UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For
the quarterly period ended March 31, 2005
or
|
o |
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 0-16423
SAN
Holdings, Inc.
(Exact
name of registrant as specified in its charter)
Colorado |
|
84-0907969 |
|
(State
of incorporation) |
|
(I.R.S.
Employer ID Number) |
9800
Pyramid Ct., Suite 130, Englewood, CO 80112-2694
(Address
of principal executive offices)
(303)
660-3933
(Registrant’s
telephone number, including area code)
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 o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes o
No x
As of May
6, 2005, 95,811,278 shares of the registrant’s common stock, no par value per
share, were outstanding.
SAN
Holdings, Inc.
TABLE OF
CONTENTS
Part
I: FINANCIAL INFORMATION
| |
Item
1. |
Financial
Statements |
|
| |
|
Consolidated
Balance Sheets |
3 |
| |
|
Consolidated
Statements of Operations |
4 |
| |
|
Consolidated
Statements of Cash Flows |
5 |
| |
|
Notes
to Consolidated Financial Statements |
6 |
| |
Item
2. |
Management’s
Discussion and Analysis of Financial Condition and Results
of Operations |
9 |
| |
Item
3. |
Quantitative
and Qualitative Disclosures About Market Risk |
16 |
| |
Item
4. |
Controls
and Procedures |
16 |
Part
II: OTHER INFORMATION
| |
Item
6. |
Exhibits |
17 |
| |
|
|
|
| Signatures |
|
|
18 |
Part
I. Financial Information
Item
1. Financial Statements
SAN
Holdings, Inc.
Consolidated
Balance Sheets
(In
thousands, except for share data)
| |
|
March
31, |
|
December
31, |
|
| |
|
2005 |
|
2004 |
|
|
ASSETS |
|
(Unaudited) |
|
|
|
| |
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
1,751 |
|
$ |
486 |
|
|
Accounts
receivable, net of allowance for doubtful accounts of $114
and $140, respectively |
|
|
14,572
|
|
|
13,097
|
|
|
Inventories,
net of valuation allowance of $154 and $137, respectively |
|
|
949
|
|
|
467
|
|
|
Deferred
maintenance contracts |
|
|
2,697
|
|
|
2,914
|
|
|
Prepaid
expenses and other current assets |
|
|
758
|
|
|
512
|
|
|
Total
current assets |
|
|
20,727
|
|
|
17,476
|
|
| |
|
|
|
|
|
|
|
|
Property
and equipment, net |
|
|
903
|
|
|
1,005
|
|
|
Capitalized
software, net |
|
|
819
|
|
|
659
|
|
|
Goodwill |
|
|
32,008
|
|
|
32,008
|
|
|
Intangible
assets, net |
|
|
2,051
|
|
|
2,205
|
|
|
Other
assets |
|
|
387
|
|
|
384
|
|
|
Total
long-term assets |
|
|
36,168
|
|
|
36,261
|
|
| |
|
|
|
|
|
|
|
|
TOTAL
ASSETS |
|
$ |
56,895 |
|
$ |
53,737 |
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Lines
of credit: |
|
|
|
|
|
|
|
|
Wells
Fargo Business Credit, Inc. |
|
$ |
9,828 |
|
$ |
6,759 |
|
|
Harris
Trust and Savings Bank |
|
|
9,508
|
|
|
7,700
|
|
|
Accounts
payable |
|
|
11,410
|
|
|
12,453
|
|
|
Accrued
expenses |
|
|
2,368
|
|
|
2,651
|
|
|
Deferred
revenue |
|
|
4,013
|
|
|
3,942
|
|
|
Total
current liabilities |
|
|
37,127
|
|
|
33,505
|
|
| |
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 6) |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Stockholders’
equity |
|
|
|
|
|
|
|
|
Preferred
stock; Series A; no par value; 8,000 shares authorized; -0-
shares issued and outstanding |
|
|
--
|
|
|
--
|
|
|
Preferred
stock; Series B; no par value; 2,000 shares authorized; -0-
shares issued and outstanding |
|
|
--
|
|
|
--
|
|
|
Common
stock; no par value, 200,000,000 shares authorized; 95,811,278
shares issued and outstanding |
|
|
32,577
|
|
|
32,577
|
|
|
Warrants |
|
|
6,740
|
|
|
5,691
|
|
|
Accumulated
deficit |
|
|
(19,549 |
) |
|
(18,036 |
) |
|
Total
stockholders’ equity |
|
|
19,768
|
|
|
20,232
|
|
| |
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
56,895 |
|
$ |
53,737 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
SAN
Holdings, Inc.
Consolidated
Statements of Operations
(Unaudited)
(In
thousands, except share and per share data)
| |
|
Three
Months Ended March 31, |
|
| |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
Revenue |
|
|
|
|
|
|
Product
sales and vendor supplied services |
|
$ |
12,235 |
|
$ |
13,957 |
|
|
Consulting
and engineering services |
|
|
1,257
|
|
|
1,005
|
|
|
Maintenance
services and maintenance contract fees |
|
|
2,024
|
|
|
1,877
|
|
|
Total
revenue |
|
|
15,516
|
|
|
16,839
|
|
| |
|
|
|
|
|
|
|
|
Cost
of revenue |
|
|
|
|
|
|
|
|
Product
sales and vendor supplied services |
|
|
9,593
|
|
|
10,984
|
|
|
Consulting
and engineering services |
|
|
746
|
|
|
566
|
|
|
Maintenance
services and maintenance contract fees |
|
|
1,399
|
|
|
1,325
|
|
|
Total
cost of revenue |
|
|
11,738
|
|
|
12,875
|
|
| |
|
|
|
|
|
|
|
|
Gross
profit |
|
|
3,778
|
|
|
3,964
|
|
| |
|
|
|
|
|
|
|
|
Operating
expenses |
|
|
|
|
|
|
|
|
Selling,
general and administrative |
|
|
3,535
|
|
|
3,840
|
|
|
Depreciation
and amortization |
|
|
355
|
|
|
311
|
|
|
Total
operating expenses |
|
|
3,890
|
|
|
4,151
|
|
| |
|
|
|
|
|
|
|
|
Loss
from operations |
|
|
(112 |
) |
|
(187 |
) |
| |
|
|
|
|
|
|
|
|
Other
income (expense) |
|
|
|
|
|
|
|
|
Interest
expense |
|
|
(347 |
) |
|
(289 |
) |
|
Charge
for warrant issued to related party for debt guaranty |
|
|
(1,049 |
) |
|
--
|
|
|
Other
income (expense) |
|
|
(5 |
) |
|
(8 |
) |
| |
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(1,513 |
) |
$ |
(484 |
) |
| |
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share |
|
$ |
(0.01 |
) |
$ |
(0.01 |
) |
| |
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic and diluted |
|
|
103,835,445
|
|
|
58,407,625
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
SAN
Holdings, Inc.
Consolidated
Statements of Cash Flows
(Unaudited)
(In
thousands)
| |
|
Three
months ended March 31, |
|
| |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
Cash
flows from operating activities: |
|
|
|
|
|
|
Net
loss |
|
$ |
(1,513 |
) |
$ |
(484 |
) |
|
Adjustments
to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
355
|
|
|
311
|
|
|
Charge
for warrant issued to related party for debt guaranty |
|
|
1,049
|
|
|
--
|
|
|
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(1,475 |
) |
|
(2,281 |
) |
|
Inventories |
|
|
(462 |
) |
|
764
|
|
|
Deferred
maintenance contracts |
|
|
218
|
|
|
82
|
|
|
Prepaid
expenses and other current assets |
|
|
(246 |
) |
|
(52 |
) |
|
Other
assets |
|
|
(4 |
) |
|
8
|
|
|
Accounts
payable |
|
|
(1,043 |
) |
|
(4,870 |
) |
|
Accrued
expenses |
|
|
(284 |
) |
|
936
|
|
|
Deferred
revenue |
|
|
71
|
|
|
(58 |
) |
|
Net
cash used in operating activities |
|
|
(3,334 |
) |
|
(5,644 |
) |
| |
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase
of property and equipment, net |
|
|
(71 |
) |
|
(100 |
) |
|
Capitalized
software costs |
|
|
(207 |
) |
|
(18 |
) |
|
Net
cash used in investing activities |
|
|
(278 |
) |
|
(118 |
) |
| |
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
Net
borrowings (payments) on line of credit - Harris Trust and Savings
Bank |
|
|
1,808
|
|
|
2,800
|
|
|
Net
borrowings (payments) on line of credit - Wells Fargo Business
Credit |
|
|
3,069
|
|
|
534
|
|
|
Net
cash provided by financing activities |
|
|
4,877
|
|
|
3,334
|
|
| |
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents |
|
|
1,265
|
|
|
(2,428 |
) |
| |
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period |
|
|
486
|
|
|
3,792
|
|
| |
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period |
|
$ |
1,751 |
|
$ |
1,364 |
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosure of other cash flow information: |
|
|
|
|
|
|
|
|
Interest
paid |
|
$ |
290 |
|
$ |
257 |
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Transfer
of inventory to property and equipment |
|
$ |
20 |
|
$ |
-- |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
SAN
Holdings, Inc.
Notes to
Consolidated Financial Statements (Unaudited)
NOTE
1 - BASIS OF PRESENTATION
The
accompanying consolidated financial statements of SAN Holdings, Inc. (“SANZ,”
the “Company” or “we”) and its wholly-owned subsidiary, SANZ Inc., and its
wholly-owned subsidiary, Solunet Storage, Inc. (“Solunet Storage”), have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). All
significant intercompany transactions and balances have been eliminated in
consolidation. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America (“US GAAP”), have been condensed or omitted pursuant to
such rules and regulations. In the opinion of management, the unaudited
consolidated financial statements have been prepared on the same basis as the
annual consolidated financial statements, and reflect all adjustments,
consisting only of normal, recurring adjustments, necessary for a fair
presentation in accordance with US GAAP. The results of operations for interim
periods presented are not necessarily indicative of the operating results for
the full year. These consolidated financial statements should be read in
connection with the consolidated financial statements and notes thereto included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004
(the “2004 Annual Report on Form 10-K”).
Reclassifications
Certain
reclassifications have been made to the prior year’s balances to conform with
current year presentations.
NOTE
2 - FINANCIAL CONDITION
The
accompanying consolidated financial statements have been prepared in conformity
with US GAAP (except with regard to omission of certain disclosures within
interim financial statements, as permitted by the SEC), which contemplate our
continuation as a going concern. However, we have incurred substantial losses
from operations since inception, including a net loss of $6,285,000 for the year
ended December 31, 2004, and a net loss of $1,513,000 for the three months ended
March 31, 2005. In addition, as of March 31, 2005, we have negative working
capital (current liabilities in excess of current assets) of $16,400,000.
Accordingly, as of March 31, 2005, the recoverability of a major portion of the
recorded asset amounts, including “Goodwill,” is dependent on our continuing
operations, which in turn is dependent on our ability to maintain our current
financing arrangements and our ability to become profitable in our future
operations. Our consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary if we were
unable to continue as a going concern.
At March
31, 2005, the Company had $1.4 million of undrawn availability on its principal
borrowing facility with Wells Fargo Business Credit, Inc. (“Wells Fargo”) and
$500,000 of undrawn availability on its secondary debt facility with Harris
Trust and Savings Bank (“Harris Trust”). These two debt facilities, combined
with open credit lines with suppliers, are anticipated to provide continued
liquidity for the foreseeable future, or next 12 months. However, our ability to
borrow under the Wells Fargo facility is subject to maintaining our accounts
receivable balance at current levels, as well as complying with the financial
covenants we have made to the lender. If we are unable to comply with our
financial covenants to the lender, the facility could cease to be available to
us. As of March 31, 2005, the Company was in compliance with all of the
financial covenants under the Wells Fargo credit agreement, which was amended
in March
2005. See further discussion of the Wells Fargo credit facility in Note
5.
As of
March 31, 2005, the Company had a $10.0 million debt facility with Harris Trust
which is unsecured but guaranteed by Sun Capital Partners II, LP (“Sun Capital
II”), an affiliate of the Company’s majority shareholder, Sun Solunet LLC (“Sun
Solunet”). While this facility is in the form of a demand note, it expires in
February 2006, unless called earlier by the lender. As part
of its guaranty, Sun Capital II has agreed that, upon the written request of
SANZ, it will provide SANZ with sufficient funds to repay the debt outstanding
under the credit facility in the event that Harris Trust requires repayment of
such debt or, at Sun Capital II’s election, pay the outstanding debt directly to
Harris Trust; provided that in no event will Sun Capital II’s obligation exceed
the amount of Sun Capital II’s guaranty. This guaranty and all obligations
expire on December 31, 2005. See
further discussion of the Harris Trust facility in Note 5.
NOTE
3 - STOCK-BASED COMPENSATION
As
permitted under Statement of Financial Accounting Standards No. 123, “Accounting
for Stock-Based Compensation” (“SFAS 123”), the Company accounts for stock-based
compensation using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
(“APB 25”) and related interpretations. Accordingly, no compensation expense has
been recognized in connection with the grant of stock options to employees and
directors during the periods presented, as all options granted had an exercise
price equal to the market value of the underlying stock at the date of grant.
The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS No.
123:
| |
|
Three
Months Ended March 31, |
|
| |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
Net
loss, as reported |
|
$ |
(1,513 |
) |
$ |
(484 |
) |
| |
|
|
|
|
|
|
|
|
Deduct,
Total stock-based compensation expense determined under fair-value based
method, net of related tax effects |
|
|
(125 |
) |
|
(231 |
) |
| |
|
|
|
|
|
|
|
|
Pro
forma net loss |
|
$ |
(1,638 |
) |
$ |
(715 |
) |
| |
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share: |
|
|
|
|
|
|
|
|
As
reported |
|
$ |
(0.01 |
) |
$ |
(0.01 |
) |
|
Pro
forma |
|
$ |
(0.02 |
) |
$ |
(0.01 |
) |
NOTE
4 - EARNINGS (LOSS) PER SHARE
Basic
earnings (loss) per share is based on the weighted average number of common
shares outstanding. In addition to common shares outstanding, and in accordance
with Statement of Financial Standards No. 128, “Earnings per Share” (“SFAS
128”), any shares issuable for little or no cash consideration are considered
outstanding shares and included in the calculation of weighted average number of
common shares. Accordingly, for the three months ended March 31, 2005, the
weighted average number of common shares outstanding included 10,801,763 shares
issuable under outstanding debt guaranty warrants that were immediately
exercisable at $0.001 per share, and held by our majority shareholder, Sun
Solunet. See Notes 5 and 6 below for additional information regarding the debt
guaranty warrants issued.
Diluted
earnings (loss) per share is computed using the weighted average number of
common shares outstanding plus the number of common shares that would be issued
assuming exercise or conversion of all potentially dilutive common shares.
Warrants and options outstanding to purchase an aggregate of 33,451,768 and
35,120,080 shares of common stock as of March 31, 2005 and 2004, respectively,
have been excluded from the diluted share calculations for the three-month
periods ending March 31, 2005 and 2004, respectively, as they were antidilutive
as a result of the net losses incurred for those periods. Accordingly, basic
shares equal diluted shares for all periods presented.
As
partial consideration for a debt guaranty provided by Sun Capital II, an
affiliate of our majority shareholder and as discussed in further detail in Note
6 below, the Company expects to issue a stock purchase warrant for approximately
2.2 million shares of SANZ’ common stock to its majority shareholder, Sun
Solunet, on May 16, 2005. This warrant will be immediately exercisable on a one
for one basis into shares of common stock at an exercise price of $0.001, and
will result in dilution to our other common shareholders of approximately 2.0%.
NOTE
5 - DEBT
Wells
Fargo Line of Credit
In March
2005, the Company amended its $12.0 million credit facility with Wells Fargo. As
part of the amendment, Wells Fargo waived the Company’s non-compliance on
certain financial covenants as of December 31, 2004. In addition, Wells Fargo
reset the following financial covenant requirements effective January 1, 2005:
(1) minimum net income on a year to date basis, calculated quarterly;
(2) minimum net worth plus “subordinated debt” (measured in the aggregate,
with amounts loaned to SANZ Inc. and its wholly-owned subsidiary, Solunet
Storage, (the Company’s borrowers) from SANZ being defined as subordinated
debt), calculated on a monthly basis; (3) minimum availability, calculated
monthly; (4) capital expenditure limit, calculated on an annual basis; and (5) a
minimum cash infusion from SANZ or an outside source if SANZ Inc. and its
subsidiary, Solunet Storage, generate a net loss in a given quarter and has
generated a net loss on a year to date basis at that time, in an amount equal to
the lesser of the quarterly net loss or the year to date net loss.
Additionally,
the amended credit agreement with Wells Fargo includes as an additional
borrower, Solunet Storage, which in March 2005 became a wholly-owned subsidiary
of SANZ Inc., itself a wholly-owned subsidiary of SANZ. As part of the
co-borrowing arrangement with SANZ Inc. and Solunet Storage, each of the
borrowers has a separate borrowing base; however, total borrowings under the
facility may not exceed $12,000,000. Additionally, each entity is required to
guaranty each other’s debt under the borrowing facility. Cash transfers from
SANZ Inc. to Solunet Storage are limited to the funding of Solunet Storage’s
operating expenses, subject to an annual limit, and to a minimum availability on
the date of any such transfer. Solunet Storage may not borrow under the credit
facility with Wells Fargo until certain conditions precedent have been
satisfied.
Also as
part of the amended agreement and effective January 1, 2005, Wells Fargo
increased the interest rate on our borrowings to prime plus 5.0% (10.75% at
March 31, 2005), an increase of three points. This rate is subject to potential
decreases, as permitted by Wells Fargo, based on SANZ Inc. and its subsidiary,
Solunet Storage, achieving certain net income levels during 2005. As of March
31, 2005, the Company was in
compliance with all financial covenants, and in accordance with the amended
credit agreement and based on SANZ Inc. and Solunet Storage achieving a minimum
net loss threshold for the three months ended March 31, 2005, the interest rate
on the Company’s borrowings was decreased one point from prime plus 5.0% to
prime plus 4.0%, effective May 1, 2005.
Harris
Trust Credit Facility
On
February 16, 2005, we entered into a revised credit agreement with Harris Trust,
which increased our availability by $2.0 million, for a total of $10.0 million,
and consolidated two credit lines (one maintained by Solunet Storage and one
maintained by SANZ) into one facility with SANZ as the sole borrower and
guaranteed by Sun Capital II, an affiliate of our majority shareholder, Sun
Solunet. This facility is unsecured, is not limited by availability under a
borrowing base, does not require the maintenance of specified financial
covenants, and as of March 31, 2005, bore interest at a rate of prime plus 1.0%
or 6.75%. While the Harris Trust facility is a demand note, under the revised
agreement it has been extended to February 2006, unless called earlier by the
lender. Sun
Capital II has guaranteed the Harris Trust credit facility and has agreed that,
upon the written request of SANZ, it will provide SANZ with sufficient funds to
repay the debt outstanding under the credit facility in the event that Harris
Trust requires repayment of such debt or, at Sun Capital II’s election, pay the
outstanding debt directly to Harris Trust; provided that in no event will Sun
Capital II’s obligation exceed the amount of Sun Capital II’s guaranty. This
guaranty and all obligations expire on December 31, 2005.
In
exchange for the guaranty by Sun Capital on the increased Harris Trust line of
credit, on March 23, 2005, the Company issued a warrant to purchase 3,086,218
shares of our common stock with an exercise price of $0.001 per share to our
majority shareholder, Sun Solunet, which resulted in dilution of the other
shareholders of the Company. See further discussion in Note 6. Based on the
number of shares issued pursuant to the warrant, the Company recorded in the
first quarter of 2005 a charge of $1.1 million calculated as the number of
shares issued under the warrant multiplied by the closing market price of SANZ’
common stock on the issuance date. This warrant is immediately exercisable. The
Company expects to be required to issue an additional stock purchase warrant to
Sun Solunet on May 16, 2005 in connection with the guaranty as described in Note
6.
NOTE
6 - COMMITMENTS AND CONTINGENCIES
As
discussed in Notes 2 and 5 above, the Harris Trust debt facility term extends
until February 2006. Pursuant to a credit support agreement provided by Sun
Capital II, until the Company reduces the guaranteed debt to $3.0 million or
less, it is required to issue stock purchase warrants at an exercise
price of
$0.001 to Sun
Solunet beginning on November 16, 2004 and continuing at six-month intervals in
the future (each May and November). The number of warrants to be issued is
dependent on the amount by which the remaining guaranteed debt exceeds $3.0
million, according to formulas applicable to each such date, as disclosed in our
2004 Annual Report on Form 10-K. The issuance of these warrants will result in
dilution of the other shareholders of the Company.
On March
23, 2005, the Company issued to Sun Solunet an additional stock purchase warrant
for the purchase of 3,086,218 shares of common stock as consideration for an
additional $2.0 million debt guaranty provided in February 2005 by Sun Capital
II on the Company’s Harris Trust credit facility. The number of shares
underlying the warrant was calculated using the formula applicable to the
November 16, 2004 measurement (as if the $2.0 million debt guaranty was in place
as of November 16, 2004).
Pursuant
to the credit support agreement discussed above and based on the anticipated
guaranteed amount of debt as of May 16, 2005, the Company expects to issue a
stock purchase warrant for approximately 2.2 million shares of SANZ’ common
stock to Sun Solunet in May 2005. The issuance of this warrant will result in
dilution to our other common shareholders of approximately 2.0%.
NOTE
7 - RECENT ACCOUNTING PRONOUNCEMENTS
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard No. 123 (revised) (“SFAS 123R”),
“Share-Based Payment,” which provides guidance on share-based payment
transactions and requires fair value accounting for all share-based
compensation. SFAS 123R requires the Company to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award (with limited exceptions). That cost will be
recognized over the period during which an employee is required to provide
service in exchange for the award, usually the vesting period. Under SFAS 123R,
the Company was required to adopt SFAS 123R at the beginning of its third
quarter of 2005. In April 2005, the SEC postponed the required adoption of SFAS
123R until the beginning of fiscal years starting after June 15, 2005, which for
SANZ will be effective beginning January 1, 2006.
We are
currently evaluating the impact of SFAS 123R on our financial position and
results of operations as well as alternative transition methods under
SFAS 123R. In addition, we have not determined whether the adoption of
SFAS 123R will result in amounts that are similar to the current pro forma
disclosures under SFAS 123. See Note 3 related to the pro forma effects on
our net loss and loss per share if we had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
FORWARD-LOOKING
STATEMENTS
This
report
contains
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. In many but not all cases you can identify
forward-looking statements by words such as
“anticipate,”
“believe,”
“could,”
“estimate,”
“expect,”
“intend,” “may,” “plan,” “potential,” “should,” “will” and “would” or the
negative of these terms or other similar
expressions. These
forward-looking statements include statements regarding our expectations,
beliefs, or intentions about the future, and are based on information available
to us at this time. We assume no obligation to update any of these statements
and specifically decline any obligation to update or correct any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events. Actual
events and results could differ materially from our expectations as a result of
many factors, including those identified in this Report. We urge
you to review and consider those factors, and those identified from time to time
in our reports and filings with the SEC, for
information about risks and uncertainties that may affect our future results.
All forward-looking statements we make after the date of this filing are also
qualified by this cautionary statement and identified risks. Additional factors
are discussed in the Company’s 2004 Annual Report on Form 10-K and its other
reports filed with the SEC, to which reference should be made.
Overview
SANZ
provides sophisticated enterprise-level data storage and data management
solutions to commercial and government clients. We focus on the design, delivery
and management of data storage systems, especially those that are built using a
network architecture. Because we typically design integrated solutions for our
clients rather than merely selling them hardware, we are known in the industry
as a “storage solution provider.”
In the
course of our business, we provide the following products and services:
| · |
Data
storage solutions
that we design and deliver as a customized project to meet a client’s
specific needs, including both data storage networks and data
backup/recovery systems; |
| · |
Storage-related
engineering and consulting services; |
| · |
Maintenance
services on
storage hardware and software; and |
| · |
A
proprietary data management software product known as
“EarthWhere™,”
which
facilitates imagery data access and provisioning for geospatial digital
imagery users
(principally satellite and aerial imagery and map data),
together with associated support and consulting services.
|
We refer
to these first three products and services as our “storage solutions” business
and the fourth item as our “geospatial” or “EarthWhere” business.
First
Quarter 2005 Financial Overview
In
evaluating our current financial operating performance, we believe, based on
feedback from investors, analysts and other users of the Company’s financial
information, that earnings before interest, taxes, depreciation, amortization
and other income and expense (“EBITDA”) is an appropriate and important
financial measure. For the quarter ended March 31, 2005, we generated EBITDA of
$243,000 versus $124,000 for the comparable 2004 period. Since EBITDA is a
non-GAAP measure, a reconciliation of EBITDA to our reported net losses for the
March 2005 and 2004 quarters is provided below.
| Reconciliation of Net loss to EBITDA |
|
|
|
| |
|
Three
Months Ended |
|
|
(In
thousands) |
|
March
31, 2005 |
|
March
31, 2004 |
|
| |
|
|
|
|
|
|
Net
loss |
|
$ |
(1,513 |
) |
$ |
(484 |
) |
| |
|
|
|
|
|
|
|
|
Interest
expense and related charges |
|
|
|
|
|
|
|
|
Interest
expense |
|
|
347
|
|
|
289
|
|
|
Charge
for warrant issued to related party for debt guaranty |
|
|
1,049
|
|
|
--
|
|
|
Depreciation
and amortization |
|
|
355
|
|
|
311
|
|
|
Other
non-operating (income) expense |
|
|
5
|
|
|
8
|
|
| |
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
243 |
|
$ |
124 |
|
For the
quarter ended March 31, 2005, our loss from operations was $112,000 as compared
to $187,000 for the quarter ended March 31, 2004. This represents a 40% decrease
quarter over quarter. Importantly, the March 2005 quarter operating loss
included a net expense of approximately $244,000 from our EarthWhere™ software
business. This represents our increased spending on business development, sales,
marketing and technical development in support of our growth objectives for this
part of our business. In comparison, the net contribution profit from our
storage solutions business (net contribution profit being defined as gross
profit from storage solutions revenue less storage solutions direct operating
expenses) was approximately $1.2 million for the March 2005 quarter
For the
March 2005 quarter, revenue from our storage solutions consulting and
engineering services (“professional services”) grew substantially at 25% over
the March 2004 quarter. The majority of this increase was in the Federal
government sector, where we continue to see most of our new significant
professional services opportunities. Additionally, our storage solutions
maintenance services revenue also increased quarter over quarter. Growing both
professional and maintenance services we believe are critical elements in our
drive to improve overall gross margin performance in our solutions business.
Recently, we have added another OEM supplier, Sun Microsystems, to our list of
OEMs for whose products we provide “first call” maintenance
services.
For the
March 2005 quarter, revenue from our EarthWhere products and services business
was $283,000. Software license sales and related services revenue totaled
$232,000 in the first quarter of 2005, compared to $83,000 in the first quarter
of 2004, a nearly threefold increase. We continued to expand our business
development activity and made significant progress in several new accounts at
large Federal agencies, most of which we expect will provide revenue in 2005.
Our product and service offering continues to be well received and we expect to
invest further to take advantage of the market opportunities.
Results
of Operations
Selected
Consolidated Statements of Operations Data
The
following table presents Consolidated Statements of Operations data for the
quarters ended March 31, 2005 and March 31, 2004, showing the percentage of
revenue for each line item. The table also presents the dollar and percentage
change of each of the items.
| |
|
|
|
|
|
|
|
|
(In
thousands) |
|
For
the three months ended March 31, |
|
$
Change |
|
%
Change |
|
| |
|
2005 |
|
%
of rev |
|
2004 |
|
%
of rev |
|
2004
- 2005 |
|
2004
- 2005 |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales and vendor supplied services |
|
$ |
12,235 |
|
|
78.9
|
%
|
$ |
13,957 |
|
|
82.9
|
%
|
$ |
(1,722 |
) |
|
(
12.3 |
)% |
|
Consulting
and engineering services |
|
|
1,257
|
|
|
8.1
|
|
|
1,005
|
|
|
6.0
|
|
|
252
|
|
|
25.1
|
|
|
Maintenance
services and contract fees |
|
|
2,024
|
|
|
13.0
|
|
|
1,877
|
|
|
11.1
|
|
|
147
|
|
|
7.8
|
|
|
Total
Revenue |
|
|
15,516
|
|
|
100.0
|
|
|
16,839
|
|
|
100.0
|
|
|
(1,323 |
) |
|
(
7.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit (% of respective revenue) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales and vendor supplied services |
|
|
2,642
|
|
|
21.6
|
|
|
2,973
|
|
|
21.3
|
|
|
(331 |
) |
|
(
11.1 |
) |
|
Consulting
and engineering services |
|
|
511
|
|
|
40.7
|
|
|
439
|
|
|
43.7
|
|
|
72
|
|
|
16.4
|
|
|
Maintenance
services and contract fees |
|
|
625
|
|
|
30.9
|
|
|
552
|
|
|
29.4
|
|
|
73
|
|
|
13.2
|
|
|
Total
Gross Profit |
|
|
3,778
|
|
|
24.3
|
|
|
3,964
|
|
|
23.5
|
|
|
(186 |
) |
|
(
4.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative |
|
|
3,535
|
|
|
22.8
|
|
|
3,840
|
|
|
22.8
|
|
|
305
|
|
|
7.9
|
|
|
Depreciation
and amortization |
|
|
355
|
|
|
2.3
|
|
|
311
|
|
|
1.8
|
|
|
(44 |
) |
|
(
14.1 |
) |
|
Total
operating expenses |
|
|
3,890
|
|
|
25.1
|
|
|
4,151
|
|
|
24.7
|
|
|
261
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations |
|
|
(112 |
) |
|
(
0.7 |
) |
|
(187 |
) |
|
(
1.1 |
) |
|
75
|
|
|
(
40.1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense |
|
|
(347 |
) |
|
(
2.2 |
) |
|
(289 |
) |
|
(
1.7 |
) |
|
58
|
|
|
(
20.1 |
) |
|
Charge
for warrant issued to related party for
debt guaranty |
|
|
(1,049 |
) |
|
(
6.8 |
) |
|
--
|
|
|
0.0
|
|
|
1,049
|
|
|
100.0
|
|
|
Other
income (expense) |
|
|
(5 |
) |
|
(
0.0 |
) |
|
(8 |
) |
|
(
0.0 |
) |
|
(3 |
) |
|
37.5
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(1,513 |
) |
|
(
9.8 |
)% |
$ |
(484 |
) |
|
(
2.9 |
)% |
$ |
(1,029 |
) |
|
212.6
|
% |
Results
of Operations for the Three Months Ended March 31, 2005
Compared
to the Three Months Ended March 31, 2004
Revenue. Our
sales of products (hardware and software) and vendor supplied services decreased
from the first quarter of 2004 to the first quarter of 2005. This decrease is
primarily due to the deferral of a customer hardware/software order of
approximately $800,000, which was under a customer evaluation process as of
March 31, 2005. This order was accepted by the customer in April 2005, and
recognized as revenue at that time.
Revenue
from professional services increased by over 25% from the first quarter of 2004
to the first quarter of 2005, and as a percentage of total revenue, increased
approximately 35%. These increases are primarily a result of growth in our
consulting and engineering services in our Federal government
sector.
Revenue
from maintenance services and maintenance contract fees (“first call”
maintenance services and the resale of vendor maintenance contracts) also
increased from the first quarter of 2004 to the first quarter of 2005, and as a
percentage of total revenue, increased approximately 17%. These increases
reflect our continued growth in both the first call maintenance services and
maintenance service renewals sectors.
Gross
Profit and Margin. Gross
profit for the quarter ended March 31, 2005 was down compared to the same period
of the prior year. Of the $186,000 decrease in gross profit, $310,000
(unfavorable) was due to decreased revenue, partially offset by $124,000
(favorable) attributable to a higher gross margin percentage (“gross margin”) in
the first quarter of 2005 as compared to the first quarter of 2004. As we are a
project business, gross margins fluctuate from project to project, and, as a
result, depending on mix, may fluctuate from quarter to quarter.
Gross
margin increased from 23.5% in the March 2004 quarter to 24.3% in the March 2005
quarter. Gross margins on product sales and vendor supplied services were higher
in 2005, primarily from a favorable product mix. Additionally, gross margins on
product sales and vendor supplied services in the March 2004 quarter included
the favorable impact of some significant vendor rebate credits. Before inclusion
of these vendor credits, total Company gross margin for the March 2004 quarter
was approximately 22.0%. Gross margin on consulting and engineering services was
lower in 2005, primarily due to the utilization of outside contractors on a
significant Federal government project. The maintenance revenue gross margins
increased in the first quarter of 2005 in part due to higher sales of vendor
maintenance contracts, which are reported on a net revenue basis.
Operating
Expenses. Operating
expenses comprise selling, marketing, engineering, and general and
administrative (“SG&A”) expenses, as well as depreciation and amortization
expense. For the
three months ended March 31, 2005, SG&A expenses decreased nearly 8% as
compared to the same period of the prior year. This decrease is the direct
result of cost reduction efforts in SG&A expense (employee reductions and
three office closures) implemented in the second half of 2004. This decrease was
achieved even as we significantly increased our investment in expanding our
geospatial software business. At March
31, 2005 we had 108 total employees, of which 16 were employed in our geospatial
business, as compared to 120 total employees at March 31, 2004, of which 8 were
dedicated to our geospatial business.
Depreciation
and amortization expense for the first quarter of 2005 increased, due to a
higher asset base of property and equipment and capitalized software costs in
2005 as compared to 2004.
Interest
Expense. Interest
expense for the first quarter of 2005 increased approximately 20% compared to
the first quarter of 2004. The increase is primarily due to higher interest
rates, which increased on average by nearly 2% in the first quarter of 2005
compared to the first quarter of 2004. Average debt outstanding for the first
quarter of 2005 was $16.5 million as compared to $17.2 million for the
first quarter of 2004.
Charge
for Warrant issued to Related Party for Debt Guaranty. In March
2005 and in consideration for our Harris debt guaranty provided by Sun Capital
II, an affiliate of our majority shareholder, Sun Solunet, we were obligated to
issue to Sun Solunet a stock purchase warrant for a total of 3,086,218 shares of
our common stock with an exercise price of $0.001 per share. Based on the number
of shares issued pursuant to the warrant, we recorded a charge of approximately
$1.1 million, calculated as the number of shares issued multiplied by the
closing market price of SANZ’ common stock as of March 23, 2005, the date of
issuance of the warrant. See further discussion regarding the debt guaranty
warrant issued in the discussion of “—Liquidity and Capital Resources”
below.
Liquidity
and Capital Resources
Liquidity
Our
consolidated financial statements as presented in Part I—Item 1 of this Report
have been prepared in conformity with US GAAP (except with regard to omission of
certain disclosures within interim financial statements, as permitted by the
SEC), which contemplate our continuation as a going concern. However, we have
incurred substantial losses from operations since inception, including a net
loss of $6.3 million for the year ended December 31, 2004, and a net loss of
$1.5 million for the three months ended March 31, 2005. In addition, as of March
31, 2005, we have negative working capital (current liabilities in excess of
current assets) of $16.4 million. Accordingly, as of March 31, 2005, the
recoverability of a major portion of the recorded asset amounts, including
“Goodwill,” is dependent on our continuing operations, which in turn is
dependent on our ability to maintain our current financing arrangements and our
ability to become profitable in our future operations. Our consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary if we were unable to
continue as a going concern.
As of
March 31, 2005, we had $1.8 million in cash and $1.9 million of undrawn
availability on our credit facilities with Wells Fargo and Harris Trust,
resulting in total cash and availability of $3.7 million. While
availability on our Harris Trust credit facility is not subject to asset levels,
borrowing under our line of credit with Wells Fargo is dependent at any time on
our having adequate eligible accounts receivable to support borrowings. For the
three months ended March 31, 2005, we generated positive earnings before
interest, taxes, depreciation and amortization, and other non-operating income
or expense, or EBITDA, however, we recorded a net loss for this same period of
$1.5 million, of which $1.1 million related to a non-cash charge related to
a stock warrant issuance. We must achieve either greater gross profits, or a
continued reduction of operating expenses, or a combination of both, if we are
to achieve true and sustained profitability.
While the
continued efforts to minimize expense, coupled with stabilization or modest
increase in gross profit levels, are currently projected to enable the Company
to reach positive cash flow in 2005, there can be no assurance that we will
succeed in doing so. By generating positive operating cash flow in 2005, and
assuming continuation of current business trends and supplier relations, we
believe that our existing credit facilities are adequate in providing sufficient
liquidity to fund our operations for 2005. However, given the additional
uncertainty regarding the turnaround in the information technology market
sector, there is a possibility that we will need either to undertake further
cost-cutting measures (which could entail curtailing certain operations), or to
raise additional debt or equity capital, or both. If we do seek to raise debt or
equity capital, there is no assurance that it will be available on favorable
terms or in an amount sufficient to avoid further cost-cutting. If equity
capital is raised, the issuance of those shares would also be dilutive to the
ownership interests of all other stockholders.
Wells
Fargo Line of Credit
In March
2005, we amended our $12.0 million credit facility with Wells Fargo. As part of
the amendment, Wells Fargo waived our non-compliance on certain financial
covenants as of December 31, 2004. In addition, Wells Fargo reset the following
financial covenant requirements effective January 1, 2005: (1) minimum net
income on a year to date basis, calculated quarterly (see covenants below);
(2) minimum net worth plus “subordinated debt” (measured in the aggregate,
with amounts loaned to SANZ Inc. and its wholly-owned subsidiary, Solunet
Storage, (the Company’s borrowers) from SANZ being defined as subordinated
debt), calculated on a monthly basis (see covenants below); (3) minimum average
availability of $500,000, calculated monthly; (4) capital expenditure limit of
$1,500,000, calculated on an annual basis; and (5) a minimum cash infusion from
SANZ or an outside source if SANZ Inc. and its subsidiary, Solunet Storage,
generate a net loss in a given quarter and has generated a net loss on a year to
date basis at that time, in an amount equal to the lesser of the quarterly net
loss or the year to date net loss.
|
Period |
Minimum
Net Income (Operating
subsidiaries only) |
|
|
Three
months ending March 31, 2005 |
|
$ |
(300,000 |
) |
|
Six
months ending June 30, 2005 |
|
|
(250,000 |
) |
|
Nine
months ending September 30, 2005 |
|
|
0
|
|
|
Twelve
months ending December 31, 2005 |
|
|
300,000
|
|
|
Period |
Minimum
Book Net Worth
plus
Subordinated Debt
(Operating
subsidiaries only) |
|
| |
|
|
|
|
March
31, 2005 |
|
$ |
26,231,447 |
|
|
April
30, 2005 |
|
|
25,845,023
|
|
|
May
31, 2005 |
|
|
25,370,393
|
|
|
June
30, 2005 |
|
|
26,281,447
|
|
|
July
31, 2005 |
|
|
26,041,364
|
|
|
August
31, 2005 |
|
|
25,645,398
|
|
|
September
30, 2005 |
|
|
26,531,447
|
|
|
October
31, 2005 |
|
|
26,277,279
|
|
|
November
30, 2005 |
|
|
25,910,771
|
|
|
December
31, 2005 and each month thereafter |
|
|
26,831,447
|
|
Additionally,
the amended credit agreement with Wells Fargo includes as an additional
borrower, Solunet Storage, which in March 2005 became a wholly-owned subsidiary
of SANZ Inc., itself a wholly-owned subsidiary of SANZ. As part of the
co-borrowing arrangement with SANZ Inc. and Solunet Storage, each of the
borrowers has a separate borrowing base; however, total borrowings under the
facility may not exceed $12,000,000. Additionally, each entity is required to
guaranty each other’s debt under the borrowing facility. Cash transfers from
SANZ Inc. to Solunet Storage are limited to the funding of Solunet Storage’s
operating expenses, subject to an annual limit, and to a minimum availability on
the date of any such transfer. Solunet Storage may not borrow under the credit
facility with Wells Fargo until certain conditions precedent have been
satisfied.
Also as
part of the amended agreement and effective January 1, 2005, Wells Fargo
increased the interest rate on our borrowings to prime plus 5.0% (10.75% at
March 31, 2005), an increase of three points. This rate is subject to potential
decreases, as permitted by Wells Fargo, based on SANZ Inc. and Solunet Storage
achieving certain net income levels during 2005. As of March 31, 2005, we
were in
compliance with all financial covenants, and in accordance with the amended
credit agreement and based on SANZ Inc. and Solunet Storage achieving a minimum
net loss threshold for the three months ended March 31, 2005, the interest rate
on our borrowings was decreased one point from prime plus 5.0% to prime plus
4.0%, effective May 1, 2005.
Harris
Trust Credit Facility
On
February 16, 2005, we entered into a revised credit agreement with Harris Trust,
which increased our availability by $2.0 million, for a total of $10.0 million,
and consolidated two credit lines (one maintained by Solunet Storage and one
maintained by SANZ) into one facility with SANZ as the sole borrower and
guaranteed by Sun Capital II, an affiliate of our majority shareholder, Sun
Solunet. This facility is unsecured, is not limited by availability under a
borrowing base, does not require the maintenance of specified financial
covenants, and as of March 31, 2005, bore interest at a rate of prime plus 1.0%
or 6.75%. While the Harris Trust facility is a demand note, under the revised
agreement it has been extended to February 2006, unless called earlier by the
lender. We have no reason to believe that Harris Trust will not renew the credit
facilities at that date. Sun Capital II has guaranteed the Harris Trust credit
facility and has agreed that, upon the written request of SANZ, it will provide
SANZ with sufficient funds to repay the debt outstanding under the credit
facility in the event that Harris Trust requires repayment of such debt or, at
Sun Capital II’s election, pay the outstanding debt directly to Harris Trust;
provided that in no event will Sun Capital II’s obligation exceed the amount of
Sun Capital II’s guaranty. This guaranty and all obligations expire on December
31, 2005.
In
exchange for the guaranty by Sun Capital on the increased Harris Trust line of
credit, on March 23, 2005, we issued a warrant to purchase 3,086,218 shares of
our common stock with an exercise price of $0.001 per share to our majority
shareholder, Sun Solunet, which resulted in dilution of the other shareholders
of the Company. Based on the number of shares issued pursuant to the warrant, we
recorded in the first quarter of 2005 a charge of $1.1 million calculated as the
number of shares issued under the warrant multiplied by the closing market price
of SANZ’ common stock on the issuance date. We expect to be required to issue an
additional stock purchase warrant to Sun Solunet on May 16, 2005 in connection
with the guaranty as described in Note 6 of Part I—Item 1 of this
Report.
Cash
and Cash Flows
Our cash
and cash equivalents increased from $0.5 million at December 31, 2004 to $1.8
million at March 31, 2005. For the three months ended March 31, 2005, we used
$3.3 million of cash in operating activities, compared to $5.6 million used
in the same period of 2004. Significant uses of cash from operations for the
first quarter of 2005 were: (1) the net loss incurred for the period of
$1.5 million, less a $1.1 million non-cash charge related to a warrant issued to
a related party; (2) an increase in our accounts receivable of $1.5 million, due
in part to higher customer billings at the end of the March 2005 quarter,
compared to the end of the December 2004 quarter, and partially due to the
granting of extended terms to certain customers; (3) a decrease in our accounts
payable of $1.0 million, due to the timing of payments to suppliers at the end
of the March 2005 quarter; and (4) an increase in inventory of
$0.5 million, primarily attributable to a hardware evaluation unit on site
with a customer at March 31, 2005, which was accepted for purchase by the
customer in April 2005.
Cash used
in investing activities for the first three months of 2005 was comprised of
purchases of equipment of $71,000 and capitalized software costs of $207,000.
Cash provided by financing activities for the first three months of 2005
consisted of net borrowings of $3.1 million on our Wells Fargo line of credit,
and additional borrowings of $1.8 million on our Harris Trust credit facility.
These borrowings were necessitated by the $3.3 million of cash used in
operations for the first quarter of 2005.
Capital
Resources
We
anticipate our capital expenditures for property and equipment for the remainder
of 2005 to be in the range of $50,000 to $75,000 per quarter ($200,000 to
$300,000 annually), consistent with the first quarter’s expenditures of $71,000.
In addition, we will continue to capitalize the development of our EarthWhere™
software products, which we anticipate will be approximately $250,000 per
quarter for the remainder of 2005, as compared to $207,000 in the first quarter.
We expect to fund these capital expenditures from cash, either from operations
or line of credit borrowings.
Contractual
Obligations
In
February 2005, we entered into a lease for additional space for our Vienna, VA
office, effective April 1, 2005 through March 31, 2008, for a monthly rent
amount of approximately $4,000. At the same time, we extended the lease on our
existing office space in Vienna for an additional 17 months, from November 1,
2006 through March 31, 2008, at approximately $6,000 per month. The total
additional commitment through March 2008 for this office space is approximately
$240,000 in the aggregate, in addition to what was previously reported in this
section of our 2004 Annual Report on Form 10-K.
In March
2005, we entered into a lease for additional space for our Stafford, TX office,
effective May 2005. At the same time, we extended the existing lease through May
2008, resulting in a revised monthly rent amount for the existing and additional
space of $5,000. The total lease commitment through May 2008 under the new lease
is approximately $180,000.
In April
2005, we executed a renewal for the lease of our headquarters in Englewood, CO,
effective September 2005 through September 2008, for a monthly rent amount of
approximately $14,000 and a total lease commitment over 36 months of
approximately $500,000.
We expect
to fund our contractual obligations from a combination of cash from operations
and line of credit borrowings. There were no other material changes in our
contractual obligations, excluding bank debt obligations, during the first
quarter of 2005.
Critical
Accounting Policies
We have
not adopted any material changes to our critical accounting policies from those
discussed under this heading in our 2004 Annual Report on Form
10-K.
Recent
Accounting Pronouncements
In
December 2004, the FASB issued SFAS 123R, “Share-Based Payment,” which provides
guidance on share-based payment transactions and requires fair value accounting
for all share-based compensation. SFAS 123R requires the Company to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award, usually the
vesting period. Under SFAS 123R, the Company was required to adopt SFAS 123R at
the beginning of its third quarter of 2005. In April 2005, the SEC postponed the
required adoption of SFAS 123R until the beginning of fiscal years starting
after June 15, 2005, which for SANZ will be effective beginning January 1,
2006.
We are
currently evaluating the impact of SFAS 123R on our financial position and
results of operations as well as alternative transition methods under
SFAS 123R. In addition, we have not determined whether the adoption of
SFAS 123R will result in amounts that are similar to the current pro forma
disclosures under SFAS 123. See Note 3 related to the pro forma effects on
our net income and earnings per share if we had applied the fair value
recognition provisions of SFAS 123 to stock-based employee
compensation.
Item
3. Quantitative
and Qualitative Disclosures about Market Risk
We are
exposed to market risk from changes in interest rates on our outstanding bank
debt. At March 31, 2005, we had $19.3 million in variable, prime rate based bank
debt. At March 31, 2005, our Harris Trust debt of $9.5 million bore interest at
the rate of prime + 1.0% (or 6.75%) and our Wells Fargo line of credit of $9.8
million bore interest at the rate of prime + 5.0% (or 10.75%). At March 31,
2005, a hypothetical 100 basis point increase in the prime rate would result in
additional interest expense of $193,000 on an annualized basis, assuming
estimated borrowing amounts of $9.5 million for Harris Trust and $9.8
million for Wells Fargo. Currently, we do not utilize interest rate swaps or
other types of financial derivative instruments.
Item
4. Controls
and Procedures
We have
adopted and maintain
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)) that are designed to ensure that information required to be
disclosed in our reports under the Exchange Act, is recorded, processed,
summarized and reported within the time periods required under the SEC’s rules
and forms and that the information is gathered and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As
required by SEC Rule 13a-15(b), the Company carried out an evaluation under the
supervision and with the participation of our management, including the Chief
Executive Officer (Principal
Executive Officer) and Chief Financial Officer (Principal
Financial Officer), of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14 as of the end of the period
covered by this report. Based on
the foregoing, our
Chief Executive Officer and Chief
Financial Officer have
concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic SEC filings. We
have not made any changes in our disclosure controls and procedures or in other
factors that could have materially affected or are reasonably likely to
materially affect those disclosure controls and procedures subsequent to the
date of the evaluation described above.
Part
II. Other Information
Item
6. Exhibits
|
(a)
|
|
Exhibits.
The following exhibits are filed with this Form 10-Q: |
| |
|
|
|
10.01 |
|
Third
Amendment to Lease dated as of February 28, 2005 by and between
J.B.G./TYCON 2, L.L.C. and SANZ Inc. |
|
10.02 |
|
First
Lease Amendment dated March 18, 2005 by and between Input/Output, Inc. and
SANZ Inc. |
|
10.03 |
|
Lease
dated as of April 12, 2005 by and between Catlin Properties, Inc. and SANZ
Inc. |
|
31.01 |
|
CEO
Certification pursuant to Rule 13a-14(a)/15(d)-14(a). |
|
31.02 |
|
CFO
Certification pursuant to Rule 13a-14(a)/15(d)-14(a). |
|
32.01 |
|
CEO
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350). |
|
31.01 |
|
CFO
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350). |
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
| |
|
|
| |
SAN Holdings, Inc.
(Registrant) |
|
|
|
| Date:
May 12, 2005 |
By: |
/s/ John Jenkins |
| |
John Jenkins, Chief Executive Officer |
| |
|
| |
|
|
| |
|
|
|
|
| Date:
May 12, 2005 |
By: |
/s/ Robert C. Ogden |
| |
Robert C. Ogden, Chief Financial Officer
(Principal
Financial and Accounting Officer) |
| |
|