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 MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT
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
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2201 Cantu Court, Suite 102A, Sarasota,
Florida 34232-6254
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(Address of principal executive offices)
941-377-6710
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(Issuer's telephone number)
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 [ ]
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
- ------------------------------------------------------------------------------
(Title of class) (Shares outstanding March 31, 1998)
Transitional small business disclosure format (check one): Yes [ ] No [X]
<PAGE>
SUNGROUP, INC.
FORM 10-QSB
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet
March 31, 1998 3
Consolidated Statement of Operations
Three Months Ended March 31, 1998 and 1997 4
Consolidated Statement of Cash Flow
Three Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statement
Three Months Ended March 31, 1998 and 1997 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Results of Operations 7
Financial Condition 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SUNGROUP, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
(IN THOUSANDS)
--------------
(UNAUDITED)
<S> <C>
CURRENT ASSETS
Cash $ 309
Accounts Receivable (net) 1,584
Deferred Income Taxes 1,499
Prepaid and Other 220
---------
TOTAL CURRENT ASSETS 3,612
PROPERTY AND EQUIPMENT (NET) 1,594
OTHER ASSETS
Intangible Assets (net) 5,645
Other Assets 47
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TOTAL OTHER ASSETS 5,692
TOTAL ASSETS $10,898
=========
CURRENT LIABILITIES
Accounts Payable & Accrued
Expenses 833
Accrued Interest 0
Current Maturities of LT Debt 9,032
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TOTAL CURRENT LIABILITIES $ 9,865
LONG TERM DEBT $ 606
DEFERRED INCOME TAXES $ 1,091
STOCKHOLDERS' EQUITY
Common Stock - $1 par value, authorized 10 million 3,770
Additional Paid in Capital 5,970
Accumulated Deficit (10,404)
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TOTAL STOCKHOLDERS' EQUITY (664)
TOTAL LIABILITY & STOCKHOLDERS' EQUITY $10,898
=========
</TABLE>
See "Notes to Consolidated Financial Statements"
3
<PAGE>
SUNGROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
----------------------------------
1998 1997
(UNAUDITED, IN THOUSANDS)*
----------------------------------
<S> <C> <C>
INCOME $ 2,203 $ 1,847
Agency Commission (204) (211)
---------- ----------
1,999 1,636
EXPENSES
Technical & Programming 495 402
Selling and Administrative 1,567 1,253
---------- ----------
2,062 1,655
LOSS FROM OPERATIONS (63) (19)
OTHER INCOME (EXPENSE)
Interest Expense (142) (57)
Gain (Loss) on Disposal of Assets 0 0
Other 7 2
---------- ----------
(135) (55)
LOSS BEFORE EXTRAORDINARY ITEM (198) (74)
Extraordinary Gain From Debt Extinguishment 0 0
NET INCOME (LOSS) BEFORE TAXES (198) (74)
INCOME TAXES 6 0
NET INCOME (LOSS) (192) (74)
LOSS PER COMMON SHARE
Loss Before Extraordinary Item (0.01) (0.01)
Extraordinary Item 0.00 0.00
---------- ----------
LOSS PER SHARE (0.01) (0.01)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 14,499 13,340
DIVIDENDS PER SHARE 0 0
</TABLE>
See "Notes to Consolidated Financial Statements"
*Except for "Per Common Share" and "Per Share" amounts
4
<PAGE>
SUNGROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
------------------------------
1998 1997
(UNAUDITED, IN THOUSANDS)*
------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss) $ (192) $ (74)
Reconciliation of Net Income (Loss)
to Net Cash provided by Operating Activities
Depreciation and Amortization 172 152
(Gain) Loss on Disposal of Assets 0 0
Net Income Loss From Barter Transactions (128) (6)
Extraordinary Gain From Debt Extinguishment
Changes In:
Accounts Receivable 176 51
Prepaid Expenses and Other Current Assets 54 (22)
Accounts Payable and Accrued Expense (123) 111
Interest Payable 0 (13)
-------- --------
Net Cash Provided by Operating Activities (41) 199
INVESTMENT ACTIVITIES
Purchase of Property and Equipment (66) (37)
Proceeds from Sale of Equipment 0 0
Other (3) 7
-------- --------
Net Cash Provided by Operating Activities (69) (30)
FINANCING ACTIVITIES
Repayment of Long-term Debt (1,301) (162)
-------- --------
(981) (162)
INCREASE IN CASH (1,028) 7
Cash, Beginning Of Quarter 1,337 552
Cash, End Of Quarter 309 559
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid 139 66
NON-CASH TRANSACTION:
Property and Equipment Acquired by Barter Transaction 0 6
Accrued Interest Added to New Notes in Restructuring 3 3
</TABLE>
*See "Notes to Consolidated Financial Statements"
5
<PAGE>
SUNGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
(1) CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. The accompanying unaudited
consolidated financial statements of SunGroup, Inc. and its subsidiaries
(collectively, "Corporation") 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 of such financial information for the
periods indicated 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. 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 March 31, 1998, the Corporation had approximately $10 million of net
operating loss carry-forwards, which expired in years 2002 through 2010.
At March 31, 1998, 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 reversals
of taxable temporary differences, the Corporation will not generate
income to utilize all of the net operating loss carry forwards. At March
31, 1998, the Corporation had a recorded deferred tax asset of
$1,499,000.00.
(3) NET INCOME PER COMMON SHARE. For 1997 and 1998, earnings per common and
common equivalent share were computed by dividing net income by the
weighted average number of common stock and common stock equivalents
outstanding during the first quarter. The Corporation's warrants have
been considered the equivalent of common stock, and as such, increased
the number of common shares. The Corporation's outstanding stock
options, however, have not been added to the number of common shares
because of the market price of the common stock does not exceed the
exercise price of the options. The increase in the number of common
shares was reduced by the number of common shares that are assumed to
have been purchased with the proceeds from the exercise of the warrants;
those purchases were assumed to have been made at the average price per
share of the common stock. The average price has been determined to be
$.375.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
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Financial Condition
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RESULTS OF OPERATIONS
- ---------------------
For the period ended March 31, 1998 and 1997, the Corporation operated
the same properties, except for KALK-FM in Mt. Pleasant, Texas and KROW-FM in
Abilene, Texas. The Corporation entered into a Local Marketing Agreement (LMA)
with KALK-FM in June 1997. Operation of KROW-FM commenced on October 29, 1997.
Gross revenue for 1998 increased 19.2% or $355,840 for 1997. This increase is
attributable to the additional operations of the two new locations and
increased revenues at the existing locations. Excluding, KALK-FM and KROW-FM,
revenues increased $227,694 or 10.1%. This increase is due to a larger portion
of local advertising at the existing locations. National advertising,
political advertising, miscellaneous and network income has decreased by
slightly more than $44,000 or 12.8%.
Agency commission as a percentage of gross sales for the quarter was
approximately 9.26% in 1998 versus 11.42% in 1997. The decrease is
attributable to a decrease in national and political advertising which
originates through agencies.
Technical and programming expense increased 23.13% from the same periods
of 1998 to 1997. KALK-FM and KROW-FM accounted for $30,413 of the increase or
7.46%. The remainder of the increase consists of additional expenses for
royalty fees, which are based on revenues, and survey costs. The survey costs
are necessary for the stations to be able to maintain their ratings and thus
their fair share of the market revenue.
Selling and administrative expenses, which include depreciation and
amortization, increased $314,000 or 25.1%. The increase is due to the
operation of the additional locations, additional sales commissions costs,
bonus compensation for reaching first quarter goals and extraordinary legal
and professional fees incurred with the potential sale of the Corporation.
Interest expense increased 147.23% or $84,600. This is a result of
refinancing several zero interest bearing notes that became due December 31,
1997 with short-term notes, paying a 10% annual return.
The Corporation recorded other income of $7,000 in 1998 versus $2,000 in
1997. This consists of interest income of $2,000 and miscellaneous income of
$5,000.
The Corporation had no extraordinary items in 1998 or 1997.
The Corporation, through its subsidiary Radio SunGroup of Texas, Inc.,
has signed a Local Management Agreement (LMA) and Right to Purchase Agreement
with Mt. Pleasant Radio, Inc. for the Corporation to manage and ultimately
purchase radio station KALK-FM, Mt. Pleasant, Texas in June 1997.
RadioSunGroup of Texas, Inc. has also acquired a construction permit for
KROW-FM in Abilene, Texas. The Corporation built the station and it became
operational on October 29, 1997.
7
<PAGE>
KEAN-AM, which had been simulcast with KEAN-FM, changed to a sports
format in February, 1997. The change was made to give the audience another
choice in the market which they did not previously have. The Corporation views
this change as a good opportunity to create additional income and net revenue.
FINANCIAL CONDITION
- -------------------
The Corporation's principal source of funds is cash flow provided by the
operation of its subsidiaries' radio stations. Its primary needs include
working capital, capital expenditures, maintenance of property, plant, and
equipment, and repayment of debt and interest. During the first three months
of 1998, the Corporation was able to meet its primary cash need of debt
service and interest expense ($157,000).
On February 3, 1998, the Corporation entered into an Asset Purchase
Agreement (APA) with SunBurst Media, LP of Dallas, Texas to substantially sell
all of the assets of the Corporation for $24,000,000.00. The Corporation will
retain its cash and accounts receivable. It is anticipated that the net
proceeds, after payment of the Corporation's outstanding debt obligations and
tax liabilities, will be distributed and the Corporation liquidated after all
affairs are wound-up. The sale is contingent upon, among other conditions,
consent by the Federal Communications Commission (FCC) to the assignment of
the various broadcast licenses from SunGroup, Inc. to SunBurst Media, LP.
Further FCC approval is contingent upon the commission's stance regarding the
EEO problems at the Texas properties. The FCC is also awaiting the radiation
level survey results on the New Mexico property.
Subsequently, the Corporation entered into a Local Management Agreement
(LMA) with SunBurst Media, LP for the operation of its stations in Abilene,
Longview and Bryan College Station, Texas, effective April 1, 1998. The
Corporation believes this agreement was in the best interest of its
stockholders and would expedite the Asset Purchase Agreement (APA) previously
entered into.
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
-------------------------
During the normal course of operations, the Corporation is engaged in
routine litigation incidental to its business. In most cases, such litigation
is not material and is settled before proceeding to litigation.
In 1997, KKSS-FM, a subsidiary of the Corporation, was sued by a former
employee for wrongful discharge. The Corporation settled with the defendant
with conditions that were beneficial to the Corporation.
Also in 1997, KMJJ-FM entered into a suit against Atlantic Records for
breach of contract. Litigation is pending on this case, but the Corporation
expects to be successful in its pursuit of this claim.
On March 12, 1998, the FCC, upon review of the Corporation's applications
for license renewal for four Texas stations, determined that the stations had
serious deficiencies with respect to their Equal Employment Opportunity (EEO)
programs. The Corporation has retained legal counsel to defend these
allegations. The FCC may impose one of several remedies, including,
8
<PAGE>
but not limited to, fines and short-term renewals. The Corporation expects to
resolve this situation and retain the licenses.
The Corporation has received Securities and Exchange Commission (SEC)
approval of its proxy for the sale of the Corporation from SunGroup, Inc. to
SunBurst Media, LP. The Schedule 14(a) Information Proxy Statement Pursuant to
Section 14(a) of the Securities Exchange Act of 1932 (Amendment No. 1), Notice
of Special Meeting of Shareholders, Shareholder Letter, 1997 10 KSB, Asset
Purchase Agreement, will be mailed to all SunGroup, Inc. shareholders by
Monday, May 11, 1998. A Special Meeting of Shareholders of SunGroup, Inc. is
to be held on Wednesday, May 27, 1998 at the Company's headquarters at 2201
Cantu Court, Suite 102A, Sarasota, Florida to vote on the sale of the
Corporation.
On April 14, 1998 in the United States Court of Appeals, District of
Columbia declared unconstitutional the FCC's controversial EEO regulations and
challenged the federal agency's authority to even promulgate non-discrimination
rules for broadcasters. This has caused a change in direction of the FCC in
approving license renewals. While the FCC resolves this conflict, the renewal
process is being delayed along with the transfer of licenses from SunGroup,
Inc. to SunBurst Media, LP.
The Corporation, through its subsidiary RadioSunGroup of Texas, Inc. with
OARA, Inc. has formed S.O. 2,000 LLC, a joint-corporation for the purpose of
applying for and to obtain an FM Construction Permit (CP) at Winona, Texas.
This CP application is being delayed due to the FCC's concern over the Texas
EEO issue.
We have been in discussions with our FCC legal counsel and they are in
contact with the FCC with regards to the EEO controversy. For further
information regarding the Court's decision, please refer to Docket No. 97-1116
at the United States Court of Appeals For The District of Columbia Circuit,
Lutheran Church Missouri Synod, Appellant v. Federal Communications
Commission, Appellee.
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) A Form 8-K was filed during the first quarter of 1998 on March
3, 1998.
9
<PAGE>
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)
May 14, 1998 /s/ John W. Biddinger
- ------------------- ------------------------------------------
Date John W. Biddinger
Principal Operating Officer
May 14, 1998 /s/ James A. Hoetger
- ------------------- ------------------------------------------
Date James A. Hoetger, Vice President/Treasurer
Principal Accounting and Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE PERIOD ENDING MARCH 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 309
<SECURITIES> 0
<RECEIVABLES> 1,417
<ALLOWANCES> (94)
<INVENTORY> 0
<CURRENT-ASSETS> 3,352
<PP&E> 3,968
<DEPRECIATION> (2,374)
<TOTAL-ASSETS> 10,639
<CURRENT-LIABILITIES> 573
<BONDS> 9,638
0
0
<COMMON> 3,770
<OTHER-SE> (4,432)
<TOTAL-LIABILITY-AND-EQUITY> 10,639
<SALES> 2,203
<TOTAL-REVENUES> 2,210
<CGS> 0
<TOTAL-COSTS> 2,072
<OTHER-EXPENSES> 171
<LOSS-PROVISION> 22
<INTEREST-EXPENSE> 142
<INCOME-PRETAX> (197)
<INCOME-TAX> (6)
<INCOME-CONTINUING> (191)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (191)
<EPS-PRIMARY> (0.027)
<EPS-DILUTED> (0.013)
</TABLE>
