UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2003
Commission File Number 33-42498
SUN NETWORK GROUP, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 65-024624
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1440 CORAL RIDGE DRIVE, #140, CORAL SPRINGS, FL 33071
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(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-B 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-KSB or any amendment to
this Form 10-KSB. [_]
State issuer's revenues for its most recent fiscal year: $42,398.
88,450,315 shares of common stock, $.0001 par value, were issued and
outstanding on April 2, 2004.
The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant as of the close of business on April 2, 2004
(an aggregate of 61,515,315 shares out of a total of 88,450,315 shares
outstanding at that time) was $2,153,036 computed by reference to the closing
bid price of $.035 on April 2, 2004.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
PART I
ITEM 1. DESCRIPTION OF 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 anticipated adding between 10 and 30 hours of
programming to Radio X in fiscal 2003, however, due to lack of funding, we have
not added this programming. We will manage the Radio X Network with Sports
Byline USA, L.P. on an equal basis, however, we have the right to determine all
matters relative to this partnership.
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 we have six programs, in the aggregate, in
production, 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 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 have at least six programs in production and have a minimum of $1,000,000 in
liquid capital resources available, at that time, to pursue leasing a
transponder and establishing operations for a stand alone network, the cost of
which will exceed a $1,000,000. 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.
2
In order to most effectively grow the company, management has
implemented a two-phase business plan. Subject to the completion of additional
financing, development of programming and securing a local broadcast partners,
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, which we will finance in part from our debt financing and cash
flows from operations. The net cash investment projected for eight regional
programs is estimated as a total of the initial start up expenses, estimated
between $5,000 and $7,000 per week per program less anticipated advertising
revenues, estimated between $10,000 and $15,000 per week. Start up expenses
include installation of equipment in a broadcast studio at the station,
prodution personnel, graphics and other visual materials for the program. 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 12:30 a.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. We have no material intellectual property
other than the MANCOW TV 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 and 2003 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 will be for sale by direct response on a 800 number promoted on TV or radio
and/or by retail sale. The Company is entitled to 50% of the net proceeds of the
video. The video is in production and we received revenues in 2003.
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. Subject to the completion of our debenture financing and
securing a local broadcast partner, we expect to launch THE KIDD KRADDICK RADIO
SHOW in the Dallas market prior to the end of 2004. The Company has had talks
with several local Dallas broadcasters, over the past two years but, as of March
31, 2004, the Company has not yet secured any formal agreements. The estimated
cost to launch THE KIDD KRADDICK RADIO SHOW is $150,000.
3
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. 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 debuted on about 115 traditional affiliate
radio stations in April 2003. Radio X contracts with a third party, Broadband
Comedy Networks, Inc., to provide us with a fully produced show on a CD-Rom that
costs approximately $300 per week.
Radio X generates its revenues principally from advertising sales,
sponsorship fees and merchandising. 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.
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 currently derives revenues from advertisers, and sponsorships.
Sponsorships includes special advertising and promotion programs, including
title sponsors. Although we have developed special advertising and promotion
programs, we have not commenced either. We expect to generate revenues from
merchandising. 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.
All of the Company's revenues in 2003 are from its Radio X joint
venture and from MANCOW TV video sales.
4
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.
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
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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
2004 ----- ----
First Quarter $0.05 $.024
2003 ----- ------
First Quarter $.060 $.020
Second Quarter $.045 $.015
Third Quarter $.030 $.015
Fourth Quarter $.090 $.035
HIGH LOW
2002 ------ ------
First Quarter $1.55 $.56
Second Quarter $ .67 $.07
Third Quarter $ .27 $.05
Fourth Quarter $ .06 $.015
5
SECURITY HOLDERS
At April 2, 2004, there were 88,450,315 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, 2003 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.
On November 15, 2003, we entered into an agreement with a third party
for investor relations services. The term of this agreement was from the date of
the contact to December 31, 2003. In connection with this agreement, we issued
such consultant 2,000,000 shares of its common stock for these services.
On December 4, 2003, we entered into an agreement with a third party
for management consulting, business advisory, shareholder information and public
relations services. The term of this agreement was for two months. In connection
with this agreement, we issued such consultant 10,000,000 shares of its common
stock for these services.
On December 12, 2003, we entered into an agreement with a third
party for investor relations services. The term of this agreement was for a
six-month period. In connection with this agreement, we issued such consultant
3,000,000 shares of its common stock for these services.
On December 15, 2003, we entered into an agreement with a third
party for investor relations services. The term of this agreement was for a
two-month period. In connection with this agreement, we issued such consultant
3,000,000 shares of its common stock for these services.
OTHER
On June 5, 2003, with the approval of our Board of Directors, the authorized
number of common shares, $0.001 par value, authorized by the Company was
increased from 100,000,000 to 200,000,000. In October 2003, we changed the
number of authorized common shares to 500,000,000.
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.
THE APPLICATION OF THE "PENNY STOCK REGULATION" COULD HARM THE MARKET PRICE OF
OUR COMMON STOCK
Our common stock currently trades on the OTC Bulletin Board. Since our
common stock continues to trade below $5.00 per share, our common stock is
considered a "penny stock" and is subject to SEC rules and regulations, which
impose limitations upon the manner in which our shares can be publicly traded.
These regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the associated risks. Under these regulations, certain brokers who
recommend such securities to persons other than established customers or certain
accredited investors must make a special written suitability determination
regarding such a purchaser and receive such purchaser's written agreement to a
transaction prior to sale. These regulations have the effect of limiting the
trading activity of our common stock and reducing the liquidity of an investment
in our common stock.
6
Stockholders should be aware that, according to the Securities and
Exchange Commission Release No. 34-29093, the market for penny stocks has
suffered in recent years from patterns of fraud and abuse. These patterns
include:
- Control of the market for the security by one or a few broker-dealers
that are often related to the promoter or issuer;
- Manipulation of prices through prearranged matching of purchases and
sales and false and misleading press releases;
- "Boiler room" practices involving high pressure sales tactics and
unrealistic price projections by inexperienced sales persons;
- Excessive and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
- The wholesale dumping of the same securities by promoters and
broker-dealers after prices have been manipulated to a desired level, along with
the inevitable collapse of those prices with consequent investor losses.
Furthermore, the "penny stock" designation may adversely affect the
development of any public market for the Company's shares of common stock or, if
such a market develops, its continuation. Broker-dealers are required to
personally determine whether an investment in "penny stock" is suitable for
customers.
Penny stocks are securities (i) with a price of less than five
dollars per share; (ii) that are not traded on a "recognized" national exchange;
(iii) whose prices are not quoted on the NASDAQ automated quotation system
(NASDAQ-listed stocks must still meet requirement (i) above); or (iv) of an
issuer with net tangible assets less than $2,000,000 (if the issuer has been in
continuous operation for at least three years) or $5,000,000 (if in continuous
operation for less than three years), or with average annual revenues of less
than $6,000,000 for the last three years.
Section 15(g) of the Exchange Act, and Rule 15g-2 of the Commission
require broker-dealers dealing in penny stocks to provide potential investors
with a document disclosing the risks of penny stocks and to obtain a manually
signed and dated written receipt of the document before effecting any
transaction in a penny stock for the investor's account. Potential investors in
the Company's common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be "penny stock."
Rule 15g-9 of the Commission requires broker-dealers in penny stocks
to approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult for the Company's stockholders to
resell their shares to third parties or to otherwise dispose of them.
FUTURE SALES OF LARGE AMOUNTS OF COMMON STOCK COULD ADVERSELY EFFECT THE MARKET
PRICE OF OUR COMMON STOCK AND OUR ABILITY TO RAISE CAPITAL.
Future sales of our common stock by existing stockholders pursuant
to Rule 144 under the Securities Act of 1933, or following the exercise of
future option grants, could adversely affect the market price of our common
stock. Our directors and executive officers and their family members are not
under lockup letters or other forms of restriction on the sale of their common
stock. The issuance of any or all of these additional shares upon exercise of
options will dilute the voting power of our current stockholders on corporate
matters and, as a result, may cause the market price of our common stock to
decrease. Further, sales of a large number of shares of common stock in the
public market could adversely affect the market price of the common stock and
could materially impair our future ability to generate funds through sales of
common stock or other equity securities.
7
ITEM 6. 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. On October 30, 2003, the SB-2 was declared effective by the SEC.
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 attempting to
collect its debts from Live in the Los Angeles Superior Court.
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
completion of additional funding, it will have sufficient capital to operate
through the end of 2004. 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.
On March 8, 2004, we entered into a redemption agreement with our
debenture holders, whereby we agreed to pay $150,000 per week for five weeks
commencing on March 22, 2004 until such time as the Company has paid $750,000.
Upon final payment, we will deliver 20,000,000 shares of common stock to the
debenture holders as full satisfaction of liabilities under the debenture
agreements. Through April 5, 2004, $450,000 was repaid to the debenture holders.
In March, 2004, we entered into loan agreements to borrow approximately
$273,000 and $217,000. The loans bear interest at a rate equal to the prevailing
30-day LIBOR rate plus 100 basis points. Interest on the loans is computed on
the basis of 360-day year for the number of actual days elapsed and is due and
payable quarterly commencing June 2, 3004. The loans are due in March 2006. If
the loans are not paid by the close of business on the due date in March 2006,
the Company shall pay the lender a late charge equal to five percent of the
outstanding principal balance. The Company paid a cash fee equal 10% of the
amount borrowed which is deducted directly from the proceeds by the lender. The
loans are collateralized by 28,000,000 shares of the Company's common stock. In
addition, we issued an additional 38,000,000 common shares into escrow as
collateral during March 2004 in anticipation of future borrowings. The
collateral shares are not considered outstanding for accounting purposes and do
not have voting rights until and unless they are foreclosed upon due to any
future default as stipulated in the agreements.
RESULTS OF OPERATIONS
Year ended December 31, 2003 compared to the year ended December 31, 2002
REVENUES
Revenues for the year ended December 31, 2003 were $42,398 as
compared to revenues for the year ended December 31, 2002 of $3,566. Of the
$42,398 of revenue in 2003, $30,000 was derived from video production and
$12,398 revenues were derived from our consolidated subsidiary, Radio X Network.
Revenues in 2002 were from our Radio X Network subsidiary.
OPERATING EXPENSES
Compensation was $153,486 for the year ended December 31, 2003
compared to $165,261 for the comparable period in 2002. Compensation in 2003 and
2002 relates solely to compensation under our employment agreement with our
president aggregating $150,000 plus payment of certain of his personal expenses
totaling $3,486 and $15,261, respectively. 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,
2003, was $188,492.
8
Amortization of radio programs of $10,192 and $7,052 for the year
ended December 31, 2003 and 2002, respectively, results from amortizing the
radio programs intangible assets that resulted from the investment by our
subsidiary, RadioTV Network, Inc, in the Radio X Network. The intangible asset
was being amortized using the straight-line method over the expected useful life
of the program of one year. Amortization in the comparable period in 2002 was
lower since the investment was made in September 2002.
For the year ended December 31, 2003, bad debt expense amounted $6,600
as compared to $112,580. In 2003, bad debt consisted of a provision on interest
receivable relating to interest income recognized on notes receivable previously
reserved. In 2002, bad debt consisted 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.
Consulting expense for the year ended December 31, 2003 was $162,177
compared to $193,918 for the year ended December 31, 2002, and included $127,000
and $106,700 of non-cash consulting expense in 2003 and 2002, respectively, from
the issuance of common stock for services.
The Debenture penalty of $485,245 and $31,233 for the year ended
December 31, 2003 and 2002, respectively, 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 of $99,616 and $31,233, liquidated
damages penalty for not having enough authorized shares to allow for the
issuance of all dilutive securities based on a formula as stipulated in the
Debenture agreement of $$206,137 and $0, and a default penalty on the June 28,
2003 and August 8, 2003 maturity of $500,000 of debentures of $179,492 and $0
for the years ended December 31, 2003 and 2002, respectively.
For the year ended December 31, 2003, the Company had an impairment
loss of $20,910 as compared to $32,756 for the year ended December 31, 2002. In
2003, the impairment relates to certain capital stock received in a German
private company in lieu of a refund of a prepaid expense paid to a service
provider. Since there was no objective valuation data supporting the value of
the capital stock received, the Company elected to impair this asset. In 2002,
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, 2003 were $74,387
compared to $65,001 for the year ended December 31, 2002. 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.
Other selling, general and administrative expenses were $135,799 for
the year ended December 31, 2003 as compared to $117,838 for the year ended
December 31, 2002 summarized as follows:
Advertising $ -- $ 36,074
Production and talent expenses 32,600 4,600
Travel and entertainment 50,188 8,783
Other 53,011 68,381
-------- --------
Total $135,799 $117,838
======== ========
The increased advertising expense in 2002 is primarily due to the
amortization of $35,200 of pre-paid advertising used in 2002. In 2003 we have an
increase in production and talent expense primarily due to the amortization of
$20,000 of prepaid production fees. Travel and entertainment increased primarily
due to increased corporate travel related to increased marketing activities and
activities related to investor relations and the seeking of funding
opportunities.
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 quoted
trading price of $0.03 per share on the settlement date resulting in a total
settlement expense of $36,500.
Interest expense was $329,965 for the year ended December 31, 2003
compared to $515,279 for the year ended December 31, 2002. Interest expense for
the years ended December 31, 2003 and 2002 is attributed to the Convertible
Debenture offering and includes accrued interest of the Convertible Debentures
and amortization of the debt discount as well as accrued interest on the
Convertible Debentures due to the default on payment. For the year ended
December 31, 2003 and 2002, $246,500 and $475,795 of interest expense was
recognized relating to an imbedded beneficial conversion feature on the
convertible debentures, respectively.
As a result of these factors, we reported a net loss of $1,355,037
or $(.04) per share for the year ended December 31, 2003 as compared to a net
loss of $1,237,497 or ($.06) per share for the year ended December 31, 2002.
9
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, we had a stockholders' deficit of $1,412,368. 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 $750,000 through December 31, 2003. 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, 2003
was $101,879. As of April 10, 2004 the Company had minimal cash on hand and will
have to minimize operations until it receives additional cash flows from its
businesses or completes its Debenture financing.
We have no other material commitments for capital expenditures except
for the anticipated launch of a RadioTV Network program in 2004. We may also
receive financing from the exercise of 500,000 outstanding warrants, which would
provide a maximum funds of $75,000.
Other than a minimal amount of funds 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 2004, we are not currently generating
meaningful revenues and, unless we raise additional capital, we may not be able
to continue operating beyond fiscal 2004.
In addition, we intend to develop programming for our RTV and Radio X
subsidiaries and then to distribute the programs and seek sponsorships and other
forms of income for the programs. If we can successfully generate revenue for
our programming we will be able to continue as a going concern without
additional, new capital, into fiscal 2004 and beyond. If we cannot generate
revenues, through ad sales, sponsorships or other revenue sources, we will
require the infusion of additional capital to continue our operations. We
estimate that, if minimum revenue targets are not met, we will require an
additional infusion of $500,000 in new capital to continue in business.
Net cash used in operations during the year ended December 31, 2003 was
$252,630 and was substantially attributable to net loss of $1,355,037 offset
primarily by non-cash stock based expenses of $163,500, impairment loss of
$20,910, non-cash debt discount amortization of $13,211, amortization of
deferred debt issuance costs of $13,000, Interest expense on beneficial
conversion feature of $246,500, and net changes in operating assets and
liabilities of $633,591. In the comparable period of 2002, we had net cash used
in operations of $300,438 primarily relating to the net loss of $1,237,497
primarily offset by a change in accrued compensation of $110,000, stock based
expenses of $106,700 and non-cash interest expense from the beneficial
conversion feature of $475,795.
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.
Net cash provided by financing activities for the year ended December
31, 2003 was $272,758 as compared to net cash provided by financing activities
of $536,369 for the year ended December 31, 2002. During the year ended December
31, 2003, we received net proceeds from a loan from our joint venture partner of
$50,000 and net proceeds from convertible debt of $226,000 offset by payments on
loans from officers of $3,242. The loan from our joint venture partner came from
funds held by that partner and due to our controlled subsidiary, Radio X. In the
comparable period of 2002, we received equity proceeds from stockholders of
$82,390, net proceeds from convertible debt of $480,000 offset by payment on
loans to officers of $26,021.
For the fiscal year ended December 31, 2003, our auditors have issued a
going concern opinion in connection with their audit of the Company's financial
statements. As reflected in the accompanying consolidated financial statements,
the Company had an accumulated deficit of $3,168,362 and a working capital
deficit of $1,374,241 at December 31, 2003, net losses in 2003 of $1,355,037 and
cash used in operations in 2003 of $252,630. In addition, revenues were nominal.
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.
10
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 follow the guidance of the Securities and Exchange Commission's Staff
Accounting Bulletin 104 for revenue recognition. In general, we record revenue
when persuasive evidence of an arrangement exists, services have been rendered
or product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectability is reasonably assured. The following policies
reflect specific criteria for the various revenues streams of the Company:
We account 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").
We generally produces episodic television series and generates revenues from the
sale of broadcast licenses and advertising sales. The terms of the licensing
arrangement may vary significantly from contract to contract and may include
fixed fees, variable fees with or without nonrefundable minimum guarantees, or
barter arrangements.
We recognize monetary revenues when evidence of a sale or licensing arrangement
exists, the license period has begun, delivery of the film to the licensee has
occurred or the film is available for immediate and unconditional delivery, the
arrangement fee is fixed or determinable, and collection of the arrangement fee
is reasonably assured. We recognize 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 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.
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 7. FINANCIAL STATEMENTS
The financial statements required by this report are included,
commencing on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an
evaluation, under the supervision and with the participation of the Chief
Executive Officer and Principal Accounting Officer, of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, the Chief
Executive Officer and Principal Accounting Officer concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms. There was no change in the Company's internal control over financial
reporting during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
11
PART III
ITEM 9. 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, 2004.
Name Age Position
------------------- --- ------------------------
Richard Wellman 60 Chairman, Director
T. Joseph Coleman 53 Chief Executive Officer,
President and Director
William H. Coleman 44 Director, Secretary
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,
2003, 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 10. EXECUTIVE COMPENSATION
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
2003 and 2002.
12
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION
Name and Principal Year Salary ($) Bonus($) All Other
Positions Compensations ($)
---------------------- ---- ---------- -------- -----------------
T. Joseph Coleman 2003 120,000(1) 30,000 15,261 (2)
Chief Executive Officer 2002 120,000(1) 30,000 3,486 (2)
(1) Mr. Coleman deferred his 2003 and 2002 salary and or bonus due under his
employment agreement with the Company dated July 16, 2001. On December 30, 2002,
Mr. Coleman was issued 5,000,000 shares of restricted common stock in full
satisfaction of $120,000 of the 2002 obligation.
(2) RTV Media Corp. paid certain auto and insurance expense for Mr. Coleman in
2003 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, 2005.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 8, 2004 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) 9.74%
1440 Coral Ridge Dr. CEO
#140
Coral Springs,
FL 33071
William H. Coleman Director, Secretary 2,350,000 (3) 2.66%
45 Whitewood Circle
Norwood, MA 02002
Alchemy Media LLC 5,967,500 6.75%
5670 Wilshire Blvd.
Suite 1300
Los Angeles, CA 90036
Total securities held by officers 10,967,500 12.40%
and directors as a group (2 people):
(1) Based upon 88,450,315 shares outstanding as of April 2, 2004.
(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 12. 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 13. 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, attached as Exhibit 10.6 to Form SB-2 filed by the Company
(Sun Network Group, Inc.) on January 24, 2003 and incorporated by
reference herein.
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, attached as Exhibit 10.7 to Form SB-2 filed by the Company
(Sun Network Group, Inc.) on January 24, 2003 and incorporated by
reference herein.
10.8 Partnership Agreement of the Radio X Network dated September 5, 2002
between RadioTV Network, Inc. and Sports Byline USA L.P., attached as
Exhibit 10.8 to Form SB-2 Amendment No.1 filed by the Company (Sun
Network Group, Inc.) on May 8, 2003 and incorporated by reference
herein.
14
31.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
REPORTS ON FORM 8-K
None
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed by the Company's auditors for professional services
rendered in connection with the audit of the Company's annual consolidated
financial statements for fiscal 2003 and 2002 and reviews of the consolidated
financial statements included in the Company's Forms 10-KSB for fiscal 2003 and
2002 were approximately $14,000 and $23,000, respectively.
AUDIT-RELATED FEES
For fiscal 2003 and 2002, the Company's auditors billed for service related to
an SB-2 registration filing with the SEC in the amount of $2,000 and $4,000,
respectively. The Company's auditors did not bill any additional fees for
assurance and related services that are reasonably related to the performance of
the audit or review of the Company's financial statements and are not reported
under "Audit Fees" above.
TAX FEES
The aggregate fees billed by the Company's auditors for professional services
for tax compliance, tax advice, and tax planning were $0 and $0 for fiscal 2003
and 2002, respectively.
ALL OTHER FEES
The aggregate fees billed by the Company's auditors for all other non-audit
services rendered to the Company, such as attending meetings and other
miscellaneous financial consulting, in fiscal 2003 and 2002 were $0 and $0,
respectively.
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 14th day of April,
2004.
SUN NETWORK GROUP, INC.
By: /s/ T. Joseph Coleman
-------------------------
T. Joseph Coleman
Chief Executive Officer (Principal Executive Officer),
Chief Financial Officer and
Principal Accounting Officer
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 Chief Executive Officer April 14, 2004
(Principal Executive Officer),
Chief Financial Officer and
Principal Accounting Officer
/s/ William H. Coleman Director and Secretary April 14, 2004
15
SUN NETWORK GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, AND 2002
Sun Network Group, Inc.
and Subsidiaries
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-7 - F-21
F-1
Independent Auditors' Report
Board of Directors and Stockholders of:
Sun Network Group, Inc.
We have audited the accompanying consolidated balance sheet of Sun Network
Group, Inc. and Subsidiaries as of December 31, 2003 and the related
consolidated statements of operations, changes of stockholders' equity
(deficiency) and cash flows for the years ended December 31, 2003 and 2002.
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, 2003 and the
consolidated results of its operations and its cash flows for the years ended
December 31, 2003 and 2002, 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
$3,168,362 and a working capital deficit of $1,374,241 at December 31, 2003, net
losses in 2003 of $1,355,037, cash used in operations in 2003 of $252,630, and
nominal revenues. In addition, the Company is in default on $500,000 of
convertible debentures at December 31, 2003. 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
April 7, 2004
F-2
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
ASSETS
------
Current assets:
Cash $ 101,879
Deferred debt issuance cost, net 21,000
Prepaids 34,000
-----------
Total current assets 156,879
-----------
Total assets $ 156,879
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Convertible debentures, net $ 721,932
Accounts payable 5,911
Accrued interest 98,307
Accrued penalty 516,478
Accrued compensation, related party 188,492
-----------
Total current liabilities 1,531,120
-----------
Minority interest 38,127
-----------
Stockholders' deficit:
Common stock ($0.001 par value; 500,000,000 authorized shares;
55,346,815 shares issued and outstanding) 55,346
Additional paid-in capital 1,836,648
Accumulated deficit (3,168,362)
Deferred consulting (136,000)
-----------
Total stockholders' deficit (1,412,368)
-----------
Total liabilities and stockholders' deficit $ 156,879
===========
See accompanying notes to consolidated financial statements.
-F-3-
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
December 31
-------------------------------
2003 2002
------------ ------------
REVENUES $ 42,398 $ 3,566
------------ ------------
OPERATING EXPENSES:
Compensation 153,486 165,261
Amortization 10,192 7,052
Bad debt 6,600 112,580
Consulting 162,177 193,918
Debenture penalties 485,245 31,233
Debt issuance cost amortization 13,000 10,000
Impairment loss 20,910 32,756
Professional fees 74,387 65,001
Other selling, general and administrative 135,799 117,838
------------ ------------
Total Operating Expenses 1,061,796 735,639
------------ ------------
LOSS FROM OPERATIONS (1,019,398) (732,073)
OTHER INCOME (EXPENSES):
Settlement expense (36,500) --
Interest expense (329,965) (515,279)
Recovery of bad debt 19,129 --
Interest income 6,600 3,079
------------ ------------
Total Other Expenses (340,736) (512,200)
------------ ------------
LOSS BEFORE MINORITY INTEREST (1,360,134) (1,244,273)
MINORITY INTEREST IN SUBSIDIARY LOSS 5,097 6,776
------------ ------------
NET LOSS $ (1,355,037) $ (1,237,497)
============ ============
EARNING (LOSS) PER SHARE:
Net Loss Per Common Share - Basic and Diluted $ (0.04) $ (0.06)
============ ============
Weighted Common Shares Outstanding - Basic and Diluted 30,210,585 22,143,751
============ ============
See accompanying note to consolidated financial statements.
-F-4-
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
ADDITIONAL
COMMON STOCK COMMON STOCK ISSUABLE PAID-IN
-------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------ ----------- ------------- -------------
Balance at December 31, 2001 21,665,399 $ 21,665 - $ - $ 486,734
Sale of common stock 183,088 183 - - 82,207
Common stock issued for services 600,000 600 - - 106,100
Warrants issued with convertible debentures - - - - 24,205
Beneficial converssion value of convertible debentures - - - - 475,795
Stock issued to officer for accrued compensation - - 5,000,000 5,000 115,000
Net Income for the year - - - - -
------------ ------------ ----------- ------------- -------------
Balance at December 31, 2002 22,448,487 22,448 5,000,000 5,000 1,290,041
Common stock issued in exchange for debt 8,898,328 8,898 - - 16,107
Common stock issued for settlement 1,000,000 1,000 - - 35,500
Common stock issued for services rendered 18,000,000 18,000 - - 245,000
Warrants issued with convertible debentures - - - - 3,500
Beneficial converssion value of convertible debentures - - - - 246,500
Issuance of previously issuable common stock 5,000,000 5,000 (5,000,000) (5,000) -
Net loss for the year - - - - -
------------ ------------ ----------- ------------- -------------
Balance at December 31, 2003 55,346,815 $ 55,346 - $ - $1,836,648
============ ============ =========== ============= =============
ACCUMULATED DEFERRED
DEFICIT CONSULTING TOTAL
-------------- --------------- ------------
Balance at December 31, 2001 $ (575,828) $ - $ (67,429)
Sale of common stock - - 82,390
Common stock issued for services - - 106,700
Warrants issued with convertible debentures - - 24,205
Beneficial converssion value of convertible debentures - - 475,795
Stock issued to officer for accrued compensation - - 120,000
Net Income for the year (1,237,497) - (1,237,497)
-------------- --------------- ------------
Balance at December 31, 2002 (1,813,325) - (495,836)
Common stock issued in exchange for debt - - 25,005
Common stock issued for settlement - - 36,500
Common stock issued for services rendered - (136,000) 127,000
Warrants issued with convertible debentures - - 3,500
Beneficial converssion value of convertible debentures - - 246,500
Issuance of previously issuable common stock - - -
Net loss for the year (1,355,037) - (1,355,037)
-------------- --------------- ------------
Balance at December 31, 2003 $ (3,168,362) $ (136,000) $(1,412,368)
============== =============== ============
See accompanying note to consolidated financial statements.
-F-5-
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year
Ended December 31,
---------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss $(1,355,037) $(1,237,497)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization expense 10,192 7,052
Bad debt expense 6,600 112,580
Impairment loss 20,910 32,756
Interest expense of beneficial conversion feature 246,500 475,795
Amortization of deferred debt issuance costs 13,000 10,000
Amortization of debt discounts to interest expense 13,211 11,431
Prepaid advertising expenses -- 35,200
Stock based consulting expense 127,000 106,700
Settlement expense 36,500 --
Allocation of loss to minority interest (5,097) (6,776)
(Increase) decrease in:
Interest receivable (6,600) (3,079)
Prepaids (34,000) (20,910)
Increase (decrease) in:
Accounts payable (11,050) 7,024
Accrued interest 70,254 28,053
Accrued penalties 485,245 31,233
Accrued compensation, related party 129,742 110,000
----------- -----------
Net cash used in operating activities (252,630) (300,438)
----------- -----------
Cash flows from investing activities:
Loan disbursement -- (56,000)
Loan disbursement to joint venture partner -- (93,501)
Convertible note disbursement -- (10,000)
----------- -----------
Net cash used in investing activities -- (159,501)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock -- 82,390
Deferred debt issuance costs -- (20,000)
Proceeds from convertible debenture 226,000 500,000
Proceeds from loan from joint venture partner 50,000 --
Proceeds from (payments on) loans from officer (3,242) (26,021)
----------- -----------
Net cash provided by financing activities 272,758 536,369
----------- -----------
Net (decrease) increase in cash 20,128 76,430
Cash at beginning of year 81,751 5,321
----------- -----------
Cash at end of year $ 101,879 $ 81,751
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ -- $ --
=========== ===========
Income Taxes $ -- $ --
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for debentures payable $ 25,005 $ --
=========== ===========
Debt issuance costs deferred in connection with convertible debentures $ 24,000 $ --
=========== ===========
See accompanying notes to consolidated financial statements.
-F-6-
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
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. The business became
operational in July 2001 when Radio TV was acquired. The transaction
was accounted for as a recapitalization of Radio TV. Radio TV started
operations in 1998.
Sun Network Group, Inc. acts as a holding company for Radio TV and
Radio X,
Radio TV produces and broadcasts television versions of top rated radio
programs.
On September 5, 2002, the Company formed a general partnership with one
other partner. 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.
(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.
(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.
F-7
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(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 consisted 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
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.
(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.
F-8
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(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 all current liabilities, 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 follows the guidance of the Securities and Exchange
Commission's Staff Accounting Bulletin 104 for revenue recognition. In
general, the Company records revenue when persuasive evidence of an
arrangement exists, services have been rendered or product delivery has
occurred, the sales price to the customer is fixed or determinable, and
collectability is reasonably assured. The following policies reflect
specific criteria for the various revenues streams of the Company:
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 and advertising sales. 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
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
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 its 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
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(M) INCOME TAXES
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
The Financial Accounting Standards Board has recently issued several
new accounting pronouncements:
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure. Statement 148 provides alternative methods of
transition to Statement 123's fair value method of accounting for
stock-based employee compensation. It also amends the disclosure
provisions of Statement 123 and APB Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting with
respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements.
Statement 148's amendment of the transition and annual disclosure
requirements of Statement's 123 are effective for fiscal years ending
after December 15, 2002. Statement 148's amendment of the disclosure
requirements of Opinion 28 is effective for interim periods beginning
after December 15, 2002. The adoption of the disclosure provisions of
Statement 148 as of December 31, 2002 did not have a material impact on
the Company's financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires that if
an entity has a controlling financial interest in a variable interest
entity, the assets, liabilities and results of activities of the
variable interest entity should be included in the consolidated
financial statements of the entity. FIN 46 requires that its provisions
are effective immediately for all arrangements entered into after
January 31, 2003. The Company does not have any variable interest
entities created after January 31, 2003. For those arrangements entered
into prior to January 31, 2003, the FIN 46 provisions are required to
be adopted at the beginning of the first interim or annual period
beginning after June 15, 2003. The Company has not identified any
variable interest entities to date and will continue to evaluate
whether it has variable interest entities that will have a significant
impact on its consolidated balance sheet and results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity." This statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. This statement is
effective for financial instruments entered into or modified after May
F-11
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
31, 2003, and otherwise is effective for the first interim period
beginning after June 15, 2003, with certain exceptions. The adoption of
SFAS No. 150 did not have a significant impact on our consolidated
financial position or results of operations.
(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, 2003 and 2002, there were
750,000 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, 2003 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, 2003, management could not ascertain the collectability of
$24,372 of the balance due. Accordingly, this amount was charged to bad
debt expense in 2002 and has been fully reserved as an allowance at
December 31, 2003.
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 matured 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 and charged $10,000 and the related accrued
interest receivable of $324 to bad debt expense in 2002. During 2003,
the Company continued to recognize interest income and a related bad
debt expense $1,000. The Company will discontinue this accrual in 2004.
The convertible note receivable at December 31, 2003 was as follows:
Convertible note receivable $ 10,000
Accrued interest receivable 1,324
Allowance for loan loss (11,324)
-----------
$ -
===========
F-12
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 4 INTANGIBLE ASSETS, INVESTMENTS, AND RELATED IMPAIRMENT
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 amortized the acquired radio programs over their estimated
useful life of one year.
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, in 2002, 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. For the years ended December 31,
2003 and 2002, amortization expense amounted to $10,192 and $7,052,
respectively.
The Company received certain capital stock of a private German company
in exchange for a prepaid expense of $20,910 that was recorded at
December 31, 2002. As the valuation of the capital stock received could
not be supported based on valuation or other objective data, the
Company has elected to conservatively impair this asset for accounting
purposes. Accordingly, the Company recorded an impairment loss of
$20,910 for the year ended December 31, 2003.
NOTE 5 CONVERTIBLE DEBENTURES AND WARRANTS
On June 27, 2002, the Company entered into a Securities Purchase
Agreement to issue and sell 12% convertible debentures, in the
aggregate amount of $750,000, convertible into shares of common stock,
of the Company. The Company is permitted to use the proceeds to make
one or more loans for a legitimate business purpose, which such loans,
in the aggregate, may not exceed $100,000. As of June 27, 2002,
$250,000 in convertible debentures were issued to various parties. The
holders of this debt have the right to convert all or any amount of
this debenture into fully paid and non-assessable shares of common
stock at the conversion price with the limitation that any debenture
holder may not convert any amount of the debentures if after conversion
that debenture holder would beneficially hold more than 4.9% of the
total outstanding common stock of the Company. However, any debenture
holder may waive this limitation provision with 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 matured on
June 27, 2003, and are secured by substantially all present and future
assets of the Company. (see default discussion below)
F-13
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
In connection with these 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 in 2002 were 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 and
matured on August 8, 2003 (see default discussion below). The warrants
were treated as a discount on these convertible debentures and in 2002
were valued at $14,775 computed using the Black-Scholes option-pricing
model.
On November 7, 2003, 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 and
mature on November 8, 2004. The warrants were treated as a discount on
these convertible debentures and in 2003 were valued at $3,500 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 of the discount on the convertible debentures included in
interest expense for the years ended December 31, 2003 and 2002 was
$13,211 and $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 was 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. On November 7, 2003, the
Company recognized an additional interest expense of $246,500 related
to the additional debentures issued. At November 7, 2003, this
beneficial conversion value was computed by the Company based on the
$246,500 value allocated to the debentures and an effective conversion
price of $0.0075 per share. The value was computed as $253,500, but is
limited under the above EITF provisions to the $246,500 value allocated
to the debentures.
F-14
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
Since a registration statement relating to the debentures was not
declared effective within 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. The registration statement was declared effective on
October 30, 2003. In connection with this penalty, the Company has
recorded $99,616 in penalty fee expenses for the year ended December
31, 2003 resulting in a total accrued penalty related to this penalty
of $130,849 at December 31, 2003.
In 2003 and 2002, the Company paid $24,000 and $20,000 of legal fees
related to the debenture issuances, respectively, 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 costs included in general and administrative were $13,000 and
$10,000 for the years ended December 31, 2003 and 2002, respectively.
Under the debenture, the Company incurs a liquidated damages penalty
for not having enough authorized shares to allow for the issuance of
all dilutive securities based on a formula as stipulated in the
Debenture agreement or for not reporting to the debenture holder's on a
timely basis as stipulated in the Debenture Agreement. The penalty rate
is computed as 3% of the outstanding debenture balance per month, which
computes to $15,000 per month. The accrued penalty through December 31,
2003 amounted to $206,137. For the years ended December 31, 2003 and
2002, liquidating penalty expense amounted to $206,137 and $0,
respectively. Although the Company authorized the increase of its
authorized shares to 200,000,000 in May 2003 and then to 500,000,000 in
October 2003, this increase was not sufficient to satisfy the required
authorized shares pursuant to the Debenture Agreement and therefore the
penalty has been accrued through December 31, 2003. During October
through December 2003, the debenture holders' converted $25,006 of
principal to common stock (see Note 9).
On June 28, 2003 and on August 8, 2003 (the "Default Dates"), the
Company defaulted on its maturity date payments on $500,000 of
debentures. A default penalty was computed under the terms of the
debenture as $179,490 and has been charged to operations in 2003 from
the Default Dates through December 31, 2003 and is included in accrued
penalty at December 31, 2003.
In addition, interest is accruing at the default rate of 15% from the
default dates. The convertible debenture liability is as follows at
December 31, 2003:
Convertible debenture $ 724,994
Less: unamortized discount on debenture (3,062)
------------
Convertible debenture, net $ 721,932
============
Accrued interest at December 31, 2003 was $98,307
F-15
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 6 COMMITMENT AND CONTINGENCIES
On February 21, 2003, the Company executed a Production and Studio
Facility Agreement (the "Agreement") whereby the Company will pay a
vendor to construct a production facility and provide certain initial
stipulated production services relating to a television program for
which the Company has exclusive rights. Production was to commence no
later than October 1, 2003. The total consideration to be paid by the
Company is $162,000. The Company paid $54,000 upon execution of the
agreement, which was reflected as a prepaid expense on the accompanying
balance sheet, and became committed to pay the next $54,000 on August
1, 2003. Another $54,000 will be due when the studio construction is
completed. As of the date of this report, the $54,000 due on August 1,
2003 had not been paid. As contingent consideration, the Company will
pay 5% of all "net receipts" as defined in the Agreement. During 2003,
the Company incurred initial production costs of $20,000 related to
this Agreement. As of December 31, 2003, the Company has reflected
prepaid expenses of $34,000 related to this agreement. The Company may
terminate the agreement after July 1, 2003 and received as a refund any
unused portion of the consideration advanced plus $10,000.
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
2005.
The Company has free use of office space for its sole employee, the
President. The fair value of the office in 2003 and 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. 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, 2003 was in default. Due to the uncertainty of
collecting the balance due and the uncertain value of the collateral,
the Company charged the $56,000 and related interest of $2,755 at
December 31, 2002 to bad debt expense in 2002. During 2003, the Company
continued to recognize interest income and a related bad debt expense
$5,600. The Company will discontinue this accrual in 2004 and has
reserved 100% of this note and related accrued interest through
December 31, 2003 as follows:
Notes receivable $ 56,000
Accrued interest 8,355
Allowance for loan loss (64,355)
-------------
$ -
=============
F-16
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
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
Preferred shares
On June 5, 2003, the Company's Board of Directors authorized 10,000,000
shares of preferred stock, par value $0.001. Such preferred stock, or
any series thereof, shall have such designations, preferences,
participating, optional or other annual rights and qualifications,
limitations or restrictions adopted by the Company's Board of
Directors.
Common Stock
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.
F-17
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
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.
In January 2003, 5,000,000 shares previously issuable were issued.
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 quoted
trading price of $0.03 per share on the settlement date resulting in a
total settlement expense of $36,500.
On June 5, 2003, with the approval of the Company's Board of Directors,
the authorized number of common shares, $0.001 par value, authorized by
the Company was increased from 100,000,000 to 200,000,000. In October
2003, the Company changed the number of authorized common shares to
500,000,000.
During the three months ended December 31, 2003, in connection with the
conversion of debentures payable, the Company issued 8,898,328 shares
of common stock upon the conversion of debentures payable amounting to
$25,006.
On November 15, 2003, the Company entered into an agreement with a
third party for investor relations services. The term of this agreement
was from the date of the contact to December 31, 2003. In connection
with this agreement, the Company issued such consultant 2,000,000
shares of its common stock for these services. The Company valued these
shares at the fair market value on the date of the agreement or $0.0095
per share, and recorded consulting expense of $19,000.
On December 4, 2003, the Company entered into an agreement with a third
party for management consulting, business advisory, shareholder
information and public relations services. The term of this agreement
was for two months. In connection with this agreement, the Company
issued such consultant 10,000,000 shares of its common stock for these
services. The Company valued these shares at the fair market value on
the date of the agreement or $0.004 per share, and recorded consulting
expense of $20,000 and deferred consulting expense of $20,000 to be
amortized over the contract term.
F-18
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
On December 12, 2003, the Company entered into an agreement with a
third party for investor relations services. The term of this agreement
was for a six-month period. In connection with this agreement, the
Company issued such consultant 3,000,000 shares of its common stock for
these services. The Company valued these shares at the fair market
value on the date of the agreement or $0.014 per share, and recorded
consulting expense of $7,000 and deferred consulting expense of $35,000
to be amortized over the contract term..
On December 15, 2003, the Company entered into an agreement with a
third party for investor relations services. The term of this agreement
was for a two-month period. In connection with this agreement, the
Company issued such consultant 3,000,000 shares of its common stock for
these services. The Company valued these shares at the fair market
value on the date of the agreement or $0.054 per share, and recorded
consulting expense of $81,000 and deferred consulting expense of
$81,000 to be amortized over the contract term.
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 2003 and
2002 due to the Company's net loss and valuation allowance on the
resulting deferred tax asset.
The actual tax expense differs from the "expected" tax expense for the
years ended December 31, 2003 and 2002 (computed by applying the U.S.
Federal Corporate tax rate of 34 percent to income before taxes) as
follows:
2003 2002
------------ -------------
Computed "expected" tax benefit $ (460,713) $ (420,749)
State income taxes (64,625) -
Change in tax rate estimate (91,266) 1,066
Stock for services and/or settlement 55,590 36,278
Other 13,910 -
Change in deferred tax asset valuation allowance 547,104 383,405
------------ -------------
$ - $ -
============ =============
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 2003
are as follows:
Deferred tax assets: 2003
-------------
Net operating loss carryforward $ 963,643
Loan loss allowance 36,913
-------------
Total Gross Deferred Assets 1,000,556
Less valuation allowance (1,000,556)
-------------
Net Deferred Tax Asset $ -
=============
F-19
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
At December 31, 2003, the Company had useable net operating loss
carryforwards of approximately $2,439,602 for income tax purposes,
available to offset future taxable income expiring in 2023.
The valuation allowance at January 1, 2003 was $453,452. The net change
in the valuation allowance during the year ended December 31, 2003 was
an increase of $547,104.
NOTE 11 REPORTABLE SEGMENTS
At December 31, 2003, 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:
December 31, 2003 Network TV Network Radio Total
-------------------------------------- ---------- ------------- -----------------------
Assets $ 156,879 $ - $ 156,879
---------- ------------- -----------------------
Revenues $ 30,000 12,398 $ 42,398
Amortization - (10,192) (10,192)
Other operating expenses (1,020,077) (31,527) (1,051,604)
Interest income 6,600 - 6,600
Interest expense (329,965) - (329,965)
Settlement expense (36,500) - (36,500)
Recovery of bad debt - 19,129 19,129
Minority interest in subsidiary losses - 5,097 5,097
---------- ------------- -----------------------
Segment loss $(1,349,942) $ (5,095) $ (1,355,037)
========== ============= =======================
December 31, 2002 Network TV Network Radio Total
-------------------------------------- ---------- ------------- -----------------------
Assets $ 112,661 $ 60,192 $ 172,853
---------- ------------- -----------------------
Revenues $ - 3,566 $ 3,566
Amortization - (7,052) (7,052)
Other operating expenses (642,265) (86,322) (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 $(1,154,465) $ (83,032) $(1,237,497)
=========== ============= =======================
NoTE 12 - CONCENTRATIONS
The Company maintains its cash in bank deposit accounts, which, at
times, exceed federally insured limits. At December 31, 2003, the
Company had $1,754 in United States bank deposits, which exceed
federally insured limits. The Company has not experienced any losses in
such accounts through December 31, 2003.
Revenues of $30,000 were derived from one customer in 2003.
F-20
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 13 GOING CONCERN
As reflected in the accompanying consolidated financial statements, the
Company had an accumulated deficit of $3,168,362 and a working capital
deficit of $1,374,241 at December 31, 2003, net losses in 2003 of
$1,355,037 and cash used in operations in 2003 of $252,630. In
addition, revenues were nominal. In addition, the Company is in default
on $500,000 of its convertible debentures.
In 2002, the Company received $500,000 in funding and a commitment for
an additional $250,000. In November 2003, the Company received
$167,400, net of $82,600 of fees. In March 2004 the Company has been
receiving debt funds from a new lender which management believes are on
better terms than the debenture funds. The new loans are being used to
retire the debentures. In addition, management has implemented revenue
producing programs in its new subsidiary, Radio X Network, which have
started to generate minimal revenues.
Management expects operations to generate negative cash flow at least
through December 2004 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 SUBSEQUENT EVENTS
In January and February 2004, in connection with the conversion of
debentures payable, the Company issued 6,303,500 shares of common stock
upon the conversion of debentures payable of approximately $62,000.
In January through March 2004, in connection with third party
consulting agreements for management consulting, business advisory,
shareholder information and public relations services, the Company
issued 26,800,000 shares of its common stock for these services. The
Company valued these shares at the fair market value on the dates of
the agreements resulting in a value of approximately $950,000 to be
amortized over the contract terms which are generally less than six
months.
On March 8, 2004, the Company entered into a redemption agreement with
its debenture holders, whereby the Company agreed to pay $150,000 per
week for five weeks commencing on March 22, 2004 until such time as the
Company has paid $750,000. Upon final payment, the Company will deliver
20,000,000 shares of common stock to the debenture holders as full
satisfaction of liabilities under the debenture agreements. Through
April 5, 2004, $450,000 was repaid to the debenture holders.
F-21
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
In March, 2004, the Company entered into loan agreements to borrow
approximately $273,000 and $217,000. The loans bear interest at a rate
equal to the prevailing 30-day LIBOR rate plus 100 basis points.
Interest on the loans is computed on the basis of 360-day year for the
number of actual days elapsed and is due and payable quarterly
commencing June 2, 3004. The loans are due in March 2006. If the loans
are not paid by the close of business on the due date in March 2006,
the Company shall pay the lender a late charge equal to five percent of
the outstanding principal balance. The Company paid a cash fee equal
10% of the amount borrowed which is deducted directly from the proceeds
by the lender. The loans are collateralized by 28,000,000 shares of the
Company's common stock. In addition, the Company issued an additional
38,000,000 common shares into escrow as collateral during March 2004 in
anticipation of future borrowings. The collateral shares are not
considered outstanding for accounting purposes and do not have voting
rights until and unless they are foreclosed upon due to any future
default as stipulated in the agreements.
F-22