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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____________ to
_____________
Commission file number 0-3851
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SUNGROUP, INC.
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(Exact name of small business issuer as specified in its charter)
Tennessee 62-0790469
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9102 North Meridian Street, Suite 545, Indianapolis,
Indiana 46260
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(Address of principal executive offices)
(317) 844-7425
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(Issuer's telephone number)
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant issuer has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by a court.
Yes No N/A
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Stock, No Par Value 6,543,700 Common Shares
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(Title of class) (Shares outstanding as of June 30, 1996)
Transitional Small Business Disclosure Format (check one): Yes No X
Page 1 of 13
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SUNGROUP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheet 3
June 30, 1996
Consolidated Statement of Operations 4
Three Months Ended June 30, 1996 and 1995
Consolidated Statement of Operations 5
Six Months Ended June 30, 1996 and 1995
Consolidated Statement of Cash Flow 6
Six Months Ended June 30, 1996 and 1995
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 3. Defaults Upon Senior Securities 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SUNGROUP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, 1996
(In Thousands)
--------------
Current Assets
<S> <C>
Cash $341
Deferred Taxes 1,289
Accounts Receivable (net) 1,403
Prepaid and Other 56
--
Total Current Assets 3,089
Property And Equipment (Net) 1,653
Other Assets
Intangible Assets (net) 7,180
Other Assets 67
--
Total Other Assets 7,247
Total Assets $11,989
=======
Current Liabilities
Accounts Payable & Accrued
Expenses 497
Accrued Interest 2,828
Current Maturates of LT Debt 8,710
-----
Total Current Liabilities 12,035
Long Term Debt 9,541
Deferred Income Taxes 92
Stockholders' Equity
Common Stock - $1 par value,
authorized $10 million 3,771
Additional Paid in Capital 5,969
Accumulated Deficit (19,419)
--------
Total Stockholders' Equity (9,679)
Total Liability &
Stockholders' Equity $11,989
=======
</TABLE>
See "Notes to Consolidated Financial Statements"
3
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SUNGROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1996 1995
------------------
(In Thousands*)
<S> <C> <C>
Gross Revenue $2,625 $2,426
Agency Commission (280) (193)
----- -----
Net Revenue 2,345 2,223
Technical & Programming Expense 696 575
Selling and G & A Expense 1,395 1,452
----- -----
Total Operating Expense 2,091 2,027
Income From Operations 254 206
Interest Expense (71) (156)
Gain (Loss) on Disposal of Assets (5) (5)
Other 1 1
- -
Total Other Income (Expense) (75) (160)
Income Before Income Taxes and Extraordinary Item 179 46
Income Taxes 28 32
-- --
Income Before Extraordinary Item 151 14
Extraordinary Item 200 0
Net Income 351 14
Income Per Common Share
Income Before Extraordinary Item .01 0
Extraordinary Item .02 0
Income Per Share .03 0
--- -
Weighted Average Number Of
Common Shares Outstanding 13,174 13,174
Dividends Per Share 0 0
</TABLE>
See "Notes to Consolidated Financial Statements"
*Except for "Per Common Share" amounts
4
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SUNGROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
----------------------
(In Thousands*)
<S> <C> <C>
Gross Revenue $4,575 $4,403
Agency Commission (489) (396)
----- -----
Net Revenue 4,086 4,007
Technical & Programming Expense 1,208 1,031
Selling and G & A Expense 2,721 2,785
----- -----
Total Operating Expense 3,929 3,816
Income From Operations 157 191
Interest Expense (142) (305)
Loss on Disposal of Assets (5) (4)
Other 2 3
- -
Total Other Income (Expense) (145) (306)
Income (Loss) Before Income Taxes and
Extraordinary Item 12 (115)
Income Taxes 28 32
-- --
Loss Before Extraordinary Item (16) (147)
Extraordinary Items 1,342 180
----- ---
Net Income (Loss) 1,326 33
Income (Loss) Per Common Share
Loss Before Extraordinary Item 0.00 (0.01)
Extraordinary Item 0.10 0.01
---- ----
Income (Loss) Per Share 0.10 0.00
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 13,174 13,174
DIVIDENDS PER SHARE 0 0
</TABLE>
See "Notes to Consolidated Financial Statements"
*Except for "Per Common Share" amounts
5
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SUNGROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
------------------
(In Thousands)
<S> <C> <C>
Operating Activities
Net Income (Loss) $1,326 $33
Reconciliation Of Net Income (Loss)
To Net Cash Provided By Operating Activities
Depreciation And Amortization 373 369
(Gain) Loss On Disposal Of Assets 5 4
Net (Income) Loss From Barter Transactions 41 43
Extraordinary Items (1,142) (180)
Changes In:
Accounts Receivable (119) (224)
Prepaid Expenses And Other Current Assets 37 103
Accounts Payable And Accrued Expense 24 58
Interest Payable 0 176
- ---
Net Cash Provided by Operating Activities 545 382
INVESTMENT ACTIVITIES
Purchase of Property and Equipment (56) (26)
Proceeds from Sale of Equipment 0 1
Other (50) (2)
---- ---
Net Cash Provided (used) by Investing Activities (106) (27)
FINANCING ACTIVITIES:
Repayments of Long-term Debt (433) (438)
----- -----
Net Cash Used by Financing Activities (433) (438)
INCREASE IN CASH 6 (83)
Cash, Beginning Of Year 335 363
Cash, End Of Quarter 341 280
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest Paid 137 123
NON-CASH TRANSACTION:
Property and Equipment Acquired by Barter Transaction 10 21
Accrued Interest Added to New Notes in Restructuring 6 6
</TABLE>
See "Notes to Consolidated Financial Statements"
6
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SUNGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1996
(1) Consolidated Condensed Financial Statements. The accompanying unaudited
financial statements have been prepared in accordance with the
instructions to Form 10-QSB and do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for fair presentation have been included. While management believes that
the disclosures presented are adequate to make the information not
misleading, it is suggested that these financial statements be read in
conjunction with the financial statements and the related notes included
in the Corporation's latest report on Form 10-KSB for the fiscal year
ending December 31, 1995. Operating results for the interim period are
not necessarily indicative of the results to be expected for the entire
year.
(2) Income Taxes. Income taxes in the consolidated statement of operations
include deferred income tax provisions for all significant temporary
differences in recognizing income and expenses for financial reporting and
income tax purposes. The Corporation files consolidated income tax
returns.
At June 30, 1996, the Corporation had approximately $13 million of net
operating loss carry forwards, which expire at various times in the years
2002 through 2010.
At June 30, 1996, the Corporation had a cumulative net deferred tax asset.
This asset has been offset by an evaluation allowance since management
believes it is more likely than not that, except for the reversals of
taxable temporary differences, the Corporation will not generate income to
utilize all of the net operating loss carry forwards. At June 30, 1996,
the Corporation had a recorded deferred tax asset of $1,288,621. This
asset is an allowance against tax expense to be generated by debt
forgiveness in 1996. In addition, the Corporation had deferred state
income tax expense of $92,348.
(3) Net Income Per Common Share. For 1995 and 1996, earnings per common and
common equivalent share were computed by dividing net income by the
weighted average number of shares of common stock and common stock
equivalents outstanding during the second quarter and year to date. The
Corporation s warrants have been considered the equivalent of common stock
and, as such, increase the number of common shares. The Corporation s
outstanding stock options, however, have not been added to the number of
common shares outstanding because the market price of the common stock
does not exceed the exercise price of the options. The increase in the
number of outstanding common shares was reduced by the number of common
shares that are assumed to have been purchased with the proceeds from the
exercise of such warrants; those purchases were assumed to have been made
at the average price of the common stock, which has been determined to be
$.1875.
7
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(4) On July 2, 1996, the Corporation consummated the sale of its radio station
in Pensacola, Florida to Southern Broadcasting of Pensacola, Florida. The
Corporation booked a gain of $645,729.66 on the sale of these assets. In
addition, the Corporation realized $2,959,678.06 in debt forgiveness as a
result of a settlement with the Federal Deposit Insurance Corporation, the
secured lender on the property. The Corporation had a deferred tax asset
reserved for this transaction in the amount of $1,288,621. This leaves
the Corporation with a net after tax gain for this transaction of
$2,316,786.72.
8
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Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Results of Operations
- ---------------------
For the three and six months ended June 30, 1996 and 1995, the
Corporation held and operated the same properties.
Gross revenues for the quarter were up 8.2% or $199,000. Gross revenues
for the six months were up $172,000 or 3.9%. These increases are attributable
to a significant increase in revenues at the Corporation s Bryan, Texas and
Pensacola, Florida properties. The improved performances at these stations
were a direct result of better audience ratings.
Agency commissions as a percentage of gross sales for the quarter were
10.7% in 1996 vs. 8% in 1995. Agency commissions as a percentage of gross
sales for the six months were 10.7% in 1996 and 9% in 1995. These increases
are attributable to a larger percentage of local/regional advertising sales
originated through agencies. Agencies historically charge a radio station a
15% commission.
Technical and programming expenses were up $121,000 or 21% for the
quarter and up $177,000 or 17% for the six months. These increases are a
result of higher programming salary cost, higher royalty/licensing fees as a
result of higher sales, Arbitron rating expense and station promotional cost.
Two of the Corporation's markets added subscriptions to Arbitron's rating
services during the later part of 1995. The Corporation did not incur expense
for these services in the first half of 1995; however, they are incurring
these expenses currently. In addition, the Corporation has increased its
expenditures in the area of contest and promotions for its radio stations. The
Corporation has increased these expenditures in an effort to increase and
maintain its current rating shares in its respective markets.
Selling and general administrative expenses were down $57,000 or 4% and
$64,000 or 2.3% for the three and six months, respectively. Increased sales
commission cost as a result of higher sales and general increases in office
operating expenses were offset by decreases in bonus compensation and
professional fees. Fewer of the Corporation's general managers hit their
monthly and quarterly bonus targets during the first half of 1996 as opposed
to 1995. Bonus compensation is generally tied to budgeted financial
performance which is typically higher than prior year s actual results. In
addition, the Corporation had fewer legal expenses during the first half of
1996 versus 1995.
Interest expense was down $85,000 or 54.5% and $163,000 or 53.4% for the
three and six months, respectively. The Corporation ceased accruing interest
on a total of $5.7 million in debt in 1996 versus 1995. On $2.2 million of
this debt, the Corporation has not had contact with the debt holders in over
seven years. Management believes that the likelihood of the Corporation
eventually being required to pay this interest is minimal (see Financial
Condition following). The remaining $3.5 million in debt is associated with a
note secured by one of the Corporation s properties. The Corporation entered
into a settlement agreement with the debt holder in which the Corporation
would sell the subject property and the debt holder would receive the sales
9
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proceeds in satisfaction of the debt. The sale and consummation of the
cancellation of this debt transpired on July 2, 1996. The Corporation s
overall interest expense compared to its debt level continues to remain low as
a result of a substantial amount of debt being restructured with an effective
interest rate of 0% for book purposes.
Changes in the loss on disposal of assets and other income was
negligible for the quarter and six months ended June 30, 1996.
The Corporation recorded $1,142,000 in gains from debt extinguishment
during the first half of 1996. This gain was attributable to the Corporation
writing off seven notes with unpaid principal balance of approximately
$755,000 and unpaid interest of $387,000. Payments on these notes became due
in January 1990, and in February of 1990, the Corporation was notified of its
default for non-payment of these notes and demand for payment was made. The
holders of these notes have made no additional collection efforts and the
statute of limitations with respect of the collection of these notes expired
in the first quarter of 1996. In 1995, the Corporation recorded a gain of
$180,000 from debt extinguishment of other note amounts.
During the second quarter of 1996, the Corporation received a cash
payment in the amount of $200,000. This payment was made in accordance with
an agreement with Service Broadcasting in which the Corporation agreed to move
the transmitter site for one of its radio stations to a new location selected
by Service Broadcasting. In addition to the cash payment, the Corporation
anticipates receiving real and personal property of approximately $675,000
from Service Broadcasting sometime during the second half of 1996.
Financial Condition
- -------------------
The Corporation's principal source of funds is cash flow provided by the
operation of the radio stations it holds as subsidiaries. Its primary needs
include working capital, capital expenditures to maintain property, plant and
equipment, and repayment of debt. During the first six months of 1996, the
Corporation was able to meet its primary cash need of debt service ($570,000)
with its station operating cash flow of approximately $566,000. During the
second quarter of 1996, the Corporation entered into an agreement to purchase
the construction permit for radio station KFXJ-FM in Abilene, Texas for a
total cost of $150,000. The Corporation has made a $50,000 escrow payment
towards this transaction. It is anticipated that the remaining $100,000 will
be due during the fourth quarter of 1996.
The Corporation has operated with a working capital deficiency for
several years. At June 30, 1996, the deficit was approximately $8,946,000.
This deficit compares to a deficit of approximately $11,397,000 at December
31, 1995. During the last several years, the Corporation has not generated
sufficient funds for working capital, debt repayment schedules as they
currently exist, and capital expenditures.
As described in Part II, Item 3, "Defaults Upon Senior Securities", the
Corporation continues to be in violation of certain provisions of its long-
term borrowings. The total principal value of all notes on which the
Corporation is currently in default is approximately $2,163,000. This note
has approximately $1.3 million in unpaid accrued interest. The Corporation is
10
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in default on this debt primarily because of non-payment of principal and
interest. The lender on this debt has not received payments from the
Corporation for over seven years and the note matured on April 28, 1990. Under
applicable state law, scheduled debt payments which are not made after a
specified period of time (statute of limitations) are not collectible by the
creditor. The statute of limitations on the above debt has expired, and
therefore, will eliminate this debt from the Corporation s books in the third
quarter.
During the first half of 1996, the Corporation treated as canceled seven
notes issued in July 1986, with unpaid principal of $755,000 and unpaid
interest of $387,000. The notes have been treated as canceled because they
have been in default for more than six years, and the Corporation has been
advised by counsel that the applicable statute of limitations for collection
of these notes is six years. Also, as of June 30, 1996, the Corporation had
ceased accruing interest on $5,663,000 of its notes. The holders of these
notes have not made an effort to collect on them for more than seven years. On
July 2, 1996, the Corporation settled in full a note representing $3,500,000
of this debt. See Note (4) to Consolidated Financial Statements. The
remaining $2.2 million in debt will be eliminated from the balance sheet
during the third quarter as the statute of limitations will expire with
regards to collection of this note.
The Corporation plans to deal with its weak financial condition by
continuing to develop a strong profit base with its current stations and
focusing on restructuring its secured and unsecured debts. The Corporation
continues to negotiate with some of its secured lenders in order to
restructure its debt obligations in such a way they can be paid out of the net
cash currently being generated by the Corporation s broadcast properties. As
noted above, subsequent to the end of the second quarter, the Corporation was
successful in completing the sale of certain assets in order to finalize its
settlement agreement with the Federal Deposit Insurance Corporation for
certain debts owed by the Corporation. These events have been further
described in the Corporation s report on Form 8-K as filed on July 12, 1996.
However, there is no certainty that additional creditors to whom the
Corporation is now in default will accept renegotiated or settlement terms in
the future. Failure to renegotiate successfully with these lenders will
severally hamper the Corporation s ability to continue as a going concern. The
Corporation will not generate sufficient funds in 1996 to service its current
operating expenses, capital needs, and debt obligations as they are currently
structured.
11
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PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
As previously reported in the Corporation's Form 10-KSB for the fiscal
year ended December 31, 1995, the Corporation had been in litigation with the
Federal Deposit Insurance Corporation, as Receiver for the National Bank of
Washington ( FDIC ), the senior creditor for the Corporation's Pensacola,
Florida property ( Pensacola Property ). On January 26, 1996, the Corporation
entered into an agreement with the FDIC to sell its Pensacola Property and
remit the proceeds to the FDIC for cancellation of all debt obligations owed
by the Corporation. On July 2, 1996, the sale of the assets and subsequent
payment to the FDIC was consummated. The FDIC has filed a release with the
courts for all previous judgments against the Corporation.
Item 3. Defaults Upon Senior Securities
Below is a table of the Corporation's debt instruments which were in
default at June 30, 1996, each of which is an amount greater than 5% of the
Corporation's total assets.
<TABLE>
<CAPTION>
REASON FOR PRINCIPAL INTEREST IN
HOLDER DEFAULT IN DEFAULT DEFAULT
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Note Payable Bank Note was due
(RTC Receivership) in full on April 28, 1990 $2,162,820 $1,263,000
Default Since 05/01/88
Note Payable Bank1 Non-payment of
(FDIC Receivership) principal and interest $3,500,000 $1,480,000
Default Since 06/30/90
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
- -------------------------
1 Assets sold July 2, 1996, and this debt was paid off or forgiven in full.
12
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SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
SUNGROUP, INC.
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(Registrant)
July 31, 1996 /S/ John W. Biddinger
- -------------------- -----------------------------------------------
Date John W. Biddinger
Principal Operating Officer
July 31, 1996 /S/ John E. Southwood, Jr.
- -------------------- -----------------------------------------------
Date John E. Southwood, Jr.
Principal Financial Officer
13
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERIM
FINANCIAL STATEMENTS FOR THE PERIOD ENDING JUNE 30, 1996, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 0 341
<SECURITIES> 0 0
<RECEIVABLES> 0 1,501
<ALLOWANCES> 0 (98)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 3,089
<PP&E> 0 4,634
<DEPRECIATION> 0 (2,981)
<TOTAL-ASSETS> 0 11,989
<CURRENT-LIABILITIES> 0 12,035
<BONDS> 0 9,541
0 0
0 0
<COMMON> 0 3,771
<OTHER-SE> 0 (13,450)
<TOTAL-LIABILITY-AND-EQUITY> 0 11,989
<SALES> 2,625 4,575
<TOTAL-REVENUES> 2,626 4,577
<CGS> 0 0
<TOTAL-COSTS> 2,154 3,982
<OTHER-EXPENSES> 182 367
<LOSS-PROVISION> 35 69
<INTEREST-EXPENSE> 71 142
<INCOME-PRETAX> 179 12
<INCOME-TAX> 28 28
<INCOME-CONTINUING> 151 (16)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 200 1,342
<CHANGES> 0 0
<NET-INCOME> 351 1,326
<EPS-PRIMARY> .055 .206
<EPS-DILUTED> .027 .101
</TABLE>
