U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996.
Commission file number 0-3851
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
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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 as of
September 30, 1996)
Transitional Small Business Disclosure Format (check one) Yes No X
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Page 1 of 12
SUNGROUP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheet 3
September 30, 1996
Consolidated Statement of Operations 4
Three Months Ended September 30, 1996 and 1995
Consolidated Statement of Operations 5
Nine Months Ended September 30, 1996 and 1995
Consolidated Statement of Cash Flow 6
Nine Months Ended September 30, 1996 and 1995
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan 8
of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 3. Defaults Upon Senior Securities 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SUNGROUP, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
(dollars in thousands)
September 30, 1996
------------------
Current Assets
Cash $ 605
Deferred Taxes 0
Accounts Receivable (net) 1,311
Prepaid and Other 53
------
Total Current Assets 1,969
Property And Equipment (Net) 1,627
Other Assets
Intangible Assets (net) 6,237
Other Assets 13
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Total Other Assets 6,250
Total Assets $9,846
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Current Liabilities
Accounts Payable & Accrued
Expenses 554
Accrued Interest 11
Current Maturaties of Long Term Debt 3,001
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Total Current Liabilities 3,566
Long Term Debt 9,380
Deferred Income Taxes 92
Stockholders' Equity
Common Stock - $1 par value,
authorized 10 million shares 3,771
Additional Paid in Capital 5,969
Accumulated Deficit (12,932)
------
Total Stockholders' Equity (3,192)
Total Liability &
Stockholders' Equity $9,846
======
See "Notes to Consolidated Financial Statements"
3
SUNGROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(dollars in thousands, except per share data)
Three Months Ended
September 30,
1996 1995
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Gross Revenue $2,151 $2,444
Agency Commission (247) (220)
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Net Revenue 1,904 2,224
Technical & Programming Expense 428 507
Selling and G & A Expense 1,119 1,370
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Total Operating Expense 1,547 1,877
Income From Operations 357 347
Interest Expense (72) (145)
Gain (Loss) on Disposal of Assets 652 (18)
Other 4 1
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Total Other Income (Expense) 584 (162)
Income Before Income Taxes and Extraordinary Item 941 185
Income Taxes 1,623 0
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Income (Loss) Before Extraordinary Item (682) 185
Extraordinary Items 3,080 0
Extraordinary Gain From Debt Extinguishment 4,089 0
Net Income 6,487 185
Income (Loss) Per Common Share
Income (Loss) Before Extraordinary Item (0.05) 0.01
Extraordinary Item 0.54 0.00
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Income Per Share 0.49 0.01
Weighted Average Number Of
Common Shares Outstanding 13,174 13,174
Dividends Per Share 0 0
See "Notes to Consolidated Financial Statements"
4
SUNGROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(dollars in thousands, except per share data)
Nine Months Ended
September 30,
1996 1995
----------------------
Gross Revenue $6,726 $6,847
Agency Commission (736) (616)
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Net Revenue 5,990 6,231
Technical & Programming Expense 1,636 1,538
Selling and G & A Expense 3,840 4,155
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Total Operating Expense 5,476 5,693
Income From Operations 514 538
Interest Expense (214) (450)
Gain (Loss) on Disposal of Assets 647 (22)
Other 6 4
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Total Other Income (Expense) 439 (468)
Income Before Income Taxes and Extraordinary Item 953 70
Income Taxes 1,651 32
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Income (Loss) Before Extraordinary Item (698) 38
Extraordinary Items 3,280 0
Extraordinary Gain From Debt Extinguishment 5,231 180
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Net Income 7,813 218
Income (Loss) Per Common Share
Income (Loss) Before Extraordinary Item (0.05) 0.00
Extraordinary Item 0.65 0.01
------ ------
Income Per Share 0.59 0.02
Weighted Average Number Of
Common Shares Outstanding 13,174 13,174
Dividends Per Share 0 0
See "Notes to Consolidated Financial Statements"
5
SUNGROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(dollars in thousands, except per share data)
Nine Months Ended
September 30,
1996 1995
----------------------
OPERATING ACTIVITIES
Net Income (Loss) $7,813 $ 218
Reconciliation Of Net Income (Loss)
To Net Cash Provided By Operating Activities
Depreciation And Amortization 524 552
(Gain) Loss On Disposal Of Assets (647) 22
Net Income (Loss) From Barter Transactions 29 (38)
Extraordinary Items (6,903) (180)
Changes In:
Accounts Receivable (1) (254)
Prepaid Expenses And Other Current Assets 21 102
Accounts Payable And Accrued Expense 273 69
Interest Payable 9 263
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Net Cash Provided by Operating Activities 1,118 754
INVESTMENT ACTIVITIES
Purchase of Property and Equipment (67) (55)
Proceeds from Sale of Equipment 1,958 1
Other 0 (3)
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Net Cash Provided (used) by Investing Activities 1,891 (57)
FINANCING ACTIVITIES:
Repayment of Long Term Debt (2,739) (625)
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Net Cash Used by Financing Activities (2,739) (625)
INCREASE IN CASH 270 72
Cash, Beginning Of Year 335 363
Cash, End Of Quarter 605 435
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid 0 181
NON-CASH TRANSACTION
Property and Equipment Acquired by Barter Transaction 13 21
Accrued Interest Added to New Notes in Restructuring 9 6
Liability Received in Sale of WOWW 192 0
See "Notes to Consolidated Financial Statements"
6
SUNGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
(1) Consolidated Condensed Financial Statements. The accompanying
unaudited 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 and
recurring accruals) considered necessary for the 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 expense
for financial reporting and income tax purposes. The Corporation
files consolidated income tax returns.
At September 30, 1996, The Corporation had approximately $13 million
of net operating loss carry forwards, which expire in years 2002
through 2010.
At September 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 September 30, 1996, the Corporation had a
recorded deferred tax asset 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 third 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 because
the market price of a share of 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 proceeds from the exercise of such
warrants; such purchases were assumed to have been made at the
average price of a share of common stock, determined to be $.1875.
7
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
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On July 2, 1996, the Corporation consummated the sale of its
Pensacola, Florida station 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. For the quarter and
nine months ended September 30, 1996 versus 1995, this was the only
major change in operations.
Gross revenues for the quarter were down 12% or $293,000. Gross
revenues for the nine months were down $121,000 or 1.8%. This decrease
is due to the sale of the Pensacola station.
Agency commissions as a percentage of gross sales for the quarter
were 11.48% in 1996 vs. 9% in 1995. Agency commissions as a percentage
of gross sales for the nine months were 10.94% 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 expense was down $79,000 or 15.58% for the quarter and
$98,000 or 6.3% for the nine months. The decrease in the quarter is due
to the sale of WOWW in Pensacola. Excluding the Pensacola station, such
expense increased $5,000 or 1.18% during the quarter. This increase is
a result of higher programming and salary costs, higher
royalty/licensing fees as a result of higher sales, Arbitron rating
expenses and station promotional cost. Two of the Corporation's markets
added subscriptions to Arbitron's rating services during the latter part
of 1995. The Corporation did not incur expenses for these services in
the first half of 1995; however, it is 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 share in its respective markets.
Selling and general administrative expense was down $250,000 or 18.3%
and $315,000 or 7.6% for the quarter and nine months, respectively. The
majority of this decrease is a result of the sale of the Pensacola
station. Fewer of the Corporation's general managers hit their monthly
and quarterly bonus targets during the first nine months 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 nine months of 1996 versus 1995.
Interest expense was down $73,000 or 50.3% and $236,000 or 52.4% for
the quarter and nine 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
8
with the debt holders in over seven years and the statute of limitations
has taken effect. 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 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 the
debt being restructured with an effective rate of 0% for book purposes.
Changes in the gain on disposal of assets and other income was
$625,000 for the quarter and nine months ended September 30, 1996,
resulting from the sale of the Pensacola station.
The Corporation recorded $7,527,000 in gains from debt extinguishment
in the first nine months of 1996. This gain was attributable to the
Corporation writing off several notes with unpaid principal and interest
totaling $4,568,000. Payments on these notes became due in 1990, and
the Corporation was notified of 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 1996. As a result
of the WOWW station sale discussed earlier, the Corporation realized
$2,959,000 in debt forgiveness from the Federal Deposit Insurance
Corporation. In 1995, the Corporation recorded a gain of $180,000 from
debt extinguishment.
During the third 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. In
addition to the cash payment, the Corporation received real and personal
property in the amount of $644,000 in the third quarter of 1996.
Financial Condition
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The Corporation's principal source of funds is cash flow provided by
the operation of its radio stations. Its primary needs include working
capital, capital expenditures to maintain property, plant and equipment,
and repayment of debt. During the first nine months of 1996, the
Corporation was able to meet its primary cash need of debt service
($857,000) with its station operating cash flow of approximately
$1,060,000.
The Corporation has operated with a working capital deficiency for
several years. At September 30, 1996, the deficit was approximately
$1,597,000. 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.
The Corporation has scheduled debt repayment of $1,153,000 for the
period of October 1996 through September 1997.
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 the restructuring of secured and unsecured debt. The
Corporation continues to negotiate with some of its secured lenders in
9
order to restructure its debt obligations in such a way they can be paid
out of the net cash now being generated by the Corporation's broadcast
properties. However, there is no certainty that 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 severely hamper the Corporation's ability to continue as a
going concern.
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. On July 2,
1996, the Corporation settled in full a note representing $3,500,000 of
this debt. The remaining $2.2 million in debt was eliminated from the
balance sheet during the third quarter as the statute of limitations has
expired regarding the collection of this note.
10
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.
There are no legal proceedings as of September 30, 1996.
Item 3. Defaults Upon Senior Securities
Below is a table of the Corporation's debt instruments which were in
default at July 2, 1996, which is an amount greater than 5% of the
Corporation's total assets.
REASON FOR PRINCIPAL IN INTEREST IN
HOLDER DEFAULT DEFAULT DEFAULT
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Note Payable Bank(1) Non-payment of principal and
(FDIC Receivership) interest Default Since 06/30/90 $3,500,000 $1,480,000
There are no current debt instruments in default at September 30, 1996
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) On July 12, 1996, the Corporation filed a current report on Form 8-K
with the Securities and Exchange Commission reporting consummation
of the sale of its Pensacola, Florida radio station, WOWW-FM.
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(1) Assets sold July 2, 1996, and this debt was paid off or forgiven in full.
11
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)
November 14, 1996 /S/ John W. Biddinger
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Date John W. Biddinger, President
(Chief Executive Officer)
November 14, 1996 /S/ James A. Hoetger
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Date James A. Hoetger, Vice President/Treasurer
(Principal Accounting and Financial Officer)
12