As filed with the Securities and Exchange Commission on January 30, 2004
Registration No. 333-
----------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SORRENTO NETWORKS CORPORATION
(exact name of registrant as specified in its charter)
Delaware 3672 04-3757586
(State or other jurisdiction (Primary Standard Industrial (I.R.S. employer
of incorporation Classification Code Number) Identification No.)
or organization)
9990 Mesa Rim Road
San Diego, California 92121
(858) 558-3960
(Address, including zip code, and telephone number, including
area code, of registrant's principal offices)
PHILLIP W. ARNESON
Chief Executive Officer
Sorrento Networks Corporation
9990 Mesa Rim Road
San Diego, California 92121
(858)-558-3960
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of all communications to:
W. RAYMOND FELTON, ESQ.
Greenbaum, Rowe, Smith, Ravin, Davis & Himmel LLP
Metro Corporate Campus I
Post Office Box 5600
Woodbridge, New Jersey 07095
(732) 549-5600
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
Calculation of Registration Fee
--------------------------- -------------------- ----------------------- ---------------------- ----------------------
Title of each Class of Proposed Maximum
Securities to be Amount to be Offering price per Aggregate Amount of
Registered Registered(1) Share(2) Offering Price(2) Registration Fee
--------------------------- -------------------- ----------------------- ---------------------- ----------------------
Common Stock, par value 8,098,580 $4.69 $37,982,341 $4,815
$.001 per share
--------------------------- -------------------- ----------------------- ---------------------- ----------------------
----------------------
(1) Includes an indeterminate number of shares of common stock issuable to
prevent dilution resulting from stock splits, stock dividends or similar
transactions pursuant to Rule 416 under the Securities Act of 1933, as amended.
(2) The offering price is estimated solely for the purpose of calculating the
registration fee in accordance with Rule 457(c) using the average of the high
and low price reported by The Nasdaq National Market for the Common Stock on
January 29, 2004, which was approximately $4.69 per share. The Registrant hereby
amends this Registration Statement on such date or dates as may be necessary to
delay its effective date until the Registrant shall file a further amendment
which specifically states that this Registration Statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933
or until the Registration Statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to said Section 8(a), may
determine.
SUBJECT TO COMPLETION DATED JANUARY 30, 2004
PROSPECTUS
Sorrento Networks Corporation
8,098,580 Shares
Common Stock
This prospectus relates to the resale, from time to time, by the selling
stockholders named in this prospectus, of up to 8,098,580 shares of our common
stock, consisting of 5,061,613 shares of our common stock sold in private
placements in December 2003 and January 2004, 2,530,806 shares of common stock
that are issuable upon the exercise of the warrants sold in the private
placements, and 506,161 shares of common stock that are issuable upon the
exercise of warrants that were issued to the placement agent in the private
placements upon the closing of the December 2003 and January 2004 placements.
The shares are being registered pursuant to registration rights granted to the
selling stockholders in the private placements.
We will not receive any of the proceeds from the sale of the shares
sold pursuant to this prospectus, and we will bear all expenses incident to
their registration. The selling stockholders will bear all selling and other
expenses. The selling stockholders may sell the shares of common stock described
in this prospectus in a number of different ways and at varying prices. The
price to the public for the shares and the proceeds to the selling stockholders
will depend upon the market price of the securities when sold. See "Selling
Stockholders" and "Plan of Distribution".
Our common stock is quoted on the Nasdaq National Market under the
symbol "FIBR." On January 29, 2004, the closing price for our common stock was
$4.92.
Investing in common stock involves risk. Before you invest, you should
consider carefully the "Risk Factors" beginning on page 13.
The information in this prospectus is not complete and may be changed.
These securities registered hereunder may not be sold until the registration
statement containing this prospectus, which has been filed with the Securities
and Exchange Commission, is declared effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Neither the SEC nor any state securities commission has approved or
disapproved these securities or passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
The date of this prospectus is ______________, 2004.
TABLE OF CONTENTS
Page
----
THE COMPANY....................................................................3
OUR BUSINESS...................................................................4
RISK FACTORS..................................................................13
THE OFFERING..................................................................23
USE OF PROCEEDS...............................................................24
PLAN OF DISTRIBUTION..........................................................26
DESCRIPTION OF OUR COMMON STOCK...............................................28
WHERE YOU CAN FIND MORE INFORMATION...........................................28
FORWARD LOOKING INFORMATION...................................................30
LEGAL MATTERS.................................................................30
EXPERTS.......................................................................30
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES...............................................30
2
THE COMPANY
We are a leading supplier of intelligent optical networking solutions
for metropolitan and regional applications worldwide. Our solutions enable
communication carriers and service providers to offer broadband networking
services over optical fibers for metropolitan and regional applications. Our
technologies permit telecommunications service providers to increase fiber
capacity and fiber bandwidth utilization, reduce network costs and complexity
over scalable and efficient networking platforms. Our optical networking systems
support a wide variety of protocols, mixed speeds of traffic and accommodate
changing traffic patterns directly over optical networks.
Our product solutions include optical access, optical transport, and
network management solutions optimized for access, metro and regional markets,
and combine to create powerful, cost-effective, and easy-to-manage optical
networks. Our dense wavelength division multiplexing, or DWDM, and coarse
wavelength division multiplexing, or CWDM, platforms can be used in enterprise,
access, metropolitan and regional network applications. DWDM technology allows
many optical signals to be transmitted simultaneously on the same optical fiber
by using different wavelengths of light to distinguish the signals. This
technology increases optical network capacity and flexibility.
Our comprehensive suite of optical networking interfaces and optical
access multiplexers allows us to also address video on demand, storage area
networking, data center fail-over recovery, and internet connectivity
applications. Our CWDM products provide a lower cost, entry level solution that
can be used for enterprise and carrier customer access and that complement our
DWDM product line. Multiplexing is a process that combines a number of lower
speed data streams into one high-speed data stream.
We also have two powerful network management solutions for our DWDM
product line. Addressing all key management aspects - fault, configuration,
performance, and security - these systems conform to North American and
international standards and are simple to learn and use. We have a robust,
carrier-class management system that offers broad functionality, including
equipment/facilities management, fault management, performance monitoring,
security control, alarm filtering, and remote download. We also have an
enterprise network management solution that provides an intuitive graphical
interface and covers operations, administration, maintenance, and provisioning
functionality for our DWDM networks.
We currently have an installed base with over 20 communications service
providers and system integrators worldwide, including AT&T Broadband, now
Comcast Corporation, Deutsche Telekom, Cox Communications, Time Warner Telecom,
United Pan-Europe Communications, El Paso Global Networks and Edison Carrier
Solutions.
Our shares of common stock are traded on the Nasdaq National Market
under the symbol "FIBR."
Our principal executive offices are located at 9990 Mesa Rim Road, San
Diego, California 92121. Our telephone number is (858) 558-3960. Our website is
sorrentonet.com. We do not intend the information found on our website to be a
part of this prospectus.
3
OUR BUSINESS
Understanding Our Market
Rapid Growth in Bandwidth Demand
Fueled by the growth of the Internet, the volume of data traffic
transmitted across telecommunications networks now exceeds voice traffic. The
growth of data traffic is attributable to increased Internet usage, increased
access speeds and greater use of bandwidth intensive applications. Bandwidth
means the capacity to move information down a communications channel. Bandwidth
is defined by the highest data rates that can be transmitted by that channel and
is commonly measured in bits per second.
Migration of Network Infrastructure
Traditional copper-based and SONET/SDH based telecommunications
infrastructures were originally designed for voice traffic. These
infrastructures do not scale effectively to provide the bandwidth needed to
support the growth in high-speed data traffic. In addition, these
infrastructures need network-wide upgrades in order to accommodate growing
traffic thus resulting in long delays for provisioning new services.
DWDM and CWDM technologies are more flexible, more efficient and more
scalable networking alternatives for meeting the growing demand for bandwidth
and new broadband services. Broadband means technologies or networks that have
the ability to transmit high data rates. DWDM is a sophisticated
opto-electronics technology that uses multiple wavelengths of light very
efficiently to greatly increase the number of video, data or voice channels of
information that can be sent on a single optical fiber. Synchronous Optical
Network, SONET, is a telecom transmission protocol for high-speed transmission
over fiber optic cable, which was introduced by Bell Communications in 1984 and
quickly accepted by American National Standards Institute. SDH stands for
Synchronous Digital Hierarchy, which is transmission protocol for high-speed
transmission over fiber optic cable published in 1988 by the Consultative
Committee for International Telegraph and Telephony. It is a transmission
protocol used outside the United States, mostly in Europe, that is similar to
SONET.
DWDM networks were first deployed in long-haul applications. However,
optical solutions specifically designed to address the challenges faced by
metropolitan markets have significantly lagged in deployment. Accordingly, metro
networks are considered to be traffic bottlenecks in the fast and efficient
transmission of data.
Enhanced Competition in the Service Provider Market
Worldwide deregulation in the telecommunications industry has led to an
increase in the number of service providers seeking to address the growing
demand for bandwidth. In the U.S. and internationally, traditional service
providers such as incumbent local exchange carriers (ILECs), inter-exchange
carriers (IXCs) and post, telephone and telegraph companies (PTTs) are seeing
new entrants in the broadband networking market seeking to capitalize on the
growing demand for bandwidth. A number of competitors to these incumbents are
building new data-centric networks to address the present bandwidth bottlenecks
in the metropolitan markets, including utilities and cable television companies
which are upgrading their current networks and
4
are leveraging existing investments in fiber optic infrastructure to deliver
high-speed data services in both the local and regional markets. This enhanced
competition in the carrier and service provider markets is driving increased
capital expenditures on network infrastructure that is focused on delivering
scalable high-speed data services in a cost efficient manner.
Network Topography
The following describes each of the network segments within the optical
network hierarchy:
Long-haul networks are high capacity networks that connect
service providers and carry voice and data across large geographic
regions, typically spanning distances up to 4,000 kilometers.
Long-haul networks are relatively simple networks, built around
SONET/SDH technology and are primarily designed only to satisfy
service provider long haul network capacity requirements.
Metropolitan core (metro-core) networks connect the central offices
of service providers in a metropolitan area and facilitate the
transport and switching of traffic within extended metropolitan
areas and between the network edge and long-haul networks.
Metropolitan core networks are typically implemented in ring
configurations and reach ring circumferences up to 300 kilometers.
In order to efficiently use the optical network, sub-rate
multiplexing devices aggregate traffic into wavelengths carrying
higher speed aggregate bit rates across telecommunications
networks. Regional networks typically transport voice and data
traffic between cities across distances of 200 to 600 kilometers or
more.
Access networks connect enterprises or traffic aggregation nodes,
in multiple locations throughout metropolitan areas, to service
providers' central offices or connect different end-user locations
to each other. In order to efficiently use the optical network,
optical access devices aggregate traffic from end users into
wavelengths or wavelength bands for transport across
telecommunications networks. Because access networks must support
the varying demands of end users, these networks tend to be very
complex.
Metropolitan Area Optical Network Opportunity
Although optical technologies are being deployed in long-haul networks
to relieve capacity constraints, these solutions are not specifically designed
to address the issues inherent in metropolitan and regional optical networks.
Data is normally mapped into the voice multiplexing hierarchy for transport over
the long-haul network. Metropolitan optical networks are characterized by
varying traffic patterns and protocols as well as varied topologies and end-user
requirements, making them more complex and difficult to manage than long haul
networks. As a result, service providers have only recently begun to exploit the
benefits of optical technologies in metropolitan optical networks.
The optical networking market has seen a substantial downturn. The
metro WDM market, which was expected to increase, has also experienced a
slowdown as capital spending has declined throughout the telecommunications
industry. Although we believe that the metro WDM world-wide market will grow
significantly in the years to come, such growth is not likely to
5
occur until capital spending resumes in the markets we serve, and we are unable
to assess at present when this might take place. According to industry analysts,
including Ryan, Hankin and Kent and others, the metro WDM market in 2001 was
about $1.2 billion worldwide and is expected to grow to $3.6 billion by 2005.
Regional Optical Network Opportunity
In addition to the metropolitan market, recent engineering enhancements
have permitted the use of DWDM networking platforms for regional optical
networking applications. This development opens up the opportunity to address a
portion of the substantial long haul market. In some regions, e.g., Europe,
regional solutions apply to the majority of the networks installed. Industry
researchers recently started looking at reclassifying the regional market
opportunity, although statistical data for this market are not available.
Specific Challenges Facing Metropolitan and Regional Optical Networks
Service providers face numerous specific challenges in addressing
metropolitan and regional optical networks:
Scalability Limitations. Originally constructed for voice
traffic, the current network infrastructure based on SONET/SDH
technology does not allow for the network efficiencies necessary to
address the shift to a predominantly data-driven network. Due to
its inherent lack of scalability, the current network
infrastructure may require service providers to undertake the
expensive and tedious process of replacing network equipment or
adding new layers of similar equipment in response to changes or
increases in bandwidth demand. Alternative approaches to WDM are
being developed by other vendors to address the scalability of the
SONET/SDH networks. These nonstandard solutions are called next
generation SONET/SDH and can minimize the wasted bandwidth of
legacy SONET/SDH. While these solutions allow carriers to combine
voice and data on the same network, such solutions do not, however,
expand the amount of bandwidth available and are, therefore, unable
to accommodate the need for large amounts of bandwidth.
Need to Support Multiple Protocols. Metropolitan optical networks
are characterized by a wide variety of protocols. The inability to
support multiple protocols and services from a single platform
further increases the cost and complexity of the metropolitan
networks. Alternative approaches to WDM are being developed by
other vendors to address the requirement for support of multiple
services. These nonstandard solutions are called multi-service
provisioning platforms (MSPP). These solutions generally carry out
protocol conversions and are much more complex than WDM solutions.
Market Downturn. Virtually all telecom related market segments have
suffered a decline in demand in the current economic downturn. What
was once viewed as only a long-haul decline in market demand has
now affected the regional and metropolitan networks as both
enterprise and carrier business have cut back capital spending.
Although we expect that demand in the regional and metropolitan
markets will be strong in future periods, there are no assurances
that capital spending will resume within this sector in the near
term.
6
Several Stages of Conversion. Present solutions require several
conversions to transport data through a metropolitan network. In
the access networks, aggregation of traffic often requires protocol
conversions into a common protocol before optical transmission. In
the central office, data is often demultiplexed and converted into
electrical signals for regeneration, switching or further
aggregation into higher capacity links and then reconverted into
optical signals for transmission in the metro-core network.
Inefficient Bandwidth Utilization. Within metropolitan optical
networks, service providers must cater to end-users with varying
access speeds. Current optical access solutions do not make
efficient use of scarce wavelength resources. Service providers
must assign a full wavelength to each signal, whether or not the
end-user requires the full bandwidth potential of each wavelength.
Difficulty of Network Management. Multiple protocols and services,
coupled with the lack of standards that exist in metropolitan
optical networks, make network management functions, such as
performance monitoring and configuration, exceedingly difficult.
Lack of a robust network management platform further adds to the
cost and complexity of metropolitan optical networks.
Need for New, Enhanced Service Offerings to Generate New Revenue
Opportunities. Service providers are searching for next-generation
solutions that will enable them to generate additional sources of
revenue from offering new or enhanced services to their customers.
Current solutions typically require the service provider to deploy
equipment that is specifically designed for a particular service
and transmission rate. Next-generation solutions must be able to
offer enhanced features, wavelength provisioning and
bandwidth-on-demand, that end-users will increasingly request from
service providers.
Our Solution
Our solutions feature products designed to specifically address the
shortcomings of legacy SONET/SDH networks and to facilitate offering new
services throughout metropolitan and regional optical networks. We enable our
customers to meet the rapidly growing demand for bandwidth by offering
end-to-end access, metropolitan and regional optical networking solutions for
the aggregation, transport and management of traffic. Our current products,
including our GigaMux'r' 6400 DWDM transport system, our EPC'TM' sub-rate
multiplexing modules, our GigaMux'r' 3200 and 1600 DWDM and CWDM transport
systems, as well as the network management product line that includes GigaView
'TM', TeraManager'TM' and TeraConfigurator'TM', are specifically designed to
meet the unique requirements of the metropolitan and regional markets.
Our optical networking solutions offer numerous benefits including:
Cost Effective Entry-Level Access Solution. Our GigaMux'r' 3200 and
1600 DWDM and CWDM platforms allow low cost multiplexing of up to
sixteen wavelengths carrying a mix of protocols and signals for
access applications. The 3200 and 1600 products enable customers to
seamlessly and cost effectively mix CWDM and DWDM on the same
platform and on the same fiber. These products also provide
patented,
7
cost effective and feature rich in wavelength management
capabilities. The 3200 and 1600 products also reduce customer
operating costs by enabling the same modules to be used across
every platform, thereby reducing sparing costs.
Scalable Architecture. We have created an optical networking
solution that simultaneously transmits voice, data, and video over
optimized fiber channels. The modular architecture of our solution
enables service providers to incrementally expand capacity as their
bandwidth needs increase. This simple, scaleable, and functional
solution solves short and long-term service provider problems,
which enhances their ability to reduce costs and offer value-added
services. For example, a service provider can begin deployment with
a single channel and later expand up to 64 channels, providing up
to 640 gigabits per second, or Gbps, of transmission capacity
without interrupting existing traffic. A fiber channel is a serial
data transfer architecture standard conceived for new mass storage
devices and other peripheral devices that require very high
bandwidth connections. Bit rates for fiber channels are either 1.06
Gbps or 2.1 Gbps.
Protocol and Signal Transparency. Our suite of solutions transports
a mix of protocols and signals, including SONET/SDH, Asynchronous
Transfer Mode (ATM) over SONET, Internet Protocol (IP) over SONET,
Gigabit Ethernet, Fibre Channel and Enterprise System Connectivity
in their native formats over numerous wavelengths in the same
fiber. This transparency provides operational simplicity in that
the service provider can offer networking connectivity without
having to worry about protocol conversions. This is particularly
important in metropolitan areas where multiple protocols are
utilized and data transmission rates change often. The transparency
of our solution eliminates the unnecessary conversions from optical
to electrical and back to optical, as well as eliminates several
layers of equipment that would otherwise be required in the
transport and switching of traffic, thus reducing network
complexity and signal latency.
Protocol Aggregation. Our EPC'TM' optical access multiplexer
aggregates traffic, of varied rates utilizing a wavelength per
direction of transmission, from businesses and network points of
presence for transport throughout optical networks. This
aggregation allows better utilization of wavelengths and lowers
capital expenditures of telecom service providers by reducing
investments in excess network capacity.
Manageability. The design of our end-to-end optical networking
solution will allow service providers to perform network management
from a single platform with our TeraManager'TM' product. This
intelligent optical network element management software platform
provides fault, configuration, performance, and security management
utilizing an easy-to-use graphical user interface that allows point
and click network provisioning and monitoring.
Regional Optical Transport. Our solution permits service providers
to expand beyond the confines of metropolitan networks using the
same platform for metropolitan and regional applications. Regional
networks can now be built using the lower cost solutions developed
for the metropolitan environment.
8
Our Strategy
Our objective is to become a leading supplier of intelligent optical
networking solutions for metro and regional applications worldwide. The key
elements of our strategy are to:
Enhance our optical networking solutions
We intend to continue to enhance our existing family of optical
networking products and to introduce new products that increase the
functionality of our end-to-end optical solution. We introduced
TeraManager'TM' and TeraConfigurator'TM' in our management solution
portfolio in fiscal 2002. We introduced a new 10-port Gigabit Ethernet
multiplexer in December 2003 for video on demand and large commercial
applications. The combination of our GigaMux'r' optical transport
products, with the EPC'TM' sub-rate multiplexers, and TeraManager'TM',
our carrier class network management product, creates an intelligent
all-optical transport solution.
Leverage our engineering expertise
We intend to leverage our engineering expertise in the areas of
optical, mechanical, electrical and network management design to
continue to provide leading end-to-end metropolitan and regional
optical networking systems and to expand our market share. We believe
we were the first company to commercially ship a metropolitan optical
networking product using DWDM technology. As of December 31, 2003, we
had a skilled team of 49 engineers that continually focus on developing
products for the metropolitan and regional optical transport market. We
believe that our technological expertise has been the key to our
success and will enable us to rapidly develop new product offerings and
end-to-end optical solutions for the metropolitan and regional markets.
Allow our customers to leverage their fiber assets by offering
revenue-generating services
The majority of our existing customers and targeted customers
have a large amount of fiber assets in the metropolitan and regional
network infrastructure. We intend to continue to develop and provide
solutions that will enable our customers to leverage their existing
fiber infrastructure to deliver revenue-generating services, while
reducing their overall network costs. In addition, we believe our
existing customer base provides us with an advantage when competing for
new customers. We intend to continue to work closely with our customers
and invest in sales and marketing resources to maintain our high level
of customer service and remain responsive to our customers' changing
needs.
Aggressively pursue expense reduction initiatives
We continue to aggressively pursue cost reduction initiatives to
bring our expenses in line with current and future anticipated
revenues. Such reductions may affect the size of our workforce, and may
require decreasing our operating expenses and capital spending. During
the past two fiscal years we have concentrated on implementing
initiatives that have lowered our operating costs and anticipate the
need for continued cost reductions if sales volume does not increase in
the near future.
9
Maintain our sales, service and support organizations worldwide
We intend to continue to market our products worldwide. We
currently have sales, service and support teams in North America,
Europe and Asia. We believe that sales, service and support efforts on
a customer-by-customer basis are most effective due to the technical
evaluation and significant investments that are made by our customers.
Expand our product and customer base through careful acquisitions
We intend to expand our addressable market by adding
"best-of-breed" optical access products to our metro/regional portfolio
and enhance our edge-to-core network offerings. The recent acquisition
of LuxN, Inc., is a prime example of such expansion. LuxN supplies
optical access equipment for the network edge using CWDM and DWDM
technology. LuxN's OSMINE-certified products enable delivery of
high-bandwidth data, storage, video, and voice services for service
providers, cable MSOs, and enterprises. Our union with LuxN broadens
our 30-plus blue-chip customer base by adding over 20 new customers
including Time Warner Telecom, Hawaii I-Net, Yipes Enterprise Services,
and numerous universities.
Products
Our family of optical networking systems is designed to provide our
customers with end-to-end solutions for the metropolitan and regional optical
networking markets. Our transport, access, switching and network management
systems include the following products, some of which are still in development.
GigaMux'r' 6400 -- DWDM Optical Transport
Our GigaMux'r' 6400 optical transport product utilizes DWDM technology
to expand the capacity of new and existing fibers and enable traffic to travel
throughout metropolitan optical networks without optical to electrical to
optical conversions at each intermediate node. Our GigaMux'r' 6400 features
wavelength translation, wavelength multiplexing, optical amplification, optical
add-drop multiplexing, protection switching and performance monitoring. The
scalable and modular architecture of our GigaMux'r' 6400 product enables service
providers to easily and cost-effectively expand their existing networks as
bandwidth requirements increase. The GigaMux'r' 6400 can simultaneously
transport multiple protocols bi-directionally over one or more fibers, which
reduces the cost and complexity of the network. As part of our focus on
video-on-demand transport, we recently introduced a 10-port Gigabit Ethernet
multiplexer for GigaMux'r' 6400 metro/regional DWDM system targeted at the cable
multi-system operator community.
Our GigaMux'r' 6400 product is Network Equipment Building Standards; or
NEBS, level III certified. As of December 31, 2003, we have shipped our
GigaMux'r' product to over 20 direct carrier customers or resellers worldwide.
Our GigaMux'r' product includes the following key features:
Scalability: the system can grow from 1 to 64 protected channels
(640 Gbps/fiber) without a major upgrade or service interruption.
10
Protocol transparency: the system can aggregate and transport
SONET/SDH (OC-3/STM-1 through OC-192/STM-64 carrying voice, IP or
ATM traffic), ESCON, Fibre Channel, Fast Ethernet, Gigabit Ethernet
and video.
Modular protection: the system's modular protection system allows
redundancy to be implemented at any point in the network.
Add/drop channels: the system is equipped with add/drop modules
that allow specific channels to be added or dropped while all other
channels pass through. Our filter subsystem can add or drop from
single channels to larger wavelength bands.
Reach: Up to 600 kilometers with optical amplifiers and up to 1,000
km with the addition of dispersion compensation.
EPC'TM' - Sub-Rate Access Multiplexers
Electric Photonic Concentrator, or EPC'TM', is our sub-rate access
multiplexer product that aggregates a wide variety of traffic from businesses
and network points of presence for high-speed transport throughout optical
networks. The traffic is aggregated and effectively shares a wavelength per
direction of transmission and can be ported directly into the DWDM stage of our
GigaMux'r' 6400. EPC'TM' is designed to lower the cost and increase the
efficiency of bandwidth delivery within optical networks.
Our EPC'TM' products include the following key features:
Support for asynchronous or synchronous (SONET/SDH) time
division multiplexing of data
Provisionable bit rates and protocol and overhead transparency
GigaMux'r' 3200 and 1600 - DWDM and CWDM Optical Transport
Our GigaMux'r' 3200 and 1600 platforms feature the flexibility and
value needed for optical access and metro applications. The GM 3200 and 1600 can
scale up to 16 protected wavelengths of DWDM or 8 protected wavelengths of CWDM,
respectively, optimizing the cost of ownership for differing application needs.
The system features wavelength translation, wavelength multiplexing, optical
amplification, optical add-drop multiplexing, protection switching, and
comprehensive management and performance monitoring.
The GM 3200 and 1600 modules are supported in 4 different chassis
options (GM 3234, GM 3217, GM 1608, and GMX 128), ranging from 1 to 64
wavelengths in capacity. All modules are common across multiple chassis allowing
ease and simplicity of sparing and flexible provisioning. Whether the CWDM/DWDM
equipment is positioned at the Central Office or customer premise, Sorrento
utilizes an industry leading form factor to keep rack space to a minimum. The
operational flexibility is extended to multi-rate software provisioning, varying
methods of protection, with DC and AC power support across all chassis. The GM
3200 and 1600 design is focused on providing simple intelligent optical access
solutions at a low cost of ownership to the carrier providing a quick ROI with
ease of implementing new revenue services.
11
Our GigaMux'r' 3200 and 1600 product is Network Equipment Building
Standards; or NEBS, level III certified. As of December 31, 2003, we have
shipped our GigaMux'r' 3200-1600 products to over 20 customers worldwide. Our GM
3200 - 1600 product includes the following key features:
Affordable pay-as-you-grow architecture featuring a low entry price,
modular design, and the ability to add more services without interrupting
the existing traffic.
Multi-rate, multi-protocol on the same hardware, supporting GbE, 1G & 2G
Fibre Channel, ESCON, FICON, OC-3 thru OC-192, digital video, 10 GbE
LAN/WAN PHY and more.
Support for all access and metro topologies (including point-to-point,
linear add/drop, ring, and mesh) over single or dual fibers with distances
over 250 km.
Four different chassis options starting at 2RU in height (3.5") and scaling
from 1 to 64 wavelengths in capacity.
Cost effective In-Wavelength Management, eliminating the need for a
separate Optical Supervisory Channel.
Support for both CWDM and DWDM in the same chassis and on the same fiber,
utilizing the same form factor for all modules - maximizing service
flexibility and greatly reducing sparing and inventory costs.
TeraManager'TM' -- Element Management System
TeraManager'TM' is our TLl-based intelligent element management
software platform that provides fault, configuration, performance and security
management for all the Sorrento networks products and for networks built with
such products. Service providers can operate our network management platform
through an easy-to-use graphical user interface, which gives users a complete
network view and enables point and click provisioning and monitoring.
Our TeraManager'TM' product includes the following features:
Fault, configuration, security and performance management
Carrier class performance
Interface with higher layer operation support systems
Meret Optical Communications
Our optical networking subsidiary, Meret Communications, Inc., doing
business as Meret Optical Communications, also markets our new CWDM product, as
well as feature-rich video transport and switching, radio frequency, or RF,
transmission, and RF synthesis products.
Liquidity and Capital Resources
12
We finance our operations through a combination of internal funds,
investments and debt and equity financing. At October 31, 2003 our working
capital was $10.2 million including $5.3 million in cash and marketable
securities. Our business requires substantial investments into research and
development and sales and marketing projects and activities to remain
competitive. In addition we have incurred substantial expenses in legal and
administrative costs associated with restructuring our Series A Preferred Stock
in our main operating subsidiary, Sorrento Networks Inc., and our Senior 9.75%
Convertible Debentures at Sorrento Networks Corp. As a result we have incurred
significant losses in prior periods and expect to incur losses in the future.
We anticipate that our available cash resources and marketable
securities available for sale together with the proceeds of our private
placement, will be sufficient to meet our presently anticipated capital
requirement for the next year. Nonetheless, our future capital requirements may
vary materially from those now planned including the need for additional working
capital to accommodate planned growth, integration of acquisitions, hiring and
infrastructure needs. There can be no assurances that our working capital
requirements will not exceed our ability to generate sufficient cash internally
to support our requirements and that external financing will be available or
that, if available, such financing can be obtained on terms favorable to us and
our shareholders.
RISK FACTORS
We have substantial debt, and we may not generate sufficient cash flow to meet
our debt service obligations.
Our total debt consists primarily of approximately $12.6 million
principal amount of 7.5% debentures with a maturity date in August 2007, and
mortgage debt of approximately $3.6 million. The amount of our debt could have
important consequences, including:
impairing our ability to obtain additional financing for working
capital, capital expenditures, acquisitions or general corporate
purposes;
requiring us to dedicate a substantial portion of our operating
cash flow to paying principal and interest on indebtedness, thereby
reducing the funds available for operations;
limiting our ability to grow and make capital expenditures due to
the financial covenants contained in our debt arrangements;
impairing our ability to adjust rapidly to changing market
conditions, invest in new or developing technologies, or take
advantage of significant business opportunities that may arise;
placing us at a competitive disadvantage compared to our
competitors that have less debt; and
making us more vulnerable if the current general economic downturn
continues or if our business experiences difficulties.
13
If we cannot generate sufficient revenues, we may not be able to meet
our debt service obligations, repay our debt when due, or comply with other
covenants in the 7.5% debentures. If we breach our obligations under the 7.5%
debentures, the holders could require repayment of all amounts owed, and we may
not have sufficient cash reserves to repay such amounts.
We may be unable to raise the funds necessary to repay or refinance our
indebtedness.
We are obligated to make interest payments on the 7.5% debentures on a
quarterly basis each year until 2007, when the 7.5% debentures mature. We have
the option to pay interest in shares of our common stock and in additional 7.5%
debentures to a certain limitation rather than cash. Upon maturity in August
2007 we may need additional capital to fund the repayment of the 7.5%
debentures. Our ability to arrange financing and the cost of financing if
necessary, to repay these debentures will depend upon many factors, including:
general economic and capital markets conditions generally, and
in particular the non-investment grade debt market;
credit availability from banks or other lenders;
investor confidence in the telecommunications industry generally
and our company specifically; and
provisions of tax and securities law that are conducive to raising
capital.
If we need additional funds and are unable to raise them, our inability
to raise them will have an adverse effect on our operations. If we decide to
raise additional funds by incurring debt, we may become subject to additional or
more restrictive financial covenants and ratios.
A significant number of shares of our common stock issued in connection with the
restructuring transaction we undertook in June 2003, and in connection with the
December 2003 and January 2004 private placements, may be sold into the market.
This could cause the market price of our common stock to drop significantly,
even if our business is doing well.
Pursuant to the restructuring transaction we undertook in June 2003
with the former holders of our subsidiary's Series A Preferred Stock and our
then outstanding 9.75% Senior Convertible Debentures, we registered for resale
15,000,000 shares of our common stock that were issued and are issuable or
potentially issuable in connection with the restructuring transaction. As part
of the restructuring transaction, we issued an aggregate principal amount of
$13.1 million of 7.5% convertible debentures, which are convertible into
approximately 2,416,975 shares at a conversion price of $5.42.
Additionally, in the December 2003 and January 2004 private placements,
we sold 5,061,613 shares of our common stock and issued warrants to purchase
2,530,806 shares of common stock to investors, and warrants to purchase 506,161
shares of common stock to the placement agent in the private placement.
Sales of a substantial number of shares of our common stock within any
narrow period of time could reduce the market price of our common stock unless
and until we achieve revenue
14
growth or cost savings and other business economies sufficient to offset the
effect of this issuance. We cannot assure you that we will achieve revenue
growth, cost savings or other business economies.
We have a history of losses and expect to incur future losses.
We have incurred operating losses during the years ended January 31,
2003, 2002 and 2001 of $31.3 million, $37.2 million and $50.4 million,
respectively, and as of January 31, 2003, we had an accumulated deficit of
$187.5 million. We expect to continue to incur losses in the future. If we do
not become profitable, the value of our stock will decrease. We have large
expenses in the areas of sales and marketing, research and development,
manufacturing, and general and administrative expenses that are not covered by
our current sales volume and resulting gross margin. Currently, the majority of
revenues are from shipments of our optical networking product lines. In order
for us to become profitable, we will need to generate and sustain higher
revenue, improve our gross margins on products while maintaining reasonable
expense levels.
Our history of losses and future losses could have an impact on our ability to
finance our business and risk our ability to continue operating.
We have incurred significant losses and may incur significant losses in
the future. Such losses could cause our equity balance to fall below necessary
levels so that we are in violation of minimum listing requirements for our
publicly traded stock on the Nasdaq National Market, which could cause
significant decline in stockholder value and stock price.
Your percentage of ownership and voting power, and the price of our common stock
may decrease because we may issue a substantial number of shares of common
stock, or securities convertible or exercisable into our common stock.
We have the authority to issue up to one hundred fifty million shares
of our common stock and two million shares of our preferred stock without
stockholder approval. We have also previously issued warrants to certain of our
stockholders which will be exercisable to purchase approximately 1,000,000
shares of our common stock, and to the selling stockholders named herein, which
will be exercisable to purchase approximately 2,510,806 shares of our common
stock.
On August 8, 2003 we issued 1,374,194 and on January 8, 2004 we issued
505,146 shares of our common stock in connection with our acquisition of LuxN,
Inc., a Delaware corporation, which we acquired by the merger of our
wholly-owned subsidiary with and into LuxN. In addition, we issued warrants to
purchase approximately 400,000 of our shares of common stock in connection with
the merger.
We may also issue additional warrants and options to purchase shares of
our common stock. These future issuances could be at values substantially below
the price paid for our common stock by current stockholders. We may conduct
additional future offerings of our common stock, preferred stock, or other
securities with rights to convert the securities into shares of our common
stock, which may result in a decrease in the value or market price of our common
stock. Further, the issuance of preferred stock could have the effect of
delaying,
15
deferring or preventing a change of ownership without further vote or
action by the stockholders and may adversely affect the voting and other rights
of holders of common stock.
Our industry is highly competitive, and we may not have the resources required
to compete successfully.
The market for optical networking equipment is extremely competitive.
We expect competition to intensify in the future. Our primary sources of
competition include vendors of optical networking and infrastructure equipment
such as CIENA Corporation, Cisco Systems, Lucent Technologies, Nortel Networks,
Sycamore Networks and ADVA AG Optical Networking as well as private companies
that have been or will be focusing on our target markets. The competitors for
Meret's legacy products include Pesa, Artel, RGB Spectrum, Utah Scientific, and
many other companies. We may also face competition from a number of other
companies that have announced plans for new products to address the same network
problems that our products address. Many of our current and potential
competitors have significantly greater sales and marketing, technical,
manufacturing, financial and other resources than we do. Our competitors also
may have more extensive customer relationships than us, including relationships
with our current and potential customers. If we are unable to compete
successfully against our current and future competitors, we could experience
pricing pressures, reduced gross margins and order cancellations, any one of
which could seriously harm our business.
Our business may be seriously harmed if the market for optical networking
products in metropolitan and regional areas does not develop as we expect.
Our current and future product offerings are focused on the needs of
providers that service regional and metropolitan areas. The market for optical
networking products in regional and metropolitan areas is not yet mature, and we
cannot be certain that a feasible market for our products will develop or be
sustainable. In addition, the market has suffered a cutback in capital spending
from both enterprise and carrier customers as a result of poor economic
conditions. If this market does not develop, or develops more slowly than we
expect or continues to be impacted by the reduction in capital spending, our
business may be seriously harmed. Furthermore, the optical networking industry
is subject to rapid technological change, and newer technology or products
developed by others could render our products less competitive or obsolete. In
developing our products, we have made, and will continue to make, assumptions
about the optical networking standards that our customers and competitors may
adopt. If the standards adopted are different from those which we have chosen to
support, market acceptance of our product would be significantly reduced and our
business will be seriously harmed.
Our future growth depends on our ability to attract new customers, and on our
customers' ability to sell additional services to their own customers.
Most of our potential customers evaluate optical networking products
for deployment in large telecommunications systems that they are installing.
There is a limited number of potential customers for our products. If we are not
selected by a potential customer, our revenues and ability to grow our business
may be seriously harmed. Similarly, much of our growth depends on our customers'
success in selling communications services based on our products and
complementary products from others. Our success will depend on our ability to
effectively anticipate and adapt to customer requirements and offer products and
services that meet customer demands. Any failure of our current or prospective
customers to purchase products
16
from us for any reason, including a downturn in their business, would seriously
harm our ability to grow our business.
If we fail to establish and successfully maintain strategic alliances, long-term
contracts and relationships with distributors and system integrators, our
ability to grow and be profitable may be seriously harmed.
Strategic alliances and long-term contracts are an important part of
our effort to expand our sales opportunities and technological capabilities. To
date, we have entered into strategic alliances with AT&T Broadband, now Comcast
Corporation, United Pan-Europe Communications, and Looking Glass. In addition we
have a long-term contract with Cox Communications. We cannot be certain that our
existing alliances and long-term contracts will not be cancelled or that we will
be able to enter additional strategic alliances on terms that are favorable to
us. With the exception of two agreements we recently entered into with TCI
Network Solutions, Inc., d/b/a AT&T Broadband Network Solutions, and UFO
Communications, Inc., our agreements to date with our strategic allies are
non-exclusive, and we anticipate that future agreements will also be on a
non-exclusive basis. These agreements are generally short term, have no minimum
financial commitments on either side and can be cancelled without significant
financial consequence. In addition, we cannot be certain that our existing and
any future strategic alliances will be successful. As we expand internationally,
we will increasingly depend upon distributors and system integrators. Our
ability to grow and be profitable may be seriously harmed if we fail to
establish and maintain strategic alliances, long-term contracts and
relationships with distributors and system integrators. Our five-year agreement
with AT&T Broadband Network Solutions provides that we will be AT&T Broadband
Network Solutions' exclusive supplier, subject to certain exceptions, of dense
and course wavelength division multiplexing equipment. We also recently
contracted with UFO to be its exclusive supplier of equipment, subject to
certain exceptions, for networks owned, leased or operated by UFO.
We rely on a small number of customers for most of our revenues and any loss,
cancellation, reduction or delay in sales to, or collections from, any single
customer could seriously harm our business.
Our customer base is highly concentrated. Historically, orders from a
relatively limited number of customers accounted for most of our net sales. For
the fiscal year ending January 31, 2003, five customers accounted for 56% of net
sales, during the fiscal year ended January 31, 2002, five customers accounted
for 70% of net sales and in fiscal year 2001 five customers accounted for 61% of
our net sales. We expect that, for the foreseeable future, sales to a limited
number of customers will continue to account for a high percentage of our net
sales. We currently do not have any long-term purchase commitments with any of
our customers, and we are subject to the varying purchase cycles of our
customers. Our concentrated customer base significantly increases the credit
risks associated with slow payments or non-payments by our customers. The loss
or delay of orders or slow or non-payment from, any of our largest customers
could adversely impact our business.
Our backlog at any point may not be a good indicator of expected revenues.
17
Our backlog at the beginning of each quarter typically is not
sufficient to achieve expected sales for the quarter. To achieve our sales
objective, we are dependent upon obtaining orders during each quarter for
shipment during that quarter. Furthermore, our agreements with our customers
typically provide that they may change delivery schedules and cancel orders
within specified times which are typically 30 days or more prior to the
scheduled shipment date, without significant penalty. Our customers have in the
past built, and may in the future build, significant inventory in order to
facilitate more rapid deployment of anticipated major projects or for other
reasons. Decisions by such customers to reduce their inventory levels have led
and could lead to reductions in purchases from us. These reductions, in turn,
have and could cause fluctuations in our operating results and have had and
could have caused an adverse effect on our business, financial condition and
results of operations in periods in which the inventory is reduced.
Our operating results are likely to fluctuate significantly and may fail to meet
or exceed the expectations of securities analysts or investors, causing our
stock price to decline.
Our revenues and operating results may vary significantly from quarter
to quarter and year to year due to a number of factors, many of which are
outside of our control and any of which may cause our stock price to fluctuate.
Some of the factors that may affect us include changes in market demand for our
optical networking products, the cost and availability of components used in our
products, the timing and amount of customer orders, the length and
unpredictability of the sales and deployment cycles of our products, the timing
of new product introductions and enhancements by our competitors and ourselves,
changes in our pricing or the pricing of our competitors, our ability to attain
and maintain production volumes and quality levels of our products, and general
economic conditions as well as those specific to the telecommunications and
related industries.
If we are unable to comply with regulations affecting our customers' industries,
our revenues may be seriously harmed.
Our customers are involved in industries that are subject to extensive
regulation by domestic and foreign governments. If we fail to conform our
products to these regulatory requirements, we could lose sales and our business
could be seriously harmed. Additionally, any failure of our products to comply
with relevant regulations could delay their introduction and require costly and
time-consuming engineering changes.
The time that our customers and potential customers require for testing and
qualification before purchasing our products can be long and variable, and may
require us to invest significant resources without any assurances of sales,
which may cause our results of operations to be unpredictable.
Before purchasing our products, potential customers typically undertake
a lengthy evaluation, testing and product qualification process. In addition,
potential customers often require time consuming field trials of our products.
Our sales effort requires the effective demonstration of the benefits of our
products to, and significant training of, potential customers. In addition, even
after deciding to purchase our products, our customers may take several years to
deploy our products. The timing of deployment depends on many factors, including
the sophistication of a customer and the complexity and size of a customer's
networks. Our sales cycle, which is the period from the time a sales lead is
generated until the recognition of revenue,
18
can often be longer than one year. The length and variability of our sales cycle
is influenced by a variety of factors beyond our control, including our
customers' build out and deployment schedules, our customers' access to product
purchase financing, our customers' needs for functional demonstration and field
trials, and the manufacturing lead time for our products. Because our sales
cycles are long and variable and may require us to invest significant resources
without any assurances of sales, our results of operations may be unpredictable.
The GigaMux'r' 6400 and 3200 products, EPC'TM', and TeraManager'TM' are our only
currently available significant products, and if they are not commercially
successful, our revenue will not grow and we may not achieve profitability.
If our customers and potential customers do not adopt, purchase and
successfully deploy our GigaMux'r', EPC'TM', and TeraManager'TM' products in
large numbers, our revenue may not grow and our business, financial condition
and results of operations will be seriously harmed. Because the market for our
products is relatively new, future demand for our products is uncertain and will
depend on the speed of adoption of optical networking, in general, and optical
equipment in metro and regional networks, in particular.
If we are not able to develop and commercialize new or enhanced products, our
operating results and competitive position will be seriously harmed.
Our growth depends on our ability to successfully fund and develop new
and enhanced products. The development of new or enhanced products is a costly,
complex and uncertain process that requires us to anticipate accurately future
technological and market trends. Our next generation of transport and network
management products is currently under development. We cannot be sure whether
these or other new products will be successfully developed and introduced to the
market on a timely basis, or at all. We will need to complete each of the
following steps to successfully commercialize these and any other new products,
complete product development, qualify and establish component suppliers,
validate manufacturing methods, conduct extensive quality assurance and
reliability testing, complete software validation, and demonstrate systems
interoperability.
Each of these steps presents serious risks of failure, rework or delay,
any one of which could adversely affect the rate at which we are able to
introduce and market our products. If we do not develop these products in a
timely manner, our competitive position and financial condition could be
adversely affected.
In addition, as we introduce new or enhanced products, we must also
manage the transition from older products to newer products. If we fail to do
so, we may disrupt customer ordering patterns or may not be able to ensure that
adequate supplies of new products can be delivered to meet anticipated customer
demand. Any failure to effectively manage this transition may cause us to lose
current and prospective customers.
If our products do not interoperate with our customers' networks, installations
will be delayed or cancelled or our products could be returned.
Many of our customers require that we design products to interoperate
with their existing networks, each of which may have different specifications
and utilize a variety of protocols. Our customers' networks contain multiple
generations of products that have been added over time as
19
these networks have grown and evolved. Our products must intemperate with all of
the products within these networks as well as future products in order to meet
our customers' requirements. If we are required to modify our product design to
be compatible with our customers' systems to achieve a sale, it may result in a
longer sales cycle, increased research and development expense and reduced
margins on our products. If our products do not interoperate with those of our
customers' networks, installations could be delayed, orders for our products
could be cancelled or our products could be returned, any of which could
seriously harm our business.
Our products may have errors or defects that we find only after deployment,
which could seriously harm our relationship with our customers and our
reputation.
Our customers may discover errors or defects in our products, and our
products may not operate as expected. If we are unable to fix errors or other
problems that may be identified on a timely basis, we could experience losses of
or delays in revenues and loss of market share, loss of customers, failure to
attract new customers or achieve market acceptance, diversion of engineering
resources, increased service and warranty costs, and legal actions by our
customers. Any failure of our current or planned products to operate as expected
could delay or prevent their adoption and seriously harm our relationship with
our customers and our reputation.
We depend upon contract manufacturers and any disruption in these relationships
may cause us to fail to meet the demands of our customers and damage our
customer relationships.
We use contract manufacturers to manufacture and assemble some of our
products in accordance with our specifications. We currently have three
U.S.-based contract manufacturers. We do not have long-term contracts with any
of them, and none of them is obligated to perform services for us for any
specific period or at any specified price, except as may be provided in a
particular purchase order. We may not be able to effectively manage our
relationships with these manufacturers and they may not meet our future
requirements for timely delivery or provide us with the quality of products that
we and our customers require.
Each of our contract manufacturers also builds products for other
companies. We cannot be certain that they will always have sufficient quantities
of inventory available to fill our orders, or that they will allocate their
internal resources to fill these orders on a timely basis. Qualifying a new
contract manufacturer and commencing volume production is expensive and time
consuming and could result in a significant interruption in the supply of our
products. If we are required to change contract manufacturers, we may suffer
delays that could lead to the loss of revenue and damage our customer
relationships.
We rely on a limited number of suppliers and single suppliers for some of our
components, and our sales and operating results may be seriously harmed if our
supply of any of these components is disrupted.
We and our contract manufacturers currently purchase several key
components of our products from single and limited sources. We purchase each of
these components on a purchase order basis and have no long-term contracts for
these components. In the event of a disruption in supply or if we receive an
unexpectedly high level of purchase orders, we may not be able to develop an
alternate source in a timely manner or at favorable prices. Any of these events
could hurt our ability to deliver our products to our customers and negatively
affect our operating
20
margins. In addition, our reliance on our suppliers exposes us to potential
supplier production difficulties or quality variations. Any such disruption in
supply would seriously affect our present and future sales.
We expect the average selling prices of our products to decline, which may
reduce gross margins and revenue.
Our industry has experienced erosion of average product selling prices.
We anticipate that the average selling prices of our products will decline in
response to competitive pressures, increased sales discounts, and new product
introductions by our competitors or other factors. Such reduced sales prices
require us to reduce our costs in order to maintain or improve our existing
gross margins. If we are unable to achieve sufficient cost reductions and
increases in sales volumes, the decline in average selling prices will reduce
our gross margins and revenue.
If we are unable to hire or retain highly skilled personnel, we may not be able
to operate our business successfully.
Our future success depends upon the continued services of our key
management, sales and marketing, and engineering personnel, many of whom have
significant industry experience and relationships. Many of our personnel could
be difficult to replace. We do not have "key person" life insurance policies
covering any of our personnel. The loss of the services of any of our key
personnel could delay the development and introduction of, and have a negative
impact on our ability to sell, our products. Competition for highly skilled
personnel is intense in our industry, and we may not be able to attract and
retain qualified personnel, which could seriously harm our business.
If we become subject to unfair hiring claims, we could incur substantial costs
in defending ourselves.
Companies in our industry whose employees accept positions with
competitors frequently claim that their competitors have engaged in unfair
hiring practices. We cannot assure you that we will not receive claims of this
kind in the future as we seek to hire qualified personnel or that those claims
will not result in material litigation. We could incur substantial costs in
defending ourselves or our employees against such claims, regardless of their
merits. In addition, defending ourselves from such claims could divert the
attention of our management away from our operations.
We may be unable to protect our intellectual property, which could limit our
ability to compete.
We rely on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights. We also enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and control access to, and
distribution of, our software, documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology.
Monitoring unauthorized use of our products is difficult, and we cannot be
certain that the steps we have taken will prevent unauthorized use of our
technology, particularly in foreign countries where the
21
laws may not protect our proprietary rights as fully as in the United States. If
competitors gain access to our technology, our ability to compete could be
harmed.
We could become subject to litigation regarding intellectual property rights,
which could seriously harm our business and require us to incur significant
costs.
In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. We may be a
party to litigation in the future to protect our intellectual property or as a
result of an allegation that we infringe upon others' intellectual property
rights. Any parties asserting that our products infringe upon their proprietary
rights would force us to defend ourselves and possibly our customers or
manufacturers against the alleged infringement. These claims and any resulting
lawsuits, if successful, could subject us to significant liability for damages
and invalidation of our proprietary rights. Additionally, any claims and
lawsuits, regardless of their merits, would likely be time-consuming and
expensive to resolve and would divert management time and attention.
Any claims of infringement on the intellectual property rights of
others could also force us to do one or more of the following: stop selling,
incorporating or using our products that use the challenged intellectual
property, obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which may not be available to us
on reasonable terms, or at all, or redesign- those products that use such
technology. If we are forced to take any of the foregoing actions, our business
may be seriously harmed. However, we intend to vigorously protect our
intellectual property against all material challenges.
If necessary licenses of third-party technology are not available to us or are
very expensive, our products could become obsolete.
We have been licensing, and may be required to license, technology from
third parties to develop new products or product enhancements. We cannot assure
you that third-party licenses will be available to us on commercially reasonable
terms, if at all. If we are required to obtain any third-party licenses to
develop new products and product enhancements, we could be required to obtain
substitute technology, which could result in lower performance or greater cost,
either of which could seriously harm the competitiveness of our products.
Our international operations could subject us to risks due to currency
fluctuations and changes in foreign government regulations, which could harm our
business.
Our international operations are subject to a number of risks,
including changes in foreign government regulations and telecommunications
standards, import and export license requirements, tariffs, taxes and other
trade barriers, fluctuations in currency exchange rates, difficulty in
collecting accounts receivable, the burden of complying with a wide variety of
foreign laws, treaties and technical standards, difficulty in staffing and
managing foreign operations, and political and economic instability.
The majority of our sales and expenses have been denominated in U.S.
dollars. However, in the future a larger portion of our sales and expenses may
be denominated in non-U.S. currencies. As a result, currency fluctuations
between the U.S. dollar and the currencies in which we do business could cause
foreign currency translation gains or losses that we would recognize in the
period incurred. We cannot predict the effect of exchange rate fluctuations on
our future
22
operating results because of the number of currencies involved, the variability
of currency exposure and the potential volatility of currency exchange rates. We
do not currently engage in foreign exchange hedging transactions to manage our
foreign currency exposure.
If we do not effectively address our financial, managerial and manufacturing
processes, we may not be able to successfully expand our business.
Our business has experienced wide fluctuations in sales volume from
quarter to quarter, which places a significant strain on our management systems
and resources. Our ability to successfully offer our products and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We will need to continue to improve our financial,
managerial and manufacturing processes and reporting systems, and will need to
continue to expand, train and manage our workforce worldwide. If we fail to
effectively address the above requirements, our ability to pursue business
opportunities and expand our business could be harmed.
Our stock price may be volatile which may affect your ability to sell shares at
or above the offering price or result in securities litigation against us.
The stock market in general, the Nasdaq Stock Market and the stock of
optical networking companies in particular, have experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to a
company's operating performance. We expect the price of our common stock to
fluctuate. The offering price may not be indicative of the prices that will
prevail in the public market after the offering. The trading price of our common
stock could fluctuate in response to factors including those described elsewhere
in this prospectus and:
General market and economic conditions;
Announcements of technological innovations or new products;
Publicity regarding actual or potential results with respect to
technologies or products under development; and
Other events or factors, many of which are beyond our control.
These broad market and industry factors may cause our stock price to
decline, regardless of our actual operating performance. In the past, following
periods of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against that company.
Securities class-action litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources, which would harm
our profitability.
THE OFFERING
Shares of Common Stock Offered....................... 8,098,580 shares of common stock.
Use of Proceeds...................................... We do not own any of the shares being
registered hereunder and so we will
not receive any cash proceeds from the
sale of the shares.
23
Nasdaq Symbol........................................ FIBR
USE OF PROCEEDS
We do not own any of the shares offered hereunder and we will not
receive any cash proceeds from their sale.
SELLING STOCKHOLDERS
We are registering a total of 8,098,580 shares of our common stock,
pursuant to the requirements of Securities Purchase Agreements and Registration
Rights Agreements we entered into with the selling stockholders in December 2003
and/or January 2004. We are registering for resale the shares of common stock
that were issued under the Securities Purchase Agreement, and the shares that
are issuable upon exercise of the warrants we issued to the selling
stockholders. Other than the shares covered by this prospectus, none of the
selling stockholders listed below holds more than one percent (1%) of our common
stock and none of the selling stockholders listed below has ever held any
position or office with us, and except for our placement agent, Roth Capital
Partners, LLC, none of the selling stockholders listed below has had, within the
past three years, any material relationships with us.
2,140,101 shares of common stock, and warrants to purchase 1,070,051
shares of common stock were purchased by the selling stockholders in the
December 2003 private placement. 2,921,512 shares of common stock, and warrants
to purchase 1,460,755 shares of common stock were purchased by the selling
stockholders in the January 2004 private placement. The selling stockholders in
each private placement received a warrant to purchase one share of common stock
for each two shares of common stock purchased. The effective price in the
December 2003 private placement was $2.97 for each unit consisting of one share
of common stock and a warrant to purchase one-half of a share of common stock.
The $2.97 per share purchase price was determined based on the fair market value
of the Company's common stock in accordance with Nasdaq Marketplace Rules, using
the closing bid price of the common stock as reported on the Nasdaq National
Market on December 23, 2003, the date the investors became obligated to purchase
the shares in the December 2003 private placement by signing a securities
purchase agreement, plus an additional amount to take into account the value of
the warrant coverage. The December 2003 warrants have an exercise price of $2.97
per share. The effective price in the January 2004 private placement was $3.44
for each unit consisting of one share of common stock and a warrant to purchase
one-half of a share of common stock. The $3.44 per share purchase price was
determined based on the fair market value of the Company's common stock as of
the date the investors became obligated to purchase the shares in the January
2004 private placement by signing a securities purchase agreement on January 13,
2004, determined in accordance with Nasdaq Marketplace Rules, using the average
closing bid price on the five days prior to the execution date of the securities
purchase agreement, plus an additional amount to take into account the value of
the warrant coverage. The January 2004 warrants have an exercise price of $3.44
per share.
Roth Capital Partners, LLC acted as placement agent in connection with
the December 2003 and January 2004 private placements. As partial compensation
for Roth Capital Partners' services as placement agent in the private
placements, we paid Roth Capital Partners $1,332,487.96, or 8% of the gross
proceeds in the private placements. As further compensation of its services as
placement agent, we issued Roth Capital Partners a warrant to purchase up to
24
214,010 shares of our common stock, exercisable at a price of $3.256 per share,
in connection with the December 2003 private placement, and a warrant to
purchase up to 292,151 shares of our common stock, exercisable at a price of
$5.599 per share, in connection with the January 2004 private placement. The
exercise price for the December 2004 warrant is based on 110% of the closing
price of Sorrento's common stock on the December 31, 2003 closing date of the
December 2003 placement, and the exercise price for the December 2004 warrant is
based on 110% of the closing price of Sorrento's common stock on the January 26,
2004 closing date of the January 2004 placement. The warrants are exercisable
for five (5) years.
The following table sets forth information for the shares being
registered hereunder, as of January 30, 2004 with respect to the shares held by
the selling stockholders. The number of shares of common stock offered for
resale by this prospectus by the selling stockholders was determined by the
terms of our agreement with such selling stockholders.
Shares of Common Number of Shares Number of Shares of
Stock Owned Prior to be Offered for Common Stock Owned
Name of Selling Stockholder to Offering (1)(3) Sale (2)(3) after Offering (2)
--------------------------- ------------------ ----------- ------------------
Kingdon Offshore, NV 549,418 549,418 0
Kingdon Associates 196,221 196,221 0
Kingdon Partners 74,128 74,128 0
Kingdon Family Partnership, LP 52,326 52,326 0
Philip T. Hempleman 750,000 750,000 0
Five Points Fund, L.P. 267,675 267,675 0
Five Points Fund II, L.P. 281,625 281,625 0
Five Points Offshore Fund, Ltd. 200,700 200,700 0
Symmetry Peak, LP 450,000 450,000 0
Heimdall Investments Ltd. 436,047 436,047 0
STG Capital Fund, Ltd. 250,500 250,500 0
STG Capital Partners (QP), LP 124,500 124,500 0
Colonial Fund, LLC 375,000 375,000 0
CDIB Capital Investment America Ltd. 152,616 152,616 0
Bluegrass Growth Fund LP 109,011 109,011 0
Geduld Capital Partners LP 112,500 112,500 0
ZLP Master Opportunity Fund, Ltd. (4) 1,052,200 1,052,200 0
Heimdall Investments Ltd. 505,050 505,050 0
MicroCapital Fund LP 239,899 239,899 0
MicroCapital Fund Ltd. 138,890 138,890 0
Bonanza Master Fund, Ltd. 300,000 300,000 0
Proximity Fund LP 150,000 150,000 0
Proximity Partners LP 150,000 150,000 0
Bristol Investment Fund, Ltd. 252,525 252,525 0
Gryphon Master Fund, L.P. (5) 343,845 343,845 0
Neal I. Goldman 150,000 150,000 0
Bluegrass Growth Fund LP 126,263 126,263 0
Lakefront Partners, LLC 45,000 45,000 0
------ ------
Roth Capital Partners, LLC (6) 506,161 506,161 0
-
TOTAL (4)(5) 8,342,100 8,342,100 0
-
25
(1) Except as otherwise indicated, the number of shares beneficially owned is
determined under rules promulgated by the SEC, and the information is not
necessarily indicative of beneficial ownership for any other purpose.
Each selling stockholder has sole voting power and investment power with
respect to all shares listed as owned by that selling stockholder.
(2) We do not know when or in what amounts the selling stockholders will
offer shares for sale, if at all. The selling stockholders may sell any
or all of the shares included in and offered by this prospectus. Because
the selling stockholders may offer all or some of the shares pursuant to
this offering, we cannot estimate the number of the shares that will be
held by the selling stockholders after completion of the offering.
However, for purposes of this table, we have assumed that, after
completion of the offering, none of the shares included in and covered by
this prospectus will be held by the selling stockholders.
(3) Includes 3,016,967 shares of common stock issuable upon exercise of
warrants held by the selling stockholders
(4) Includes a beneficial ownership in our 7.5% convertible debenture debt.
The convertible debentures held by the selling stockholder can be
converted into approximately 152,200 shares of our common stock at a
conversion price of $5.42, which shares were previously registered.
Assumes the common stock available for sale upon conversion will be sold.
(5) Includes a beneficial ownership in our 7.5% convertible debenture debt.
The convertible debentures held by the selling stockholder can be
converted into approximately 91,320 shares of our common stock at a
conversion price of $5.42, which shares were previously registered.
Assumes the common stock available for sale upon conversion will be sold.
(6) This selling stockholder is a broker-dealer and received the warrants to
purchase common stock as compensation for services performed as placement
agent in the private placements in the ordinary course of business. At
the time this selling stockholder was issued the securities, it had no
agreements or understandings, directly or indirectly, with any person to
distribute the securities.
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, donees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
ordinary brokerage transactions and transactions in which the
broker-dealer solicits investors;
block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
an exchange distribution in accordance with the rules of the
applicable exchange;
26
privately negotiated transactions;
short sales (other than short sales established prior to the
effectiveness of the registration statement to which this
prospectus is a part)
broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
a combination of any such methods of sale; and
any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933 (the " Securities Act"), if available, rather than under
this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling stockholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders may from time to time pledge or grant a
security interest in some or all of the shares (including shares issued upon
exercise of the warrants) owned by them and, if they default in the performance
of their secured obligations, the pledgees or secured parties may offer and sell
shares of common stock from time to time under this prospectus, or under an
amendment to this prospectus under Rule 424(b)(3) or other applicable provision
of the Securities Act amending the list of selling stockholders to include the
pledgee, transferee or other successors in interest as selling stockholders
under this prospectus.
Upon the Company being notified in writing by a selling stockholder
that any material arrangement has been entered into with a broker-dealer for the
sale of common stock through a block trade, special offering, exchange
distribution or secondary distribution or a purchase by a broker or dealer, a
supplement to this prospectus will be filed, if required, pursuant to Rule
424(b) under the Securities Act, disclosing (i) the name of each such selling
stockholder and of the participating broker-dealer(s), (ii) the number of shares
involved, (iii) the price at which such the shares of common stock were sold,
(iv)the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not
conduct any investigation to verify the information set out or incorporated by
reference in this prospectus, and (vi) other facts material to the transaction.
In addition, upon the Company being notified in writing by a selling stockholder
that a donee or pledge intends to sell more than 500 shares of common stock, a
supplement to this prospectus will be filed if then required in accordance with
applicable securities law.
The selling stockholders also may transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in
27
connection with such sales. In such event, any commissions received by such
broker-dealers or agents and any profit on the resale of the shares purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act. Discounts, concessions, commissions and similar selling
expenses, if any, that can be attributed to the sale of securities will be paid
by the selling stockholder and/or the purchasers. Each selling stockholder has
represented and warranted to the Company that it does not have any agreement or
understanding, directly or indirectly, with any person to distribute the common
stock.
The Company is required to pay all fees and expenses incident to the
registration of the shares, but the Company will not receive any proceeds from
the sale of the common stock. The Company has agreed to indemnify the selling
stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act. If the selling stockholders use this
prospectus for any sale of the common stock, they will be subject to the
prospectus delivery requirements of the Securities Act.
DESCRIPTION OF OUR COMMON STOCK
As of January 28, 2004, there were approximately 16,278,184 shares of
our common stock issued and outstanding. We are a Delaware corporation and are
authorized to issue 150 million shares of common stock, par value $0.001 per
share, and 2 million shares of preferred stock, $0.01 par value per share.
Each share of our common stock has one vote on all matters presented to
the stockholders. Because our common stock does not have cumulative voting
rights, the holders of more than 50% of the shares may, if they choose to do so,
elect all of the directors, and, in that event, the holders of the remaining
shares will not be able to elect any of our directors. The holders of our common
stock are entitled to receive dividends when, as and if declared by our board of
directors out of funds legally available therefore. In the event of our
liquidation, dissolution or winding up, holders of our common stock are entitled
to share ratably in all assets remaining available for distribution to them
after payment of liabilities and after provision for claims against us. Holders
of shares of common stock, as such, have no conversion, preemptive or other
subscription rights, and there are and will be no redemption provisions
applicable to the common stock. All of the outstanding shares of common stock,
and the shares of common stock offered hereby when issued against payment of the
consideration set forth in this prospectus, are, fully paid and non-assessable.
The registrar and transfer agent for our common stock is American Stock
Transfer & Trust Co., 6201 15th Avenue, 3rd Floor, Brooklyn, New York 11219.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of the registration statement on Form S-3 which
we filed with the SEC under the Securities Act using a "shelf" registration
process. As permitted by SEC rules, this prospectus does not contain all the
information included in the registration statement and the accompanying exhibits
filed with the SEC. You may refer to the registration statement and its exhibits
for more information.
28
We are subject to and comply with the informational reporting
requirements of the Securities Exchange Act of 1934. You may read and copy any
document we file with the SEC at the SEC's public reference room at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 or at its regional offices at:
233 Broadway, New York, New York 10279 and at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. You may obtain further information about the
operation of the SEC's public reference room by calling the SEC at
1-800-SEC-0330. Our filings are also available to the public over the Internet
at the SEC's website at http://www.sec.gov.
The SEC allows us to "incorporate by reference" into this prospectus
the information we file with the SEC. This means that we may disclose important
information to you by referring you to those documents. The information we
incorporate by reference is considered to be part of this prospectus. If we
subsequently file superseding or updating information with the SEC in a document
that is incorporated by reference into this prospectus, the updated information
will also become a part of this prospectus and will supersede the earlier
information.
We are incorporating by reference into this prospectus the following
documents that we previously filed with the SEC:
Our Annual Report on Form 10-K/A for the fiscal year ended
January 31, 2003.
Our Quarterly Report on Form 10-Q for the fiscal quarter ended
April 30, 2003.
Our Quarterly Report on Form 10-Q for the fiscal quarter ended
July 2003.
Our Quarterly Report on Form 10-Q for the fiscal quarter ended
October 31, 2003
Our Current Reports on Form 8-K dated January 27, 2004,
January 14, 2004, December 31, 2003, December 24, 2003,
August 22, 2003 (as amended August 25, 2003 and October 23,
2003), August 13, 2003, June 13, 2003, June 9, 2003, May 30,
2003, May 29, 2003, May 12, 2003, and March 12, 2003 (except for
information furnished under Item 9 or Item 12 of Form 8-K, which
is not deemed filed and not incorporated by reference herein).
The description of our common stock contained in our
post-effective amendment to our registration statement on Form
S-3, filed with the SEC on June 5, 2003, including any amendment
or report filed for the purpose of updating that description.
We are also incorporating by reference into this prospectus all
documents that we subsequently file with the SEC under Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this prospectus and prior to the
termination of this offering, except for information furnished under Item 9 or
Item 12 of Form 8-K, which is not deemed filed and not incorporated by reference
herein.. Any statements made in this prospectus or in a document incorporated or
deemed to be incorporated by reference in this prospectus will be deemed to be
modified or superseded for purposes of this prospectus to the extent that a
statement contained in this prospectus or in any other subsequently filed
document that is also incorporated or deemed to be incorporated by reference in
this prospectus modifies or supersedes the statement. Any statement so modified
or superseded will not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
29
You may obtain copies of any of our filings which are incorporated by
reference, at no cost, by contacting us at the following address or telephone
number:
Sorrento Networks Corporation
9990 Mesa Rim Road
San Diego, California 92121
Attention: Joe R. Armstrong
Chief Financial Officer
(858) 558-3960
In order to ensure timely delivery of the documents, your request
should be made no later than five (5) business days prior to the date on which
you make your final investment decision.
FORWARD LOOKING INFORMATION
All statements included or incorporated by reference in this
prospectus, other than statements of historical facts, that address activities,
events or developments that we intend, expect, project, believe or anticipate
will or may occur in the future are forward looking statements. Such statements
are typically characterized by terminology such as "believe," "anticipate,"
"should," "intend," "plan," "will," "expect," "estimate," "project,"
"positioned," "strategy," and similar expressions. These statements are based on
assumptions and assessments made by our management in light of its experience
and its perception of historical trends, current conditions, expected future
developments and other factors our management believes to be appropriate. These
forward looking statements are subject to a number of risks and uncertainties,
including those risks described in this prospectus under "Risk Factors," as well
as other factors that our management has not yet identified. Any such forward
looking statements are not guarantees of future performance and actual results,
developments and business decisions may differ from those contemplated by such
forward looking statements. We disclaim any duty to update any forward looking
statements.
LEGAL MATTERS
The legality of the shares offered by this prospectus has been passed
upon by Greenbaum, Rowe, Smith, Ravin, Davis & Himmel LLP, Woodbridge, New
Jersey.
EXPERTS
The financial statements and schedules included in this Prospectus and
in the Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports (which contain an explanatory paragraph regarding the Company's
ability to continue as a going concern) appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of said firm as experts in auditing and accounting.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
The Company's Certificate of Incorporation permits indemnification to
the fullest extent permitted by Delaware law. The bylaws of the Company require
the Company to indemnify any
30
person who was or is a party or is threatened to be made a party to any
proceeding, by reason of the fact that such person was or is a director or
officer of the Company or that, being or having been such a director or officer
of the Company, such person is or was serving at the request of the Company as a
director, officer, employee or agent of another business entity, against
expenses, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with such proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in, or not opposed to, the best interests of the Company and, with respect
to any criminal third party proceeding (including any action or investigation
which could or does lead to a criminal third party proceeding) had no reasonable
cause to believe such conduct was unlawful. The Company may also indemnify any
person who was or is an authorized representative of the Company and who was or
is a party or is threatened to be made a party to any proceeding by reason of
the fact that such person was or is an authorized representative of the Company,
against expenses actually and reasonably incurred by such person in connection
with the defense or settlement of such proceeding if such person acted in good
faith and in a manner reasonably believed to be in, or not opposed to, the best
interests of the Company, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Company unless and only to the extent that the
court in which such corporate proceeding was pending shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such authorized representative is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper. Such indemnification is mandatory under the Company's by-laws as to
expenses actually and reasonably incurred to the extent that an authorized
representative of the Company has been successful on the merits or otherwise in
defense of any third party or corporate proceeding or in defense of any claim,
issue or matter therein. The determination of whether an individual is entitled
to indemnification may be made by a majority of disinterested directors,
independent legal counsel in a written legal opinion or the stockholders.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in that Act and is
therefore unenforceable.
31
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
We have not authorized any dealer, sales person or other person to give
any information or represent anything contained in this prospectus. You must not
rely on any unauthorized information.
This prospectus is not an offer to sell, or a solicitation
of an offer to buy, securities in any jurisdiction where it is
unlawful.
The information contained in this prospectus is current as
of January 30, 2004
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
8,098,580 Shares
SORRENTO NETWORKS
CORPORATION
Common Stock
---------------
PROSPECTUS
---------------
January 30, 2004
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The registrant estimates expenses in connection with the offering
described in this Registration Statement will be as follows:
Item Amount
---- ------
Securities and Exchange Commission Registration Fee $ 4,815.00
Printing and Engraving Expenses $ 5,000.00
Accountants' Fees and Expenses $15,000.00
Legal Fees and Expenses $20,000.00
Nasdaq Listing Fees $22,500.00
Miscellaneous $ 85.00
Total $67,400.00
Item 15. Indemnification of Directors and Officers.
The Registrant's Certificate of Incorporation permits indemnification
to the fullest extent permitted by Delaware law. The bylaws of the Registrant
require the Registrant to indemnify any person who was or is a party or is
threatened to be made a party to any proceeding, by reason of the fact that such
person was or is a director or officer of the Registrant or that, being or
having been such a director or officer of the Registrant, such person is or was
serving at the request of the Registrant as a director, officer, employee or
agent of another business entity, against expenses, judgments, penalties, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in, or not opposed to, the best
interests of the Registrant and, with respect to any criminal third party
proceeding (including any action or investigation which could or does lead to a
criminal third party proceeding) had no reasonable cause to believe such conduct
was unlawful. The Registrant may also indemnify any person who was or is an
authorized representative of the Registrant and who was or is a party or is
threatened to be made a party to any proceeding by reason of the fact that such
person was or is an authorized representative of the Registrant, against
expenses actually and reasonably incurred by such person in connection with the
defense or settlement of such proceeding if such person acted in good faith and
in a manner reasonably believed to be in, or not opposed to, the best interests
of the Registrant, except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged to
be liable to the Registrant unless and only to the extent that the court in
which such corporate proceeding was pending shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such authorized representative is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Such
indemnification is mandatory under the Registrant's by-laws as to expenses
actually and reasonably incurred to the extent that an authorized representative
of the Registrant has been successful on the merits or otherwise in defense of
any third party or corporate proceeding or in defense of any claim, issue or
matter
II-1
therein. The determination of whether an individual is entitled to
indemnification may be made by a majority of disinterested directors,
independent legal counsel in a written legal opinion or the stockholders.
The Delaware General Corporation Law authorizes a corporation to
indemnify directors, officers, employees or agents of the corporation if such
party acted in good faith and in a manner he or she reasonably believed to be in
or not opposed to the best interest of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe his or her conduct was
unlawful, as determined in accordance with the Delaware General Corporation Law.
Delaware law further provides that indemnification shall be provided if the
party in question is successful on the merits otherwise. In addition, the
Delaware General Corporation Law does not permit indemnification in an action or
suit by or in the right of the corporation, where such person has been adjudged
liable to the corporation, unless, and only to the extent that, a court
determines that such person fairly and reasonably is entitled to indemnity for
costs the court deems proper in light of liability adjudication. Indemnity is
mandatory to the extent a claim, issue or matter has been successfully defended.
The Registrant currently maintains a directors and officers liability
insurance policy.
Item 16. Exhibits.
Exhibit Number Description of Document
3.1 Certificate of Incorporation of the Registrant (incorporated by reference
to the Company's Proxy Statement dated April 16, 2003.).
3.2 By-Laws of the Registrant (incorporated by reference to the Company's Proxy
Statement dated April 16, 2003.).
10.1 Securities Purchase Agreement, dated December 23, 2003, by and among the
Company and the investors a party thereto (incorporated by reference to the
Company's Current Report on Form 8-K filed on December 31, 2003).
10.2 Registration Rights Agreement, dated December 23 , 2003, by and among the
Company and the investors a party thereto (incorporated by reference to the
Company's Current Report on Form 8-K filed on December 31, 2003).
10.3 Form of Warrant issued pursuant to the Securities Purchase Agreement, dated
December 23, 2003, by and among the Company and the investors a party thereto
(incorporated by reference to the Company's Current Report on Form 8-K filed on
December 31, 2003).
10.4 Securities Purchase Agreement, dated January 13, 2004, by and among the
Company and the investors a party thereto (incorporated by reference to the
Company's Current Report on Form 8-K filed on January 27, 2004).
10.5 Registration Rights Agreement, dated January 13, 2004, by and among the
Company and the investors a party thereto (incorporated by reference to the
Company's Current Report on Form 8-K filed on January 27, 2004).
II-2
10.6 Form of Warrant issued pursuant to the Securities Purchase Agreement, dated
January 13, 2004, by and among the Company and the investors a party thereto
(incorporated by reference to the Company's Current Report on Form 8-K filed on
December 31, 2003).
5. Opinion of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel LLP, filed
herewith.
23.1 Consent of BDO Seidman LLP - filed herewith.
23.2 Consent of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel LLP (included in
opinion filed as Exhibit 5).
24.1 Power of Attorney (included on signature page hereto).
-----------------
Item 17. Undertakings.
(a) The Company hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in the registration statement. Notwithstanding
the foregoing, any increase or decrease in
volume of securities offered (if the total
dollar value of securities offered would not
exceed that which was registered) and any
deviation from the low or high end of the
estimated maximum offering range may be
reflected in the form of prospectus filed with
the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price
represent no more than 20 percent change in the
maximum aggregate offering price set forth in
"Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect
to the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii)
above do not apply if the registration statement is on Form
S-3, Form S-8 or Form F-3, and the information required to be
included in a post-effective amendment by those
II-3
paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Company's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934, (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable ground to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California, on the 30th. day of
January, 2003.
SORRENTO NETWORKS CORPORATION
By: /s/ Phillip W. Arneson
-------------------------
Phillip W. Arneson
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Phillip W. Arneson, his true and lawful
attorney-in-fact and agent, with full power of substitution and revocation, for
him and in his her name, place and stead, in any and all capacities, to sign
(i) any and all amendments (including post-effective amendments) to this
Registration Statement and to file the same with all exhibits thereto, and other
documents in connection therewith and (ii) any registration statement and any
and all amendments thereto, relating to the offer covered hereby filed pursuant
to Rule 462(b) under the Securities Act of 1933, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
Signature Title Date
/s/ Phillip W. Arneson Chief Executive Officer, January 30, 2004
---------------------------- Chairman, Director
PHILLIP W. ARNESON
/s/ Joe R. Armstrong Principal Accounting January 30, 2004
---------------------------- Officer, Chief Financial Officer
JOE R. ARMSTRONG
/s/ Donne Fisher Director January 30, 2004
----------------------------
DONNE FISHER
/s/ Robert Hibbard Director January 30, 2004
----------------------------
ROBERT HIBBARD
/s/ Gary M. Parsons Director January 30, 2004
----------------------------
GARY M. PARSONS
II-5
/s/ Don Herzog Director January 30, 2004
----------------------------
DON HERZOG
/s/ Tom Schilling Director January 30, 2004
----------------------------
TOM SCHILLING
II-6
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as............................... 'TM'
The registered trademark symbol shall be expressed as.................... 'r'