UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO.2
(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, 2002.
or
[ ] 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: 33-42498
SUN NETWORK GROUP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-024624
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1440 CORAL RIDGE DRIVE, # 140
CORAL SPRINGS, FL 330771
(954) 360-4080
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
(Former name, former address and former fiscal year,
if changed since last report)
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 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:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK - 21,848,487 shares outstanding as of June 30, 2002.
EXPLANATORY NOTE
The purpose of this amendment to the company's quarterly report on Form
10-Q and 10-Q/A Amendment No. 1, is to restate the company's financial
statements to reflect interest expense for a beneficial conversion feature of
the convertible debentures.
In addition, this quarterly report incorporates certain certifications
pursuant to Section 906 and Section 302 of the Sarbanes-Oxley Act of 2002.
2
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
Restated Financial Statements for the quarter ending June 30, 2002 are attached
hereto following the Signatures page.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company acquired all of the assets of RadioTV Network, Inc ("RTV") on July
16, 2001 in a transaction treated as a recapitilization 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.
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 a SB-2
Registration Statement in connection with the Debenture and anticipates
receiving the full funding from the Debenture by the 4th Quarter 2002. As of
June 30, 2002 the Company had received $250,000 of the Debenture financing.
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.
The Company has agreed to loan Live $50,000, pending the completion of the
acquisition and, as currently contemplated in the Agreement, the Company will
issue 8,000,000 shares of its common stock to acquire Live in a transaction
expected to close by the 4th Quarter 2002.
The Company intends to use the net proceeds from the Debenture to develop,
operate and expand the businesses of RTV and Live and to continue to seek other
opportunities for the Company. The Company believes that if it successfully
completes the Debenture, on a timely basis, it will have sufficient capital to
operate in the near-term. The Company will, however, continue to seek additional
capital to fund further development, expansion and operation of its businesses.
The Debenture and acquisition of Live will result in significant shareholder
dilution upon the completion of the acquisition and conversion of the Debenture.
The Company had no revenues in the 2nd Quarter as it continued to focus on
raising capital. The Company had a net loss of $435,933 in the Quarter compared
with $38,805 in the prior Quarter. The increase is principally due to a reserve
for accrued compensation under an employment agreement, professional fees for
filing the Form SB-2, consulting fees of $119,100, an officer's trip to Europe
to facilitate the Company's listing on the Frankfort Stock Exchange, and
$240,570 non-cash interest expense to account for a beneficial conversion
feature in the convertible debentures.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
3
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
The Company and its Chief Executive Officer have been named in a lawsuit filed
in the Southern District of Florida captioned Florida Securities Funding
Partnership v. Sun Network Group, Inc et al, case no. 02-80360 in connection
with a stock purchase of Company shares from a third party. The Partnership
alleges that the Company was involved in a conspiracy with an outside
shareholder to sell shares at an unfavorable price to the Partnership. No
damages have been specified or claimed. The Company has filed a motion to
dismiss the claims and believe the lawsuit is without merit and frivolous.
Item 2. Changes in Securities and Use of Proceeds.
On June 27, 2002 the Company entered into agreement with four (4) institutional
investors for $750,000 in Secured Convertible Debentures and 750,000 warrants.
The Company has filed a Form SB-2 Registration Statement with the SEC describing
the details of this transaction, which, upon conversion, will result in
substantial dilution to current Company shareholders. The Company shall use any
proceeds derived from the Debenture or sale of warrants for general operating
purposes.
Item 3. Defaults Upon Senior Securities.
NONE.
Item 4. Submission of Matters to a Vote of Security Holders.
NONE.
Item 5. Other Information.
NONE.
Item 6. Exhibits and Reports on Form 8-K
Exhibit Description
------- -----------
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
4
SIGNATURES*
Pursuant to the requirements 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.
SUN EXPRESS GROUP, INC.
(Registrant)
Date: May 8, 2003 T. Joseph Coleman
/s/ T. Joseph Coleman
---------------------------
T. Joseph Coleman,
President, Director and Ceo
Date: May 8, 2003 William H. Coleman
/s/ William H. Coleman
----------------------
William H. Coleman,
Secretary and Director
CERTIFICATION
I, T. Joseph Coleman, CEO and Acting CFO, certify that:
1. I have reviewed this quarterly report on Form 10-Q and Form 10-Q/A Amendment
No. 1 of Sun Network Group, Inc. (the "Report");
2. Based on my knowledge, this Report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this Report (the "Evaluation Date"); and
c) presented in this Report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
May 8, 2003
/s/ T. Joseph Coleman
Chief Executive Officer
Sun Network Group, Inc.
and Subsidiary
Consolidated Financial Statements
June 30, 2002
Sun Network Group, Inc.
and Subsidiary
Contents
Page(s)
-------
Consolidated Balance Sheets .................................................F-1
Consolidated Statements of Operations .......................................F-2
Consolidated Statements of Cash Flows .......................................F-3
Notes to Consolidated Financial Statements ...........................F-4 to F-6
Sun Network Group, Inc. and Subsidiary
Consolidated Balance Sheets
Assets
June 30,
2002 December 31,
(Unaudited) 2001
----------- -----------
Restated
(Note7)
-----------
Current Assets
Cash ............................................. $ 224,070 $ 5,321
Deferred debt issuance cost ...................... 20,000 -
----------- -----------
Total Current Assets ............................. 244,070 5,321
----------- -----------
Other Assets
Prepaid advertising .............................. 35,200 35,200
----------- -----------
Total Other Assets ............................... 35,200 35,200
----------- -----------
Total Assets ..................................... $ 279,270 $ 40,521
=========== ===========
Liabilities and Stockholders' Deficiency
Current Liabilities
Accounts payable ................................. $ 11,518 $ 9,937
Accrued compensation, related party .............. 143,750 68,750
Due to stockholders' ............................. 20,442 29,263
----------- -----------
Total Current Liabilities ........................ 175,710 107,950
----------- -----------
Long Term Liabilities
Convertible debenture, net of discount ........... 240,570 -
----------- -----------
Total Liabilities ................................ 416,280 107,950
----------- -----------
Stockholders' Deficiency
Common stock, $0.001 par value,
100,000,000 shares authorized,
21,848,487 and 21,665,399 issued and
outstanding, respectively ..................... 21,848 21,665
Common stock issuable (300,000 shares) ........... 300 -
Additional paid-in capital ....................... 662,071 486,734
Accumulated deficit .............................. (1,061,799) (575,828)
----------- -----------
Total Stockholders' Deficiency ................... (417,580) (67,429)
----------- -----------
Total Liabilities and Stockholders' Deficiency ... $ 279,270 $ 40,521
=========== ===========
See accompanying notes to consolidated financial statements.
F-1
Sun Network Group, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Restated Restated
(Note7) (Note7)
------------ ------------
Revenues ............................. $ - $ - $ - $ 35,200
Operating Expenses
Compensation ......................... 40,655 13,000 81,016 21,000
Consulting ........................... 119,100 - 119,100 33,395
General and administrative ........... 23,534 17,217 31,661 27,299
Professional fees .................... 12,074 8,588 13,624 20,088
------------ ------------ ------------ ------------
Total Operating Expenses ............. 195,363 38,805 245,401 101,782
------------ ------------ ------------ ------------
Loss from Operations ................. (195,363) (38,805) (245,401) (66,582)
Other Income (Expense)
Interest expense ..................... (240,570) - (240,570) -
------------ ------------ ------------ ------------
Total Other Income (Expense) ......... (240,570) - (240,570) -
------------ ------------ ------------ ------------
Net Loss ............................. $ (435,933) $ (38,805) $ (485,971) $ (66,582)
============ ============ ============ ============
Net Loss Per Share - Basic and Diluted $ (0.02) $ - $ (0.02) $ (0.01)
============ ============ ============ ============
Weighted Average Shares Outstanding -
Basic and Diluted .................. 22,045,190 13,333,333 21,860,456 12,931,602
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-2
Sun Network Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
2002 2001
--------- ---------
Restated
(Note7)
---------
Cash Flows from Operating Activities:
Net loss ........................................... $(485,971) $ (66,582)
Adjustments to reconcile net loss to net
cash used in operating activities:
Settlement income .................................. - (35,200)
Stock for services ................................. 84,000 33,395
Interest expense ................................... 240,570 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable ................................ - 300
Increase (decrease) in:
Accounts payable ................................... 1,581 4,283
Accrued compensation, related party ................ 75,000 -
--------- ---------
Net Cash Used in Operating Activities .............. (84,820) (63,804)
--------- ---------
Cash Flows from Financing Activities:
Cash overdraft ..................................... - 716
Proceeds from sale of common stock ................. 82,390 60,000
Loan proceeds from stockholder ..................... 20,442 -
Proceeds from convertible debt ..................... 250,000 -
Deferred debt issuance cost ........................ (20,000) -
Repayment of loans from stockholder ................ (29,263) -
--------- ---------
Net Cash Provided by Financing Activities .......... 303,569 60,716
--------- ---------
Net Increase (Decrease) in Cash .................... 218,749 (3,088)
Cash at Beginning of Period ........................ 5,321 3,088
--------- ---------
Cash at End of Period .............................. $ 224,070 $ -
========= =========
See accompanying notes to consolidated financial statements.
F-3
Sun Network Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
June 30, 2002
(Unaudited)
Note 1 Basis of Presentation
The accompanying unaudited consolidated financial statements of Sun Network
Group, Inc. and Subsidiary (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States of America and the
rules and regulations of the United States Securities and Exchange Commission
for interim financial information. Accordingly, they do not include all the
information and footnotes necessary for a comprehensive presentation of
consolidated financial position and results of operations.
It is management's opinion, however, that all material adjustments (consisting
of normal recurring adjustments) have been made which are necessary for a fair
consolidated financial statements presentation. The results for the interim
period are not necessarily indicative of the results to be expected for the
year.
For further information, refer to the audited financial statements and footnotes
of RadioTV Network, LLC for the years ended December 31, 2001, 2000 and 1999
included in the Current Report on Form 8-K on Sun Express Group, Inc.
Note 2 Convertible Debenture and Warrants
On June 27, 2002 (the "Issuance Date"), the Company entered into a Securities
Purchase Agreement to issue and sell 12% convertible debentures, in the
aggregate amount of $750,000, convertible into shares of common stock, of the
Company. The Company is permitted to use the proceeds to make one or more loans
for a legitimate business purpose, which such loans, in the aggregate, may not
exceed $100,000. As of June 27, 2002, $250,000 in convertible debentures were
issued to various parties. The holders of the debentures have the right to
convert all or any amount of this debenture into fully paid and non-assessable
shares of common stock at the conversion price with the limitation that any
debenture holder may not convert any amount of the debentures if after
conversion that debenture holder would beneficially hold more than 4.9% of the
total outstanding common stock of the Company. However, any debenture holder may
waive this limitation provision with 61 days written notice to the Company. The
conversion price generally is the lesser of (a) 50% of the market value of the
common stock as defined in the debenture or (b) $0.15. Interest is payable
either quarterly or at the conversion date at the option of the holder. The
convertible debentures mature on June 27, 2003 and are secured by substantially
all present and future assets of the Company.
The Company paid $20,000 of legal fees related to the debenture issuances and
recorded these fees as a deferred debt issuance cost asset to be amortized over
the one-year term of the debentures.
In connection with the convertible debentures issued, warrants to purchase
250,000 common shares were issued to the holders at an exercise price per share
of $0.15. The warrants are exercisable immediately and through the third
anniversary of the date of issuance. These warrants were treated as a discount
on the convertible debenture and valued at $9,430 under SFAS No. 123 using the
Black-Scholes option-pricing model. The discount will be amortized over the life
of the loans starting on July 1, 2002. If the registration statement relating to
the debentures is not declared effective with in 90 days of June 27, 2002 or
loses quotation in the NASD OTCBB the Company is obligated to pay a fee to the
debenture holders equal to 2% per month on the principal balance outstanding.
F-4
Pursuant to EITF Issue No. 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and
EITF Issue No. 00-27 "Application of Issue No. 98-5 to Certain Convertible
Instruments" the convertible debentures contain an imbedded beneficial
conversion feature since the fair market value of the common stock exceeds the
most beneficial exercise price on the debenture Issuance Date. This beneficial
conversion value has been computed by the Company based on the $240,570 value
allocated to the debentures and an effective conversion price of $0.043 per
share. The value was computed as $259,430, but is limited under the above EITF
provisions to the $240,570 value allocated to the debentures. Since the
conversion feature is exercisable immediately, the $240,570 was recognized as
interest expense on the Issuance Date.
If the registration statement relating to the debentures is not declared
effective with in 90 days of June 27, 2002, or loses quotation in the NASD OTCBB
the Company is obligated to pay a fee to the debenture holders equal to 2% per
month on the principal balance outstanding.
The convertible debenture liability is as follows at June 30, 2002:
Convertible debenture $ 250,000
Less: discount on debenture (9,430)
-----------
Convertible debenture, net $ 240,570
===========
Note 3 Commitment and Contingencies
The Company and its Chief Executive Officer have been named in a lawsuit filed
in the Southern District Court of Florida. The Company is defending itself and
has filed a motion to dismiss the matter. The lawsuit alleges the Company and
its chief executive officer conspired to lower the Company's share price after a
third party shareholder of the Company sold a block of his shares to a Florida
securities partnership. The Company is not a party to any other litigation and
management has no knowledge of any other threatening or pending litigation.
During the three months ended June 30, 2002, the Company accrued $37,500 under
an employment agreement.
Note 4 Common Stock Issuances
In March 2002, the Company issued 183,088 common shares at $0.45 per share to an
investor for total proceeds of $82,390.
During April through June 2002, the Company committed to issue 300,000 common
shares in consideration of consulting services performed during that period. The
$84,000 value of these shares was computed based on the trading price of the
common stock on each date the shares were earned.
Note 5 Option Agreement and Plan of Merger
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. Live
granted the Company the exclusive option to acquire Live and merge Live into the
Company upon executing of a formal Agreement for a six month period commencing
June 28, 2002. The Company shall acquire all capital stock or assets of Live
F-5
that will result in a tax-free combination of Live and the Company with Live
being operated as a wholly-owned subsidiary of the Company.
In consideration for the Agreement, the Company shall issue and pay to Live
shareholders an aggregate of 8,000,000 shares of the Company's common stock.
Additionally, the Company will agree to loan Live up to $50,000 to process its
business and will be payable per terms of a promissory note.
In addition, Live shareholders will be granted 4,100,000 warrants for the
Company's common shares exercisable as stipulated at strike prices and terms,
favorable to the Company, to be determined.
Note 6 Going Concern
As reflected in the accompanying consolidated financial statements, the Company
had an accumulated deficit of $1,061,799 through June 30, 2002, operating losses
for the six months ended June 30, 2002 of $485,971 and cash used in operations
for the six months ended June 30, 2002 of $84,820. The ability of the Company to
continue as a going concern is dependent on the Company's ability to further
implement its business plan and generate revenues. The consolidated financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
As discussed in Notes 2 and 8, the Company received $500,000 in funding and a
commitment for an additional $250,000. Management is currently seeking
additional funding and acquisitions. 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 7 Restatement
Subsequent to the filing of the Company's Form 10-QSB for the quarter ended June
30, 2002 management became aware that the prior March 31, 2002 and December 31,
2001 consolidated financial statements did not include an aggregate $106,250 of
accrued compensation expense pursuant to a July 16, 2001 employment agreement
with the Company's chief executive officer, $119,100 of consulting costs treated
as a deferred debt issuance cost should have been expensed, $5,000 of legal fees
expensed should have been capitalized as deferred debt issuance cost, deferred
debt issuance costs should have been classified as current, and a $240,520
interest expense should have been recognized relating to an imbedded beneficial
conversion feature on the convertible debentures. The inclusion of these items
in the revised June 30, 2002 consolidated financial statements has the effect of
decreasing assets by $114,400, increasing current liabilities by $106,250, and
increasing accumulated deficit by $460,920 at June 30, 2002 and increasing
interest expense by $240,570 for the three months ended June 30, 2002. The
effect on net loss per shares was an increase of $0.02 and $0.02 for the three
and six months ended June 30, 2002, respectively.
Note 8 Subsequent Event
On August 8, 2002, an additional $250,000 of convertible debentures and warrants
to purchase 250,000 common shares were purchased from the Company for $250,000
with the terms similar to that described in Note 2. The Company recognized a
discount of $14,775 relating to the warrants and an interest expense of $235,225
for a beneficial conversion feature.
F-6