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, 2004
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.
323,657,813 shares of common stock, $.0001 par value, were issued and
outstanding on April 13, 2005.
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 13, 2005
(an aggregate of 289,557,813 shares out of a total of 323,657,813 shares
outstanding at that time) was $1,303,010 computed by reference to the closing
bid price of $.0045 on April 13, 2005.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ITEM 2. DESCRIPTION OF PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS
ITEM 7. FINANCIAL STATEMENTS
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND
ITEM 8A. CONTROLS AND PROCEDURES
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
SIGNATURES
EX-31.1
EX-31.2
EX-32.1
EX-32.2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
We have been developing new media businesses that we have acquired or
operate via a joint venture, however, in March 2005 the Company decided to elect
Business Development Corporation Status and has entered into a binding Letter of
Intent to acquire Aventura Networks, LLC ("Aventura"), a business that operates
in the Voice over Internet Protocol (VOIP) industry and the Company intends to
pursue further development and acquisitions in this field. 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 proposed
television network that had intended to produce and distribute television
versions of top rated radio programs but, thus far, has not succeeded. Radio X
is a nationally syndicated radio network that produces and syndicates 2 radio
programs in partnership with a third party. The Company intends now to focus its
resources on developing its telecom assets through Aventura.
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. We entered into Letter of Intent agreement
to acquire Aventura on February 27, 2004.
BUSINESS AND ACQUISTION STRATEGY
We plan to acquire late-stage development companies and established
businesses with a focus on telecom and communication based companies. We plan to
expand our subsidiary portfolio to include a wide range of telecom and
communication related business that we deem would most effectively maximize
shareholder value.
Subject to the timely completion of the Aventura acquisition, which the
Company anticipates concluding by the end of April 2005, the Company now plans
to focus its resources on expanding Aventura's VOIP businesses, primarily in the
wholesale markets, and by seeking strategic acquisitions and partnerships that
are compatible with Aventura. We intend to raise additional financing for the
Company through the issuance of stock, under our Business Development
Corporation status and, subject to the timely completion of our acquisition of
Aventura, the Company plans on divesting itself of its non-performing media
assets.
OPERATIONS
RADIOTV NETWORK
The RadioTV Network ("RTV") is a proposed new television network that
the Company has been developing for several years. The proposed new network
would produce and distribute TV versions of existing, top rated radio programs.
Despite investing considerable resources and a significant amount of
management's time and focus, the Company has been unable to progress its
business model and plans now to put its emphasis on its new telecom businesses.
RADIO X NETWORK
Radio X is a, 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 produces and distributes three 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 two (2) 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 "Stuff Sports' a 2-hour comedy/sports program that will be produced
in association with Dennis Publishing, Inc and should debut by May 2005.
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 and does not anticipate any further revenues.
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 had expected 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 2004 are from its Radio X joint
venture.
COMPETITION
The competition in the new businesses the Company intends to enter,
principally the VOIP telecom industry, is vast and extremely competitive,
particularly on the retail level. After the completion of the acquisition of
Aventura, the Company intends to focus its resources and time on developing its
wholesale businesses.
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 and director.
ITEM 3. LEGAL PROCEEDINGS
The Company has initiated an Arbitration against Paradigm
International, LLC ("Paradigm") (American Arbitration Association Case No. 72
181 01307 04 TOST) in an attempt to recover stock transferred and costs
associated with their recovery, in connection with a September 17, 2004 Private
Placement and Consulting Agreement that was not performed by Paradigm.
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 $.05 $.024
Second Quarter $.045 $.020
Third Quarter $.035 $.018
Fourth Quarter $.015 $.003
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
SECURITY HOLDERS
At April 13, 2005, there were 323,657,813 shares of our common stock
outstanding, which were held of record by approximately 380 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, 2004 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
On January 8, 2004 the Company entered into an agreement with a third
party for marketing, consulting and investor relations services. The term of the
agreement was for 30 days and in connection with the agreement the Company
issued said consultant 350,000 shares of the Company's common stock.
On January 16, 2004 the Company entered into an agreement with a third
party for marketing, consulting and investor relations services. The term of the
agreement was for six (6) months and in connection with the agreement the
Company issued said consultant 3,250,000 shares of the Company's common stock.
On January 22, 2004 the Company entered into agreement with a third
party to pay for certain obligations to the party for services rendered to the
Company. In connection with this agreement the Company issued the party
1,000,000 shares of its common stock to settle the obligation.
On January 29, 2004 the Company entered into agreement with a third
party for marketing, consulting and investor relations services. The term of the
agreement was for six (6) months and in connection with the agreement the
Company issued said consultant 3,300,000 shares of the Company's common stock.
On February 5, 2004 the Company entered into agreement with a third
party to provide marketing, consulting and investor relations services. The term
of the agreement was for 60 days and in connection with the agreement the
Company issued said consultant 600,000 shares of the Company's common stock.
On February 12, 2004 the Company entered into agreement with a third
party for marketing, consulting and investor relations services. The term of the
agreement was for six (6) months and in connection with the agreement the
Company issued said consultant 3,300,000 shares of the Company's common stock.
On March 1, 2004 the Company entered into agreement with two third
parties for the payment of past due obligations and for marketing, consulting
and consulting services. In connection with the agreement the Company issued
said consultants 5,000,000 shares of the Company's common stock.
On March 5, 2004 the Company entered into agreement to borrow funds
from a third party to payoff obligations due under a Redemption of Secured
Convertible Preferred Debenture agreement. In connection with this loan the
Company issued and pledged 14,000,000 shares of the Company's common stock.
On March 8, 2004 the Company entered into agreement with a third party
for marketing, consulting and investor relations services. The term of the
agreement was for one (1) year and in connection with the agreement the Company
issued said consultant 10,000,000 shares of the Company common stock.
On March 10, 2004 the Company, in order to fully resolve and settle a
pending matter of arbitration with a former vendor, fully settled the matter
upon the issuance of 5,000,000 shares of the Company's common stock to the
vendor.
On March 11, 2004 the Company entered into agreement with a third party
for marketing, consulting and investor relation services. The term of the
agreement was for six (6) months and in connection with the agreement the
Company issued said consultant 5,000,000 shares of the Company's common stock.
On March 16, 2004 the Company entered into agreement to borrow funds
from a third party to payoff obligations due under a Redemption of Secured
Convertible Preferred Debenture agreement. In connection with this loan the
Company issued and pledged 14,000,000 shares of the Company common stock.
On March 26, 2004 the Company entered into agreement to borrow funds
from a third party to payoff obligations due under a Redemption of Secured
Convertible Preferred Debenture agreement. In connection with this agreement the
Company issued and pledged 14,000,000 shares of the Company's common stock.
On April 1, 2004 the Company entered into agreement to borrow funds
from a third party to payoff obligations under a Redemption of Secured
Convertible Preferred Debenture agreement. In connection with this agreement the
Company issued and pledged 14,000,000 shares of the Company's common stock.
On April 26, 2004 the Company entered into agreement with a third party
for marketing, consulting and investor relations services. The term of the
agreement was for one (1) year and in connection with the agreement the Company
issued said consultant 10,000,000 shares of the Company's common stock in two
5,000,000 share tranches.
On April 29, 2004 the Company issued the holders of its Secured
Convertible Debentures, 20,000,000 shares of the Company's common stock in
connection with the full and final payoff of its obligations under the
Redemption of Secured Convertible Debentures agreement.
On May 20, 2004 the Company issued an affiliate of its Chief Executive
Officer 10,000,000 shares of the Company's common stock in exchange for
compensation and consideration due but not paid the officer under an employment
contract with the Company.
On May 24, 2004 the Company entered into agreement with a third party
for marketing, consulting and investor relations services. The term of the
agreement was for six (6) months and in connection with the agreement the
Company issued said consultant 3,500,000 shares of the Company's common stock.
On June 26, 2004 the Company issued 400,000 shares of the Company
common stock to a third party to resolve and fully pay a vendor obligation.
On July 21, 2004 the Company issued 300,000 shares of the Company's
common stock to a third party to fully resolve and pay a vendor obligation.
On July 21, 2004, the Company issued an affiliate of its Chief Executive
Officer and its Chief Executive Officer an aggregate of 15,000,000 shares of the
Company's common stock in exchange for compensation and consideration in
connection with the Chief Executive Officer's employment contract with the
Company.
On July 23, 2004 the Company issued a third party vendor 5,000,000
shares of the Company common stock to fully resolve and settle contract
obligations.
On August 11 and 23, 2004 the Company issued an aggregate of 300,000
shares of the Company's common stock to a third party for services provided to
the Company by the vendor.
On August 23, 2004, the Company issued an affiliate of its Chief Executive
Officer and its Chief Executive Officer an aggregate of 20,000,000 shares of the
Company's common stock in exchange for compensation and consideration in
connection with the Chief Executive Officer's employment contract with the
Company.
On August 31, 2004, the Company issued an affiliate of its Chief Executive
Officer and its Chief Executive Officer an aggregate of 31,000,000 shares of the
Company's common stock in exchange for compensation and consideration in
connection with the Chief Executive Officer's employment contract with the
Company.
On August 23, 2004 the Company issued an affiliate of its Chief
Executive Officer 20,000,000 shares of the Company's common stock in exchange
for compensation and consideration due but not paid by the officer under an
employment agreement with the Company.
On September 17, 2004 the Company entered into agreement with a third
party under a Private Placement Agreement and Consulting Agreement. Under the
terms of this agreement the third part was to make a private purchase of the
Company's common stock and provide consulting services for a one year period.
Under the terms of this agreement the Company issued said consultant, at various
times during the 2nd and 3rd Quarter an aggregate of 53,000,000 shares of the
Company's common stock.
On September 24, 2004 the Company issued 250,000 shares of the
Company's common stock to a new Company Director in lieu of compensation.
On October 29, 2004 the Company issued a third party vendor 500,000
shares of the Company's common stock in exchange for services rendered.
OTHER
On July 27, 2004, 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 500,000,000 to 2,500,000,000. On December 8, 2004, the
Company increased the number of authorized common shares to 5,000,000,000.
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.
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 is 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This following information specifies certain forward-looking statements of
management of the company. Forward-looking statements are statements that
estimate the happening of future events are not based on historical fact.
Forward-looking statements may be identified by the use of forward-looking
terminology, such as "may", "shall", "could", "expect", "estimate",
"anticipate", "predict", "probable", "possible", "should", "continue", or
similar terms, variations of those terms or the negative of those terms. The
forward-looking statements specified in the following information have been
compiled by our management on the basis of assumptions made by management and
considered by management to be reasonable. Our future operating results,
however, are impossible to predict and no representation, guaranty, or warranty
is to be inferred from those forward-looking statements.
The assumptions used for purposes of the forward-looking statements specified in
the following information represent estimates of future events and are subject
to uncertainty as to possible changes in economic, legislative, industry, and
other circumstances. As a result, the identification and interpretation of data
and other information and their use in developing and selecting assumptions from
and among reasonable alternatives require the exercise of judgment. To the
extent that the assumed events do not occur, the outcome may vary substantially
from anticipated or projected results, and, accordingly, no opinion is expressed
on the achievability of those forward-looking statements. No assurance can be
given that any of the assumptions relating to the forward-looking statements
specified in the following information are accurate, and we assume no obligation
to update any such forward-looking statements.
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. The Company
has not had success in establishing the TV network and will longer dedicate any
resources to this endeavor. The Company also produces and distributes radio
programs through a partnership created in September 2002 with an established
radio network. This network represents all of the Company's current revenue
streams. The Company is planning on expanding and moving into new areas,
primarily the VOIP telecom business, via a proposed acquisition in 2005.
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.
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 delivered 20,000,000 shares of common stock to the debenture holders
as full satisfaction of liabilities under the debenture agreements. The full
redemption of the Secured Convertible Debentures was completed in mid 2004.
In March and April 2004, we entered into loan agreements to borrow and aggregate
of $824,000. 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 in June 2004. The loans are due in March and April 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. In 2004 the Company resigned all
of its pledged collateral to the Lender in exchange for full forgiveness of all
loans and any and all past due interest obligations.
RESULTS OF OPERATIONS
Year ended December 31, 2004 compared to the year ended December 31, 2003
REVENUES
Revenues for the year ended December 31, 2004 were $8,090 as compared to
revenues for the year ended December 31, 2003 of $42,398 and were derived from
our consolidated subsidiary, Radio X Network.
OPERATING EXPENSES
Compensation was $1,547,708 for the year ended December 31, 2004 compared to
$153,486 for the comparable period in 2003. Compensation relates solely to
compensation under our employment agreement with our president and additional
stock based compensation valued at $1,410,500 in the third quarter of 2004.
Additionally, in May 2004, the Company recorded additional non-cash compensation
of $57,208 due to the issuance of 10,000,000 common shares for accrued
compensation.
Amortization of radio programs of $0 and $10,192 for the years ended December
31, 2004 and 2003, 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.
Consulting expense for the year ended December 31, 2004 was $2,209,725 compared
to $162,177 for the year ended December 31, 2003. During the year ended December
31, 2004, consulting expense related to the issuance of common stock for
services to outside consultants.
The debenture penalty of $30,000 and $485,245 for the years ended December 31,
2004 and 2003, 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 and 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 and a default penalty on the
June 28, 2003 and August 8, 2003 maturity of $500,000 of debentures.
The debt issue cost amortization of $92,400 and $13,000 for the years ended
December 31, 2004 and 2003, respectively, represents the amortization of the
cost we incurred to raise debt capital. These fees are recorded debt discount
and amortized over the loan term. Due to the foreclosure (see below) of the
$824,000 loan payable in 2004, the entire unamortized portion of these debt
discounts were expensed during the year ended December 31, 2004.
For the year ended December 31, 2003, the Company had an impairment loss of
$20,910 as compared to $0 for the year ended December 31, 2004. 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.
Professional fees for the year ended December 31, 2004 were $33,603 compared to
$74,387 for the year ended December 31, 2003. The decrease is primarily related
to accounting and legal, audit and registration statement related services
regarding our filing a SB-2 in the 2003 period.
Other selling, general and administrative expenses were $159,676 for the year
ended December 31, 2004 as compared to $135,799 for the year ended December 31,
2003. The increase in expenses is primarily due to an increase in travel related
expense for the year ended December 31, 2004 as compared to the year ended
December 31, 2003.
Interest expense was $58,812 for the year ended December 31, 2004 compared to
$329,965 for the year ended December 31, 2003. Interest expense is attributed to
the loan payable and 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, 2004, we recognized settlement expense of
$144,527 related to the redemption of the debentures. 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.
For the year ended December 31, 2004, we recognized a loss on the foreclosure of
our loan payable in the amount of $1,008,885. We defaulted on the $824,000 loans
payable in June and October 2004 due to non-payment of required interest
payments. In November 2004, the lender took possession of 56,000,000 collateral
common shares. As a result of this foreclosure by the lender, we recorded the
value of the 56,000,000 shares of $1,869,000 and removed the loan payable and
accrued interest balances of $824,000 and $36,115, respectively, resulting in a
loss on foreclosure of $1,008,885. The value of the 56,000,000 shares was
determined using the market price of the shares on the date they were granted as
collateral.
As a result of these factors, we reported a net loss of $5,277,784 or $(.03) per
share for the year ended December 31, 2004 as compared to a net loss of
$1,355,037 or ($.04) per share for the year ended December 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, we had a stockholders' deficit of $89,138. 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, by the sale of convertible
debentures of $750,000 through November 2003, and net proceeds from loan of
$752,600 through May 2004. We also sold 53,000,000 shares of our common stock in
a private placement offering in September 2004 for $132,500. We collected
$30,000 of this amount and are attempting to collect the remaining $102,500. At
December 31, 2004, we have provided an allowance for $102,500 against this stock
subscription receivable. 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
and debentures. During the three months ended June 30, 2004, we repaid $750,000
of our outstanding convertible debentures. Our president also advanced to us
$40,000 during the fourth quarter of 2004. The cash balance at December 31, 2004
was $19,852 and we will have to minimize operations until we receive additional
cash flows from our businesses, complete additional financing, or find a merger
candidate. On February 28, 2005, we entered into a binding letter of intent to
acquire 100% Aventura Networks, LLC in exchange for shares of our common stock.
Aventura is a leading Voice Over Internet Protocol ("VOIP"') telephone service
provider currently conducting business primarily in the wholesale market. There
is a $50,000 termination fee payable by the party that terminates the letter of
intent.
We have no other material commitments for capital expenditures. Other than
several thousand dollars to be generated from our advertising sales from the
broadcast of our initial program on the Radio X Network, debenture proceeds and
loan proceeds, we have no external sources of liquidity. Although we believe we
will have sufficient capital to fund our anticipated operations through the
middle of 2005, we are not currently generating meaningful revenues and, unless
we raise additional capital, we may not be able to continue operating beyond the
middle of 2005.
Net cash used in operations during the year ended December 31, 2004 was $161,627
and was substantially attributable to net loss of $5,277,784 offset primarily by
non-cash stock based expenses of $3,817,326, settlement expense of $144,527,
loss on foreclosure of loan payable of $1,008,885, non-cash debt discount
amortization of $3,062, amortization of deferred debt issuance costs of $92,400,
and net changes in operating assets and liabilities of ($62,543). In the
comparable period of 2003, we had net cash used in operations of $252,630
primarily relating to the net loss of $1,355,037 primarily offset by an
impairment loss of $20,910, stock-based consulting expense of $127,000, non-cash
debt discount amortization of $13,211, amortization of deferred debt issuance
costs of $13,000, a non-cash impairment loss of $20,910, non-cash interest
expense of beneficial conversion feature of $246,500 and net changes in
operating assets and liabilities of $633,591.
Net cash provided by financing activities for the year ended December 31, 2004
was $79,600 as compared to net cash provided by financing activities of $272,758
for the year ended December 31, 2003. During the year ended December 31, 2004,
we received proceeds from loans of $824,000, received $47,000 from a stockholder
advance, paid debt issuance costs of $71,400 and repaid debenture holders
$750,000. In the comparable period of 2003, we received a loan from a joint
venture partner of $50,000, received $226,000 from a convertible debenture and
repayment of an officer loan of $3,242.
For the fiscal year ended December 31, 2004, our auditors have issued a going
concern opinion in connection with their audit of the Company's financial
statements. These conditions raise substantial doubt about our ability to
continue as a going concern if sufficient additional funding is not acquired or
alternative sources of capital developed to meet our working capital needs.
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 1 to the
audited financial statements included elsewhere in this Annual Report on Form
10-K. 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, 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:
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 produce episodic television series and generate 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. We account for stock issued to non-employees in accordance with SFAS
123 and related interpretations.
OFF BALANCE SHEET ARRANGEMENTS
There are no off balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
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 13, 2005.
Name Age Position
------------------- --- ------------------------
Peter Klamka 37 Chairman, Director
T. Joseph Coleman 54 Chief Executive Officer,
President and Director
William H. Coleman 45 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
Peter Klamka (Chairman) has been a Director of the Company since September 2004.
Mr. Klamka is the Chairman and CEO of Legend Mobile, Inc (OTCBB:LGMB.OB) since
its inception in May 1997. Through its subsidiary Legend Credit, Inc, Legend
Mobile develops and markets stored value cards. Mr. Klamka has been active in
creating, marketing and developing various licensed products. He also has bought
and sold several businesses, including Sunset Interactive Network, Inc, which
was sold to American Sports history, Inc. (OTCBB:AMSH), and General Display
Services, Inc, which was sold to Daktronics, Inc (NASDAQ:DAKT). In 1994 Mr.
Klamka founded Wilshire Fragrance and served as its CEO. Mr. Klamka received his
Bachelor of Arts degree from the University of Michigan.
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
2004 and 2003.
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION
Name and Principal Year Salary ($) Bonus($) All Other
Positions Compensations ($)
---------------------- ---- ---------- -------- -----------------
T. Joseph Coleman 2004 120,000(1) 30,000 2,837 (2)
Chief Executive Officer 2003 120,000(1) 30,000 15,261 (2)
(1) Mr. Coleman deferred his 2004 and 2003 salary and or bonus due under his
employment agreement with the Company dated July 16, 2001 and amended March 14,
2004. During 2004, Mr. Coleman and an affiliate were issued 76,000,000 shares of
restricted common stock in full satisfaction of the 2003 and 2004 obligations
and any future obligations under his employment agreement.
(2) The Company. paid certain auto and insurance expense for Mr. Coleman in 2004
and 2003.
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 exchanged his salary and
bonus for the full term of his contract. The Company has issued Mr. Coleman an
aggregate of 45,000,000 shares of restricted common stock to satisfy the
contract obligations. 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 March 2004, we extended Mr. Coleman's employment
agreement to expire on July 15, 2007.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 13, 2005
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 33,850,000 (2) 10.45%
1440 Coral Ridge Dr. CEO
#140
Coral Springs,
FL 33071
William H. Coleman Director, Secretary 33,850,000 (2) 10.45%
45 Whitewood Circle
Norwood, MA 02002
Peter Klamka 250,000 .00078%
5670 Wilshire Blvd.
Suite 1300
Los Angeles, CA 90036
Total securities held by officers 34,100,000 10.45%
and directors as a group (3 people):
(1) Based upon 323,657,813 shares outstanding as of April 13, 2005.
(2) Constitutes all shares held in the Coleman Family Trust. William Coleman is
the Trustee of the Trust. William Coleman is the brother of 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.
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.
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 2004 and 2003 and reviews of the consolidated
financial statements included in the Company's Forms 10-KSB for fiscal 2004 and
2003 were approximately $17,000 and $14,000, respectively.
AUDIT-RELATED FEES
For fiscal 2004 and 2003, the Company's auditors billed for service related to
an SB-2 registration filing with the SEC in the amount of $0 and $2,000,
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 2004
and 2003, 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 2004 and 2003 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 13, 2005
(Principal Executive Officer),
Chief Financial Officer and
Principal Accounting Officer
/s/ William H. Coleman Director and Secretary April 13, 2005
15
SUN NETWORK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
Contents
Page
Report of Independent Registered Public Accounting Firm F-1
Financial Statements:
Consolidated Balance Sheet as of December 31, 2004 F-2
Consolidated Statements of Operations for the years ended
December 31, 2004 and 2003 F-3
Consolidated Statement of Changes in Stockholders' Deficit for
the years ended December 31, 2004 and 2003 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2004 and 2003 F-5
Notes to Consolidated Financial Statements F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and the related
consolidated statements of operations, changes in stockholders' deficit and cash
flows for the years ended December 31, 2004 and 2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and the
consolidated results of its operations and its cash flows for the years ended
December 31, 2004 and 2003, 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 14 to
the consolidated financial statements, the Company has accumulated deficit of
$8,446,146 and a working capital deficit of $51,011 at December 31, 2004, net
losses in 2004 of $5,277,784, cash used in operations in 2004 of $161,627, and
nominal revenues. These factors and the need for additional cash to fund
operations over the next year raise substantial doubt about its ability to
continue as a going concern. Management's Plan in regards to these matters is
also described in Note 14. 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 9, 2005
F-1
Sun Network Group, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31,
2004
--------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 19,852
--------------
TOTAL CURRENT ASSETS $ 19,852
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 23,863
Due to stockholder 47,000
--------------
TOTAL CURRENT LIABILITIES 70,863
--------------
MINORITY INTEREST 38,127
COMMITMENTS AND CONTINGENCIES (Note 7) -
STOCKHOLDERS' DEFICIT
Common stock; $0.001 par value; 5,000,000,000 shares
authorized; 323,657,813 shares issued and outstanding 323,658
Additional paid-in capital 8,180,375
Accumulated deficit (8,446,146)
Deferred consulting (147,025)
--------------
TOTAL STOCKHOLDERS' DEFICIT (89,138)
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 19,852
==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
Sun Network Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended
----------------------------
December 31, December 31,
2004 2003
------------- ------------
REVENUES $ 8,090 $ 42,398
OPERATING EXPENSES
Compensation - officer 1,547,708 153,486
Amortization - 10,192
Bad debt 10,000 6,600
Consulting 2,209,725 162,177
Debenture penalties 30,000 485,245
Debt issue cost amortization 92,400 13,000
Impairment loss - 20,910
Professional fees 33,603 74,387
Other selling, general and administrative 159,676 135,799
------------- -------------
TOTAL OPERATING EXPENSES 4,083,112 1,061,796
------------- -------------
LOSS FROM OPERATIONS (4,075,022) (1,019,398)
------------- -------------
OTHER INCOME (EXPENSE)
Settlement expense (144,527) (36,500)
Interest expense (58,812) (329,965)
Loss on foreclosure of loan payable (1,008,885) -
Recovery of bad debt 9,462 19,129
Interest income - 6,600
------------- -------------
TOTAL OTHER INCOME (EXPENSE) (1,202,762) (340,736)
------------- -------------
LOSS BEFORE MINORITY INTEREST (5,277,784) (1,360,134)
MINORITY INTEREST IN SUBSIDIARY LOSS - 5,097
------------- -------------
NET LOSS $ (5,277,784) $ (1,355,037)
============= =============
------------- -------------
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.03) $ (0.04)
============= =============
WEIGHTED AVERAGE COMMON EQUIVALENT
SHARES OUTSTANDING - BASIC AND DILUTED 172,367,734 30,210,585
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
Sun Network Group, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Deficit
For the Years Ended December 31, 2004 and 2003
Common Stock Common Stock Issuable Additional
----------------------- ----------------------- Paid-in Accumulated Deferred
Shares Amount Shares Amount Capital Deficit Consulting Total
----------- ---------- ----------- ---------- ------------ ------------ ------------ -----------
Balance, December 31, 2002 22,448,487 $ 22,448 5,000,000 $ 5,000 $ 1,290,041 $ (1,813,325) $ - $ (495,836)
Common stock issued in
exchange of debt 8,898,328 8,898 16,107 25,005
Common stock issued for
settlement 1,000,000 1,000 35,500 36,500
Common stock issued for
services rendered 18,000,000 18,000 245,000 (136,000) 127,000
Warrant issued with
convertible debentures 3,500 3,500
Beneficial conversion value
of convertible debenture 246,500 246,500
Issuance of previously
issuable common stock 5,000,000 5,000 (5,000,000) (5,000) -
Net loss (1,355,037) (1,355,037)
----------- ---------- ----------- --------- ------------ ------------ ------------ -----------
Balance, December 31, 2003 55,346,815 55,346 - - 1,836,648 (3,168,362) (136,000) (1,412,368)
Common stock issued for
cash and services 53,000,000 53,000 371,000 (291,500) 132,500
Common stock issued in
exchange of debt 6,260,998 6,261 55,927 62,188
Common stock issued for
settlement 20,000,000 20,000 700,000 720,000
Common stock issued for
services rendered 133,050,000 133,051 3,403,800 (758,000) 2,778,851
Common stock issued upon
foreclosure on loans
payable 56,000,000 56,000 1,813,000 1,869,000
Amortization of deferred
consulting 1,038,475 1,038,475
Net loss (5,277,784) (5,277,784)
----------- ---------- ----------- --------- ------------ ------------ ------------ -----------
Balance, December 31, 2004 323,657,813 $ 323,658 - $ - $ 8,180,375 $ (8,446,146) $ (147,025) $ (89,138)
=========== ========== =========== ========= ============ ============ ============ ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
Sun Network Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended
---------------------------------
December 31, December 31,
2004 2003
-------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,277,784) $ (1,355,037)
Adjustment to reconcile net loss to net cash
used in operating activities:
Amortization expense - 10,192
Bad debt expense 10,000 6,600
Impairment loss - 20,910
Interest expense of beneficial conversion feature - 246,500
Write off of stock subscription receivable 102,500 -
Amortization of deferred debt issue costs 92,400 13,000
Amortization of debt discounts to interest expense 3,062 13,211
Stock based consulting and compensation expense 3,817,326 127,000
Settlement expense 144,527 36,500
Loss on foreclosure of loan payable 1,008,885 -
Allocation of loss to minority interest - (5,097)
Changes in:
Interest receivable (10,000) (6,600)
Prepaids 34,000 (34,000)
Accounts payable 17,952 (11,050)
Accrued interest 53,997 70,254
Accrued expenses - -
Accrued penalties 30,000 485,245
Accrued compensation, related party (188,492) 129,742
-------------- ----------------
Net cash used in operating activities (161,627) (252,630)
-------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock 30,000 -
Proceeds from loans payable 824,000 -
Proceeds from convertible debenture - 226,000
Payment of debt issue costs (71,400) -
Payment on convertible debenture (750,000) -
Proceeds from stockholder advance 47,000 -
Proceeds from loan from joint venture partner - 50,000
Proceeds from (payments on) loans from officer - (3,242)
-------------- ----------------
Net cash provided by financing activities 79,600 272,758
-------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (82,027) 20,128
CASH AND CASH EQUIVALENTS, Beginning of year 101,879 81,751
-------------- ----------------
CASH AND CASH EQUIVALENTS, End of year $ 19,852 $ 101,879
============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ - $ -
============== ================
Income taxes paid $ - $ -
============== ================
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for debentures payable $ 62,188 $ 25,005
============== ================
Debt issue costs deferred in connection with
convertible debenture $ 49,000 $ 24,000
============== ================
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
Sun Network Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004 and 2003
NOTE 1 NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
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.
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.
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.
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.
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.
F-6
Sun Network Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004 and 2003
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.
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.
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.
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.
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.
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.
F-7
Sun Network Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004 and 2003
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.
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.
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.
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.
F-8
Sun Network Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004 and 2003
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.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, entitled Inventory Costs -- An
Amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No.
43, Chapter 4, entitled Inventory Pricing [June 1953], to clarify the accounting
for "abnormal amounts" of idle facility expense, freight, handling costs, and
wasted material [spoilage]. Before revision by SFAS No. 151, the guidance that
existed in ARB No. 43 stipulated that these type items may be "so abnormal" that
the appropriate accounting treatment would be to expense these costs as incurred
[i.e., these costs would be current-period charges]. SFAS No. 151 requires that
these type items be recognized as current-period charges without regard to
whether the "so abnormal" criterion has been met. Additionally, SFAS No. 151
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
adoption of SFAS 151 did not impact the consolidated financial statements.
In December 2004, the FASB issued SFAS No. 152, entitled Accounting for Real
Estate Time-Sharing Transactions -- An Amendment of FASB Statements No. 66 and
67. SFAS No. 152 amends SFAS No. 66 to reference the financial accounting and
reporting guidance for real estate time-sharing transactions that is provided in
AICPA Statement of Position 04-2. SFAS No. 152 also amends SFAS No. 67 to state
that the guidance for (a) incidental operations and (b) costs incurred to sell
real estate projects does not apply to real estate time-sharing transactions.
The accounting for those operations and costs is subject to the guidance of SOP
04-2. This statement is effective for financial statements for fiscal years
beginning after June 15, 2005. The adoption of SFAS 152 did not impact the
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, entitled Exchanges of
Nonmonetary Assets -- An Amendment of APB Opinion No.29. SFAS No. 153 amends
Opinion 29 to eliminate the exception for nonmonetary exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The adoption of SFAS 153 did
not impact the consolidated financial statements.
F-9
Sun Network Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004 and 2003
In December 2004, the FASB issued SFAS No. 123 (Revised), entitled Share-Based
Payment. This revised Statement eliminates the alternative to use APB Opinion
No. 25's intrinsic value method of accounting that was provided in SFAS No. 123
as originally issued. Under Opinion 25, issuing stock options to employees
generally resulted in recognition of no compensation cost. This Statement
requires entities to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of
those awards. For public companies that file as a small business issuer, this
Statement is effective as of the beginning of the first interim or annual
reporting period that begins after December 15, 2005. The adoption of SFAS 123
(Revised) will have an impact the consolidated financial statements if the
Company issues stock options to the employees in the future.
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, 2004 and 2003, there
were 0 and 750,000 common stock warrants outstanding, respectively, 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.
Upon formation of the joint venture, 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 or $14,910
due at December 31, 2004. Accordingly, the $24,372 was charged to bad debt
expense in 2002 and an additional $10,000 charged to bad debt expense in 2004
related to an advance made in the 4th quarter of 2004 and has been fully
reserved as an allowance at December 31, 2004.
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 discontinued this accrual in 2004. The
convertible note receivable at December 31, 2004 was as follows:
Convertible note receivable $10,000
Accrued interest receivable 1,324
Allowance for loan loss (11,324)
--------
$ -
========
F-10
Sun Network Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004 and 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. The Company has allocated the $50,000 investment
differential 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, amortization expense amounted to $10,192.
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
Prior to fiscal 2004, the Company had received $750,000 pursuant to a Securities
Purchase Agreement to issue and sell 12% convertible debentures. The holders of
this debt had 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 of
the lesser of (a) 50% of the market value of the common stock as defined in the
debenture or (b) $0.15. Interest was payable either quarterly or at the
conversion date at the option of the holder.
Since a registration statement relating to the debentures was not declared
effective within 90 days of June 27, 2002, the Company was 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 had previously recorded in
2003 $130,849 in penalty fee expenses resulting in a total accrued penalty
related to this penalty of $130,849 through the date of redemption (March 8,
2004).
Under the debenture, the Company incurred 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 was computed as 3% of the outstanding
debenture balance per month, which computed to $15,000 per month. The penalty
expense from January 1, 2004 to March 8, 2004 (date of redemption) was $20,000.
The accrued penalty through March 8, 2004 (date of redemption agreement)
amounted to $236,137. 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 had been accrued
through the redemption date (March 7, 2004).
F-11
Sun Network Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004 and 2003
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 expense was computed under the terms of the debenture as $179,492 and
was charged to operations in fiscal 2003 from the Default Dates through December
31, 2003 and included in accrued penalty.
In addition, interest accrued at the default rate of 15% from the default dates.
During December 2003 to the date of redemption (March 8, 2004), $87,194 of
debentures were converted into 15,159,326 shares of common stock (see note 4).
Additionally, from March 2004 to May 2004, the Company repaid debenture holders
$750,000.
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 delivered 20,000,000 shares of common
stock to the debenture holders as full satisfaction of all accrued liabilities
under the debenture agreements. In May 2004, the Company paid funds due to the
debenture holders in full satisfaction of all liabilities. In connection with
the redemption agreement, the Company paid the debenture holders cash of
$750,000, 20,000,000 shares of common stock valued at $720,000 or $.036 per
share, and $87,194 of common shares upon conversion of the debentures. These
were in full satisfaction of accrued penalties and liquidating damages of
$546,478, accrued interest of $116,188, and debenture liabilities of $750,000
resulting in an aggregate settlement expense of $144,527.
NOTE 6 - LOANS PAYABLE
From March to April, 2004, the Company entered into 2-year loan agreements and
borrowed an aggregate of $824,000. 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, 2004. 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 to 10%
of the amount borrowed which is deducted directly from the proceeds by the
lender. These fees are recorded debt discount and amortized over the loan term.
Due to the foreclosure (see below) the entire unamortized portion of these debt
discounts were expensed during the year ended December 31, 2004. The loans are
collateralized by 56,000,000 shares of the Company's common stock. 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. The Company defaulted on the
$824,000 loans payable in June 2004 due to non-payment of required interest
payments. In November 2004, the lender took possession of 56,000,000 collateral
common shares. As a result of this foreclosure by the lender, the Company
recorded the value of the 56,000,000 shares of $1,869,000 and removed the loan
payable and accrued interest balances of $824,000 and $36,115, respectively,
resulting in a loss on foreclosure of $1,008,885. The value of the 56,000,000
shares was determined using the market price of the shares on the date they were
granted as collateral.
NOTE 7 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 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 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. The Company had 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. This agreement was terminated in 2004
and the $34,000 that was recorded as a prepaid expense was expensed to
production fees.
F-12
Sun Network Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004 and 2003
The Company has an employment agreement with its president where he receives
$120,000 in annual salary, $30,000 annual guaranteed bonus, a 10% incentive
bonus based on Company financial criteria, and certain fringe benefits and
expense reimbursements. The agreement expires July 2005. In May 2004, the
president was issued 10,000,000 shares of the Company's common stock for all
accrued and remaining future compensation under this agreement.
The Company has free use of office space for its sole employee, the President.
The fair value of the office in 2004 and 2003 was nominal and therefore, not
recorded.
NOTE 8 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 discontinued this accrual in 2004 and has reserved
100% of this note and related accrued interest through December 31, 2004 as
follows:
Notes receivable $ 56,000
Accrued interest receivable 8,355
Allowance for loan loss (64,355)
---------
$ -
=========
NOTE 9 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. Another
$10,000 was invested in the subsidiary in late 2004.
F-13
Sun Network Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004 and 2003
NOTE 10 STOCKHOLDERS' DEFICIENCY
PREFERRED STOCK
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 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-14
Sun Network Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004 and 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.
During the three months ended March 31, 2004, in connection with the conversion
of debentures payable, the Company issued 6,260,998 shares of common stock upon
the conversion of debentures payable amounting to $62,188.
In connection with the redemption agreement on March 8, 2004, the Company issued
20,000,000 shares of common stock to the debenture holders as full satisfaction
of liabilities under the debenture agreements. These shares were valued on the
date of the redemption agreement at fair market value based on the quoted
trading price of the stock.
During the three months ended March 31, 2004, the Company entered into
agreements with third parties for management consulting, business advisory,
shareholder information and public relations services. In connection with these
agreements, the Company issued such consultants 36,800,000 shares of its common
stock for these services. The Company valued these shares at the quoted trading
price on the date of the agreement at prices ranging from $0.026 to $0.043 per
common share resulting in a value of $1,378,400, which will be amortized over
the one-year contract term.
During the three months ended June 30, 2004, the Company entered into agreements
with third parties for management consulting, business advisory, shareholder
information and public relations services. In connection with these agreements,
the Company issued such consultants 13,500,000 shares of its common stock for
these services. The Company valued these shares at the quoted trading price on
the date of the agreement at prices ranging from $0.027 to $0.036 per common
share resulting in a value of $420,000, which will be amortized over the
contract terms.
In May 2004, the Company issued 10,000,000 shares of common stock to an officer
of the Company for all accrued compensation through June 30, 2004 and future
compensation under the agreement. The Company valued these shares at the quoted
trading price on the date of grant of $0.03 per common share, and reduced
accrued compensation by $242,792 and recorded non-cash compensation expense of
$57,208.
During the three months ended September 30, 2004, the Company issued shares to
third parties and the Company's CEO for past management consulting, business
advisory, shareholder information and public relations services. In connection
with these agreements, the Company issued such consultants and employee
72,250,000 shares of its common stock for these services. The Company's CEO
received 66,000,000 of these shares. The Company valued these shares at the
quoted trading price on the date of the agreement at prices ranging from $0.007
to $0.025 per common share, and recorded consulting expense of $1,434,950 with
$1,410,500 charged to compensation - officer and $24,450 charged to consulting.
In September 2004, the Company entered into a private stock placement and
consulting agreement whereby the Company agreed to sell 53,000,000 shares of its
common stock for $0.0025 per share or $132,500. The services have been valued at
the difference between the quoted trading price on the date prior to the
agreement date and the price paid per shares or $0.0055 per share. The $291,500
allocated to services will be amortized over the two year term of the contract.
The Company received $30,000 of the $132,500 it was to receive from the sale of
these shares. The Company is trying to collect the remaining $102,500, but has
been unsuccessful and as of December 31, 2004 has provided a 100% reserve
against this receivable. In addition, since the consultant is not performing
under this agreement, the $291,500 allocated to services has been expensed
during the year ended December 31, 2004.
F-15
Sun Network Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004 and 2003
In November 2004, the Company issued 500,000 shares of common stock to a
consulting for services rendered. The Company valued these shares at the quoted
trading price on the date of grant of $0.007 per common share resulting in a
value of $3,500 which has been expensed as consulting fees.
NOTE 11 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, 2004 and 2003 (computed by applying the U.S. Federal
Corporate tax rate of 34% to income before taxes) as follows:
2004 2003
---------------- ---------------
Computed "expected" tax benefit $ (1,794,447) $ (460,713)
State income taxes (174,167) (64,625)
Change in tax rate estimate - (91,266)
Stock for services and/or settlement 1,709,615 55,590
Other - 13,910
Change in deferred tax asset valuation allowance 258,999 547,104
---------------- ---------------
$ - $ -
================ ===============
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31, 2004 are as follows:
Deferred tax assets:
Net operating loss carryforward $ 1,184,409
Loan loss allowance 75,146
------------
Total deferred tax assets 1,259,555
Less valuation allowance (1,259,555)
------------
Net deferred tax asset $ -
============
At December 31, 2004, the Company had useable net operating loss carryforwards
of approximately $3,000,000 for income tax purposes, available to offset future
taxable income expiring in 2018.
The valuation allowance at January 1, 2004 was $1,000,556. The net change in the
valuation allowance during the year ended December 31, 2004 was an increase of
$258,999.
F-16
NOTE 12 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, 2004
Network TV Network Radio Total
---------------- ---------------- ----------------
Assets $ 19,852 $ - $ 19,852
================ ================ ================
Revenue $ - $ 8,090 $ 8,090
Other operating expenses (4,055,560) (27,552) (4,083,112)
Interest expense (58,812) - (58,812)
Settlement expense (144,527) - (144,527)
Recovery of bad debts - 9,462 9,462
Loss on foreclosure on loan payable (1,008,885) - (1,008,885)
---------------- ---------------- ----------------
Segment loss $ (5,267,784) $ (10,000) $ (5,277,784)
================ ================ ================
December 31, 2003
Network TV Network Radio Total
---------------- ---------------- ----------------
Assets $ 156,879 $ $ 156,879
================ ================ ================
Revenue $ 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 debts - 19,129 19,129
Minority interest in subsidiary losses - 5,097 5,097
---------------- ---------------- ----------------
Segment loss $ (1,349,942) $ (5,095) $ (1,355,037)
================ ================ ================
NOTE 13 - CONCENTRATIONS
The Company maintains its cash in bank deposit accounts, which, at times, exceed
federally insured limits. At December 31, 2004, the Company had $19,852 in
United States bank deposits, which do not exceed federally insured limits. The
Company has not experienced any losses in such accounts through December 31,
2004.
Revenues of $0 and $30,000 were derived from one customer in 2004 and 2003,
respectively.
F-17
NOTE 14 GOING CONCERN
As reflected in the accompanying consolidated financial statements, the Company
had an accumulated deficit of $8,446,146 and a working capital deficit of
$51,011 at December 31, 2004, net losses in 2004 of $5,277,784, cash used in
operations in 2004 of $161,627 and minimal revenues.
Management expects operations to generate negative cash flow at least through
December 2005 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. 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 Company is in the process of electing to be regulated as a business
development company under the Investment Company Act of 1940. The Company filed
in March 2005, Form 1-E under the Securities and Exchange Act notifying the
Securities and Exchange Commission of the intent to sell, under Regulation E
promulgated under the Securities Act of 1933, up to $5 million of the Company's
common stock. Because the Company expects to be regulated as a business
development company, the Company believes that is has access to sufficient cash
and capital resources to operate and grow its business for the next 12 months.
Specifically, the Company intends to sell common stock permitted under the
exemption from registration offered by Regulation E of the Securities
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 15 SUBSEQUENT EVENTS
In March 2005, the Company filed Form 1-E under the Securities and Exchange Act
notifying the Securities and Exchange Commission of the intent to sell, under
Regulation E promulgated under the Securities Act of 1933, up to $5 million of
the Company's common stock.
On February 28, 2005 the Company entered into a binding letter of intent to
acquire 100% Aventura Networks, LLC in exchange for shares of the Company's
common stock. Aventura is a leading Voice Over Internet Protocol ("VOIP"')
telephone service provider currently conducting business primarily in the
wholesale market. There is a $50,000 termination fee payable by the party that
terminates the letter of intent.
F-18