SAN HOLDINGS, INC.
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
(Rule 14a-101)
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. __)
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[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [ ] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12 | ||
SAN HOLDINGS, INC. | ||||
(Name of Registrant as Specified In Its Charter) | ||||
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900 W. Castleton Road, Suite 100
Castle Rock, Colorado 80109
NOTICE OF ANNUAL MEETING
November 13, 2003
Dear SANZ Shareholder:
You are cordially invited to attend the SAN Holdings, Inc. annual meeting of shareholders. It will be held at the _______________ Hotel, _____________, Boca Raton, Florida, on Wednesday, December 17, 2003, at 10:00 a.m. local time.
Our Board of Directors has called the meeting in order for shareholders to vote on the election of 11 directors, on a proposal to amend our Articles of Incorporation to increase our authorized shares of common stock and reflect current provisions of Colorado Law, and on the ratification of our auditors. At the meeting, management will give a brief report on the company’s operations and direction. I hope you will be able to attend.
Your proxy card is enclosed. Representation of your shares at the meeting is very important. We urge each shareholder, whether or not you plan to attend the meeting, to promptly return your proxy. If you attend the meeting, you may, if you wish, revoke your proxy and vote in person. The proxy statement and accompanying proxy card will be mailed to shareholders commencing on approximately November 14, 2003.
| Sincerely, /s/ John Jenkins John Jenkins Chairman and Chief Executive Officer |
____________________________________________________
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
Wednesday, December 17, 2003, 10:00 a.m.
___________ Hotel
___________________, Boca Raton, Florida
______________________________________________________________
The Board of Directors of SAN Holdings, Inc. is soliciting proxies to be used at the annual meeting of shareholders and at any adjournments or postponements thereof. We will pay the costs of this solicitation.
In addition to this solicitation by mail, our directors and officers may solicit proxies in person, or by telephone, electronic mail, telegram and facsimile. They will not receive any additional compensation for soliciting proxies. However, we will reimburse banks, brokers and others holding shares in their names or the names of their nominees or otherwise, for reasonable out-of-pocket expenses they incurred in sending these proxy materials to the beneficial owners of those shares.
ABOUT THE MEETING
What Matters Will Be Voted On?
At the meeting, shareholders will be asked to vote upon the following matters:
| 1. | Electing 11 directors to terms expiring at the next annual meeting; |
| 2. | Amending our Articles of Incorporation to increase the number of authorized shares of common stock from 75,000,000 shares to 200,000,000 shares; |
| 3. | Amending our Articles of Incorporation to limit certain distributions, in accordance with current provisions of the Colorado Business Corporation Act; |
| 4. | Ratification of the appointment of Grant Thornton LLP as our auditors for 2003; and |
| 5. | Any and all other business that properly comes before the meeting or any adjournment of the meeting. |
Who Is Entitled to Vote at the Annual Meeting?
All shareholders who owned our common stock and preferred stock at the close of business on the record date, November 14, 2003, are entitled to receive notice of the meeting and to vote the shares they held as of that date at the meeting, and at any postponement or adjournments of the meeting.
What Are the Voting Rights of Shareholders?
On all matters to be considered at the meeting, holders of preferred stock and holders of common stock will vote together as a single class. Each outstanding share of common stock is entitled to one vote. Each outstanding share of preferred stock is entitled to that number of votes equal to the number of shares of common stock into which the preferred stock is convertible as of the record date. As of the record date, each share of preferred stock is convertible into 50,000 shares of common stock.
Who Can Attend the Annual Meeting?
All shareholders as of the record date, or their duly appointed proxies, may attend the meeting, and one guest may accompany each. Seating, however, is limited. Admission to the meeting will be on a first-come, first-served basis. Cameras, recording devices and other electronic devices will not be permitted at the meeting.
What Does It Mean If I Receive More Than One Proxy Card?
It means that you have multiple accounts at the transfer agent and/or with stockbrokers. Please sign and return all proxy cards to ensure that all your shares are voted.
What Constitutes a Quorum?
The presence at the meeting, in person or by proxy, of the holders of a majority of the voting power of the shares outstanding on the record date will constitute a quorum, which will permit us to conduct the proposed business at the meeting. As of November 14, 2003, the record date, 58,407,625 shares of common stock and 748.07306 shares of preferred stock were issued and outstanding. Each preferred stockholder is entitled to 50,000 votes per share on all matters to be voted upon at the meeting, making a total of 37,403,653 votes for the preferred stock. The common and preferred stock combined account for a total of 95,811,278 votes.
Your shares will be counted as present at the meeting if you are present at the meeting or have properly submitted a proxy.
Proxies received but marked as abstentions and broker non-votes will be included in the number of shares considered present to establish a quorum. A broker non-vote occurs when a broker votes on some matters on the proxy card but not on others because he does not have the authority to do so. If not enough shares are present at the meeting for a quorum or to approve proposals, the meeting may be adjourned to permit further solicitation of proxies.
How Do I Cast My Vote?
If you complete and properly sign the accompanying proxy card and return it to us, it will be voted as you direct. If you are a registered shareholder and attend the meeting, you may deliver your completed proxy card in person. Street name shareholders who wish to vote at the meeting will need to obtain a proxy form from the institution that holds their shares. Even if you plan to attend the annual meeting, your plans may change, so it is a good idea to complete, sign and return your proxy in advance of the meeting.
Can I Vote Electronically?
If you are a registered shareholder (that is, if you hold your stock in certificate form), Internet voting is not available for this meeting. If your shares are held in street name, please check your proxy card or contact your broker or nominee to determine whether you will be able to vote electronically.
Can I Change My Vote after I Return My Proxy Card?
Yes. Giving management a proxy does not preclude your right to attend the meeting and vote in person, or to revoke your proxy, in whole or in part, should you so desire. You may revoke your proxy at any time prior to its exercise by:
| o | providing notice in writing, which we receive no later than December 15, 2003, that the proxy is revoked; |
| o | presenting to us, no later than December 15, 2003, a later-dated proxy; or |
| o | attending the meeting and voting in person. |
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What Are the Recommendations of Our Board of Directors?
Our Board of Directors’ recommendations are set forth together with the description of each item in this proxy statement. In summary, our Board of Directors recommends a vote:
| o | for the election of the 11 nominated directors (see pages 4-6) |
| o | for the proposal to increase authorized shares of common stock (see pages 7-8) |
| o | for the proposal to amend our Articles of Incorporation (see pages 8-9), and |
| o | for the proposal to ratify and approve the selection of Grant Thornton LLP as our auditors for 2003 (see page 9). |
Unless you give other instructions on your proxy card, the persons named as proxy holders on the proxy card will vote in accordance with the recommendations of the Board of Directors. With respect to any other matter that properly comes before the meeting, the proxy holders will vote as recommended by the Board of Directors or, if no recommendation is given, in their own discretion.
What Vote is Required to Approve Each Item?
Election of Directors. Directors are elected by a plurality of votes represented at the meeting. This means that the director nominee with the most affirmative votes for a particular slot is elected for that slot, without respect to either broker non-votes or proxies marked “withhold authority.” In an uncontested election of directors, the plurality requirement is not a factor, since the number of candidates is equal to the number of available seats. The 11 nominees receiving the highest number of affirmative votes of common stock and convertible preferred stock, voting together as a single class, and cast at the annual meeting, will be elected directors of our company to serve until the next annual meeting and until their successors have been elected and qualified. A properly executed proxy marked “WITHHOLD AUTHORITY” with respect to the election of one or more directors will not be voted with respect to the director or directors indicated. Accordingly, a “WITHHOLD AUTHORITY” vote will have the effect of a negative vote.
Amendment and Restatement of Articles of Incorporation. Proposals Two and Three require that a majority of the votes represented by all of the Company’s outstanding shares be voted “FOR” the proposals. On each proposal, a shareholder may: (i) vote “FOR” the proposal; or (ii) vote “AGAINST” the proposal; or (iii) “ABSTAIN” with respect to the proposal. When the votes are counted for these proposals, both broker non-votes and proxies marked “ABSTAIN” as to that matter are ignored. Accordingly, an abstention will have the effect of a negative vote.
Ratification of Auditors. Proposal Four requires that a majority of the votes cast at the meeting be cast "FOR" the proposal. A shareholder may:
| o | vote “FOR” the proposal; or |
| o | vote “AGAINST” the proposal; or |
| o | “ABSTAIN” with respect to the proposal. |
Both broker non-votes and proxies marked “ABSTAIN” will be ignored in the tabulation.
If you hold your shares in “street name” through a broker or other nominee, your broker or nominee may not be permitted to exercise voting discretion with respect to some of the matters to be acted upon. Thus, if you do not give your broker or nominee specific instructions, your shares may not be voted on those matters, and will not be counted in determining the number of shares necessary for approval. However, shares represented by “broker non-votes” will be counted in determining whether there is a quorum.
Other Matters. As to any other matters that may properly come before the meeting, a majority of the votes cast by shareholders shall be sufficient to approve the matter, unless otherwise required by law, the Articles, or the Bylaws. Management and the Board of Directors know of no other matters to be brought before the meeting other than as described herein. If any other matters properly are presented to the shareholders for action at the meeting and any adjournments or postponements thereof, the proxy holders named in the enclosed proxy intend to vote in their discretion on all matters on which the shares of common stock represented by such proxy are entitled to vote.
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Do I Have any Dissenters’ Rights?
No. Under Colorado law, dissenters' rights are not available in the election of directors or the other matters to be voted upon at this meeting.
Where Can I Find the Voting Results of the Meeting?
The preliminary voting results will be announced at the meeting. The final results will be included in our annual report on Form 10-K for the year ending December 31, 2003.
Where Can I Find Additional Information About the Company?
Our Form 10-KSB, as amended, for the year ended December 31, 2002 and our Form 10-QSB for the quarter ended September 30, 2003 are being mailed to shareholders with this proxy statement. Note that these documents are not incorporated into this proxy statement, and are not to be considered a part of the proxy statement or soliciting materials.
PROPOSAL ONE:
Election of Directors
Our bylaws provide that our Board of Directors shall consist of no more than 14 members, with the exact number to be set by board resolution. Currently, the number of directors is set at six, and will to be increased to 11 as of the date of the annual meeting.Each director’s term is for one year or until his successor has been elected and qualified, unless he earlier resigns or is removed. Vacancies on the Board of Directors may be filled by a majority of the remaining members. Directors elected to fill vacancies serve until the next annual meeting of shareholders
The Board of Directors has nominated four of its current members, and seven new candidates, for election to the Board. Unless you instruct the proxies differently on your proxy card, the proxies will vote for these nominees. We know of no currently proposed nominee for director who is unwilling or unable to serve. If a nominee is unavailable for election, the proxy holders will vote for another nominee proposed by the board.
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The nominees for director are set forth below.The board of directors recommends a vote “FOR” each of the nominees listed below.
| Name, Age and Year First Elected |
|
| John Jenkins 53 (2000) | Chairman and CEO since November 2000. From January 1995 through June 2000, Mr. Jenkins was CEO, president and a director of TAVA Technologies, Inc., where he led the build-out of a national systems integration business. In 1999, all outstanding TAVA shares were sold in a cash transaction approved by TAVA shareholders. Mr. Jenkins holds a B.S. from the University of Washington and a J.D. from the University of Denver. |
| Marc J. Leder 41 (2003) | Mr. Leder has served as a managing director of Sun Capital Partners, Inc., a private investment firm, since May 1995. Prior to founding Sun Capital Partners (with Mr. Krouse) in 1995, Mr. Leder served in various capacities with Lehman Brothers, an investment bank based in New York City, most recently as Senior Vice President. Mr. Leder also currently serves as a director of Catalina Lighting, Inc., Northland Cranberries, Inc., Celebrity, Inc., and Mackie Designs, Inc., all of which are publicly held companies, and as a director of a number of private companies. |
| Rodger R. Krouse 41 (2003) | Mr. Krouse has served as a managing director of Sun Capital Partners, Inc., a private investment firm, since May 1995. Prior to founding Sun Capital Partners (with Mr. Leder) in 1995, Mr. Krouse served in various capacities with Lehman Brothers, an investment bank based in New York City, most recently as senior vice president. Mr. Krouse also currently serves as a director of Catalina Lighting, Inc., Northland Cranberries, Inc., Celebrity, Inc., and Mackie Designs, Inc., all of which are publicly held companies, and as a director of a number of private companies. |
| Clarence E. Terry 56 (2003) | Mr. Terry has served as a managing director of Sun Capital Partners, Inc., a private investment firm, since September 1999. From October 1973 to September 1999, Mr. Terry was principally employed as vice president of Rain Bird Sprinkler Manufacturing Corporation, a leading irrigation manufacturer. Currently, he also serves as a director of Catalina Lighting, Inc., Northland Cranberries, Inc., Celebrity, Inc., and Mackie Designs, Inc., all of which are publicly held companies, and as a director of a number of private companies. |
| Michael J. Phelan 47 (Nominee) | President and Chief Operating Officer since April 2003. Mr. Phelan joined SANZ in April 2003 pursuant to our acquisition agreement with Solunet Storage, where he had served as president and chief executive officer since the formation of Solunet Storage in September 2002. Mr. Phelan has been involved in sales and management in the computer and UNIX marketplace since 1980, and entered the data storage business in 1990 when he founded StorNet, Inc. He served as president and chairman of the Board of StorNet until the merger of that company with Vanguard Technologies in 2000. Following the merger with Vanguard, Mr. Phelan became a consultant to resulting company but ceased participation in daily operations for a period to pursue personal interests. In late 2001, at the request of the then-current board of StorNet, Mr. Phelan re-joined the company as its acting chief executive officer, a position he held until the sale of StorNet’s assets to Sun Storage by StorNet’s secured lender. Mr. Phelan serves on the advisory boards of a variety of academic and philanthropic organizations. Mr. Phelan holds a B.S. from West Chester University. |
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| Name, Age and Year First Elected |
|
| David L. Kreilein 46 (Nominee) | Vice president of Sun Capital Partners, Inc., a private investment firm, since 2001. Prior to joining Sun Capital, Mr. Kreilein served as chief financial officer for Olan Mills, Inc., a photography company, from 1999 to 2001, chief financial officer of Gateway Communications Inc., a value added reseller of technology products, from April 1999 through August 1999; and chief financial officer for Hamilton Sorter Company Inc., a manufacturer of office furniture, from 1993 to April 1999. Gateway Communications Inc. filed for protection under the federal bankruptcy laws in 1999. Currently, Mr. Kreilein is a director of a number of private companies. |
| Benjamin S. Emmons 34 (Nominee) | Vice president of Sun Capital Partners, Inc., a private investment firm, since 2002. Before joining Sun Capital, Mr. Emmons spent four and one-half years with CIT Business Credit, most recently as marketing manager for the southeast region. |
| M. Steven Liff 32 (Nominee) | Principal of Sun Capital Partners, Inc. since March 2000. From 1994 until joining Sun Capital, he was employed by Bank of America Commercial Finance, most recently as senior marketing executive, focusing on marketing, underwriting and closing new leveraged and turnaround transactions. |
| Gary F. Holloway 52 (Nominee) | Vice chairman of Five Mile Capital Partners, a privately held investment firm. Prior to joining Five Mile Capital Partners and its affiliate, Five Mile Ventures in 2000, Mr. Holloway served as the chairman of the board of Greenwich Capital Markets, Inc., where he previously held the position of president and CEO. He also served as co-CEO of Greenwich NatWest. Mr. Holloway currently serves on the Boards of Directors of Aviation Facilities Corporation, Bank of New Canaan, The Wireless Generation, Inc., St. Luke’s School in New Canaan, CT, The Curry School Foundation at the University of Virginia, and on the Leadership Committee of Special Olympics, Inc. Mr. Holloway holds a BA degree from Washington and Lee University and an MBA from the Colgate Darden School at the University of Virginia. |
| George R. Rea 65 (Nominee) | Business consultant. Mr. Rea has held various senior management positions in several high technology companies, retiring as executive vice president of Conner Peripherals ( NYSE) in 1994. Since retiring, Mr. Rea has served as a business consultant and as a director of private and public companies in high technology and other industries. Currently he is a director of the following public companies: Catalina Lighting, Inc.; Northland Cranberries, Inc., and LOUD Technologies, Inc. |
| C. Daryl Hollis 59 (Nominee) | Independent business consultant. Mr. Hollis, a certified public accountant, has been an independent business consultant since 1998. He currently serves as a director of three publicly held companies: Catalina Lighting, Inc.; Northland Cranberries, Inc.; and LOUD Technology, Inc. |
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTEFOR THESE NOMINEES.
Meetings of The Board and Committees
The Board of Directors held ___ formal meetings during 2002. Mr. Jenkins, the only nominee for director who served as a director during 2002, attended 100% of those meetings. In addition to formal meetings, the Board acted numerous times during 2002 by unanimous written consent after telephonic discussion among the members.
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The Board of Directors has established a compensation committee and an audit committee. Following the election of directors at the annual meeting, the Board will elect members to serve on these committees. Until the resignation of director William R. Hipp in April 2003, each of these committees consisted of Mr. Hipp and director Robert Brooks. Mr. Brooks is not standing for re-election to the Board, and his tenure on these committees will expire as of the annual meeting. The prior audit committee members were independent, and the Board intends to elect the audit committee members who will be independent, as defined by the National Association of Securities Dealers’ listing standards.
The Board of Directors currently does not have an active nominating committee.
Section 16(a) Beneficial Reporting Compliance
Based on a review of filings with the SEC, as well as copies of the reports and written representations we received from directors and officers required to file and their written representations, we believe that during the year ended December 31, 2002, no Directors or officers were late in filing any reports under Section 16 of the Securities Exchange Act.
PROPOSAL TWO:
Amend the Articles of Incorporation
to Increase Authorized Common Stock
From 75,000,000 Shares to 200,000,000 Shares
The Board of Directors is proposing that the number of authorized shares of common stock be increased from 75,000,000 to 200,000,000 (“Proposal Two”).There are two reasons for this proposal. First, to effect the acquisition of Solunet Storage, we issued shares of Series B convertible preferred stock to Sun Solunet LLC, and agreed to seek shareholder approval of an increase in our authorized common stock sufficient to permit conversion of those preferred shares into common shares. Pursuant to our acquisition agreement with Solunet Storage, we agreed to submit this Proposal for shareholder vote at this meeting, and Sun Solunet LLC, now our majority shareholder, agreed to vote its shares in favor of this proposal. Second, we believe that authorizing a large number of additional shares will provide several long-term advantages to the Company and it shareholders. The passage of Proposal Two will enable us to pursue acquisitions, financings, or other transactions which management believes provide the potential for growth and profit. With the extremely limited number of shares currently available, it is difficult for us to evaluate or negotiate business combinations or other transactions, such as equity financings, that might enhance shareholder value.
We continually are seeking and evaluating acquisition opportunities. Stock-for-stock transactions can be quickly completed. However, they would be more likely to be undermined by delays, uncertainties and expenses if the Company did not have sufficient authorized shares available. Acquisitions currently can be completed using preferred stock, cash, debt, or a combination of those methods. However, management and the Board of Directors believe that it is in the best interest of the Company and its shareholders to complete acquisitions for common stock, thereby conserving cash and avoiding the cost and risk of debt financing.
If Proposal Two is passed, shareholder approval will not be sought prior to the issuance of those additional shares unless such issuances relate to a merger, consolidation or other transaction that independently requires shareholder approval. The amendment is being recommended to you at this time in order to avoid any unnecessary delay and expense in connection with seeking shareholder approval for each specific future issuance of shares.
Presently, the Articles also authorize 10,000,000 shares of preferred stock. Proposal Two will not increase or decrease the number of authorized shares of preferred stock The outstanding shares of Series B preferred stock will be converted to shares of common stick automatically upon approval of Proposal Two, and the designation of those preferred shares as Series B preferred shares will be cancelled, restoring those preferred shares to the Company’s authorized shares, available for future issuance.
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Certain Effects of the Proposed Amendment
Management believes that approval of Proposal Two is essential for the growth of the Company and the Board has proposed a substantial increase in authorized common stock to provide flexibility to the Company’s management. However, in deciding how to vote upon Proposal Two, shareholders should consider the following.
These additional shares, if issued, could have a substantial dilutive effect on present shareholders. Our Articles do not grant pre-emptive rights to shareholders. Therefore, shareholders are not entitled to purchase additional shares to maintain a constant percentage of ownership when additional shares are issued.
Proposal Two is not a part of any plan by management to adopt a series of amendments to the Articles or Bylaws so as to make a takeover of the Company more difficult. However, Proposal Two could strengthen the position of management and might make the removal of management more difficult, even if it would be generally beneficial to the Company’s shareholders. The ability to issue a large number of shares without additional shareholder approval provides management with a means to negate the efforts of unfriendly tender offerors by issuing shares to others who are friendly or desirable to management. Also, Colorado law provides that a transaction is not void or voidable solely because a director has an interest in the transaction, if the relationship is known or disclosed and a sufficient number of disinterested directors approve the transaction. This ability to approve transactions with interested parties might be used in takeover or other situations to approve the issuance of shares to an interested party.
Proposal Two is not the result of management’s knowledge of any specific effort to accumulate our securities, or to obtain control of the Company by means of a merger, tender offer, proxy solicitation in opposition to management or otherwise. The Board is not submitting the proposal to enable it to frustrate any efforts by another party to acquire a controlling interest or to seek Board representation.
Management Recommendation and Required Vote
The Board of Directors believes that approval of Proposal Two is in the best interests of the Company and its shareholders, and recommends a vote “FOR” the Proposal.
The affirmative vote of at least a majority of all outstanding votes is required to approve Proposal Two. Sun Solunet LLC, our majority shareholder, has advised us it intends to vote in favor of Proposal Two.
PROPOSAL THREE
Amendment of Articles of Incorporation to Add
a Limitation on Certain Distributions, in Conformity With Current Law
The Colorado Business Corporation Act ( “the Colorado Act”) contains the following provision regarding distributions to shareholders (emphasis added):
No distribution may be made if, after giving it effect:
| (a) | The corporation would not be able to pay its debts as they become due in the usual course of business; or |
| (b) | The corporation’s total assets would be less than the sum of its total liabilitiesplus (unless the articles of incorporation permit otherwise)the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. |
The Company’s Articles of Incorporation currently do not contain the additional language, shown in bold type above, prohibiting distributions which would deplete the Company’s net worth below the amount necessary to fund liquidation rights of outstanding shares.
The wording of our Articles may have been identical to the language of the prior statute, or it may have been drafted in this manner intentionally to address unusual circumstances which existed at an earlier time in the Company’s history. In any event, the Board of Directors believes that current provision of the Colorado Act is a more prudent and fiscally responsible policy, and recommends that the Articles of Incorporation be amended to include this provision, in accordance with the intent of the current Colorado Act. This Amendment is not proposed in order to effect, facilitate, or restrict any transaction or distribution currently proposed or contemplated. The Company has never made a cash distribution to shareholders, and the Board of Directors does not contemplate making any distribution or dividend to shareholders for the foreseeable future.
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If the Amendment is approved by shareholders, the Amendment will be included in Amended and Restated Articles of Incorporation, which will restate the Articles in their entirety in order to delete historical provisions which now are obsolete or unnecessary. These provisions include statements of the purposes and duration of the Company, both of which are no longer required under the Colorado Act. The Board of Directors believes that the Restatement of the Articles of Incorporation will provide a clearer charter for the Company and make it easier for management and for the shareholders to determine the rights and responsibilities of the Company. If the Amendment is not approved, the Board of Directors will adopt Restated Articles, as it is permitted by the Colorado Act to do, which effect the changesotherthan the distribution limitation discussed in this section.
Pursuant to our acquisition agreement with Solunet Storage, we agreed to submit the Amended and Restated Articles of Incorporation for shareholder vote at this meeting, and Sun Solunet LLC, now our majority shareholder, agreed to vote its shares in favor of this proposal.
Management Recommendation and Required Vote
As noted above, the Amendment and Restatement of the Articles of Incorporation will have no effect on any action currently proposed or contemplated by the Board of Directors. Nevertheless, the Board believes that this change is timely and in the best interests of the Company and its shareholders, and recommends a vote FOR Proposal Three
The approval of at least a majority of the outstanding voting shares is required to approve Proposal Three.
PROPOSAL FOUR:
Ratification of Appointment of Auditors
The Board of Directors has appointed Grant Thornton LLP as our independent auditors for the year ending December 31, 2003. Grant Thornton LLP served as our independent auditors for the year ended December 31, 2002. Although law does not require shareholder approval of this appointment or make that approval binding on the Board, we believe that shareholders should be given the opportunity to express their views. If the shareholders do not ratify the appointment of Grant Thornton LLP, the Board will consider this vote in determining whether or not to continue the engagement of Grant Thornton LLP.
The Board of Directors recommends that shareholders vote “FOR” the ratification of the appointment of Grant Thornton LLP. The ratification must be approved by a majority of the votes cast at the meeting.
We do not expect representatives of Grant Thornton LLP to be present at this annual meeting.
Prior Change in Auditors. Causey Demgen & Moore Inc. served as our independent certified public accountant for the fiscal year ended December 31, 2000. On July 23, 2001, we dismissed Causey, Demgen & Moore Inc. and engaged Grant Thornton LLP as our independent accountants. Our Board of Directors approved these decisions.
The report of Causey Demgen & Moore Inc. on our financial statements for the year ended December 31, 2000 did not contain any adverse opinion or disclaimer of opinion, nor was it qualified as to audit scope or accounting principles. In connection with the audit for the year ended December 31, 2000, and from December 31, 2000 to July 23, 2001, we did not have any disagreements with Causey Demgen & Moore Inc. on any matter of accounting principles and practices, financial statement disclosure or auditing scope or procedure.
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Before we engaged Grant Thornton LLP, we did not consult with that firm about any matter concerning the application of accounting principles to any specific transactions, either completed or proposed, or the type of audit opinion that they might issue on our financial statements.
We reported this change of accountants in a Form 8-K Current Report dated July 23, 2001, filed with the Securities and Exchange Commission on July 27, 2001. We requested that Causey Demgen & Moore Inc. review that filing and furnish a letter, addressed to the Commission, containing any new information, clarification, or any respect in which it did not agree with the statements we made in that report. Causey Demgen & Moore Inc.‘s letter, stating that they had read the report and agreed with the disclosure, was filed as an exhibit to the Form 8-K Current Report.
AUDIT MATTERS
Audit Fees. Grant Thornton LLP billed us in the aggregate $67,000 for fees for professional services rendered in connection with the audit of our annual financial statements and reviews of financial statements included in our Forms 10-QSB for the years ended December 31, 2001 and 2002, Grant Thornton LLP billed us $45,000 and $__________, respectively.
Tax Fees.For professional services for tax compliance, tax advice, and tax planning, consisting primarily of preparation of our federal and state tax returns.
All Other Fees.During 2002 Grant Thornton LLP also billed us $10,000 for assistance they provided to us in 2001 in connection with the due diligence review of ITIS Services, Inc. prior to its acquisition in December 2001 and $____________ for assistance with our preparation of a selling shareholder registration statement, which we withdrew before it was declared effective by the SEC.
Audit Committee Report. In accordance with our written charter formally adopted at a meeting on January 17, 2002, the audit functions of the audit committee of the Board of Directors are focused on three areas: |
| o | the adequacy of the company’s internal controls and financial reporting process and the reliability of the company’s financial statements. |
| o | the independence and performance of the company’s independent auditors. |
| o | the company’s compliance with legal and regulatory requirements. |
The members of the audit committee meet with management periodically to consider the adequacy of the company’s internal controls and the objectivity of its financial reporting. We discuss these matters with the company’s independent auditors and with appropriate company financial personnel. |
We meet privately with the independent auditors annually, who have unrestricted access to the committee. We also recommend to the Board the appointment of the independent auditors and review periodically their performance and independence from management. |
The directors who serve on the committee are all independent from management. That is, the Board of Directors has determined that none of us has a relationship to SANZ that may interfere with our independence from SANZ and its management. |
You can find a copy of our charter attached to our 2002 proxy statement as Appendix A. |
Management has primary responsibility for the company’s financial statements and the overall reporting process, including the company’s system of internal controls. The independent auditors audit the annual financial statements prepared by management, express an opinion as to whether those financial statements fairly present the financial position, results of operations and cash flows of the company in conformity with generally accepted accounting principles and discuss with us any issues they believe should be raised with us. |
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This year, we reviewed drafts of the company’s audited financial statements prior to their finalization, and met with both management and Grant Thornton LLP, the company’s independent auditors, to discuss those financial statements. Management has represented to us that the financial statements were prepared in accordance with generally accepted accounting principles. |
We have received from, and had an opportunity to discuss with, Grant Thornton LLP the written disclosure and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees). These items relate to that firm’s independence from the company. We also discussed with Grant Thornton LLP any matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees) |
Based on these reviews and discussions, we recommended to the Board that the company’s audited financial statements be included in the company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002. |
Report submitted by: |
William R. Hipp |
EXECUTIVE OFFICERS
Biographical information about our executive officers who are not also director nominees is set forth below.
Hugh A. O’Reilly, Age 39, Chief Financial Officer, General Counsel and Senior Vice President, Finance and Legal, joined SANZ in December 2001 pursuant to our acquisition agreement with ITIS, where he had served as Senior Vice President – Finance and Administration and General Counsel. Mr. O’Reilly joined ITIS in October 2000. Prior to joining ITIS Services, Mr. O’Reilly was a partner at Nutter, McClennen & Fish LLP, a law firm based in Boston, Massachusetts, where he practiced corporate law for eleven years and served as the primary outside counsel for ITIS. Mr. O’Reilly holds a J.D. from Vanderbilt University and an A.B in English from Dartmouth College.
Chris M. Wilkes, Age 38, Executive Vice President,joined SANZ in April 2003 pursuant to our acquisition agreement with Solunet Storage, where he served as Executive Vice President since the formation of Solunet Storage in September 2002. From December 2001 until Solunet Storage’s acquisition of the assets of StorNet, Inc. in September 2002, Mr. Wilkes served as Vice President of Managed Services for StorNet, Inc. Prior to joining StorNet, Inc., Mr. Wilkes was the Director of Sales of Managed Storage International, a storage services provider, which he joined in 2000. From 1996 until he joined Managed Storage International, Mr. Wilkes was General Manager — South/Central District for Pioneer Standard Electronics, a computer equipment reseller and distributor. Mr. Wilkes holds an MBA from Texas A & M University, and BBA in Marketing from Texas Tech University.
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COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
| Annual Compensation | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Name and principal position | Year | Salary ($) | Bonus ($) | Other Annual Compen- sation ($) | Long Term Compensation Securities Underlying Options/SARs(#) | All other compen- sation($) | ||||||||||||
| John Jenkins, | 2002 | $227,400 | $23,950 | $-0- | 500,000 | $5,500 | ||||||||||||
| President and CEO | 2001 | $188,469 | -0- | $-0- | -0- | -0- | ||||||||||||
| 2000 | $ 58,230 | (2) | -0- | $-0- | 300,000 | -0- | ||||||||||||
| Hugh A. O’Reilly, | 2002 | $192,500 | -0- | $-0- | 200,000 | -0- | ||||||||||||
| Senior Vice President | ||||||||||||||||||
| CFO and General Counsel | ||||||||||||||||||
| Fred T. Busk, III, | ||||||||||||||||||
| Executive Vice | 2002 | $195,900 | -0- | -0- | -0- | $4,188 | ||||||||||||
| President and COO | ||||||||||||||||||
| Holly J. Burlage, C | 2002 | $117,387 | $20,000 | -0- | 50,000 | -0- | ||||||||||||
| 2001 | $143,175 | -0- | -0- | 330,000 | -0- | |||||||||||||
| (1) | Mr. Jenkins became Chief Executive Officer and President in November 2000. |
| (2) | Represents compensation paid pursuant to consulting agreements. |
| (3) | These options are exercisable at $.29 per share. |
| (4) | These options are exercisable at $2.25 per share |
| (5) | Consists solely of company matching contributions to 401(k) defined contribution plan, available to all employees of the company following 90 days of full time employment. |
| (6) | Mr. Busk was our employee from January 1 through December 31, 2002, serving as Executive Vice President and Chief Operating Officer until August, 2002. Amounts shown represent compensation for services in all capacities. |
| (7) | Ms. Burlage served as Chief Financial Officer until August, 2002. |
| (8) | These warrants are exercisable at $.68 per share. |
| (9) | Consists of 100,000 warrants exercisable at $.81 per share, 100,000 warrants exercisable at $.89 per share, 100,000 warrants exercisable at $1.00 per share, and 30,000 options, exercisable at $2.25 per share, which expired prior to exercise. |
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Option and Stock Appreciation Right Grants Table
The following table sets forth information regarding the grant of options (including warrants issued as compensation) (and stock appreciation rights during the year ended December 31, 2002, to each of our executive officers required to be named in the Summary Compensation Table.
| Name | Number of Securities Underlying Options/ SARs granted (#) | Percent of total options/ SARs granted to employees in fiscal year (%) | Exercise or base price ($/Sh) | Expiration date | |||||
|---|---|---|---|---|---|---|---|---|---|
| John Jenkins | 500,000 | 38 | .7% | $.29 | 11/11/2012 | ||||
| Hugh A. O’Reilly | 200,000 | 15 | .5% | $.29 | 11/11/2012 | ||||
| Fred T. Busk, III | -0- | -0- | -- | -- | |||||
| Holly J. Burlage | 50,000 | 3 | .9% | $.68 | 4/30/07 | ||||
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values
The following table shows the number of shares underlying unexercised options (including warrants issued as compensation) held at December 31, 2002 by each of the executive officers required to be named in the Summary Compensation Table, and the aggregate dollar value of in-the-money, unexercised options held at the end of the fiscal year. SANZ has not granted any stock appreciation rights.
| Name | Number of unexercised options at FY-end (#) exercisable/unexercisable | Value of unexercised in-the-money options at FY-end ($) | |||
|---|---|---|---|---|---|
| John Jenkins, CEO | 300,000 / 500,000 | $100,000 | (1) | ||
Hugh A. O’Reilly, CFO | 1,063,982 / 200,000 | $ 72,000 | (2) | ||
Fred T. Busk, III | 1,495,677 / 0 | $ 24,000 | (3) | ||
Holly J. Burlage | 350,000 / 0 | -0-(4) | |||
| (1) | 300,000 of these options are exercisable at $2.25 per share, which is in excess of the market price of the shares at December 31, 2002. |
| (2) | 576,871 of these options are exercisable at $.625 per share, and 287,111 of these options are exercisable at $.70 per share, both of which prices are in excess of the market price of the shares at December 31, 2002. |
| (3) | 1,345,677 of these options are exercisable at $.625 per share, which is in excess of the market price of the shares at December 31, 2002. |
| (4) | Includes 100,000 warrants are exercisable at $.81 per share, 100,000 warrants exercisable at $.89 per share, 100,000 warrants exercisable at $1.00 per share, and 50,000 warrants exercisable at $.68 per share, all of which prices are in excess of the market price of the shares at December 31, 2002. |
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Compensation of Directors
We paid no cash compensation and granted no options to our directors for their services as directors during 2002.
Employment Contracts and Termination of Employmentand
Change in Control Arrangements
We have three year employment agreements with Messrs. Jenkins and O’Reilly which require us to continue paying their salaries for a period of 12 months following termination of employment in the following cases:
| ° | if the employee terminates his employment within 90 days following specified change of control events, |
| ° | if the employee terminates his employment due to our material change of his employment conditions; or |
| ° | if we terminate his employment agreement other than for cause. |
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Common Stock
The table below reflects the number of shares of common stock beneficially owned as of October 31, 2003 by:
| ° | each person or group we believe to be the beneficial owner of more than five percent of our common stock, |
| ° | each director and director nominee, |
| ° | each executive officer required to be named in the Summary Compensation Table; and |
| ° | all directors, director nominees, and executive officers, as a group, as of October 31, 2003. |
Shares of common stock subject to options, warrants and convertible preferred stock currently exercisable or convertible, or exercisable or convertible within 60 days of October 31, 2003, are deemed outstanding for purposes of computing the percentage beneficially owned by the person or entity holding those securities, but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person or entity. Percentage of beneficial ownership is based on 58,407,625 shares of common stock and 748.07306 shares of preferred stock outstanding as of the close of business on October 31, 2003.
Unless otherwise indicated below, the address for each listed director and executive officer is SANZ, Inc., 900 W. Castleton Road, Suite 100, Castle Rock, Colorado 80109
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| Amount and Nature of Beneficial Ownership | |||||||
|---|---|---|---|---|---|---|---|
| Name and address of beneficial owner | # of shares | % of class | |||||
| John Jenkins | 1,040,000 | 1 | .75% | ||||
Marc J. Leder | 57,403,653 | (3) | 59 | .91% | |||
Rodger D. Krouse | 57,403,653 | (3) | 59 | .91% | |||
Clarence E. Terry | -0- | -0- | |||||
Michael J. Phelan | 1,435,091 | (4) | 2 | .42% | |||
David Kreilein | -0- | -0- | |||||
Ben Emmons | -0- | -0- | |||||
M. Steven Liff | -0- | -0- | |||||
Gary F. Holloway | 2,797,209 | (5) | 4 | .79% | |||
George R. Rea | 20,000 | * | |||||
C. Daryl Hollis | -0- | -0- | |||||
Hugh A. O’Reilly | 1,319,593 | (6) | 2 | .21% | |||
Brendan T. Reilly | 4,614,117 | 7 | .90% | ||||
Robert K. Brooks | 150,000 | (7) | * | ||||
All directors, director nominees | |||||||
| and executive officers, | |||||||
| as a group (14 persons) | 67,844,572 | 69 | .20% | ||||
Sun Solunet LLC | 57,403,653 | (8) | 59 | .91% | |||
| c/o Sun Capital Partners II, LP(5) | |||||||
| c/o Sun Capital Advisors II, LP(5) | |||||||
| c/o Sun Capital Partners, LLC(5) | |||||||
| 5200 Town Center Circle, Ste 470 | |||||||
| Boca Raton, FL 33486 | |||||||
Andrew K. Reilly | 4,320,617 | 7 | .40% | ||||
| 7 Extension Street | |||||||
| Newport, RI | |||||||
_______________
| * | Less than 1% |
| (1). | Includes shares of common stock issuable upon the conversion of the Company's preferred stock. The preferred stock will convert automatically into common stock at a conversion ratio of 50,000 : 1 when our Articles of Incorporation are amended to increase the number of authorized shares of common stock sufficient to enable such conversion. This ratio is fixed (subject to adjustment only in the case of stock splits, stock dividends, capital reclassifications and similar events) and is not dependent on the market value of the common stock or any similar factor. The preferred stock contains no obligatory dividends and no preferences over the common stock with respect to dividends, liquidation or other matters (other than the power to vote with the common stock on an as-converted basis) |
| (2). | Includes 500,000 shares underlying an option currently exercisable at $.29 per share, 300,000 shares underlying an option currently exercisable at $2.25 per share, 40,000 shares underlying a warrant currently exercisable at $.625 per share, and 40,000 shares underlying a warrant currently exercisable at $1.25 per share. |
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| (3). | Consists solely of shares held by Sun Solunet LLC (further described in Note 8), over which he may be deemed to have control. |
| (4). | Consists of (a) 500,000 shares of common stock, and (b) 18.702 shares of preferred stock, which are convertible into 935,091 shares of common stock. All such shares are held by Mr. Phelan jointly with his wife. All of Mr. Phelan's shares are subject to a Shareholder Agreement that, among other things, (a) grants Sun Solunet LLC sole power to vote those shares, (b) grants Sun Solunet a right of first refusal on those shares, (c) obligates Mr. Phelan to sell his shares to a party that intends to purchase shares from Sun Solunet LLC, if so demanded by Sun Solunet LLC, and (d) grants Mr. Phelan the right to require a purchaser of shares from Sun Solunet LLC also to purchase a pro rata number of Mr. Phelan's shares on the same terms. |
| (5). | Consists solely of shares held by Hollger LLC, a privately held investment firm, over which Mr. Holloway may be deemed to have control. |
| (6). | Includes: 200,000 shares underlying an option currently exercisable at $.29 per share, 200,000 shares underlying an option currently exercisable at $.33 per share, 576,871 shares underlying an option currently exercisable at $.625 per share, and 287,111 shares underlying an option currently exercisable at $.70 per share. |
| (7). | Includes 50,000 shares underlying an option currently exercisable at $.70 per share, 15,000 shares underlying an option currently exercisable at $.81 per share, 5,000 shares underlying an option currently exercisable at $10.82 per share, 10,000 shares underlying a warrant currently exercisable at $.625 per share and 10,000 shares underlying a warrant currently exercisable at $1.25 per share. |
| (8). | Consists of (a) 19,500,000 shares of common stock owned directly by Sun Solunet LLC, (b) 500,000 shares of common stock owned by Mr. Phelan over which Sun Solunet LLC has voting control, (c) 729.371 shares of preferred stock owned directly by Sun Solunet LLC, which are convertible into 36,468,562 shares of common stock, and (d) 18.702 shares of preferred stock owned by Mr. Phelan over which Sun Solunet LLC has voting control, which are convertible into 935,091 shares of common stock. Marc J. Leder and Rodger R. Krouse may each be deemed to control Sun Solunet, Sun Partners II LP, Sun Advisors II, and Sun Partners LLC, as Leder and Krouse each own 50% of the membership interests in Sun Partners LLC, which in turn is the general partner of Sun Advisors II, which in turn is the general partner of Sun Partners II LP, and Sun Partners II LP owns 99% of the membership interests of Sun Solunet. Therefore, Messrs. Leder and Krouse may each be deemed to have voting and dispositive power over the shares held by Sun Solunet LLC. |
Preferred Stock
The following table sets forth information with respect to ownership of the Company’s preferred stock by:
| o | each person or group we believe to be the beneficial owner of more than five percent of our preferred stock, |
| o | each director and director nominee, |
| o | each executive officers required to be named in the Summary Compensation Table; and |
| o | all directors, director nominees, and executive officers, as a group, as of October 31, 2003. |
Unless otherwise indicated below, the address for each listed director and executive officer is SANZ, Inc., 900 W. Castleton Road, Suite 100,Castle Rock, Colorado 80109
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| Preferred Stock | |||||||
|---|---|---|---|---|---|---|---|
| Name and address of beneficial owner | # of shares | % of class | |||||
| John Jenkins | -0- | -0- | |||||
Marc J. Leder | 748.07306 | 100.0% | |||||
Rodger D. Krouse | 748.07306 | 100.0% | |||||
Clarence E. Terry | -0- | -0- | |||||
Michael J. Phelan | 18.702 | 2.5% | |||||
David Kreilein | -0- | -0- | |||||
Ben Emmons | -0- | -0- | |||||
M. Steven Liff | -0- | -0- | |||||
Gary F. Holloway | -0- | -0- | |||||
George R. Rea | -0- | -0- | |||||
C. Daryl Hollis | -0- | -0- | |||||
Hugh A. O'Reilly | -0- | -0- | |||||
Brendan T. Reilly | -0- | -0- | |||||
Robert K. Brooks | -0- | -0- | |||||
All directors, director nominees | 748.07306 | 100.0% | |||||
| and executive officers, as a | |||||||
| group (14 persons) | |||||||
Sun Solunet LLC(5)(8) | 748.07306 | 100.0% | |||||
| c/o Sun Capital Partners II, LP(5) | |||||||
| c/o Sun Capital Advisors II, LP(5) | |||||||
| c/o Sun Capital Partners, LLC(5) | |||||||
| 5200 Town Center Circle, Ste 470 | |||||||
| Boca Raton, FL 33486 | |||||||
______________________
| (1). | Consists of (a) 729.371 shares of preferred stock owned directly by Sun Solunet LLC, and (b) 18.702 shares of preferred stock owned by Mr. Phelan over which Sun Solunet LLC has voting control. Marc J. Leder and Rodger R. Krouse may each be deemed to control Sun Solunet, Sun Partners II LP, Sun Advisors II, and Sun Partners LLC, as Leder and Krouse each own 50% of the membership interests in Sun Partners LLC, which in turn is the general partner of Sun Advisors II, which in turn is the general partner of Sun Partners II LP, and Sun Partners II LP owns 99% of the membership interests of Sun Solunet. Therefore, Messrs. Leder and Krouse may each be deemed to have voting and dispositive power over the shares held by Sun Solunet LLC. |
| (2). | These shares are held by Mr. Phelan jointly with his wife. All of Mr. Phelan's shares are subject to a Shareholder Agreement that, among other things, (a) grants Sun Solunet LLC sole power to vote those shares, (b) grants Sun Solunet a right of first refusal on those shares, (c) obligates Mr. Phelan to sell his shares to a party that intends to purchase shares from Sun Solunet LLC, if so demanded by Sun Solunet LLC, and (d) grants Mr. Phelan the right to require a purchaser of shares from Sun Solunet LLC also to purchase a pro rata number of Mr. Phelan's shares on the same terms. |
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Change In Control. On April 4, 2003, upon the closing of our acquisition agreement with Solunet Storage, Sun Solunet LLC became our majority shareholder, holding 58.5% of our common stock (including shares of preferred stock that are convertible into common stock). Sun Capital Partners II, LP (“Sun Capital II”) and Sun Capital Partners Management LLC (“Sun Capital Management”) are both affiliates of Sun Solunet LLC.See “Certain Relationships and Related Transactions” at page 18 for more information about these transactions and relationships.
Agreements Relating to Director Nomination and Election.
Pursuant to our acquisition agreement with Solunet Storage, we agreed to nominate and recommend to our shareholders the election of each of the 11 persons nominated for election as a director at this meeting, and Sun Solunet LLC, our majority shareholder, agreed to vote in favor of these nominees.
Pursuant to the terms of a Shareholders Agreement dated as of April 4, 2003 by and among the Company, Sun Solunet, Mr. and Mrs. Michael J. Phelan, and Hollger LLC (a principal shareholder of the Company prior to the Solunet Storage acquisition): (1) the Phelans have (a) agreed to vote the shares of Common Stock owned or controlled by them in the manner specified by Sun Solunet with respect to any matter on which the shareholders of a Colorado corporation generally have a right to vote and (b) granted to Sun Solunet an irrevocable proxy to vote all shares of Common Stock owned or controlled by them; and (2) Sun Solunet has agree to vote the shares of capital stock of the Company owned or controlled by it so that one representative designated by Hollger LLC shall be elected to the Company's board of directors. Gary F. Holloway, a nominee for election at this meeting, is the designee of Hollger LLC.
Certain Relationships and Related Transactions
Pursuant to our acquisition agreement with Solunet Storage, Sun Solunet LLC became our majority shareholder, holding 58.5% of our common stock (including shares of preferred stock that are convertible into common stock). Sun Capital Partners II, LP (“Sun Capital II”) and Sun Capital Partners Management LLC (“Sun Capital Management”) are both affiliates of Sun Solunet LLC.
Pursuant to that acquisition agreement, we entered into a Credit Support Agreement with Sun Capital II under which Sun Capital II has agreed to guarantee a minimum of $3 million of our the debt of the combined company. In addition, under the Credit Support Agreement we may request at any time that Sun Capital II guaranty up to an additional $2 million of our debt. However, Sun Capital II has the discretion whether or not to issue such an additional guaranty if so requested. If it does issue such an additional guaranty and we do not discharge the debt or otherwise obtain a release of the guaranty within eighteen months after its issuance, we will issue warrants to Sun Capital II in payment for that guaranty, and we will be obligated to issue additional warrants to Sun Capital II as further payment at the end of each six-month period that the guaranty is not released.
Sun Capital II fulfilled its commitments under the Credit Support Agreement by guaranteeing two revolving credit facilities that we have established with Harris Trust and Savings Bank. The first facility, established in May 2003, permits us to borrow up to $3.3 million, bears interest at a rate of prime plus ¼% (i.e., currently 4.25%), and expires in May 2004. That facility is unsecured, is not limited by availability under a borrowing base, and does not require the maintenance of specified financial covenants. At September 30, 2003, $3.29 million was outstanding on this facility.
The second facility was established in June 2003 to replace a $10 million revolving loan facility that Solunet Storage, Inc. had maintained with The CIT Group at the time of the acquisition. Following the acquisition, it became apparent that the loan covenants associated with the CIT Group facility were impeding our ability to integrate the operations of Solunet Storage and SANZ. In order to alleviate these impediments, and supported by an additional guaranty by Sun Capital II, we entered into an additional loan facility with Harris Trust and Savings Bank in the amount of $4.2 million and used proceeds of that facility to pay off and retire the CIT Group loan facility. This second Harris Trust facility also bears interest at a rate of prime plus ¼% and expires in August 2004. It is secured by substantially all of the assets of our Solunet Storage subsidiary, but it not subject to any material financial covenants. At September, the full $4.2 million was outstanding on this facility.
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Also pursuant to our acquisition agreement with Solunet Storage, we entered into a Management Services Agreement with Sun Capital Management. This Management Services Agreement replaced and superseded a similar agreement between Sun Capital Management and Solunet Storage that was in effect prior to our acquisition of Solunet Storage. Under the Management Services Agreement, we receive a variety of consulting-type management services and pay a management fee of $75,000 per calendar quarter plus reimbursement of out-of-pocket expenses (subject to increase commencing April 2005). This agreement will remain in effect until the first date when all of the following have occurred: (a) the designees of Sun Capital Management and its affiliates no longer constitute a majority of our Board of Directors; (b) Sun Capital Management and its affiliates no longer own or control at least 30% of our outstanding shares; and (c) Sun Capital Management and its affiliates (including Sun Capital II) no longer guarantee any portion of our debt. If the foregoing three events have not yet occurred, the Management Services Agreement will nonetheless terminate on April 4, 2013. As described above, a portion of our debt has been guaranteed by another affiliate of Sun Capital. While we receive material benefits from this guaranty, we pay no specified cash consideration for the guaranty (although, as also described above, if the guaranteed debt is not reduced to $3 million or less by December 2004 we will be obligated to issue warrants to Sun Capital enabling it to purchase additional common stock). In our financial statements we have reallocated a portion of the amounts paid under the Management Services Agreement, which would otherwise be classified under general and administrative expense, as a payment for the financing-related benefits that it receives under the guaranty (classified under interest expense). The portion of the management fee that has not been so reclassified continues to be reported as general and administrative expense.
OTHER MATTERS
Management and the Board of Directors know of no matters to be brought before the meeting other than as set forth herein. However, if any other matters properly are presented to the shareholders for action at the meeting and any adjournments or postponements thereof, the proxy holders named in the enclosed proxy intend to vote in their discretion on all matters on which the shares represented by such proxy are entitled to vote.
SHAREHOLDER PROPOSALS
We must receive shareholder proposals by February 3, 2004 to be considered for inclusion in management’s proxy statement and proxy for the 2004 Annual Meeting of Shareholders. We must receive shareholder proposals to be presented at the 2004 Annual Meeting, even if not included in our proxy statement, no later than May 5, 2004. Shareholder proposals should be submitted in writing to the attention of the Corporate Secretary.
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