SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1933
September 28, 2005
Date of Report (Date of earliest event reported)
____________________________________________________
Sun Network Group, Inc.
(Exact name of registrant as specified in its charter)
Florida
(State or other jurisdiction of incorporation or organization)
65-024624
(IRS Employer Identification Number)
20533 Biscayne Boulevard, Suite 1122 Miami, Florida 33180
(Address of principal executive offices) (ZIP Code)
Craig A. Waltzer, CEO
Sun Network Group, Inc.
20533 Biscayne Boulevard, Suite 1122
Miami, Florida 33180
(Name and address of agent for service)
(305)-937-2000
(Telephone number, including area code of agent for service)
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
_____________________________________________________________
Copy to:
James Reskin
Reskin & Associates
520 South Fourth Street,
Louisville, KY 40202-2577
Section 8 - Other Events
Item 8.01. Other Events. Sun Network Group, Inc. (the "Company"), is a
publicly traded Florida corporation formed in June 1991 with its principal
offices and operations center in Miami, Florida. The Company has recently filed
a notification under Form N-54a with the U.S. Securities and Exchange
Commission, (the "SEC") indicating its election to be regulated as a business
development company under the Investment Company Act of 1940 (the "1940 Act").
In connection with this election, the Company has adopted corporate resolutions
and intends to operate as a closed-end management investment company as such a
business development company (a "BDC"). We disclose the following information
which is a material departure from our prior business plan.
INVESTMENT STRATEGY
We have conducted limited operations to date. Under this recent election, we
have been organized to provide investors with the opportunity to participate,
with a modest amount in venture capital, in investments that are generally not
available to the public and that typically require substantially larger
financial commitments. In addition, we will provide professional management and
administration that might otherwise be unavailable to investors if they were to
engage directly in venture capital investing. We have decided to be regulated
as a business development company under the 1940 Act, and will operate as a
non-diversified company as that term is defined in Section 5(b)(2) of the 1940
Act. We will, at all times, conduct our business so as to retain our status as
a BDC. We may not change the nature of our business so as to cease to be, or
withdraw our election as, a BDC without the approval of the holders of a
majority of our outstanding voting stock as defined under the 1940 Act. The
Company is currently concentrating its investment strategies in the telephony
sector based upon experience and exposure to opportunities but plans to expand
its potential acquisitions and investments to other lines of business and
industry, as the acquisitions and investments, in total, will enhance value to
stockholders through capital appreciation and payments of dividends to the
Company by its investee companies.
As a business development company, we are required to invest at least 70% of our
total assets in qualifying assets, which, generally, are securities of private
companies or securities of public companies whose securities are not eligible
for purchase on margin (which includes many companies with thinly traded
securities that are quoted in the pink sheets or the NASD Electronic Quotation
Service.) We must also offer to provide significant managerial assistance to
these portfolio companies. Qualifying assets may also include:
- cash,
- cash equivalents,
- U.S. Government securities, or
- high-quality debt investments maturing in one year or less from the date
of investment.
We may invest a portion of the remaining 30% of our total assets in debt and/or
equity securities of companies that may be larger or more stabilized than target
portfolio companies.
The staff of the SEC has raised the question as to whether a private company
that has outstanding debt securities would qualify under the relevant portion of
the "eligible portfolio company" criteria. The SEC has recently issued proposed
rules to include any company that does not have a class of securities listed on
a national securities exchange or association in the definition of "eligible
portfolio company."
Until the question raised by the staff of the SEC pertaining to the Federal
Reserve's 1998 change to its margin rules has been addressed by final
legislative, administrative or judicial action, we intend to treat as qualifying
assets only those debt and equity securities that are issued by a private
company that has no marginable securities outstanding at the time we purchase
such securities or that otherwise qualifies as an "eligible portfolio company"
under the 1940 Act.
Nature of a BDC
The 1940 Act defines a BDC as a closed-end management investment company that
provides small businesses that qualify as an eligible portfolio company with
investment capital and also significant managerial assistance. A BDC is
required under the 1940 Act to invest at least 70% of its total assets in
qualifying assets consisting of eligible portfolio companies as defined in the
1940 Act and certain other assets including cash and cash equivalents.
An eligible portfolio company generally is a United States company that is not
an investment company and that:
- does not have a class of securities registered on an exchange or included
in the Federal Reserve Board's over-the-counter margin list;
- is actively controlled by a BDC and has an affiliate of a BDC on its board
of directors; or
- meets such other criteria as may be established by the SEC.
Control under the 1940 Act is presumed to exist where a BDC owns more than 25%
of the outstanding voting securities of the eligible portfolio company. We may
or may not control our portfolio companies.
An example of an eligible portfolio company is a new start up company or a
privately owned company that has not yet gone public by selling its shares in
the open market and has not applied for having its shares listed on a nationally
recognized exchange such as the NYSE, the American Stock Exchange, National
Association of Securities Dealers' Automated Quotation System, or the National
Market System. An eligible portfolio company can also be one which is subject
to filing, has filed, or has recently emerged from reorganization protection
under Chapter 11 of the Bankruptcy Act.
A BDC may invest the remaining 30% of its total assets in non-qualifying assets,
including companies that are not eligible portfolio companies. The foregoing
percentages will be determined, in the case of financings in which a BDC commits
to provide financing prior to funding the commitment, by the amount of the BDC's
total assets represented by the value of the maximum amount of securities to be
issued by the borrower or lessee to the BDC pursuant to such commitment. As a
BDC, we must invest at least 70% of our total assets in qualifying assets but
may invest more in such qualifying assets.
Primary Strategy
We will have significant relative flexibility in selecting and structuring our
investments. We will not be subject to many of the regulatory limitations that
govern traditional lending institutions such as banks. We will seek to
structure our investments so as to take into account the uncertain and
potentially variable financial performance of our portfolio companies. This
should enable our portfolio companies to retain access to committed capital at
different stages in their development and eliminate some of the uncertainty
surrounding their capital allocation decisions. We will calculate rates of
return on invested capital based on a combination of up-front commitment fees,
current and deferred interest rates and residual values, which may take the form
of common stock, warrants, equity appreciation rights or future contract
payments. We believe that this flexible approach to structuring investments
will facilitate positive, long-term relationships with our portfolio companies
and enable us to become a preferred source of capital to them. We also believe
our approach should enable debt financing to develop into a viable alternative
capital source for funding the growth of target companies that wish to avoid the
dilutive effects of equity financings for existing equity holders.
Longer Investment Horizon - We will not be subject to periodic capital return
requirements. These requirements, which are standard for most private equity
and venture capital funds, typically require that these funds return to
investors the initial capital investment after a pre-agreed time, together with
any capital gains on such capital investment. These provisions often force such
funds to seek the return of their investments in portfolio companies through
mergers, public equity offerings or other liquidity events more quickly than
they otherwise might, which can result in a lower overall return to investors
and adversely affect the ultimate viability of the affected portfolio companies.
Because we may invest in the same portfolio companies as these funds, we are
subject to these risks if these funds demand a return on their investments in
the portfolio companies. We believe that our flexibility to take a longer-term
view should help us to maximize returns on our invested capital while still
meeting the needs of our portfolio companies.
Established Deal Sourcing Network - We believe that, through our management and
directors, we have solid contacts and sources from which to generate investment
opportunities. These contacts and sources include:
- public and private companies,
- investment bankers,
- attorneys,
- accountants,
- consultants, and
- commercial bankers.
However, we cannot assure you that such relationships will lead to the
origination of debt or other investments.
Investment Criteria
As a matter of policy, we will not purchase or sell real estate or interests in
real estate or real estate investment trusts except that we may:
- purchase and sell real estate or interests in real estate in connection
with the orderly liquidation of investments, or in connection with foreclosure
on collateral;
- own the securities of companies that are in the business of buying,
selling or developing real estate; or
- finance the purchase of real estate by our portfolio companies.
We will limit our investments in more traditional securities (stock and debt
instruments) and will not, as a matter of policy:
- sell securities short except with regard to managing the risks associated
with publicly-traded securities issued by our portfolio companies;
- Purchase securities on margin (except to the extent that we may purchase
securities with borrowed money); or
- engage in the purchase or sale of commodities or commodity contracts,
including futures contracts except where necessary in working out distressed
loan; or
- investment situations or in hedging the risks associated with interest
rate fluctuations, and, in such cases, only after all necessary registrations or
exemptions from registration with the Commodity Futures Trading Commission have
been obtained.
Prospective Portfolio Company Characteristics - We have identified several
criteria that we believe will prove important in seeking our investment
objective with respect to target companies. These criteria will provide
general guidelines for our investment decisions; however, we caution readers
that not all of these criteria will be met by each prospective portfolio company
in which we choose to invest.
Experienced Management - We will generally require that our portfolio companies
have an experienced president or management team. We will also require the
portfolio companies to have in place proper incentives to induce management to
succeed and to act in concert with our interests as investors, including having
significant equity interests. We intend to provide assistance in this area
either supervising management or providing management for our portfolio
companies.
Products or Services - We will seek companies that are involved in products or
services that do not require significant additional capital or research
expenditures. In general, we will seek target companies that make innovative
use of proven technologies or methods.
Proprietary Advantage - We expect to favor companies that can demonstrate some
kind of proprietary sustainable advantage with respect to their competition.
Proprietary advantages include, but are not limited to:
- patents or trade secrets with respect to owning or manufacturing its
products, and
- a demonstrable and sustainable marketing advantage over its competition
Marketing strategies impose unusual burdens on management to be continuously
ahead of its competition, either through some kind of technological advantage or
by being continuously more creative than its competition.
Profitable or Nearly Profitable Operations Based on Cash Flow from Operations -
We will focus on target companies that are profitable or nearly profitable on an
operating cash flow basis. Typically, we would not expect to invest in start-up
companies unless there is a clear exit strategy in place.
Potential for Future Growth - We will generally require that a prospective
target company, in addition to generating sufficient cash flow to cover its
operating costs and service its debt, demonstrate an ability to increase its
revenues and operating cash flow over time. The anticipated growth rate of a
prospective target company will be a key factor in determining the value that we
ascribe to any warrants or other equity securities that we may acquire in
connection with an investment in debt securities.
Exit Strategy - Prior to making an investment in a portfolio company, we will
analyze the potential for that company to increase the liquidity of its common
equity through a future event that would enable us to realize appreciation, if
any, in the value of our equity interest. Liquidity events may include:
- an initial public offering,
- a private sale of our equity interest to a third party,
- a merger or an acquisition of the portfolio company, or
- a purchase of our equity position by the portfolio company or one of its
stockholders.
We may acquire warrants to purchase equity securities and/or convertible
preferred stock of the eligible portfolio companies in connection with providing
financing. The terms of the warrants, including the expiration date, exercise
price and terms of the equity security for which the warrant may be exercised,
will be negotiated individually with each eligible portfolio company, and will
likely be affected by the price and terms of securities issued by the eligible
portfolio company to other venture capitalists and other holders. We anticipate
that most warrants will be for a term of five to ten years, and will have an
exercise price based upon the price at which the eligible portfolio company most
recently issued equity securities or, if a new equity offering is imminent,
equity securities. The equity securities for which the warrant will be
exercised generally will be common stock of which there may be one or more
classes or convertible preferred stock. Substantially all the warrants and
underlying equity securities will be restricted securities under the 1933 Act at
the time of the issuance. We will generally negotiate for registration rights
with the issuer that may provide:
- "piggyback" registration rights, which will permit us under certain
circumstances, to include some or all of the securities owned by us in a
registration statement filed by the eligible portfolio company, or
- in circumstances, "demand" registration rights permitting us under certain
circumstances, to require the eligible portfolio company to register the
securities under the 1933 Act, in some cases at our expense. We will generally
negotiate net issuance provisions in the warrants, which will allow us to
receive upon exercise of the warrant without payment of any cash a net amount of
shares determined by the increase in the value of the issuer's stock above the
exercise price stated in the warrant.
Liquidation Value of Assets - Although we do not intend to operate as an
asset-based lender, the prospective liquidation value of the assets, if any,
collateralizing any debt securities that we hold will be an important factor in
our credit analysis. We will emphasize both tangible assets, such as:
- accounts receivable,
- inventory, and
- equipment,
and intangible assets, such as:
- intellectual property,
- customer lists,
- networks, and
- databases.
Investment Process
Due Diligence - If a target company generally meets the characteristics
described above, we will perform initial due diligence, including:
- company and technology assessments,
- existing management team,
- market analysis,
- competitive analysis,
- evaluation of management, risk analysis and transaction size,
- pricing, and
- structure analysis.
Much of this work will be done by management and professionals who are well
known by management. The criteria delineated above provide general parameters
for our investment decisions. We intend to pursue an investment strategy by
further imposing such criteria and reviews that best insures the value of our
investments. As unique circumstances may arise or be uncovered, not all of such
criteria will be followed in each instance but the process provides a guideline
by which investments can be prudently made and managed. Upon successful
completion of the preliminary evaluation, we will decide whether to deliver a
non-binding letter of intent and move forward towards the completion of a
transaction.
In our review of the management team, we look at the following:
- Interviews with management and significant shareholders, including any
financial or strategic sponsor;
- Review of financing history;
- Review of management's track record with respect to:
o product development and marketing,
o mergers and acquisitions,
o alliances,
o collaborations,
o research and development outsourcing and other strategic activities;
- Assessment of competition; and
- Review of exit strategies.
In our review of the financial conditions, we look at the following:
- Evaluation of future financing needs and plans;
- Detailed analysis of financial performance;
- Development of pro forma financial projections; and
- Review of assets and liabilities, including contingent liabilities, if
any, and legal and regulatory risks.
In our review of the products and services of the portfolio company, we look at
the following:
- Evaluation of intellectual property position;
- Review of existing customer or similar agreements and arrangements;
- Analysis of core technology;
- Assessment of collaborations;
- Review of sales and marketing procedures; and
- Assessment of market and growth potential.
Upon completion of these analyses, we will conduct on-site visits with the
target company's management team. Also, in cases in which a target company is
at a mature stage of development and if other matters that warrant such an
evaluation, we will obtain an independent appraisal of the target company.
Ongoing Relationships with Portfolio Companies
Monitoring - We will continuously monitor our portfolio companies in order to
determine whether they are meeting our financing criteria and their respective
business plans. We may decline to make additional investments in portfolio
companies that do not continue to meet our financing criteria. However, we may
choose to make additional investments in portfolio companies that do not do so,
but we believe that we will nevertheless perform well in the future.
We will monitor the financial trends of each portfolio company to assess the
appropriate course of action for each company and to evaluate overall portfolio
quality. Our management team and consulting professionals, who are well known
by our management team, will closely monitor the status and performance of each
individual company on at least a quarterly and, in some cases, a monthly basis.
We will use several methods of evaluating and monitoring the performance and
fair value of our debt and equity positions, including but not limited to the
following:
- Assessment of business development success, including product development,
financings, profitability and the portfolio company's overall adherence to its
business plan;
- Periodic and regular contact with portfolio company management to discuss
financial position, requirements and accomplishments;
- Periodic and regular formal update interviews with portfolio company
management and, if appropriate, the financial or strategic sponsor;
- Attendance at and participation in board meetings;
- Review of monthly and quarterly financial statements and financial
projections for portfolio companies.
Managerial Assistance - As a business development company, we will offer, and in
many cases may provide, significant managerial assistance to our portfolio
companies. This assistance will typically involve:
- monitoring the operations of our portfolio companies,
- participating in their board and management meetings,
- consulting with and advising their officers, and
- providing other organizational and financial guidance.
Diversification
As a BDC, we must invest at least 70% of our total assets in qualifying assets
consisting of investments in eligible portfolio companies and certain other
assets including cash and cash equivalents. In order to receive favorable
pass-through tax treatment on its distributions to our shareholders, we intend
to diversify our pool of investments in such a manner so as to qualify as a
diversified closed end management investment company. However, because of the
limited size of the funding which is likely to be available to us, we will
likely be classified as a non-diversified closed end investment company under
the 1940 Act. Until we qualify as a registered investment company, we will not
be subject to the diversification requirements applicable to RICs under the
Internal Revenue Code. Therefore, we will not receive favorable pass through
tax treatment on distributions to our shareholders. In the future, we will
seek to increase the diversification of our portfolio so as to make it possible
to meet the RIC diversification requirements, as described below. We cannot
assure you, however, that we will ever be able to meet those requirements.
To qualify as a RIC, we must meet the issuer diversification standards under the
Internal Revenue Code that require that, at the close of each quarter of our
taxable year,
- not more than 25% of the market value of our total assets is invested in
the securities of a single issuer, and
- at least 50% of the market value of our total assets is represented by
cash, cash items, government securities, securities of other RICs, and other
securities.
Each investment in these other securities is limited so that not more than 5% of
the market value of our total assets is invested in the securities of a single
issuer and we do not own more than 10% of the outstanding voting securities of a
single issuer. For purposes of the diversification requirements under the
Internal Revenue Code, the percentage of our total assets invested in securities
of a portfolio company will be deemed to refer, in the case of financings in
which we commit to provide financing prior to funding the commitment, to the
amount of our total assets represented by the value of the securities issued by
the eligible portfolio company to us at the time each portion of the commitment
is funded.
Investment Amounts
The amount of funds committed to a portfolio company and the ownership
percentage received will vary depending on the maturity of the portfolio
company, the quality and completeness of the portfolio company's management
team, the perceived business opportunity, the capital required compared to
existing capital, and the potential return. Although investment amounts will
vary considerably, we expect that the average investment, including follow-on
investments, will be between $25,000 and $500,000.
Competition
Our primary competitors to provide financing to target companies will include
private equity and venture capital funds, other equity and non-equity based
investment funds and investment banks and other sources of financing, including
traditional financial services companies such as commercial banks and specialty
finance companies. Many of these entities have substantially greater financial
and managerial resources than we will have. We believe that our competitive
advantage with regard to quality target companies relates to our ability to
negotiate flexible terms and to complete our review process on a timely basis.
We cannot assure you that we will be successful in implementing our strategies.
THE COMPANY AND ITS STRUCTURE
The Board of Directors and its Committees
The Board of directors is empowered to manage and oversee the operations of a
BDC. As such, these decisions will be made according to guidelines adopted for
that purpose. All directors will be reimbursed by the Company for any expenses
incurred in attending directors' meetings provided that the Company has the
resources to pay these fees. The Company intends to apply for officers and
directors liability insurance at such time when it has the resources to do so.
The Company will maintain whatever insurance and surety bonds are necessary when
holding physical certificates and other assets in possession.
Audit Committee
An Audit Committee charter has been accepted and under the independent
directorship control of a majority of independent directors. The audit
committee will review the results and scope of the audit and other services
provided by the independent auditors and review and evaluate the system of
internal controls. The audit committee will assist in determining the carrying
values of portfolio investments.
Investment Committee
An Investment Committee charter and policy has been approved by, and is under
the directorship control of, a majority of independent directors. The function
of the charter and the committee will be to review and approve all investments
in excess of $25,000 and assist in determining the carrying values of portfolio
investments.
Compensation Committee
A Compensation Committee charter and policy has been approved by, and is under
the directorship of, a majority of independent directors. The purpose of the
compensation committee will be to manage the stock option plan and review and
recommend compensation arrangements for the officers.
Nominating Committee
A Nominating Committee charter has been accepted and under the independent
directorship control of a majority of independent directors. The primary role of
the Nominating Committee is to actively seek individuals qualified to become
members of the board of directors, while ensuring that proper evaluations and
performances are upheld within the boards.
Verification of Independent Directors
A resolution has been adopted and a policy for determination of Directors
independence has been established. Our independent directors have proclaimed
and established themselves as independent via the following proclamation as
established by the Independence Charter, including:
- within the last five (5) years, has not received more than $50,000 per
year in direct compensation from the Corporation or any of its affiliates other
than director and committee fees and pension or other forms of deferred
compensation for prior service (provided such compensation is not contingent in
any way on continued service);
- within the last five (5) years, has not been affiliated with or employed
by any independent audit firm presently acting as auditor of the Corporation or
an affiliate of the Corporation or having acted as such an auditor during the
previous 5 years;
- within the past five (5) years, has had no personal service relationships
and has not been affiliated with an organization that has had a personal service
relationship with the Corporation, or with a member of the Corporation's senior
management;
- within the past (5) years, has not accepted any fee or compensation from
the Corporation other than director's fees and compensation;
- within the last five (5) years, has not had any material business
relationship (such as commercial, industrial, consulting, legal, or accounting)
with the Corporation for which the Corporation has been required to make
disclosure under Regulation S-K of the Securities and Exchange Commission; and;
- within the past five (5) years, has not been part of an interlocking
directorate in which an executive officer of the Corporation serves on the
compensation committee or a committee of a similar nature of another company
that concurrently employs the director.
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired
None.
(b) Pro Forma Financial Statements
None
(c) Exhibits
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following person on behalf of the
Registrant and in the capacity thereunto duly authorized, in Miami, Florida, on
the 28th day of September 2005.
Sun Network Group, Inc.
By: /s/ Craig A. Waltzer
-----------------------
Craig A. Waltzer, Chief Executive Officer
EXHIBIT INDEX
Exhibits
None.