC"). The loan carries annual interest at 10% and matures
on November 16, 2002. During the term of the loan, the Company may convert the
principal and accrued interest into a 0.3% membership interest in the LLC. If
the Company elects to convert, no interest due shall be payable to the Company.
If the Company converts and holds the 0.3% membership interest, it will be
entitled to receive a proportionate 0.3% of the LLC's interest in cash flow,
profits, and tax benefits. The note is secured by the pledge of the general
assets of the LLC. Accrued interest at September 30, 2002 was $36.
Note 4 Intangible Assets
The intangible assets were acquired on September 5, 2002 upon formation to the
general partnership subsidiary (see Note 8). The Company has allocated the
$50,000 investment differential (see Note 8) to the facilities usage rights and
management services and to the radio programs based upon the estimated fair
market value of each resulting in facilities usage rights and management
services of $35,000 and radio programs of $15,000.
The Company amortizes the facility usage rights and management services over an
estimated life of five years. The Company amortizes the acquired radio programs
over their estimated useful life of one year. Intangible assets were as follows
at September 30, 2002:
Radio Programs $ 15,000
Facilities usage rights and management services 35,000
Accumulated amortization (1,027)
-----------
$ 48,973
===========
Note 5 Convertible Debentures and Warrants
On June 27, 2002, the Company entered into a Securities Purchase Agreement to
issue and sell 12% convertible debentures, in the aggregate amount of $750,000,
convertible into shares of common stock, of the Company. The Company is
permitted to use the proceeds to make one or more loans for a legitimate
business purpose, which such loans, in the aggregate, may not exceed $100,000.
As of June 27, 2002, $250,000 in convertible debentures were issued to various
parties. The holders of this debt have the right to convert all or any amount of
this debenture into fully paid and non-assessable shares of common stock at the
conversion price with the limitation that any debenture holder may not convert
any amount of the debentures if after conversion that debenture holder would
beneficially hold more than 4.9% of the total outstanding common stock of the
Company. However, any debenture holder may waive this limitation provision with
F-7
61 days written notice to the Company. The conversion price generally is the
lesser of (a) 50% of the market value of the common stock as defined in the
debenture or (b) $0.15. Interest is payable either quarterly or at the
conversion date at the option of the holder. The convertible debentures mature
on June 27, 2003 and are secured by substantially all present and future assets
of the Company.
The Company paid $20,000 of legal fees related to the debenture issuances and
recorded these fees as a deferred debt issuance cost asset to be amortized over
the one-year term of the debentures. Amortization of the deferred debt issuance
cost included in general and administrative was $5,000 for the three months
ended September 30, 2002.
In connection with the convertible debentures issued, warrants to purchase
250,000 common shares were issued to the holders at an exercise price per share
of $0.15. The warrants are exercisable immediately and through the third
anniversary of the date of issuance. These warrants were treated as a discount
on the convertible debenture and valued at $9,430 under SFAS No. 123 using the
Black-Scholes option-pricing model. On August 8, 2002, an additional $250,000 of
convertible debentures and warrants to purchase 250,000 common shares were
purchased from the Company for $250,000 with the terms similar to that described
above. The warrants were treated as a discount on these convertible debentures
and valued at $14,775 computed using the Black-Scholes option-pricing model.
The discount on the convertible debentures will be amortized to interest expense
over the term of the debentures starting on July 1, 2002. Amortization included
in interest expense for the three months ended September 30, 2002 was $5,044.
Pursuant to EITF Issue No. 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and
EITF Issue No. 00-27 "Application of Issue No. 98-5 to Certain Convertible
Instruments" the convertible debentures contain an imbedded beneficial
conversion feature since the fair market value of the common stock exceeds the
most beneficial exercise price on the debenture Issuance Date. At June 27, 2002,
this beneficial conversion value has been computed by the Company based on the
$240,570 value allocated to the debentures and an effective conversion price of
$0.043 per share. The value was computed as $259,430 but is limited under the
above EITF provisions to the $240,570 value allocated to the debentures. Since
the conversion feature is exercisable immediately, the $240,570 was recognized
as interest expense on June 27, 2002. On August 8, 2002, the Company recognized
an additional interest expense of $235,225 related to the additional debentures
issued. At August 8, 2002, this beneficial conversion value has been computed by
the Company based on the $235,225 value allocated to the debentures and an
effective conversion price of $0.028 per share. The value was computed as
$264,775 but is limited under the above EITF provisions to the $235,225 value
allocated to the debentures.
If the registration statement relating to the debentures is not declared
effective with in 90 days of June 27, 2002 or loses quotation in the NASD OTCBB
the Company is obligated to pay a fee to the debenture holders equal to 2% per
month on the principal balance outstanding. As of September 30, 2002, the
registration statement was not effective and accordingly, the Company has
accrued $986 of penalty fee.
The convertible debenture liability is as follows at September 30, 2002:
Convertible debenture $ 500,000
Less: discount on debenture (19,161)
-----------
Convertible debenture, net $ 480,839
===========
F-8
Accrued interest on the convertible debentures was $12,329 at September 30, 2002
included in accrued interest payable.
Note 6 Commitment and Contingencies
The Company and its Chief Executive Officer have been named in a lawsuit filed
in the Southern District Court of Florida. The Company is defending itself and
has filed a motion to dismiss the matter. The lawsuit alleges the Company and
its chief executive officer conspired to lower the Company's share price after a
third party shareholder of the Company sold a block of his shares to a Florida
securities partnership. The Company is not a party to any other litigation and
management has no knowledge of any other threatening or pending litigation.
During the nine months ended September 30, 2002, the Company accrued $92,500
under an employment agreement with the Company's president.
Note 7 Option Agreement and Plan of Merger, Cancellation, and Related Notes
Receivable
An Option Agreement and Plan of Merger (the "Agreement") between the Company and
Live Media Enterprises ("Live") was entered into as of June 28, 2002. In
connection with this agreement, the Company advanced Live $50,000 in July 2002
and $6,000 in August 2002 pursuant to two promissory notes dated June 28, 2002
and August 2, 2002, respectively. Under the terms of the promissory notes, all
amounts, including interest at 10% are due and payable on demand or upon
termination of the Agreement. Under both notes, the Company has a first lien on
all assets of Live, and has filed UCC Financing Statements with regard to such
liens. In addition, a principal of Live has personally guaranteed the notes.
Based on the Company's due diligence, the Company cancelled the Agreement on
September 3, 2002. Accrued interest on the $56,000 is $1,344 as of September 30,
2002. The Company believes that the balance is recoverable.
Note 8 Joint Venture Subsidiary
On September 5, 2002, the Company's subsidiary, Radio TV Network, Inc. entered
into a partnership agreement (the "Agreement") with a third party company to
form a general partnership under the Uniform Partnership Act of the State of
California. The name of the partnership is Radio X Network. The partnership,
based in San Francisco, California, was formed for the purpose of creating and
operating a new radio network consisting primarily of a series of radio programs
principally targeted to a young male audience ages 14-35 and to engage in such
other related businesses as may be agreed upon by the partners. The partnership
shall develop, produce, acquire, distribute, market, and brand the radio
programs. The Company contributed $100,000 cash and the rights to a radio
program and will contribute management services in exchange for a 50%
partnership interest. The Company will share 50% in all partnership profits and
losses. However, under the Agreement, the Company has an overriding voting
control over all partnership matter effectively providing the Company with
voting control. Accordingly, the Company will consolidate the operations into
its financial statements. The other general partner contributed three radio
programs, and the use of its program production facilities and management
services in exchange for a 50% interest. The asset contributed by the other
general partner had a carryover basis of zero. Therefore, the Company paid
$100,000 for a 50% interest in the partnership,
F-9
which had an initial book value of $100,000. Accordingly, the investment
differential of $50,000 has been allocated to the company's proportionate share
of the fair market value of the intangible assets contributed resulting in the
recording of facility usage rights and management services of $35,000 and radio
programs of $15,000. (See Note 4)
Note 9 Stockholders' Equity
In March 2002, the Company issued 183,088 common shares at $0.45 per share to an
investor for total proceeds of $82,390.
During April through June 2002, under a three month consulting agreement, the
Company committed to issue 300,000 common shares in consideration of consulting
services performed during that period. The $84,000 value of these shares was
computed based on the trading price of the common stock on each date the shares
were earned and fully charged to operations as of June 30, 2002. Under a new
three-month consulting agreement commencing July 1, 2002, with the same
consultant, another 300,000 shares were earned and issued as of September 30,
2002. The $22,700 value of these shares was computed based on the trading price
of the common stock on each date the shares were earned and fully charged to
operations as of September 30, 2002.
On June 27 and August 8, 2002, the Company issued 250,000 and 250,000 warrants,
respectively, in connection with the issuance of convertible debentures. The
warrants were valued at $9,430 and $14,775, respectively, using the
Black-Scholes option pricing model. The aggregate $24,205 was recorded as an
addition to additional paid-in capital and charged to discount on convertible
debentures to be amortized over the term of the debentures. (See Note 3)
Note 10 Reportable Segments
At September 30, 2002, the Company had two reportable segments: Network TV and
Network Radio. The Company's reportable segments have been determined in
accordance with the Company's internal management structure. The following table
sets forth the Company's financial results for the nine months ended September
30, 2002 by operating segments:
Reconciling
Items Attributed
to Parent
Sun Network
December 31, 2002 Network TV Network Radio Group, Inc. Total
-------------------------------------- ---------- ------------- ----------- ---------
Assets ............................... $ 273,058 $ 149,473 $ - $ 422,531
Revenues ............................. - 1,100 - 1,100
Amortization ......................... - (1,027) - (1,027)
Other operating expenses ............. (319,988) (600) (106,700) (427,288)
Interest income ...................... - - 1,380 1,380
Interest expense ..................... - - (493,168) (493,168)
Minority interest in subsidiary losses - - - -
--------- --------- --------- ---------
Segment loss ......................... $(319,988) $ (527) $(598,488) $(919,003)
========= ========= ========= =========
F-10
Note 11 Going Concern
As reflected in the accompanying consolidated financial statements, the Company
had an accumulated deficit of $1,494,831 at September 30, 2002, net losses for
the three months ended September 30, 2002 of $433,032 and cash used in
operations for the nine months ended September 30, 2002 of $196,387.
As discussed in Note 4, the Company received $500,000 in funding and a
commitment for an additional $250,000. In addition, management has implemented
revenue producing programs in its new subsidiary, Radio X Network, which have
started to generate revenues.
Management expects operations to generate negative cash flow at least through
December 2003 and the Company does not have existing capital resources or credit
lines available that are sufficient to fund operations and capital requirements
as presently planned over the next twelve months. The Company's ability to raise
capital to fund operations is further constrained because we have already
pledged substantially all of our assets and have restrictions on the issuance of
our common stock.
Management plans to generate substantially all revenues in the future from sales
of our Radio X Network programs. However, our limited financial resources have
prevented the Company from aggressively advertising its product to achieve
consumer recognition. Management plans to complete the SB-2 process, and once it
is effective, raise an additional $250,000 as committed under the convertible
denture agreement.
The ability of the Company to continue as a going concern is dependent on the
Company's ability to further implement its business plan and generate revenues.
The consolidated financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern. Management
believes that the actions presently being taken to further implement its
business plan and generate additional revenues provide the opportunity for the
Company to continue as a going concern.
Note 12 Restatement
Subsequent to the issuance of the Company's consolidated financial statements
for the three and nine months ended September 30, 2002 management became aware
that those consolidated financial statements did not include $240,570 and
$235,225 of interest expense in the second and third quarters, respectively,
relating to a beneficial conversion feature for the convertible debentures. (See
Note 5) The inclusion of these items in the revised consolidated financial
statements has the effect of increasing additional paid-in capital by $475,795,
increasing net loss for the three and nine months ended September 30, 2002, by
$235,225 and $475,795, respectively, and increasing net loss per share for the
three and nine months ended September 30, 2002, by $0.01 and $0.02,
respectively.
F-11