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 SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from to
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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)
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
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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 September 30, 1998)
Transitional small business disclosure format (check one): Yes No X
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Page 1 of 13
<PAGE>
SUNGROUP, INC.
FORM 10-QSB
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet 3
September 30, 1998
Consolidated Statement of Operations 4
Three Months ended September 30, 1998 and 1997
Consolidated Statement of Operations 5
Nine Months ended September 30, 1998 and 1997
Consolidated Statement of Cash Flow 6
Nine Months ended September 30, 1998 and 1997
Notes to Consolidated Financial Statement 7
Nine Months ended September 30, 1998 and 1997
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Results of Operations 8
Financial Condition 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 13
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SUNGROUP, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
------------------
(UNAUDITED)
CURRENT ASSETS
Cash 521
Accounts Receivable (net) 1,151
Deferred Income Taxes 1,499
Prepaid and Other 318
-------
TOTAL CURRENT ASSETS 3,489
PROPERTY & EQUIPMENT NET 1,401
OTHER ASSETS
Intangible Assets (net) 5,431
Other Assets 47
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TOTAL OTHER ASSETS 5,478
TOTAL ASSETS 10,368
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CURRENT LIABILITIES
Accounts Payable & Accrued Expenses 591
Accrued Interest 385
Current Maturaties of Long Term Debt 9,008
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TOTAL CURRENT LIABILITIES 9,984
LONG TERM DEBT 571
DEFERRED INCOME TAXES 1,091
STOCKHOLDER'S EQUITY
Common Stock - $1 Par Value, authorized $10 Million 3,770
Additional Paid in Capital 5,970
Accumulated Deficit (11,018)
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TOTAL STOCKHOLDER'S EQUITY (1,278)
TOTAL LIABILITY & STOCKHOLDER'S EQUITY 10,368
-------
See "Notes to Consolidated Financial Statements"
3
<PAGE>
SUNGROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30
1998 1997
(UNAUDITED, IN THOUSANDS)*
-------------------------------
INCOME $ 1,236 $ 2,393
Agency Commission (120) (262)
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1,116 2,131
EXPENSES
Technical & Programming 215 537
Selling and Administrative 1,012 1,362
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1,227 1,899
GAIN (LOSS) FROM OPERATIONS (111) 232
OTHER INCOME (EXPENSE)
Interest Expense (537) (73)
Gain (Loss) on Sale of Assets 0 0
Gain (Loss) on Disposal of Assets 0 0
Other 6 0
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(531) (73)
GAIN (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (642) 159
Income Taxes (8) 0
INCOME BEFORE EXTRAORDINARY ITEM (634) 159
Extraordinary Gain From Debt Extinguishment 0 0
NET INCOME (LOSS) (634) 159
LOSS PER COMMON SHARE
Loss Before Extraordinary Item (0.05) 0.01
Extraordinary Item 0.00 0.00
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LOSS PER SHARE (0.05) 0.01
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 13,340 13,340
DIVIDENDS PER SHARE 0 0
See "Notes to Consolidated Financial Statements"
*Except for "Per Common Share" amounts
4
<PAGE>
SUNGROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30
1998 1997
(UNAUDITED, IN THOUSANDS)*
------------------------------
GROSS REVENUE $ 4,811 $ 6,784
Agency Commission (440) (749)
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4,371 6,035
EXPENSES
Technical & Programming 991 1,495
Selling and Administrative 3,552 3,966
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4,543 5,461
LOSS FROM OPERATIONS (172) 574
OTHER INCOME (EXPENSE)
Interest Expense (745) (204)
Gain (Loss) on Sale of Assets (65) 0
Gain (Loss) on Disposal of Assets 0 (4)
Other 45 7
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(765) (201)
LOSS BEFORE EXTRAORDINARY ITEM (937) 373
Extraordinary Gain From Debt Extinguishment 6 0
NET INCOME (LOSS) BEFORE TAXES (943) 373
INCOME TAXES 0 0
NET INCOME (LOSS) (943) 373
LOSS PER COMMON SHARE
Loss Before Extraordinary Item (0.07) 0.03
Extraordinary Item 0.00 0.00
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LOSS PER SHARE (0.07) 0.03
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 13,340 13,340
DIVIDENDS PER SHARE 0 0
See "Notes to Consolidated Financial Statements"
*Except for "Per Common Share" amounts
5
<PAGE>
SUNGROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1998 1997
(UNAUDITED, IN THOUSANDS)*
------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss) $ (807) $ 373
Reconciliation of Net Income (Loss)
to Net Cash provided by Operating Activities
Depreciation and Amortization 514 492
(Gain) Loss on Disposal of Assets (72) 4
Net Income Loss From Barter Transactions (76) (74)
Extraordinary Gain From Debt Extinguishment 0 0
Changes In:
Accounts Receivable 745 (473)
Prepaid Expenses and Other Current Assets 94 (103)
Accounts Payable and Accrued Expense (629) 303
Interest Payable 385 (16)
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Net Cash Provided by Operating Activities 154 506
INVESTMENT ACTIVITIES
Purchase of Property and Equipment (68) (139)
Proceeds from Sale of Equipment 136 0
Investments 0 (45)
Other (4) (16)
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Net Cash (Used) Provided by Investment Activities 64 (200)
FINANCING ACTIVITIES
Repayment of Long-term Debt (1,034) (501)
------ ------
(1,034) (501)
INCREASE IN CASH (813) (195)
Cash, Beginning Of Quarter 1,334 552
Cash, End Of Quarter 521 357
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid 197 197
NON-CASH TRANSACTION:
Property and Equipment Acquired by Barter Transaction 0 6
Accrued Interest Added to New Notes in Restructuring 9 9
Liability Received in Sales of WOWW 0 0
</TABLE>
*See "Notes to Consolidated Financial Statements"
6
<PAGE>
SUNGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 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 and
the related notes 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 expense for financial reporting and income tax
purposes. The Corporation files consolidated income tax returns.
At September 30, 1998, the Corporation had approximately $10 million of
net operating loss carry-forwards, which expired in years 2002 through 2010.
At September 30, 1998 the Corporation had a cumulative net deferred tax
asset. This asset has been offset by and 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 September, 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, increase 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 commons
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.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
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RESULTS OF OPERATIONS: For the period ended September 30, 1998 and 1997, the
Corporation operated the same properties, except for KALK -FM in Mount Pleasant,
Texas and KROW-FM in Abilene Texas. The Corporation entered into a Local
Marketing Agreement (LMA) with KALK-FM in June 1997 and began operating KROW-FM
on October 29, 1997. On April 1, 1998, the Corporation entered into an
additional Local Marketing Agreement with Sunburst Media LLP of Dallas, Texas
for its stations in Abilene, Texas; Bryan, Texas: and Longview, Texas.
Gross revenue for 1998 decreased 29.1% or $1,973,000 from 1997.
Agency commissions as a percentage of gross sales for the quarter was
approximately 9.15% in 1998 versus 11.04% in 1997. The decrease is due to
decrease in national and political advertising which originate through agencies.
Technical and programming expenses decreased 34% form the same period
of 1998 to 1997.
Selling and administrative expenses, which include depreciation and
amortization, decreased $414,000 or 10.4%.
All of the decreases in Revenue, Technical, Programming, Sales and
Administrative expenses are due to the Local Marketing Agreement with SunBurst
Media, LLP. Although the Corporation received monthly income of $91,645.00 per
month, this was substantially lower than normal operating revenues of the
stations. Under the local marketing agreements, there is also a correlating
decrease in expenses, with most of the normal operating expenses paid by the
operator of the stations.
Interest expense increased 365.20% or $541,000. 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 and the settlement
agreement with Conseco, Inc, the Corporations largest note and equity holder, at
18% per annum until the sale of the Corporations assets was completed.
The Corporation recorded other income of $46,000 in 1998 versus $6,000
in 1997. This consist of interest income or $8,000 and miscellaneous income of
$36,000.
In May 1998, the Corporation sold its studio building in Longview,
Texas for $136,600.00 Proceeds from the sale were used to pay the mortgage due
to Longview Bank and Trust of Longview, Texas. The Corporation recognized a gain
on the sale of $70,200.00. The Corporation had no extraordinary items in 1997.
The Corporation, through its subsidiary Radio SunGroup of Texas, Inc.,
signed a Local Management Agreement 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.
Radio SunGroup of Texas, Inc. also acquired a construction permit for
KROW-FM in Abilene Texas. The Corporation built the station and it became
operational on October 29, 1997.
8
<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 the 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 subsidiary radio stations. Its primary needs include
working capital, capital expenditures, maintenance of property, plant, and
equipment, repayment of debt and interest. During the first nine months of 1998,
the Corporation was able to meet its primary cash need of debt service and
interest expense.
On February 3, 1998 the Corporation entered into an Asset Purchase
Agreement with SunBurst Media of Dallas, Texas to substantially sell all 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 sales is contingent upon, among other conditions, consent by the Federal
Communications Commissions to the assignment of the various broadcast licenses
from SunGroup, Inc. to SunBurst Media.
Subsequently, the Corporation entered into a Local Management Agreement
with SunBurst Media 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 previously entered into.
As a condition of the assets sale of the Corporation, the Corporation
is obligated to pay its various note holders. For the Corporation to be is a
position to sell it assets, it had to negotiate a settlement with it largest
equity holder, via the warrants, and it largest note holder, Conseco Risk
Management for $10,300,000.00. Payment is due Conseco on July 23, 1998. If the
settlement does not occur on that date, interest will accrue at the rate of 18%
per annum.
The Corporation completed the sales of its subsidiary SunGroup
Broadcasting of Louisiana, Inc. Radio Station KMJJ to Capstar Broadcasting of
Austin, Texas via SunBurst Media, LP on October 14, 1998. Proceeds of the sale
were used to pay off the debt to First Savings Bank of Arlington, and the
balance was applied to the Conseco settlement mentioned above.
On October 27, 1998, the Corporation consummated the sell of its
subsidiaries Radio SunGroup of Texas, Inc. and Radio SunGroup of Bryan/College
Station, Inc. to SunBurst Media LP. The proceeds were used to pay off the
balance of the Conseco settlement, other secured and unsecured note holders. The
remaining proceeds will be used to pay any taxes the Corporation may incur ,
legal and professional fees and for distribution to the shareholders.
As part of the February 3, 1998 Asset Purchase Agreement with SunBurst
Media, LP the Corporation entered into a subsequent Asset Purchase Agreement
with Trumper Broadcasting to
9
<PAGE>
purchase its subsidiary SunGroup Broadcasting of New Mexico, Inc. Trumper has
withdrawn its offer to purchase this subsidiary and the Corporation has found a
new suitor in Simmons Broadcasting. An Asset Purchase Agreement was sign with
Simmons on October 13, 1998. The Simmons Asset Purchase Agreement has been filed
with the Federal Communications Commission during the week of November 2nd, 1998
and it is expected that it will be approved. In addition, the Corporation also
entered into a Local Marketing Agreement with Simmons Broadcasting on October
23, 1998 that went into effect November 1, 1998.
The Corporation also invested into several construction permits for new
radio stations and had a joint with Kenneth R. Reynolds for SO2000, a
co-venture to purchase and build new radio stations. As part of the Asset
Purchase Agreement with Sunburst Media, all of the rights to these transactions
were assigned to SunBurst Media.
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 preceding 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 still pending on this case, but the
Corporation expects to be successful in its pursuit of this claim. The
Corporation was successful in its claim and the suit was settled in October
1998.
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 programs. The Corporation has retained legal counsel to defend these
allegations. The FCC may impose one of several remedies, including but not
limited to, fines and short term renewals. The Corporation expects to resolve
this situation and retain the licenses. The FCC has reviewed its earlier
positions regarding EEO programs and has granted the renewal of the broadcast
licenses to the Corporations various radio stations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------------
(a) Exhibits
Exhibit 27 Financial Data Schedule (attached)
(b) No reports on Form 8-K have been filed during the third
quarter of 1998.
10
<PAGE>
SIGNATURES
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.
---------------------------------
(Registrant)
November 10, 1998 /s/ John W. Biddinger
- ------------------------ ---------------------------------
Date John W. Biddinger
Principal Operating Officer
November 10, 1998 /s/ James A. Hoetger
- ------------------------ ---------------------------------
Date James A. Hoetger,
Vice President/Treasurer
Principal Accounting and
Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE PERIOD ENDING SEPTEMBER
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 521
<SECURITIES> 0
<RECEIVABLES> 1,129
<ALLOWANCES> (46)
<INVENTORY> 0
<CURRENT-ASSETS> 3,291
<PP&E> 3,899
<DEPRECIATION> (2,498)
<TOTAL-ASSETS> 10,368
<CURRENT-LIABILITIES> 779
<BONDS> 9,579
0
0
<COMMON> 3,770
<OTHER-SE> (5,047)
<TOTAL-LIABILITY-AND-EQUITY> 10,368
<SALES> 4,811
<TOTAL-REVENUES> 4,855
<CGS> 0
<TOTAL-COSTS> 4,412
<OTHER-EXPENSES> 512
<LOSS-PROVISION> 59
<INTEREST-EXPENSE> 745
<INCOME-PRETAX> (936)
<INCOME-TAX> (7)
<INCOME-CONTINUING> (943)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (943)
<EPS-PRIMARY> (0.139)
<EPS-DILUTED> (0.065)
</TABLE>
