UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2002
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 Identification Number)
incorporation or organization)
1440 CORAL RIDGE DRIVE, #140, CORAL SPRINGS, FL 33071
----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 360-4080
Securities registered pursuant to Section 12 (b) of the Act: NONE.
Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK.
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 twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
28,448,487 shares of common stock, $.0001 par value, were issued and outstanding
on April 9, 2003.
The aggregate market value of the Registrant's common stock held by
nonaffiliates of the Registrant as of the close of business on April 9, 2003 (an
aggregate of 17,480,987 shares out of a total of 28,448,487 shares outstanding
at that time) was $297,177 computed by reference to the closing bid price of
$.017 on April 9, 2003.
PART I
ITEM 1. BUSINESS
GENERAL
We are developing new media businesses that we have acquired or operate via a
joint venture. We have one wholly owned subsidiary, the RadioTV Network, Inc,
also known as RTV, and we have entered into a joint venture to operate the Radio
X Network. RTV is a new television network that intends to produce and
distribute television versions of top rated radio programs. Radio X is a new
nationally syndicated radio network that will develop, produce and syndicate
radio programs to a young male demographic.
HISTORY
We were incorporated in June 1991 as Sun Express Group, Inc and owned and
operated Destination Sun Airlines until its principal assets were sold to Air
Tran Holdings in 1994. We were inactive until acquiring the assets of RTV, via
merger on July 16, 2001, after which our name was changed to Sun Network Group,
Inc. We entered into a partnership agreement with Sports Byline USA, L.P. to
form Radio X on September 5, 2002.
BUSINESS AND ACQUISTION STRATEGY
We plan to acquire late-stage development companies and established businesses
with a focus on media and communication based companies. We plan to expand our
subsidiary portfolio to include a wide range of media and communication related
business that we deem would most effectively maximize shareholder value.
We currently own one subsidiary, RadioTV Network, Inc. In addition, we have
entered into a partnership agreement with Sports Byline USA, L.P. to own and
operate the Radio X network. The partners are to be exclusive to one another for
this type of venture. We have contributed the sum of $100,000 to the
partnership, the rights to "Laughtraxx", a radio program concept, and limited
management services. Sports Byline has contributed two (2) existing radio
programs, "Wrestling Observer Live" and "Video Game Review" plus management
services, affiliate sales and accounting, along with studio production and
office facilities. Our investment is $100,000 and any future investment or
contributions are to be mutually determined by the parties. Radio X expects to
focus its activities on developing, producing and syndicating radio programs
designed for a young male demographic ages 14-35. The programs will generate
revenues from ad sales, subscriptions and merchandising. Revenues will first be
applied to the continuing management and operation of the business, then to
recovery of our investment and then to profits which are to be allocated at 50%
to us and 50% to Sports Byline. We anticipate adding between 10 and 30 hours of
programming to Radio X in fiscal 2003.
OPERATIONS
RADIOTV NETWORK
Our wholly owned subsidiary, RadioTV Network, Inc., is a new television network
that will exclusively produce and broadcast television versions of existing,
established radio programs.
Rather than focusing on sports, music or Hollywood gossip, RTV will attempt to
carve a new niche in television entertainment programming as the first
television network to exclusively feature popular radio programs.
RTV shows will be initially distributed via local broadcast stations in the
radio shows' originating markets, regionally syndicated in additional markets,
primarily where the radio shows are syndicated or known, via Webcast on our
RTVNET.com Internet site and, when sufficient programming is produced, via a
"nested launch" on an existing digital satellite channel to cable and direct
broadcast satellite or DBS households. A nested launch is when a program
supplier aggregates a block of programs, usually between 3 - 6 daily hours,
which are then inserted and
2
broadcast within an existing television network, using the existing network's
infrastructure to minimize costs. RTV expects to broadcast via its own satellite
transponder in the future, provided we generate a sufficient number of programs
and have sufficient capital resources available, at that time, to pursue leasing
a transponder and establishing operations for a stand alone network, the cost of
which is considerable. Most of RTV's programs will be produced on a Monday
through Friday, in standard half-hour or one-hour formats, usually within 48
hours of the original radio broadcast. In conducting these broadcasts, RTV
installs fully equipped television studios adjacent to the radio program booths.
These studios are equipped with robotic cameras and computerized editing and
switching systems, which are operated by full-time RTV personnel.
In order to most effectively grow the company, management has implemented a
two-phase business plan. Phase One will focus on the production and distribution
of up to eight programs into local and regional broadcast markets, while Phase
Two calls for aggressive expansion of an additional thirty (30) programs and a
full, 24-hour satellite-delivered feed to complement the company's local,
regional and Webcast distribution. Phase one will take about two years and about
$500,000 "net cash" to implement. The net cash investment projected is estimated
as a total of the initial start up expenses, for eight regional programs, less
anticipated advertising revenues. Phase two will commence when RTV's initial
business model is completed and providing operational cash flow.
RTV has test-marketed two programs. The first of these programs was QUINN IN THE
MORNING...@ NIGHT ("QUINN"), which was run from mid 1998 to 1999. Broadcast over
WNPA TV in Pittsburgh, QUINN was a weekly television version of Pittsburgh's
WKKR's morning political talk show hosted by Jim Quinn. QUINN debuted with a 2
rating, and remained on our former affiliate's UPN station until the station was
sold in 1999.
RTV's other inaugural program was MANCOW TV. MANCOW TV was a late-night
television program broadcast on Chicago's WCIU, and produced each day from
MANCOW MULLER'S MORNING MADHOUSE radio show on Chicago's Q101. MANCOW TV was
launched in April 1999 after RTV constructed a television studio in Q101's
broadcast booth. The program was initially broadcast in the 12:30a.m. - 1:30
a.m. time slot on WCIU, and consistently generated 1.2 - 2.5 ratings and 6 - 10
shares. MANCOW TV was regularly the highest-rated show on WCIU after 7:00 p.m.
In January 2000, MANCOW TV moved to Saturdays at 10:00 p.m., on WCIU, and became
one of the highest rated programs on the station in all day parts. MANCOW TV
ceased production in late 2000 and was broadcast and syndicated in re-runs until
mid 2001. The Company owns, and has available for distribution, about 100
individual, completed MANCOW TV programs, copyrighted by RTV. The Company has
properly secured, via written releases, all third party performance and music
rights contained in the programs. RTV anticipates producing MANCOW TV as a prime
time weekly strip (Monday through Friday, 8pm to 11pm time slots) for a new
local or national cable distribution. The Company has created a compilation
video of MANCOW TV to solicit the program to possible syndicators and
broadcasters. The Company has offered the program to several possible
distributors and networks during 2002 but has not yet secured any future
production or distribution for the program. MANCOW TV episodes are available on
an "on demand" basis for viewing at RTVNET.com and the Company has licensed
sections of MANCOW TV to a third party for incorporation into a video that is
for direct response and retail sale. The Company is entitled to 50% of the net
proceeds of the video.
RTV's two-phase business plan anticipates continued expansion via acquisition
and/or additional joint ventures. RTV continues to have negotiations with its
joint venture partner, Sports Byline USA, L.P. about a possible merger with the
Company. The Company also expects to launch THE KIDD KRADDICK RADIO SHOW in the
Dallas market prior to the end of 2003. The Company has had talks with several
local Dallas broadcasters, over the past two years but, as of March 31, 2003,
the Company has not yet secured any formal agreements. The estimated cost to
launch THE KIDD KRADDICK RADIO SHOW is $150,000.
We have produced "pilot" programs for "THE KIDD KRADDICK RADIO SHOW and for
"DEES TV". These programs have not, as of yet, secured local broadcast affiliate
license agreements and we may not secure any agreements. Once we have obtained a
local broadcast agreement for a program we will install production equipment
adjacent to the radio broadcast booths, hire local production personnel and
commence production, broadcast and advertising sales, most likely through third
parties. We are not currently developing any other programs for the RTV network
and do not, have any formal agreement with local broadcasters for our programs
nor is there any time- table as to when they may be secured.
3
We anticipate that we will require $150,000 in capital to launch each new RTV
program in a local market and we anticipate launching a maximum of two (2) new
programs in Fiscal 2003. We do not anticipate offering any of our programs via
satellite in 2003 or 2004. Prior to any national satellite launch we intend to
seek strategic partners for capital, expertise and affiliates relations.
RADIO X NETWORK
Radio X is a new, nationally syndicated radio network the Company owns and
operates in partnership with Sports Byline USA, L.P., which operates Sports
Byline USA Radio Network, a nationally syndicated sports talk radio network that
is distributed and broadcast live 8 hours a day to over 150 traditional
affiliate radio stations in the USA, 24 hours a day on the Sirius Radio
Satellite and on the American Forces Network.
Radio X intends to develop, produce and distribute a series of radio programs,
both live and taped, that are designed and targeted to young, male audiences
ages 14-35. Radio X commenced operations in September 2002 with three (3)
programs; "Wrestling Observer Live", a 2-hour program for wrestling fans that
broadcasts live Sunday evenings from 9-10pm on about 100 traditional affiliate
radio stations; "Video Game Review", a 1-hour program on what's hot in the video
game world, broadcast live also on Sunday evenings at 9-10pm on about 100
traditional affiliate radio stations and "Laughtraxx" a 2-hour comedy program
that has been produced and will debut on about 100 traditional affiliate radio
stations in April 2003.
Radio X generates its revenues principally from advertising sales, sponsorship
fees and merchandising. Sports Byline USA is providing ad and affiliate sales
and other corporate infrastructure for Radio X.
SOURCES OF REVENUES
The Company's wholly owned subsidiary RTV generally produces episodic television
series and generates the majority share of its revenues from the sale of
broadcast licenses and advertising sales. Advertising is sold to conventional
advertisers and direct response advertisers by the broadcaster's ad sales
personnel and the revenues collected our shared with the Company. The Company
has not had syndicated advertising revenues since MANCOW TV ceased syndication
and broadcast in 2001. 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.
Additional revenues are gleaned from syndication of the programs usually at a
50/50 "barter" arrangement plus merchandising for videos, licensing, and studio
rentals. Radio X derives revenues from advertisers, sponsorships, and
merchandising. Sponsorships are special advertising and promotion programs,
including title sponsors, and merchandising revenues include participation in
direct response ads, merchandise sales and license fees. Ad rates are primarily
determined by distribution and ratings of the programs.
WCIU TV parent, Weigel Broadcasting, provided 100% of RTV's revenues in 2001 and
0% in 2002. The Company has no current agreements with Weigel Broadcasting. All
of the Company's revenues in 2002 are from its Radio X joint venture.
COMPETITION
The competition in the entertainment and media industries is considerable and
very fluid. There are "major" television networks, many cable channels and
numerous, start-up "Web Channels". To the best of The Company's knowledge there
does not currently exist any other business that is directly competitive with
its wholly owned subsidiary RTV, but numerous radio networks are operating in
the US.
The U.S. Television industry, however, is a vast, multi-billion dollar business
consisting of numerous programming networks distributed to analog and digital
receivers in domestic and international markets via an affiliation of local
("over-the-air") Broadcasters, Cable TV Operators, Direct Broadcast Satellite
Operators, Digital Satellite Distributors and others. These various Networks are
supported by advertising sales, operator and subscribers fees, pay per view
revenues, government subsidies or a combination thereof. The Network's
programming ranges from primarily general entertainment channels (NBC, CBS, USA)
to a multiple of niche or theme channels such as MTV, ESPN, SCI FI Channel, and
HGTV. The industry is dominated by a handful of major media conglomerates such
as AOL Time Warner, Viacom, Disney and News Corp.
4
The U.S. Radio industry consists of thousands of individual stations located in
virtually every US market broadcasting a vast and very diversified mix of
programs. In recent years the industry has consolidated significantly and is
dominated by two major media companies, Clear Channel Communications and
Infinity Broadcasting (Viacom), and large networks such as Premier Networks
Westwood One, ABC Networks and several others.
EMPLOYEES
The Company has currently one full-time employee, who has a formal employment
agreement.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company maintains an office address in Coral Springs, Florida at 1440 Coral
Ridge Drive #140, Coral Springs, FL 33701. The Company's subsidiary, RadioTV
Network Inc., operates out of an office at 5670 Wilshire Blvd., Suite 1300, Los
Angeles, CA 90036, provided by a Company shareholder, Alchemy Media, LLC.
ITEM 3. LEGAL PROCEEDINGS
The Company and its Chief executive officer were named in a lawsuit filed in the
Southern district of Florida, captioned FLORIDA SECURITIES FUNDING PARTNERSHIP
V. SUN NETWORK GROUP ET AL, Case No. 02-80360 filed April 22, 2002. The Company
decided to settle this lawsuit and avoid any further expense of litigation and
did so in February 2003 by payment of $6500 and the issuance of 1,000,000
restricted Company shares to the Plaintiffs. A dismissal was filed and recorded
in this matter on February 12, 2003 dismissing all of Plaintiff's claims, with
prejudice. The Company is not a party to any other litigation and management has
no knowledge of any other threatened or pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
5
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
On December 26, 2001, our common stock was authorized to trade on the
over-the-counter market with quotations available on the OTC Electronic Bulletin
Board under the symbol "SNNW." No trades occurred until January 3, 2002.
The following table sets forth the range of high and low bid quotations of our
common stock for the periods indicated. The prices represent inter-dealer
quotations, which do not include retail markups, markdowns or commissions, and
may not represent actual transactions.
HIGH LOW
2003 ----- ----
First Quarter $0.06 $.017
HIGH LOW
2002 ----- ----
First Quarter $1.55 $.56
Second Quarter $ .67 $.07
Third Quarter $ .27 $.05
Fourth Quarter $ .06 $.015
SECURITY HOLDERS
At April 9, 2003, there were 28,448,487 shares of our common stock outstanding,
which were held of record by approximately 347 stockholders, not including
persons or entities who hold the stock in nominee or "street" name through
various brokerage firms.
DIVIDENDS
We have not paid a dividend since our incorporation. Our Board of Directors may
consider the payment of cash dividends, dependent upon the results of our
operations and financial condition, tax considerations, industry standards,
economic considerations, regulatory restrictions, general business factors and
other conditions.
RECENT SALES OF UNREGISTERED SECURITIES
The securities described below represent our securities sold by us during the
fiscal year ended December 31, 2002 that were not registered under the
Securities Act of 1933, as amended, all of which were issued by us pursuant to
exemptions under the Securities Act. Underwriters were involved in none of these
transactions.
PRIVATE PLACEMENTS OF COMMON STOCK AND WARRANTS FOR CASH
None.
SALES OF DEBT AND WARRANTS FOR CASH
None
OPTION GRANTS
None
ISSUANCES OF STOCK FOR SERVICES OR IN SATISFACTION OF OBLIGATIONS
In December 2002, we issued 5 million shares of our common stock to our
CEO, T.J. Coleman, in lieu of salary of $120,000.
In February 2003, we issued $6,500 and 1 million shares of our common
stock to Florida Securities Partnership to settle a lawsuit.
The above offerings and sales were deemed to be exempt under Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons and transfer was restricted by us in accordance with
the requirements of the Securities Act.
6
ITEM 6. SELECTED FINANCIAL DATA
The tables below set forth, in summary form, selected financial data of the
Company. This data, which is not covered by the independent auditors' report,
should be read in conjunction with the consolidated financial statements and
notes thereto which are included elsewhere herein.
Year Ended December 31,
-----------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net Sales ................ $ 3,566 $ 0 $ 43,903 $ 127,992 $ 0
Operating expenses ....... $ 735,639 $ 200,135 $ 139,390 $ 304,739 $ 75,382
Settlement income ........ $ 0 $ 35,200 $ 0 $ 0 $ 0
Interest expense ......... $ 515,279 $ 0 $ 0 $ 0 $ 0
Loss from operations ..... $ (732,073) $ (200,135) $ (95,487) $ (176,747) $ (75,382)
Net loss ................. $(1,237,497) $ (164,935) $ (113,483) $ (222,028) $ 75,382
Basic and diluted loss per
common share ............. $ (0.06) $ (0.01) $ (0.01) $ (0.02) $ (0.01)
SELECTED BALANCE SHEET DATA AS OF DECEMBER 31, 2002 and 2001
2002 2001
---- ----
Current assets ......... $ 162,661 $ 5,321
Current liabilities .... $ 625,465 $ 107,950
Total assets ........... $ 172,853 $ 40,521
Total liabilities ...... $ 625,465 $ 107,950
Minority Interest ...... $ 43,224 $ 0
Accumulated deficit .... ($1,813,325) ($ 575,828)
Stockholders' deficiency ($ 495,836) ($ 67,429)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
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 and also
produces and distributes radio programs through a partnership with an
established radio network.
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 and
withdrawn a SB-2 Registration Statement and, subsequently, a SB-2/A amended
Registration Statement and a new SB-2 Registration Statement in connection with
the Debenture.
7
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 Agreements 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. The Company is presently negotiating terms with Live to repay the loan.
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 sum of
$100,000 to this business plus certain management services. Our partnership
interest is 50%, however, we have an overriding voting control over all matters
of the partnership. Radio X currently has three radio programs in distribution.
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 upon completing
the Debenture financing it will have sufficient capital to operate through the
end of 2003. 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
The year ended December 31, 2002 Compared To the year ended December 31, 2001.
REVENUES
Revenues for the year ended December 31, 2002 were $3,566 as compared to
revenues for the year ended December 31, 2001 of $0. The $3,566 revenues were
derived from the new consolidated subsidiary, Radio X Network during its initial
few months of operation. The revenues generated in fiscal 2001 were from a
settlement of pre-paid advertising from a former broadcaster of a Company TV
program in Chicago.
OPERATING EXPENSES
Compensation was $165,261 for the year ended December 31, 2002 compared to
$101,768 for the comparable period in 2001. Compensation in 2002 relates solely
to compensation under our employment agreement with our president aggregating
$150,000 plus payment of certain of his personal expenses totaling $15,261.
Through December 31, 2002 the Company had accrued a cumulative $178,750 in
Compensation due to our president. On December 30, 2002 the Board authorized the
issuance of 5,000,000 common shares of the Company's stock to the president in
exchange for $120,000 of that accrued Compensation. Accrued Compensation due to
the president, under an employment agreement at December 31, 2002, was $58,750.
The Company has a reserve for bad debt of $112,580 for the year ended December
31, 2002 compared with $0 for the year ended December 31, 2001. The reserve
consists of $58,755 of loan principal and interest due from Live Media
Enterprises, Inc, $43,501 in connection with the Company's investment in Radio X
Network and $10,324 for the Company's investment in Nexxray, LLC. Although the
Company believes all of these investments are viable and collectible it is
taking the reserve at the suggestion of its auditors.
Amortization of radio programs of $4,808 and facility usage rights and
management services of $2,244 in the year ended December 31, 2002 results from
amortizing the radio programs intangible assets and facility usage rights and
management services that resulted from the investment by our subsidiary, RadioTV
Network, Inc, in the Radio X Network. The intangible assets were being amortized
using the straight-line method over the expected useful life of the program of
one year and on a usage basis for the facility rights. There was no asset being
amortized in year 2001 as the investment was made in September 2002.
8
Consulting expense for the year ended December 31, 2002 was $193,918 compared to
$33,395 in the year ended December 31, 2001. Consulting fees in the year ended
December 31, 2002 of $193,918 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 $17,018 of cash fees to other consultants.
For the year ended December 31, 2002 the Company had an Impairment loss of
$32,756 as compared to $0 for the year ended December 31, 2001. The Company
recorded a $50,000 investment differential of its Radio X partnership investment
to the facilities usage rights, management services and the radio programs based
upon fair market valuations of $35,000 to facilities and management and $15,000
to the radio programs. The facility usage rights of $32,756 ($35,000 net of
accumulated amortization of $2,244) were impaired at December 31, 2002 since the
Company could not reliably project positive future cash flows due to the
development stage nature of the Radio X business.
Professional fees for the year ended December 31, 2002 were $65,001 compared to
$24,503 for the year ended December 31, 2001. The increase is primarily related
to accounting and legal, audit and registration statement related services
regarding our filing a SB-2 and our quarterly and annual reports.
General and administrative expenses were $117,838 for the year ended December
31, 2002 compared to $30,140 for the year ended December 31, 2001. The increase
in expenses is primarily due to the amortization of $35,200 of pre-paid
advertising used in 2002, expenses incurred in connection with obtaining a
listing for the Company's stock on the Berlin Stock Exchange, Radio X expenses
of $10,000 and an increase in corporate document fees.
The Debenture penalty of $31,233 represents the accrued penalty under the
provisions of the Convertible Debentures. The penalties relate to the deadlines
associated with the Company filing a Registration Statement in connection with
the Convertible Debentures.
Interest expense was $515,279 for the year ended December 31, 2002 compared to
$0 for the year ended December 31, 2001. $475,795 of the interest expense is
attributed to the non-cash interest of the beneficial conversion feature of the
Convertible Debenture offering and $39,484 of accrued interest of the
Convertible Debentures and amortization of the debt discount.
As a result of these factors, we reported a loss from operations of $732,073 for
the year ended December 31, 2002 as compared to a loss from operations of
$200,135 for the year ended December 31, 2001. Our net loss was $1,237,497 or
$0.06 per share for 2002 compared to $164,935 or $0.01 per share for 2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
In fiscal year 2001 the Company incurred a net loss of $164,935 compared to a
net loss of $113,483 for the year ending December 31, 2000. In 2001 the Company
subsidiary, RadioTV Network, Inc, reduced operational, film and exploitation
expenses as it discontinued the broadcast and syndication of its principal
program in anticipation of changing broadcast outlets and its merger with the
Company. The Company's continuing operations and financial results for the year
reflect these changes.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, we had a stockholders' deficit of $495,836. Our operations
have been 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 December 31, 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 December 31, 2002
was $81,751. As of April 10, 2003 the Company had less than $10,000 cash on hand
and will have to minimize operations until it receives additional cash flows
from its businesses or completes its Debenture financing.
9
We have no other material commitments for capital expenditures except for the
anticipated launch of a RadioTV Network program in 2003. We expect an additional
$250,000 in convertible debenture financing upon effectiveness of our
registration statement. We may also receive financing from the exercise of
500,000 outstanding warrants, which would provide a maximum funds of $75,000.
Other than an estimated $50,000 to $500,000 to be generated from our advertising
sales from the broadcast of our initial program on the Radio X Network,
debenture proceeds and warrant exercise proceeds we have no external sources of
liquidity. Although we believe we will have sufficient capital to fund our
anticipated operations through fiscal 2003, we are not currently generating
meaningful revenues and, unless we raise additional capital, we may not be able
to continue operating beyond fiscal 2003.
Net cash used in operations during the year ended December 31, 2002 was $300,438
and was substantially attributable to net loss of $1,237,497, offset primarily
by non-cash interest expenses of $475,795 relating to the beneficial conversion
feature of the Convertible Debentures, non-cash stock based expenses of
$106,700, non-cash advertising expense of $35,200, accrued compensation of
$110,000, non-cash debt discount amortization of $11,431 and amortization of
deferred debt issuance costs of $10,000. In the comparable period of 2001 we had
net cash used in operations of $91,617 primarily relating to the net loss of
$164,935 and non-cash settlement income of $35,200, primarily offset by stock
based consulting expense of $33,395 and accrued compensation of $68,750.
Net cash used in investing activities during the year ended December 31, 2002
was $159,501 relating to a loan to a potential acquiree of $56,000, a
convertible loan of $10,000 and a $93,501 investment in Radio X partnership. The
prior year comparable period had nominal investing activity.
Net cash provided by financing activities for the year ended December 31, 2002
was $536,369 as compared to net cash provided by financing activities of $89,263
for the year ended December 31, 2001. During the year ended December 31, 2002,
we received proceeds from a common stock sale to an investor of $82,390,
proceeds from convertible debentures 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 $29,263 and equity
proceeds from stockholders of $60,000.
For the fiscal year ended December 31, 2002, our auditors have issued a going
concern opinion in connection with their audit of the Company's financial
statements. These conditions raise substantial doubt about our ability to
continue as a going concern if sufficient additional funding is not acquired or
alternative sources of capital developed to meet our working capital needs.
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, 2002 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.
ESTIMATES
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").
10
We generally produce episodic television series and radio programs and generate
revenues from advertising sales and the sale of broadcast licenses. Advertising
revenues can vary significantly subject to a program's popularity and
distribution and general supply and demand and the terms of the licensing
arrangements 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.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data are included under
Item 14(a)(l) and (2) of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth certain information with respect to our directions
and executive officers as of April 9, 2003.
Name Age Position
------------------- --- ------------------------
Richard Wellman 59 Chairman, Director
T. Joseph Coleman 52 Chief Executive Officer,
President and Director
William H. Coleman 43 Director, Secretary
11
All directors hold office until the next annual meeting of stockholders and
until their successors are elected. Officers are elected to serve, subject to
the discretion of the Board of Directors, until their successors are appointed.
Directors do not receive cash compensation for their services as directors, but
are reimbursed for expenses actually incurred in connection with attending
meetings of the Board of Directions
Richard Wellman (Chairman) has been a Director of the Company since July 16,
2001. Since 1994 Mr. Wellman has been the President and CEO of Creative Air
Transport, Inc. a US flag cargo carrier for the US Post Office, Federal Express
Company, Lufthansa Airlines and other air cargo customers. From 1986 to 1994 Mr.
Wellman was the CEO of International Airline Support Group, Inc., a major
airline parts business. Prior to IASG, Mr. Wellman served in the US Air Force
and subsequently he was a Flight Engineer and Pilot for several International
airlines.
T. Joseph Coleman has been a Director of the Company since July 16, 2001. Mr.
Coleman is President and CEO of the Company. Mr. Coleman was the founder and CEO
of the Atlantic Entertainment Group from its inception in 1974 until its sale in
1989. Atlantic was one of the leading and largest independent
producer/distributors of motion pictures in the world. Subsequent to Atlantic
Mr. Coleman was the founder and Chairman of the Independent Telemedia Group a
national market public company that acquired and developed emerging businesses
in the entertainment sector. Since resigning as Co-Chairman of INDE, Mr. Coleman
has pursued several entertainment and media related businesses.
William H. Coleman has been a Director of the Company since July 16, 2001. Mr.
Coleman is the Company's Secretary. Mr. Coleman is Trustee of the Coleman Family
Trust and Chairman of the Coleman Media Group, which has interests in several
media related businesses including radio syndication. Mr. Coleman is a Director
and Treasurer of Egolf.com Incorporated, an online retail golf business and he
has formerly held executive positions at Atlantic Entertainment Group and the
Independent Telemedia Group.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
We are not aware of any material legal proceedings that have occurred within the
past five years concerning any director, director nominee, or control person
which involved a criminal conviction, a pending criminal proceeding, a
participation in the securities or banking industries, or a finding of
securities or commodities law violations.
CODE OF ETHICS
The Company has adopted its Code of Ethics and Business Conduct for Officers,
Directors and Employees that applies to all of the officers, directors and
employees of the Company.
COMPLIANCE WITH SECTION 16(B) OF THE EXCHANGE ACT
Based solely on our review of Forms 3, 4, and 5, and amendments thereto which
have been furnished to us, we believe that during the year ended December 31,
2002, except as described below, all of our officers, directors, and beneficial
owners of more than 10% of any class of equity securities, timely filed, reports
required by Section 16(a) of the Exchange Act of 1934, as amended.
T.J. Coleman failed to file a Form 4 for in January 2003.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary for the fiscal years ended, of the cash
and non-cash compensation awarded, paid or accrued by us to our President and
CEO our compensated officer, who served in such capacities at the end of fiscal
2002 and 2001.
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION
Name and Principal Year Salary ($) Bonus($) All Other
Positions Compensations ($)
----------------------- ---- ---------- -------- -----------------
T. Joseph Coleman 2002 150,000(1) - 15,261 (2)
Chief Executive Officer 2001 89,750(1) - 12,018 (2)
12
(1) Mr. Coleman deferred his 2002 and 2001 salary and bonus due under his
employment agreement with the Company dated July 16, 2001.
(2) RTV Media Corp. paid certain auto and insurance expense for Mr. Coleman in
2001 and 2002.
EMPLOYMENT AGREEMENTS
The Company has one employment agreement with its Chief Executive Officer, T.
Joseph Coleman. Mr. Coleman's three (3) year agreement entitles him to an annual
salary of $120,000 plus a guaranteed annual bonus of $30,000 and customary
fringe benefits and expenses. Mr. Coleman has deferred his salary and bonus for
the first year of his contract. The Company has issued Mr. Coleman 5,000,000
shares of restricted common stock to satisfy $120,000 of the obligation. The
Company has no other employment agreements but may enter into them in the future
in connection with acquisitions or in the normal course of its business. In
December 2002, we extended Mr. Coleman's employment agreement to expire on July
15, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 8, 2003 regarding
the beneficial ownership of our common stock held by each of two executive
officers and directors, individually and as a group and by each person who
beneficially owns in excess of five percent of the common stock. In general,
beneficial ownership includes those shares that a person has the power to vote,
sell, or otherwise dispose. Beneficial ownership also includes that number of
shares, which an individual has the right to acquire within 60 days (such as
stock options) of the date this table was prepared. Two or more persons may be
considered the beneficial owner of the same shares. "Voting power" is the power
to vote or direct the voting of shares, and "investment power" includes the
power to dispose or direct the disposition of shares. The inclusion in this
section of any shares deemed beneficially owned does not constitute an admission
by that person of beneficial ownership of those shares.
Amount and Nature Percent
Of of
Position with Beneficial Common
Stock Name & Address Sun Network Grp. Ownership (1) Outstanding (1)
-------------------- ------------------- ----------------- ---------------
T. Joseph Coleman Director, President 8,617,500 (2) 30.29%
1440 Coral Ridge Dr. CEO
#140
Coral Springs,
FL 33071
William H. Coleman Director, Secretary 2,350,000 (3) 8.26%
45 Whitewood Circle
Norwood, MA 02002
Total securities held by officers 10,967,500 38.55%
and directors as a group (2 people):
(1) Based upon 28,448,487 shares outstanding as of April 9, 2003.
(2) Includes (i) 5 million shares of common stock owned by Mr. Coleman and (ii)
3,617,500 shares of common stock owned by RTV Media Corp. Mr. Coleman is the
President of RTV Media Corp and votes the Company's shares on behalf of RTV
Media Corp. Mr. Coleman is not the majority shareholder of RTV Media Corp. Mr.
Coleman's brother is William H. Coleman.
(3) Mr. Coleman is the Trustee of the Coleman Family Trust. Mr. Coleman's
brother is T. Joseph Coleman.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To the best of managements' knowledge, other than as set forth below, there were
no material transactions, or series of similar transactions, or any currently
proposed transactions, or series of similar transactions, to which we were or
are to be a party, in which the amount involved exceeds $60,000, and in which
any director or executive officer, or any security holder who is known by us to
own of record or beneficially more than 5% of any class of our common stock, or
any member of the immediate family of any of the foregoing persons, has an
interest.
13
ITEM 14. CONTROLS AND PROCEDURES
As of December 31, 2002, an evaluation was performed by our Chief Executive
Officer and Acting Chief Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures. Based on that
evaluation, Our Chief Executive Officer and Acting Chief Accounting Officer,
concluded that our disclosure controls and procedures were effective as of
December 31, 2002. There have been no significant changes in our internal
controls or in other factors that could significantly affect internal controls
subsequent to December 31, 2002.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
2.1 Subscription Agreement by and between Sun Network Group, Inc and Bengt
Bjorsvik dated March 28, 2002, attached as Exhibit 2.1 to Form SB-2
filed by Company (Sun Network Group, Inc.) on July 30, 2002 and
incorporated by reference herein.
3.1 Agreement and Plan of Merger dated July 16, 2001, attached as Exhibit 1
to 8-K/A filed by Company (Sun Express Group, Inc.) on July 31, 2001
and incorporated by reference herein.
4.1 Option Agreement and Plan of Merger agreement by and between Sun
Network Group, Inc and Live media Enterprises, Inc dated as of June 28,
2002, attached as Exhibit 4.1 to Form SB-2 filed by Company (Sun
Network Group, Inc.) on July 30, 2002 and incorporated by reference
herein.
10.1 Securities Purchase Agreement dated June 27, 2002 between AJW Partners,
LLC, New Millennium Capital Partners II, LLC, AJW/New Millennium
Offshore, Ltd, Pegasus Capital Partners, LLC and the Company, attached
as Exhibit 10.1 to Form SB-2 filed by Company (Sun Network Group, Inc.)
on July 30, 2002 and incorporated by reference herein.
10.2 Form of Stock Purchase Warrant dated June 27, 2002, attached as Exhibit
10.2 to Form SB-2 filed by Company (Sun Network Group, Inc.) on July
30, 2002 and incorporated by reference herein.
10.3 Form of Secured Convertible Debenture dated June 27, 2002, attached as
Exhibit 10.3 to Form SB-2 filed by Company (Sun Network Group, Inc.) on
July 30, 2002 and incorporated by reference herein.
10.4 Security Agreement dated June 27, 2002, attached as Exhibit 10.4 to
Form SB-2 filed by Company (Sun Network Group, Inc.) on July 30, 2002
and incorporated by reference herein.
10.5 Registration Rights Agreement dated June 27, 2002 between AJW Partners,
LLC, New Millennium Capital Partners II, LLC Millennium Capital
Partners II, LLC, Pegasus Capital Partners, LLC and the Company,
attached as Exhibit 10.5 to Form SB-2 filed by Company (Sun Network
Group, Inc.) on July 30, 2002 and incorporated by reference herein.
10.6 Amendment to Securities Purchase Agreement dated June 27, 2002 between
AJW Partners, LLC, New Millennium Capital Partners II, LLC, AJW/New
Millennium Offshore, Ltd, Pegasus Capital Partners, LLC and the
Company.
10.7 Amendment to Registration Rights Agreement dated June 27, 2002 between
AJW Partners, LLC, New Millennium Capital Partners II, LLC Millennium
Capital Partners II, LLC, Pegasus Capital Partners, LLC and the
Company.
10.8 Partnership Agreement of the Radio X Network dated September 5, 2002
between RadioTV Network, Inc. and Sports Byline USA L.P.
99.1 Certification of the Chief Executive Officer and Acting Chief
Accounting Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Code of Ethics and Business Conduct of Officers, Directors and
Employees
REPORTS ON FORM 8-K
None
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 15th day of April
2003.
SUN NETWORK GROUP, INC.
By: /s/ T. Joseph Coleman
-------------------------
T. Joseph Coleman
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant, and
in the capacities and on the date indicated.
Signatures Title Date
/s/ T. Joseph Coleman Director, President and CEO April 15, 2003
/s/ William H. Coleman Director and Secretary April 15, 2003
15
CERTIFICATION
I, T. Joseph Coleman, CEO and Acting CFO, certify that:
1. I have reviewed this annual report on Form 10-K of Sun Network Group, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
functions):
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
annual 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.
April 15, 2003
/s/ T. Joseph Coleman
Chief Executive Officer
16
Sun Network Group, Inc.
and Subsidiaries
Consolidated Financial Statements
December 31, 2002, 2001 and 2000
Contents
Page(s)
-------
Independent Auditors' Report ................................................F-2
Consolidated Balance Sheets .................................................F-3
Consolidated Statements of Operations .......................................F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) .....F-5
Consolidated Statements of Cash Flows .......................................F-6
Notes to Consolidated Financial Statements ..........................F-8 to F-20
F-1
Independent Auditors' Report
Board of Directors and Stockholders of:
Sun Network Group, Inc.
We have audited the accompanying consolidated balance sheets of Sun Network
Group, Inc. and Subsidiaries as of December 31, 2002 and 2001 and the related
consolidated statements of operations, changes of stockholders' equity
(deficiency) and cash flows for the years ended December 31, 2002, 2001 and
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the consolidated financial position of Sun
Network Group, Inc. and Subsidiaries as of December 31, 2002 and 2001 and the
consolidated results of its operations and its cash flows for the years ended
December 31, 2002, 2001 and 2000, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 13 to
the consolidated financial statements, the Company has accumulated deficit of
$1,813,325 and a working capital deficit of $462,804 at December 31, 2002, net
losses in 2002 of $1,237,497, cash used in operations in 2002 of $300,438, and
nominal revenues. These factors and the need for additional cash to fund
operations over the next year raise substantial doubt about its ability to
continue as a going concern. Management's Plan in regards to these matters is
also described in Note 13. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
SALBERG & COMPANY, P.A.
Boca Raton, Florida
March 27, 2003
F-2
Sun Network Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2002 and 2001
Assets
2002 2001
----------- -----------
Current Assets
Cash .................................................................... $ 81,751 $ 5,321
Due from joint venture partner, net ..................................... 50,000 -
Deferred debt issuance cost, net ........................................ 10,000 -
Prepaids ................................................................ 20,910 -
----------- -----------
Total Current Assets .................................................... 162,661 5,321
----------- -----------
Other Assets
Prepaid advertising ..................................................... - 35,200
Radio programs, net ..................................................... 10,192 -
----------- -----------
Total Other Assets ...................................................... 10,192 35,200
----------- -----------
Total Assets ............................................................ $ 172,853 $ 40,521
=========== ===========
Liabilities, Minority Interest, and Stockholders Equity (Deficiency)
Current Liabilities
Convertible debentures, net of discount ................................. $ 487,226 $ -
Accounts payable ........................................................ 16,961 9,937
Accrued interest ........................................................ 28,053 -
Accrued penalty ......................................................... 31,233 -
Accrued compensation, related party ..................................... 58,750 68,750
Due to officer .......................................................... 3,242 29,263
----------- -----------
Total Liabilities ....................................................... 625,465 107,950
----------- -----------
Minority interest ....................................................... 43,224 -
----------- -----------
Stockholders' Deficiency
Common stock, $0.001 par value, 100,000,000 shares authorized 22,448,487
and 21,665,399 issued and outstanding, respectively .................. 22,448 21,665
Common stock issuable (5,000,000 shares at par value) ................... 5,000 -
Additional paid-in capital .............................................. 1,290,041 486,734
Accumulated deficit ..................................................... (1,813,325) (575,828)
----------- -----------
Total Stockholders' Deficiency .......................................... (495,836) (67,429)
----------- -----------
Total Liabilities, Minority Interest and Stockholder' Equity (Deficiency) $ 172,853 $ 40,521
=========== ===========
See accompanying notes to consolidated financial statements
F-3
Sun Network Group, Inc. and Subsidiaries
Consolidated Statements of Operations
December 31, 2002, 2001 and 2000
2002 2001 2000
----------- ----------- -----------
Revenues ............................. $ 3,566 $ - $ 43,903
----------- ----------- -----------
Operating Expenses
Compensation ......................... 165,261 101,768 26,230
Amortization ......................... 7,052 - -
Bad debt ............................. 112,580 - -
Contract labor ....................... - - 1,167
Consulting ........................... 193,918 33,395 -
Debenture penalty .................... 31,233 - -
Debt issuance cost amortization ...... 10,000 - -
Depreciation ......................... - - 25,795
Exploitation costs ................... - 10,329 4,252
Film costs ........................... - - 57,979
General and administrative ........... 117,838 30,140 23,967
Impairment loss ...................... 32,756 - -
Professional fees .................... 65,001 24,503 -
----------- ----------- -----------
Total Operating Expenses ............. 735,639 200,135 139,390
----------- ----------- -----------
Loss from Operations ................. (732,073) (200,135) (95,487)
Other Income (Expenses)
Settlement income .................... - 35,200 -
Interest expense ..................... (515,279) - (17,996)
Interest income ...................... 3,079 - -
----------- ----------- -----------
Total Other Income (Expenses) ........ (512,200) 35,200 (17,996)
----------- ----------- -----------
Loss before minority interest ........ (1,244,273) - -
Minority interest in subsidiary losses 6,776 - -
----------- ----------- -----------
Net Loss ............................. $(1,237,497) $ (164,935) $ (113,483)
=========== =========== ===========
Net loss per share - basic and diluted $ (0.06) $ (0.01) $ (0.01)
=========== =========== ===========
Weighted average shares outstanding .. 22,143,751 16,946,324 13,261,111
=========== =========== ===========
See accompanying notes to consolidated financial statements
F-4
Sun Network Group, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity (Deficiency)
Years Ended December 31, 2002, 2001 and 2000
Common Stock Additional
Common Stock Issuable Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- -------- --------- ------ ----------- ----------- -----------
Balance, December 31, 1999 ..... 13,261,111 $ 13,261 - $ - $ 209,717 $ (297,410) $ (74,432)
Contributed capital ............ - - - - 103,375 - 103,375
Conversion of promissory note
and accrued interest to equity - - - - 204,490 - 204,490
Exchange of equity for equipment (1,326,111) (1,326) - - (114,513) - (115,839)
Net loss, 2000 ................. - - - - - (113,483) (113,483)
----------- -------- --------- ------ ----------- ----------- -----------
Balance, December 31, 2000 ..... 11,935,000 11,935 - - 403,069 (410,893) 4,111
Issuance of stock for cash ..... 898,333 898 - - 59,102 - 60,000
Issuance of stock for services . 500,000 500 - - 32,895 - 33,395
Recapitalization ............... 8,332,066 8,332 - - (8,332) - -
Net loss, 2001 ................. - - - - - (164,935) (164,935)
----------- -------- --------- ------ ----------- ----------- -----------
Balance, December 31, 2001 ..... 21,665,399 21,665 - - 486,734 (575,828) (67,429)
Issuance of stock for cash ..... 183,088 183 - - 82,207 - 82,390
Issuance of stock for services . 300,000 300 - - 83,700 - 84,000
Warrants issued with convertible
debentures .................... - - - - 9,430 - 9,430
Issuance of stock issued for
services ...................... 300,000 300 - - 22,400 - 22,700
Warrants issued with convertible
debentures .................... - - - - 14,775 - 14,775
Beneficial conversion value of
convertible debentures ........ - - - - 475,795 - 475,795
Stock issued to officer for
accrued compensation .......... - - 5,000,000 5,000 115,000 - 120,000
Net loss, 2002 ................. - - - - - (1,237,497) (1,237,497)
----------- -------- --------- ------ ----------- ----------- -----------
Balance, December 31, 2002 ..... 22,448,487 $ 22,448 5,000,000 $5,000 $ 1,290,041 $(1,813,325) $ (495,836)
=========== ======== ========= ====== =========== =========== ===========
See accompanying notes to consolidated financial statements
F-5
Sun Network Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
December 31, 2002, 2001 and 2000
2002 2001 2000
----------- ----------- -----------
Cash Flows from Operating Activities:
Net loss ............................................ $(1,237,497) $ (164,935) $ (113,483)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of long-lived assets .. 7,052 - 25,795
Bad debt expense .................................... 112,580 - -
Impairment loss ..................................... 32,756 - -
Interest expense of beneficial conversion feature ... 475,795 - -
Amortization of deferred debt issuance costs ........ 10,000 - -
Amortization of debt discounts to interest expense .. 11,431 - -
Prepaid advertising expense ......................... 35,200 - -
Stock based consulting expense ...................... 106,700 33,395 -
Settlement income ................................... - (35,200) -
Allocation of loss to minority interest ............. (6,776) - -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable ................................. - 300 2,700
Interest receivable ................................. (3,079) - -
Prepaids ............................................ (20,910) 385 904
Increase (decrease) in:
Accounts payable .................................... 7,024 5,688 (7,999)
Accrued interest .................................... 28,053 - -
Accrued penalties ................................... 31,233 - -
Accrued compensation, related party ................. 110,000 68,750 -
----------- ----------- -----------
Net Cash Used in Operating Activities ............... (300,438) (91,617) (92,083)
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment .................. - - (4,846)
(Loan to) repayment from officer .................... - 4,587 (4,587)
Loan disbursements .................................. (56,000) - -
Convertible note disbursement ....................... (10,000) - -
Loan disbursement to joint venture partner .......... (93,501) - -
----------- ----------- -----------
Net Cash Provided by (Used in) Investing Activities . (159,501) 4,587 (9,433)
----------- ----------- -----------
Cash Flows from Financing Activities
Loan proceeds from officer .......................... - 29,263 -
Proceeds from sale of common stock .................. 82,390 60,000 103,375
Proceeds from convertible debenture ................. 500,000 - -
Debt issuance cost disbursement ..................... (20,000) - -
Loan repayment to officer ........................... (26,021) - -
----------- ----------- -----------
Net Cash Provided by Financing Activities ........... 536,369 89,263 103,375
----------- ----------- -----------
Net Increase in Cash ................................ 76,430 2,233 1,859
Cash at Beginning of Year ........................... 5,321 3,088 1,229
----------- ----------- -----------
Cash at End of Year ................................. $ 81,751 $ 5,321 $ 3,088
=========== =========== ===========
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During 2000, a stockholder surrendered its entire interest in exchange for all
equipment owned by the Company with a net book value of $115,839.
During 2000, stockholders contributed advances and related accrued interest
totaling $204,409 to stockholders' equity.
During 2002, the Company issued 5,000,000 common shares to its sole officer in
exchange for accrued compensation of $120,000.
During 2002, the Company recorded $50,000 in intangible assets from applying
purchase method accounting to the formation of a joint venture partnership.
Minority interest of $50,000 was recorded and equity loss pickup of $6,776 was
recognized.
See accompanying notes to consolidated financial statements.
F-6
Sun Network Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2002
Note 1 Nature of Operations and Significant Accounting Policies
(A) Nature of Operations
Sun Network Group, Inc. was incorporated under the laws of Florida on
May 9, 1990 and was inactive for several years.
On July 17, 2001, RadioTV Network, Inc. ("Radio TV") was merged into
Sun Express Merger Corp., a subsidiary of Sun Network Group, Inc. The
transaction was accounted for as a recapitalization of Radio TV. Radio
TV Network, LLC, the predecessor to Radio TV, had an inception year of
1998 and acted as a Defacto company until its formation in 1999.
Effective on January 1, 2001, RadioTV Network, LLC sold its assets and
certain liabilities to a newly formed corporation, RadioTV, under
common control of the remaining two members of the LLC. The transaction
was treated as a recapitalization of Radio TV Network, LLC.
Pursuant to the merger into Sun Express Merger Corp. discussed above,
all shares of RadioTV were exchanged for 13,333,333 shares or 61.57% of
Sun Express Group, Inc. In accordance with APB 16, the transaction was
accounted for as a recapitalization of RadioTV at historical cost and
the historical results of operations in the accompanying consolidated
financial statements are those of RadioTV and its predecessor Radio TV
Network, LLC, with the operations of Sun Network Group, Inc., included
from the July 17, 2001. Concurrent with the merger, on July 17, 2001,
the Company authorized a 1-for-3 reverse split of its outstanding
common stock.
All amounts in the accompanying consolidated financial statements have
been retroactively restated to reflect the recapitalizations and the
reverse stock split. In addition, for comparative purposes, for
transactions, which occurred during the period the Company was an LLC,
the members are referred to in the accompanying consolidated financial
statements as stockholders.
On September 5, 2002, the Company formed a general partnership with one
other partner (see Note 8). The partnership, Radio X Network ("Radio
X"), 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.
Sun Network Group, Inc. acts as a holding company for Radio X and Radio
TV. Radio TV produces and broadcasts television versions of top rated
radio programs.
(B) Principles of Consolidation
The consolidated financial statements include the accounts of Sun
Network Group, Inc., its wholly owned subsidiary, Radio TV, and its
controlled subsidiary Radio X. All significant intercompany accounts
and transactions have been eliminated in consolidation.
F-7
(C) Use of Estimates
In preparing consolidated financial statements, management is required
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 revenues and
expenses during the reported period. Actual results may differ from
these estimates.
Significant estimates included in the accompanying consolidated
financial statements include an allowance on accounts and loans
receivable, impairment losses on long lived assets, and valuation of
non-cash stock based transactions.
(D) Cash Equivalents
For the purpose of the consolidated cash flow statement, the Company
considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents.
(E) Notes and Other Receivables
The Company assesses the probability of collections on loans, notes and
other receivables and records an allowance for loan loss accordingly.
The Company recognizes interest income on notes and loans receivable in
default, and records an appropriate allowance for loan loss on the
resulting interest receivable.
(F) Intangible Assets
Intangible assets included in the accompanying consolidated balance
sheet in other assets consist of purchased or acquired investments in
programming, and facility usage rights and management services acquired
upon the formation of the Company's controlled subsidiary, Radio X. The
Company recorded the assets pursuant to SFAS 141 and determined the
continuing accounting treatment in accordance as to SFAS 142. The
Company recorded amortization of facility usage rights over five years,
management services on a usage basis, and amortization of radio
programs over one year. At December 31, 2002, an impairment loss was
recognized (see Note 4).
(G) 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.
F-8
(H) Minority Interest
The minority interest in the net income or loss of the Company's
consolidated subsidiary, Radio X, is reflected in the consolidated
statements of operations after allocation of the minority interest
proportionate share of losses of the Radio X subsidiary.
(I) Stock-Based Compensation
The Company accounts for stock options issued to employees in
accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation cost is measured on the date of
grant as the excess of the current market price of the underlying stock
over the exercise price. Such compensation amounts are amortized over
the respective vesting periods of the option grant. The Company adopted
the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" and SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure," which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per
share disclosures for employee stock option grants as if the
fair-valued based method defined in SFAS No. 123 had been applied.
The Company accounts for stock options issued to non-employees for
goods or services in accordance with SFAS 123.
(J) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosures of
information about the fair value of certain financial instruments for
which it is practicable to estimate that value. For purposes of this
disclosure, the fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced sale or liquidation.
The carrying amounts of the Company's short-term financial instruments,
including accounts payable and due to officer, approximate fair value
due to the relatively short period to maturity for these instruments.
The carrying amount of the Company's notes receivable have been reduced
to their estimated fair market value of zero through the recording of
an allowance for loan loss.
(K) Revenue Recognition
The Company accounts for revenues from its Radio TV Network, Inc
operations 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").
The Company generally produces 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.
F-9
The Company recognizes 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.
The Company recognizes 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.
The Company recognizes revenues from the sale of radio program
advertising in its Radio X Network operations 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.
(L) Costs and Expenses of Producing Films
The Company accounts for costs and expenses of producing a film and
bringing that film to market in accordance with SOP 00-2 as follows:
Film costs include all direct negative costs incurred in the production
of a film as well as allocations of production overhead and capitalized
interest costs. Film costs are capitalized and amortized as the Company
recognizes revenue from each episode. If reliable estimates of
secondary market revenue are established, any subsequent costs are
capitalized and amortized using the individual-film-forecast method,
which amortizes costs in the same ratio as current revenues bears to
estimated unrecognized ultimate revenues.
Participation costs which consist of contingent payments based on film
financial results or based on other contractual arrangements, are
expensed and accrued, when a film is released, using the
individual-film-forecast method, if the obligation is probable.
Exploitation costs include advertising, marketing, and other
exploitation costs. Advertising costs are accounted for in accordance
with SOP 93-7, "Reporting on Advertising Costs." All other exploitation
costs, including marketing costs, are expensed as incurred.
F-10
(M) Income Taxes
During 2000, the Company was structured as a limited liability company
and elected to be taxed as a partnership under the Internal Revenue
Code. In lieu of paying corporate income taxes, the members were taxed
individually on their proportionate share of the Company's taxable
income. Therefore, no provisions or liability for income taxes during
2000 has been included in the accompanying consolidated financial
statements.
Starting from January 1, 2001, income taxes are accounted for under the
asset and liability method of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes ("SFAS 109")." Under
SFAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(N) Recent Accounting Pronouncements
Statement No. 141 "Business Combinations" establishes revised standards
for accounting for business combinations. Specifically, the statement
eliminates the pooling method, provides new guidance for recognizing
intangible assets arising in a business combination, and calls for
disclosure of considerably more information about a business
combination. This statement is effective for business combinations
initiated on or after July 1, 2001. The adoption of this pronouncement
on July 1, 2001 did not have a material effect on the Company's
financial position, results of operations or liquidity.
Statement No. 142 "Goodwill and Other Intangible Assets" provides new
guidance concerning the accounting for the acquisition of intangibles,
except those acquired in a business combination, which is subject to
SFAS 141, and the manner in which intangibles and goodwill should be
accounted for subsequent to their initial recognition. Generally,
intangible assets with indefinite lives, and goodwill, are no longer
amortized; they are carried at lower of cost or market and subject to
annual impairment evaluation, or interim impairment evaluation if an
interim triggering event occurs, using a new fair market value method.
Intangible assets with finite lives are amortized over those lives,
with no stipulated maximum, and an impairment test is performed only
when a triggering event occurs. This statement is effective for all
fiscal years beginning after December 15, 2001. The implementation of
SFAS 142 on January 1, 2002 did not have a material effect on the
Company's financial position, results of operations or liquidity.
Statement No. 143, "Accounting for Asset Retirement Obligations,"
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by
increasing the carrying amount of the related long-lived asset. Over
F-11
time, the liability is accreted to its present value each period, and
the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. The standard is effective for fiscal years beginning after
June 15, 2002. The adoption of SFAS No. 143 is not expected to have a
material impact on the Company's financial statements.
Statement No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" supercedes Statement No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" ("SFAS 121"). Though it retains the basic requirements of
SFAS 121 regarding when and how to measure an impairment loss, SFAS 144
provides additional implementation guidance. SFAS 144 excludes goodwill
and intangibles not being amortized among other exclusions. SFAS 144
also supercedes the provisions of APB 30, "Reporting the Results of
Operations," pertaining to discontinued operations. Separate reporting
of a discontinued operation is still required, but SFAS 144 expands the
presentation to include a component of an entity, rather than strictly
a business segment as defined in SFAS 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS 144 also eliminates the
current exemption to consolidation when control over a subsidiary is
likely to be temporary. This statement is effective for all fiscal
years beginning after December 15, 2001. The implementation of SFAS 144
on January 1, 2002 did not have a material effect on the Company's
financial position, results of operations or liquidity.
Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," ("SFAS
145") updates, clarifies, and simplifies existing accounting
pronouncements. Statement No. 145 rescinds Statement 4, which required
all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income
tax effect. As a result, the criteria in Opinion 30 will now be used to
classify those gains and losses. Statement 64 amended Statement 4, and
is no longer necessary because Statement 4 has been rescinded.
Statement 44 was issued to establish accounting requirements for the
effects of transition to the provisions of the motor Carrier Act of
1980. Because the transition has been completed, Statement 44 is no
longer necessary. Statement 145 amends Statement 13 to require that
certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. This amendment is consistent with FASB's
goal requiring similar accounting treatment for transactions that have
similar economic effects. This statement is effective for fiscal years
beginning after May 15, 2002. The adoption of SFAS 145 is not expected
to have a material impact on the Company's financial position, results
of operations or liquidity.
Statement No. 146, "Accounting for Exit or Disposal Activities" ("SFAS
146") addresses the recognition, measurement, and reporting of cost
that are associated with exit and disposal activities that are
currently accounted for pursuant to the guidelines set forth in EITF
94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to exit an Activity (including Certain Cost Incurred in
a Restructuring)," cost related to terminating a contract that is not a
capital lease and one-time benefit arrangements received by employees
who are involuntarily terminated - nullifying the guidance under EITF
94-3. Under SFAS 146, the cost associated with an exit or disposal
activity is recognized in the periods in which it is incurred rather
F-12
than at the date the Company committed to the exit plan. This statement
is effective for exit or disposal activities initiated after December
31, 2002 with earlier application encouraged. The adoption of SFAS 146
is not expected to have a material impact on the Company's financial
position, results of operations or liquidity.
Statement No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure", amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation." In response to a growing number of companies
announcing plans to record expenses for the fair value of stock
options, Statement 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, Statement 148 amends
the disclosure requirements of Statement 123 to require more prominent
and more frequent disclosures in financial statements about the effects
of stock-based compensation. The Statement also improves the timeliness
of those disclosures by requiring that this information be included in
interim as well as annual financial statements. In the past, companies
were required to make pro forma disclosures only in annual financial
statements. The transition guidance and annual disclosure provisions of
Statement 148 are effective for fiscal years ending after December 15,
2002, with earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after
December 15, 2002. The Company adopted the disclosure provisions of
Statement 148 for the year ended December 31, 2002, but will continue
to use the method under APB 25 in accounting for stock options. The
adoption of the disclosure provisions of Statement 148 did not have a
material impact on the Company's financial position, results of
operations or liquidity.
(O) Net Loss Per Common Share
Basic net income (loss) per common share (Basic EPS) excludes dilution
and is computed by dividing net income (loss) available to common
stockholder by the weighted-average number of common shares outstanding
for the period. Diluted net income per share (Diluted EPS) reflects the
potential dilution that could occur if stock options or other contracts
to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the Company. At December 31, 2002 and 2001, there were
500,000 common stock warrants outstanding, which may dilute future
earnings per share.
Note 2 Note Receivable and Due from Joint Venture Partner
The Company advanced a potential acquiree $56,000 under a promissory note which
amount has been fully reserved at December 31, 2002 due to default. (See Note 7)
Upon formation of the joint venture and through the date of the accompanying
audit report (see Note 8), the joint venture partner did not establish a
separate bank account for the joint venture. At December 31, 2002, management
could not ascertain the collectability of $43,501 of the balance due.
Accordingly, this amount has been fully reserved as an allowance and charged to
bad debt expense.
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
F-13
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. On November 16, 2002, the borrower defaulted and on February
28, 2003, the Company and the LLC executed a letter agreement to extend all due
dates and conversion date to May 1, 2003. Due to the default and uncertainty
about collecting the receivable and the value of the investment if converted,
the Company has established a 100% valuation allowance. The convertible note
receivable at December 31, 2002 was as follows:
Convertible note receivable $ 10,000
Accrued interest receivable 324
Allowance for loan loss (10,324)
-----------
$ -
===========
Note 4 Intangible Assets
The intangible assets were acquired on September 5, 2002 upon formation of 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 determined to amortize the facility usage rights over five years and
management services on a usage basis as they are contractually derived. The
Company estimated a life of five years based on the average life of equipment
that they have the rights to use. The Company amortizes the acquired radio
programs over their estimated useful life of one year. Intangible assets were as
follows at December 31, 2002:
Facilities usage rights and management services $ 35,000
Accumulated amortization (2,244)
Impairment loss (32,756)
-----------
$ -
===========
Radio Programs $ 15,000
Accumulated amortization (4,808)
-----------
$ 10,192
===========
At December 31, 2002, management was not able to accurately generate cash flow
projections to support the recoverability of the facility usage rights asset
since Radio X was still in early stage development. Accordingly, an impairment
loss of $32,756 was recognized. Since the charge to operations of the
amortization and impairment of this intangible asset exceeded the fair value of
contributed services through December 31, 2002, no additional compensation
expense was recognized as contributed services.
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,
F-14
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
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 $10,000 for the year ended
December 31, 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 are amortized to interest expense
over the term of the debentures starting on July 1, 2002. Amortization included
in interest expense for the year ended December 31, 2002 was $11,431.
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.
F-15
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 December 31, 2002, the
registration statement was not effective and accordingly, the Company has
accrued $31,233 of penalty fee.
The convertible debenture liability is as follows at December 31, 2002:
Convertible debenture $ 500,000
Less: unamortized discount on debenture (12,774)
------------
Convertible debenture, net $ 487,226
============
Accrued interest at December 31, 2002 was $28,053.
Note 6 Commitment and Contingencies
The Company and its Chief Executive Officer were named in a lawsuit filed in the
Southern District Court of Florida. 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. On
February 5, 2003, the Company settled the matter by paying the plaintiffs $6,500
and 1,000,000 shares of the Company's restricted common stock and the lawsuit
was dismissed.
Through December 31, 2002, the Company had accrued $178,750 in compensation due
to the president. On December 30, 2002, the Board authorized 5,000,000 common
shares to be issued to the president in exchange for $120,000 of that accrued
compensation. Accrued compensation due to the president, under an employment
agreement was $58,750 at December 31, 2002. At December 31, 2002, the 5,000,000
shares are recorded as issuable. The shares were physically issued in January
2003.
The Company has an employment agreement with its president where he receives
$120,000 in annual salary, $30,000 annual guaranteed bonus, a 10% incentive
bonus based on Company financial criteria, and certain fringe benefits and
expense reimbursements. The agreement expires July 2004.
The Company has free use of office space for its sole employee, the President.
The fair value of the office in 2002 was nominal and therefore, not recorded.
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.
F-16
Based on the Company's due diligence, the Company cancelled the Agreement on
September 3, 2002 and the note became due immediately and at December 31, 2002
was in default. Due to the uncertainty of collecting the balance due and the
uncertain value of the collateral, the Company has reserved 100% of this note
and related accrued interest through December 31, 2002 as follows:
Notes receivable $ 56,000
Accrued interest 2,755
Allowance for loan loss (58,755)
-------------
$ -
=============
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,
Sports Byline USA, L.P., 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, 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, Sports
Byline USA, L.P., contributed three radio programs, and the use of its program
production facilities and management services. 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, 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' Deficiency
On January 1, 2000, a stockholder converted a promissory note of $200,000 plus
$4,490 of accrued interest to contributed capital. The note had been executed in
July 1999 to account for equipment with original cash basis of $155,003 and
advances of $44,997 provided to the Company.
On December 31, 2000, the stockholder who previously converted the note
discussed above surrendered its entire 10% equity interest in the Company in
exchange for the equipment, which at that time had net book value of $115,839.
This transaction was considered a related party transaction and accordingly
equity was reduced by $115,839 and no gain or loss was recognized.
F-17
In February 2001, the Company issued, after its reorganization into a
corporation, 898,333 common shares to an investor for $60,000 and 500,000 common
shares to a service provider valued at the contemporaneous cash offering price
of $0.0668 per share or $33,395, The shares for services was recorded as a
consulting expense for past services rendered.
On July 17, 2001, 8,332,066, common shares were deemed issued in a
recapitalization transaction. (See Note 1(A))
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 are immediately exercisable at $0.15 per share and expire on the third
anniversary of the date of issuance. 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. Amortization of the discount to interest expense was $11,431
during 2002. (See Note 5)
On December 30, 2002, the Board authorized 5,000,000 common shares to be issued
to the president in exchange for $120,000 of that accrued compensation. Accrued
compensation due to the president, under an employment agreement was $58,750 at
December 31, 2002. At December 31, 2002, the 5,000,000 shares are recorded as
issuable. The shares were physically issued in January 2003. There was no gain
or loss since this was a related party transaction.
Note 10 Income Taxes
There was no income tax expense or benefit for federal and state income taxes in
the consolidated statement of operations for years 2002 and 2001 due to the
Company's net loss and valuation allowance on the resulting deferred tax asset.
In year 2000, the Company was structured as a limited liability company and
taxed as a partnership (see Note 1(L)).
The actual tax expense differs from the "expected" tax expense for the years
ended December 31, 2002 and 2001 (computed by applying the U.S. Federal
Corporate tax rate of 34 percent to income before taxes) as follows:
F-18
2002 2001
--------- ---------
Computed "expected" tax benefit ...................... $(420,749) $ (70,047)
Change in tax rate estimate .......................... 1,066 -
Stock for services ................................... 36,278 -
Change in deferred tax asset valuation allowance ..... 383,405 70,047
--------- ---------
$ - $ -
========= =========
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31, 2002 and 2001 are as
follows:
Deferred tax assets: 2002 2001
--------- ---------
Net operating loss carryforward .............. $ 429,965 $ 70,047
Loan loss allowance .......................... 23,487 -
--------- ---------
Total Gross Deferred Assets .................. 453,452 70,047
Less valuation allowance ..................... (453,452) (70,047)
--------- ---------
Net Deferred Tax Asset ....................... $ - $ -
========= =========
At December 31, 2002, the Company had useable net operating loss carryforwards
of approximately $1,264,603 for income tax purposes, available to offset future
taxable income expiring in 2022.
The valuation allowance at January 1, 2002 was $70,047. The net change in the
valuation allowance during the year ended December 31, 2002 was an increase of
$383,405.
Note 11 Concentrations
During 2001, one customer provided 100% of the other income, which was all
barter income.
During 2000, two customers provided 55% and 42% of the revenues, respectively.
Note 12 Reportable Segments
There were no reportable segments at December 31, 2001 and 2000.
At December 31, 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 by operating segments:
Reconciling Items
Attributed to Parent
December 31, 2002 Network TV Network Radio Sun Network Group, Inc. Total
-------------------------------------- ---------- ------------- ----------------------- -----------
Assets $ 36,404 $136,449 $ - $ 172,853
---------- ------------- ----------------------- -----------
Revenues - 3,566 - 3,566
Amortization - (7,052) - (7,052)
Other operating expenses (535,565) (86,322) (106,700) (728,587)
Interest income - - 3,079 3,079
Interest expense - - (515,279) (515,279)
Minority interest in subsidiary losses 6,776 - - 6,776
---------- ------------- ----------------------- ------------
Segment loss $(528,789) $(89,808) $(618,900) $(1,237,497)
========== ============= ======================= ============
F-19
Note 13 Going Concern
As reflected in the accompanying consolidated financial statements, the Company
had an accumulated deficit of $1,813,325 and a working capital deficit of
$462,804 at December 31, 2002, net losses in 2002 of $1,237,497 and cash used in
operations in 2002 of $300,438. In addition, revenues were nominal.
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 they have already
pledged substantially all of their assets and have restrictions on the issuance
of the common stock.
The Company expects to generate substantially all revenues in the future from
sales of Radio X Network programs. However, the Company's limited financial
resources have prevented the Company from aggressively advertising its product
to achieve consumer recognition.
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 14 Quarterly Information (Unaudited)
Total at
December 31,
First Second Third Forth 2002
----------- ----------- ----------- ----------- -----------
Year ended December 31, 2002
Revenues ................... $ - $ - $ 1,100 $ 2,466 $ 3,566
Net Income (Loss) .......... $ (50,038) $ (485,971) $ (919,003) $ 217,515 $(1,237,497)
Net Income (Loss) Per
Share-Basic and Diluted .. $ - $ (0.02) $ (0.04) $ 0.01 $ (0.06)
Note 15 Subsequent Events
On February 4, 2003, the Company settled a lawsuit by issuing 1,000,000 common
shares and $6,500 in cash. The shares were valued at the trading price of $0.03
per share on the trading date resulting in a total settlement expense of
$36,500.
In March 2003, the parent company borrowed $50,000 from Radio X to pay a
production fee.
F-20