SCHEDULE 14A
(Rule 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement [ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
SORRENTO NETWORKS CORPORATION
_________________________________________________________________________
(Name of Registrant as Specified In Its Charter)
_________________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount previously paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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[SORRENTO NETWORKS LOGO]
Optical networks made simple
March , 2003
NOTICE OF
SPECIAL
MEETING AND
PROXY STATEMENT
APRIL , 2003
AT 10:00 A.M.
SAN DIEGO
MARRIOTT DEL MAR
11966
EL CAMINO REAL
SAN DIEGO
CALIFORNIA
DEAR FELLOW SHAREHOLDERS:
We cordially invite you to attend the meeting of the shareholders of Sorrento
Networks Corporation to be held at 10:00 a.m. on April , 2003, at the San Diego
Marriott Del Mar, 11966 El Camino Real, San Diego, California. The meeting is
being held in connection with a proposed financial restructuring of our company.
This restructuring is a crucial step in ensuring the continuing viability of our
company, and we need your support to complete it. If we are unable to consummate
the restructuring transaction, we will be forced to consider an alternative plan
of reorganization or liquidation. Any alternative plan of reorganization or
liquidation may result in our shareholders receiving little or nothing for their
shares.
The financial restructuring plan involves the exchange of our outstanding 9.75%
Senior Convertible Debentures due August 2, 2004, and associated warrants, and
shares of the Series A Convertible Preferred Stock issued by our subsidiary,
Sorrento Networks, Inc., into shares of our common stock and new secured
convertible debentures. In order to effect the restructuring plan, our
shareholders must vote to approve (1) the exchange and the consequent issuance of
new shares of our common stock, (2) a change in our state of the incorporation
from New Jersey to Delaware, and (3) the adoption of a new employee equity
incentive plan.
Although the restructuring will substantially dilute the percentage of
outstanding common stock owned by our shareholders, we believe that this plan is
the best solution available to us to address our funding needs and attempt to
ensure the continued viability of our company. If the financial restructuring is
not approved or consummated, we will be forced to consider an alternative plan of
reorganization or liquidation, in which our shareholders may receive little or
nothing for their shares. These matters are more fully described in the
accompanying Notice of Special Meeting and Proxy Statement, which we encourage
you to read carefully.
Our Board of Directors recommends that shareholders vote in favor of each
proposal. We encourage all shareholders to participate by voting their shares by
Proxy, whether or not they plan to attend the meeting, as soon as possible. For
this meeting, you may vote over the Internet, by telephone, or by mailing a
traditional proxy card. If you do attend the special meeting, you may revoke your
Proxy at that time and vote in person, if you wish, even if you have previously
returned your Proxy.
If you have questions about the proposals or voting your shares, please call Mary
Lay, Vice President Finance, at the company at (858) 909-3445.
Sincerely,
Phillip W. Arneson
---------------------
PHILLIP W. ARNESON
Chairman and Chief Executive Officer
[SORRENTO NETWORKS LOGO]
Optical networks made simple
---------------------------------------
NOTICE OF SPECIAL MEETING
OF SHAREHOLDERS
---------------------------------------
To be held on April , 2003
Notice is hereby given that a special meeting of Shareholders (the 'Special
Meeting') of Sorrento Networks Corporation will be held at the San Diego
Marriott Del Mar, 11966 El Camino Real, San Diego, California, on April , 2003
at 10:00 a.m. San Diego time, to act on the following matters in connection with
our proposed financial restructuring, all of which are more fully described in
the accompanying Proxy Statement:
1. The approval of the exchange of our outstanding 9.75% Senior
Convertible Debentures due August 2, 2004, and associated
warrants, and shares of the Series A Preferred Stock issued by
our subsidiary, Sorrento Networks, Inc., into shares of our
common stock and new convertible debentures, which will result in
the issuance of an aggregate of approximately 10,494,000 shares of
common stock (including the shares into which the new debentures
will be convertible) in this restructuring transaction.
2. The change in the state in which we are incorporated from New
Jersey to Delaware.
3. The adoption of our 2003 Equity Incentive Plan.
If any of the proposals are not approved by our shareholders at the Special
Meeting, then none of them will become effective. If we are unable to consummate
the restructuring transaction, we will be forced to consider an alternative plan
of reorganization or liquidation. Any alternative plan of reorganization or
liquidation may result in our shareholders receiving little or nothing for their
shares.
Only shareholders of record at the close of business on March 7, 2003 will
be entitled to notice of and to vote at the Special Meeting or any adjournment
thereof. A complete list of the shareholders entitled to vote at the Special
Meeting will be open to the examination of shareholders for any purpose germane
to the Special Meeting during ordinary business hours for a period of 10 days
prior to the Special Meeting at our offices located at 9990 Mesa Rim Road, San
Diego, California 92121.
It is important that your shares be represented at the Special Meeting.
Whether or not you plan to attend the Special Meeting, please vote as soon as
possible. This year you may vote over the Internet, as well as by telephone or
by mailing a traditional proxy card. Your proxy may be revoked at any time prior
to the vote at the Special Meeting by following the procedures set forth in the
accompanying Proxy Statement.
By Order of the Board of Directors
Phillip W. Arneson
----------------------
PHILLIP W. ARNESON
Chairman and Chief Executive Officer
San Diego, California
March , 2003
SORRENTO NETWORKS CORPORATION
9990 MESA RIM ROAD
SAN DIEGO, CALIFORNIA 92121
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PROXY STATEMENT
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FIRST SENT TO SHAREHOLDERS ON MARCH , 2003
GENERAL
This Proxy Statement is being furnished to our shareholders in connection
with a proposed financial restructuring of our company. If approved by our
shareholders, the proposed restructuring would result in the exchange of our
outstanding Senior Convertible Debentures Due August 2, 2004, and associated
warrants, (together, the 'Outstanding Debentures'), and shares of the Series A
Preferred Stock issued by our subsidiary, Sorrento Networks, Inc. (the 'Series
A'), into shares of our common stock and an aggregate principal amount of
$12,500,000 (the 'Exchange Debentures') of new 7.5% Secured Convertible
Debentures (the 'New Debentures'). We will also issue up to $950,000 aggregate
principal amount of New Debentures (the 'Fee Amount Debentures') to some of the
holders of the Series A Preferred Stock for payment of certain legal fees. In
order to effect the proposed restructuring, our shareholders must vote to
approve the exchange transaction and the issuance of new shares of our common
stock and new convertible debentures, a change in our state of incorporation
from New Jersey to Delaware, and the adoption of a new employee equity incentive
plan.
The restructuring is being done for several reasons. The primary reason is
to allow us to restructure our approximately $81 million in obligations due to
the holders of the Outstanding Debentures and Series A. We believe that the
successful restructuring of these obligations into common equity and a much
smaller amount of convertible debentures will strengthen our balance sheet,
allow us to compete more effectively in our industry, permit us to meet the
minimum equity requirements for our principal trading market, Nasdaq, and allow
us an opportunity to raise additional working capital in the future. In addition
to the restructuring of our debt obligations, we plan to simplify our corporate
structure by rolling-up and merging various subsidiaries into one principal
corporation, although this may not happen until after the consummation of the
financial restructuring. This simplification of our corporate structure should
enable us to continue to improve our cost reduction efforts in an industry that
has experienced severe revenue and capital expenditure reductions.
THE RESTRUCTURING WILL SUBSTANTIALLY DILUTE THE PERCENTAGE OF OUTSTANDING
STOCK OWNED BY OUR COMMON SHAREHOLDERS. HOWEVER, AS DISCUSSED ABOVE, WE BELIEVE
THAT THE COMPLETION OF THE RESTRUCTURING IS CRITICAL TO OUR CONTINUING
VIABILITY. IF THE RESTRUCTURING IS NOT COMPLETED, BECAUSE OF UNCERTAINTIES
REGARDING OUR CONTINUED VIABILITY AND DEFAULT CONDITIONS THAT MAY BE TRIGGERED
UNDER OUR OUTSTANDING DEBENTURES, WE WILL BE FORCED TO CONSIDER AN ALTERNATIVE
PLAN OF REORGANIZATION OR LIQUIDATION. ANY ALTERNATIVE PLAN OF REORGANIZATION OR
LIQUIDATION MAY RESULT IN OUR SHAREHOLDERS RECEIVING LITTLE OR NOTHING FOR THEIR
SHARES.
RESTRUCTURING PLAN
The restructuring plan for achieving our financial goals consists of the
following transactions:
1. EXCHANGE OF OUR OUTSTANDING DEBENTURES FOR SHARES OF OUR COMMON STOCK AND
EXCHANGE DEBENTURES. We propose to exchange all of our Outstanding
Debentures for newly issued shares of our common stock, and Exchange
Debentures in the aggregate principal amount of $5,312,500. In the
aggregate, the Exchange Debentures received by the holders of the
Outstanding Debentures would be convertible into not less than
approximately 439,000 and
1
not more than approximately 1,318,000 of our outstanding shares of common
stock. The exact number of shares into which the Exchange Debentures are
convertible depends on the Reference Price (as defined below) at the
closing.
If all the Exchange Debentures were convertible into an aggregate of
8.75% of our common stock outstanding on a diluted basis, we would
issue approximately 3,954,000 shares at the closing to the exchanging
holders of the Outstanding Debentures. If the Exchange Debentures were
convertible into an aggregate of 26.25% of our common stock outstanding
on a diluted basis, we would issue approximately 3,075,000 shares of our
common stock at the closing to the exchanging holders of the Outstanding
Debentures.
Assuming the Exchange Debentures were convertible into an aggregate of
17.5% of our outstanding shares of common stock on a diluted basis, at
the closing we would issue approximately 3,514,000 shares of our common
stock to the exchanging holders of Outstanding Debentures, representing
approximately 38.4% of our shares issued and outstanding on the closing
date of the restructuring transaction. Under that same assumption, the
Exchange Debentures issued at the closing to holders of the Outstanding
Debentures would be convertible into approximately 879,000 shares of our
common stock. If all the Exchange Debentures were converted into shares
of our common stock, the exchanging holders of the Outstanding Debentures
would own approximately 4,393,000 of our shares, representing
approximately 37.2% of our common stock on a diluted basis. All of the
holders of the Outstanding Debentures have agreed to exchange their
Outstanding Debentures to accomplish this restructuring, subject to the
satisfaction or waiver of the conditions set forth in the Exchange
Agreement.
'Diluted basis' is a concept that is used in the Exchange Agreement, and
means the total number of shares of our common stock issued and
outstanding immediately after the closing of the restructuring
transaction, after giving effect to (i) the issuance of shares of common
stock as part of the restructuring transaction, (ii) shares of our common
stock issuable upon conversion of $12.5 million principal amount of the
New Debentures, and (iii) shares of our common stock issuable upon
exercise of the New Warrants. 'Diluted basis' does not give effect to (i)
the shares of our common stock issuable under the 2003 Equity Incentive
Plan, (ii) shares of common stock issuable upon conversion of the Fee
Amount Debentures, (iii) shares of our common stock issuable upon
conversion of our Series D Preferred Stock, and (iv) shares of our common
stock issuable upon exercise of existing options or warrants.
The 'Reference Price' is the price per share equal to the volume-weighted
average closing market price of our common stock for the ten trading days
ending on the third trading day prior to the closing date of the
restructuring transaction.
2. EXCHANGE OF SERIES A FOR SHARES OF OUR COMMON STOCK AND NEW DEBENTURES.
We propose to exchange all of the issued and outstanding shares of
Sorrento Networks, Inc.'s ('SNI's') Series A for newly issued shares of
our common stock, and Exchange Debentures in the aggregate principal
amount of $7,187,500. In the aggregate, the Exchange Debentures received
by the holders of the Series A would be convertible into not less than
approximately 594,000 and not more than approximately 1,785,000 of our
outstanding shares of common stock on a diluted basis. The exact number
of shares into which the Exchange Debentures are convertible depends on
the Reference Price at the closing.
If all the Exchange Debentures were convertible into an aggregate of
8.75% of our common stock outstanding on a diluted basis, we would issue
approximately 4,160,000 shares at the closing to the exchanging holders
of the Series A. If the Exchange Debentures were convertible into an
aggregate of 26.25% of our common stock outstanding on a diluted basis,
we would issue approximately 4,160,000 shares of our common stock at the
closing to the exchanging holders of the Series A.
Assuming the Exchange Debentures were convertible into an aggregate of
17.5% of our outstanding stock on a diluted basis, at the closing we
would issue approximately 4,755,000 shares of our common stock to the
exchanging holders of the Series A, representing approximately 51.9%
of our shares issued and outstanding on the closing date of the
restructuring transaction. Under that same assumption, the Exchange
Debentures issued at the closing to holders of the Series A would be
convertible into
2
approximately 1,189,000 shares of our common stock. If all the Exchange
Debentures were converted into shares of our common stock, the exchanging
holders of the Series A would own approximately 5,944,000 of our shares,
representing 50.3% of our common stock on a diluted basis. All of the
holders of the Series A have agreed to exchange their shares of Series A
to accomplish this restructuring, subject to the satisfaction or waiver
of the conditions set forth in the Exchange Agreement.
In addition to the shares of common stock and Exchange Debentures to be
issued, we have agreed to issue Fee Amount Debentures to certain holders
of the Series A.
3. ISSUANCE OF FEE AMOUNT DEBENTURES TO SERIES A HOLDERS. We propose to
issue Fee Amount Debentures in the principal amount of up to $950,000 to
certain holders of Series A for certain legal fees incurred by them. The
principal amount of the Fee Amount Debentures will be reduced on a dollar
for dollar basis, by any amount paid by United Pan-Europe Communications,
N.V. to SNI from December 10, 2002 through the closing date of the
restructuring transaction with respect to the invoices at issue in the
pending litigation between them and which is thereafter paid to the
holders of Series A who funded the Delaware litigation. The number of
shares of our common stock into which the Fee Amount Debentures can be
converted will depend upon the Reference Price and the amount of Fee
Amount Debentures issued at the closing. The Fee Amount Debentures
contain the same terms and conditions as the Exchange Debentures.
4. ISSUANCE OF NEW WARRANTS TO EXISTING SHAREHOLDERS. We propose to issue
warrants (the 'New Warrants') to our existing shareholders, exercisable
into approximately 591,000 shares of our common stock, representing 5% of
our common stock on a diluted basis. If all of the New Warrants were
exercised for shares of our common stock, our current shareholders would
own approximately 1,477,000 shares of our common stock, representing
approximately 12.5% of our outstanding common stock on a diluted basis.
The New Warrants would be non-transferable, and would be exercisable at
any time after the first anniversary of the closing of the restructuring
transaction and before August 2, 2007. The exercise price of the New
Warrants would be equal to 110% of the Reference Price. We may repurchase
the New Warrants, upon 30 days prior notice, for $0.01 per warrant share,
at any time after the volume-weighted average market price of the common
stock for any 10 consecutive trading days equals or exceeds 150% of the
exercise price. Exercise of the New Warrants will also be subject to the
effectiveness of a registration statement with respect to the shares of
our common stock to be issued upon exercise of the New Warrants.
5. REINCORPORATION IN DELAWARE; 2003 EQUITY INCENTIVE PLAN. In addition to
the foregoing proposals, we propose to change our state of incorporation
from New Jersey to Delaware. We also propose to adopt a new 2003 Equity
Incentive Plan.
OPINION OF FINANCIAL ADVISOR
In connection with the proposed restructuring, our board of directors
received a written opinion from Houlihan Lokey Howard & Zukin Financial
Advisors, Inc., or 'Houlihan Lokey', as to the fairness of the restructuring to
the existing holders of our common stock, from a financial point of view. The
full text of Houlihan Lokey's written opinion, dated February 14, 2003, is
attached to this proxy statement as Appendix B. We encourage you to read this
opinion carefully in its entirety for a description of the assumptions made,
procedures followed, matters considered and limitations on the review
undertaken. HOULIHAN LOKEY'S OPINION WAS PROVIDED IN CONNECTION WITH THE
RESTRUCTURING, DOES NOT ADDRESS ANY RELATED TRANSACTION AND DOES NOT CONSTITUTE
A RECOMMENDATION TO YOU AS TO HOW YOU SHOULD VOTE OR ACT ON ANY MATTERS RELATING
TO THE RESTRUCTURING TRANSACTION OR ANY RELATED TRANSACTIONS.
SHAREHOLDER APPROVAL
Pursuant to this Proxy Statement, we are soliciting proxies to be voted at
the special meeting. The special meeting will be held to consider and vote on
the following proposals:
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1. The issuance to the exchanging holders of the Outstanding Debentures and
Series A of an aggregate of approximately 8,269,000 shares of our common
stock in the restructuring transaction, and Exchange Debentures
convertible into approximately 2,067,000 shares of our common stock,
assuming the Exchange Debentures are convertible into 17.5% of our
outstanding common stock on a diluted basis.
2. The reincorporation of our company from the State of New Jersey to the
State of Delaware, through the merger of our company into a new Delaware
corporation, formed solely for the purpose of accomplishing the merger.
3. The approval of our 2003 Equity Incentive Plan.
Consummation of the restructuring transaction requires shareholder approval
of each of the proposals. IF ANY OF THE PROPOSALS ARE NOT APPROVED BY OUR
SHAREHOLDERS AT THE SPECIAL MEETING, THEN NONE OF THEM WILL BECOME EFFECTIVE.
DILUTION
Upon consummation of the restructuring, the equity interests of our existing
common shareholders, as a percentage of the total number of the outstanding
shares of our common stock, will be substantially diluted. Assuming that the
Exchange Debentures are convertible into 17.5% of our outstanding common stock
on a diluted basis, the following table sets forth the approximate percentages
of our common stock that holders of our common stock, Outstanding Debentures,
and Series A will own if the restructuring transaction is completed and shares
of our common stock are issued to the exchanging holders of the Outstanding
Debentures and Series A. This table does not give effect to the shares of our
common stock that are issuable upon conversion of the Exchange Debentures or the
Fee Amount Debentures, upon exercise of the New Warrants or upon issuance of
shares under the 2003 Equity Incentive Plan:
PERCENTAGE OF OUTSTANDING
COMMON STOCK OWNED
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BEFORE AT THE CLOSING OF
HOLDER THE RESTRUCTURING THE RESTRUCTURING
------ ----------------- -----------------
Common Stockholders................................. 100% 9.7%
Series A Preferred Stockholders..................... 0% 51.9%
9.75% Senior Convertible Debentures Holders......... 0% 38.4%
Assuming that the Exchange Debentures are convertible into 17.5% of our
outstanding common stock on a diluted basis, the following table sets forth the
approximate percentages of our common stock that existing holders of our common
stock, holders of the Outstanding Debentures and holders of the Series A will
own if the restructuring transaction is completed and shares of our common stock
are issued, and all the Exchange Debentures and New Warrants are converted into
or exercised for shares of common stock. This table does not give effect to the
shares of our common stock that are issuable upon conversion of the Fee Amount
Debentures or under the 2003 Equity Incentive Plan:
PERCENTAGE OF OUTSTANDING
COMMON STOCK OWNED
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AFTER ISSUANCE
OF SHARES,
CONVERSION OF
THE EXCHANGE
DEBENTURES AND
BEFORE EXERCISE OF
HOLDER THE RESTRUCTURING THE NEW WARRANTS
------ ----------------- ----------------
Common Stockholders................................. 100% 12.5%
Series A Preferred Stockholders..................... 0% 50.3%
9.75% Senior Convertible Debentures Holders......... 0% 37.2%
IF THE RESTRUCTURING IS NOT COMPLETED, WE WILL BE FORCED TO CONSIDER AN
ALTERNATIVE PLAN OF REORGANIZATION OR LIQUIDATION. ANY ALTERNATIVE PLAN OF
REORGANIZATION OR LIQUIDATION MAY RESULT IN OUR CURRENT EQUITY HOLDERS RECEIVING
LITTLE OR NOTHING FOR THEIR SHARES.
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TABLE OF CONTENTS
About the Solicitation. 6
Risk Factors................................................ 8
Background of and Reasons for the Restructuring............. 13
Summary of the Exchange Agreement and Related Agreements.... 15
Summary of Other Agreements related to the Exchange
Agreement................................................. 19
Fairness Opinion of our Financial Advisor................... 22
Recommendation and Reasons of our Board of Directors........ 26
Restructuring Proposals..................................... 28
Proposal 1 -- Approval of the Restructuring Transaction..... 28
Proposal 2 -- Approval of the Change of State of
Incorporation from New Jersey to Delaware................. 30
Proposal 3 -- Approval of the Sorrento Networks Corporation
2003 Equity Incentive Plan................................ 39
Regulatory Approvals........................................ 43
Interests of Certain Persons in the Restructuring
Transaction............................................... 43
Appraisal or Dissenters' Rights............................. 43
Accounting Treatment........................................ 43
Unaudited Pro Forma Financial Statements.................... 44
Material Federal Income Tax Consequences.................... 46
Past Contracts or Transactions.............................. 46
Description of Capital Stock................................ 48
Beneficial Owners and Management............................ 48
Officer and Director Option Grants.......................... 51
Shareholder Proposals....................................... 51
Presence of Independent Auditors at Special Meeting......... 51
Incorporation by Reference.................................. 51
Other Matters............................................... 52
Appendix A -- Exchange Agreement............................ A-1
Appendix B -- Fairness Opinion of our Financial Advisor..... B-1
Appendix C -- 2003 Equity Incentive Plan.................... C-1
Appendix D -- Certificate of Incorporation of the Delaware
corporation that survives the merger...................... D-1
Appendix E -- Bylaws of the Delaware corporation that
survives the merger....................................... E-1
In this proxy statement, we use the terms 'Sorrento,' 'we,' 'us' and 'our'
to refer to Sorrento Networks Corporation, a New Jersey corporation, and its
subsidiaries.
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ABOUT THE SOLICITATION
SOLICITATION OF PROXIES AND ACCEPTANCES
This proxy statement is furnished in connection with our solicitation of
proxies to be voted at the special meeting of our shareholders.
YOU MUST COMPLETE AND RETURN THE ENCLOSED PROXY IN ORDER TO VOTE FOR OR
AGAINST THE RESTRUCTURING PROPOSALS. OUR BOARD OF DIRECTORS RECOMMENDS A VOTE
'FOR' EACH OF THE RESTRUCTURING PROPOSALS.
Whether or not you are able to attend the special meeting of shareholders,
your vote by proxy is very important. Shareholders are encouraged to mark, sign
and date the enclosed proxy and mail it promptly in the enclosed return
envelope.
Proxies are being solicited by and on behalf of our board of directors. We
will bear all expenses of this solicitation, including the cost of preparing and
mailing this proxy statement. In addition to solicitation by use of the mails,
proxies may be solicited by our directors, officers and employees personally, by
telephone or otherwise. Such persons will not receive any fees or other
compensation for such solicitation, but may be reimbursed for out-of-pocket
expenses in connection with such solicitation. Arrangements will also be made
with custodians, nominees and fiduciaries for forwarding of proxy solicitation
material to beneficial owners of our common stock held of record by such
persons, and we may reimburse such custodians, nominees and fiduciaries for
reasonable expenses incurred in connection therewith.
RECORD DATE
The record date for purposes of determining which shareholders are eligible
to vote at the special meeting is 5:00 p.m., New York City time, on March 7,
2003. On the record date there were 886,000 shares of our common stock
outstanding, and there were shareholders of record.
DATE, TIME AND PLACE OF SPECIAL MEETING
The special meeting will be held on April , 2003 at 10:00 a.m., San Diego
time, at the San Diego Marriott Del Mar, 11966 El Camino Real, San Diego,
California.
PURPOSE OF SPECIAL MEETING
The purpose of the special meeting is to consider and vote on the following
proposals:
1. The issuance to holders of the Outstanding Debentures and Series A of
between 7,236,000 and 9,303,000 shares of our common stock and
convertible debentures in the aggregate principal amount of $12,500,000
in the restructuring transaction. The Exchange Debentures will be
convertible into between approximately 1,034,000 and approximately
3,101,000 shares, depending on the conversion price, which we will not
know until shortly before the closing of the restructuring transaction.
In certain portions of this Proxy Statement, we have assumed that the
Exchange Debentures will be convertible into 2,067,000 shares, which
would be 17.5% of our outstanding common stock on a diluted basis. If the
Exchange Debentures were convertible into more than 17.5% of our
outstanding common stock on a diluted basis, then the number of shares
issued at the closing of the restructuring transaction would be lower;
conversely, if the Exchange Debentures were convertible into less than
17.5% of our outstanding common stock on a diluted basis, then the number
of shares issued at the closing of the restructuring transaction would be
higher. The aggregate number of shares to be issued at closing and
issuable upon conversion of the Exchange Debentures would be
approximately 10,337,000.
2. Approval of a change in our state of incorporation from New Jersey to
Delaware by merging our company into a newly-formed Delaware corporation.
3. The adoption of our 2003 Equity Incentive Plan.
6
The affirmative vote of a majority of all votes cast at the special meeting
is required to approve the foregoing proposals. Approval of all the proposals is
a condition to the consummation of the restructuring plan. For a full
description of each of the proposals, see 'The Restructuring Proposals'
beginning on page 28.
VOTING ON THE RESTRUCTURING PROPOSALS
All shares represented by a properly executed proxy will be voted at the
special meeting in accordance with the directions on such proxy. If no direction
is indicated on a properly executed proxy, the shares covered thereby will be
voted in favor of each proposal.
In the event that sufficient votes in favor of the restructuring proposals
are not received by the time scheduled for the special meeting, the persons
named as proxies may propose one or more adjournments of the special meeting to
permit further solicitation of proxies with respect to such proposals. Any such
adjournment will require the affirmative vote of a majority of the voting power
present or represented at the special meeting.
QUORUM; VOTING RIGHTS; EFFECT OF ABSTENTIONS AND NON-VOTES
At the special meeting, an Inspector of Election will determine the presence
of a quorum and tabulate the results of the voting by the shareholders. The
holders of a majority of the outstanding shares of common stock that are
entitled to vote at the meeting must be present in person or by proxy in order
to have the quorum that is necessary for the transaction of business at the
meeting. The Inspector will treat properly executed proxies marked 'abstain' or
required to be treated as 'non-votes' as present for purposes of determining
whether there is a quorum at the meeting. Broker 'non-votes' occur when a broker
or nominee holding shares for a beneficial owner returns a proxy but does not
have the authority to vote on a particular proposal.
Assuming a quorum of shareholders is present at the special meeting, the
affirmative vote of a majority of all votes cast is required to approve each of
the restructuring proposals. Each share of our common stock is entitled to one
vote. Abstentions and non-votes will have the same effect as a vote against any
proposal.
NO DISSENTERS' RIGHTS
Shareholders have no statutory appraisal or dissenters' rights with respect
to the restructuring proposals or the undertaking by us of any of the
transactions described in this Proxy Statement.
REVOCATION OF PROXIES
A shareholder who has executed and returned a proxy may revoke it at any
time before it is voted by executing and returning a proxy bearing a later date,
by giving written notice of revocation to Mary Lay, Vice President Finance, at
the Company, or by attending the special meeting and voting in person.
QUESTIONS AND REQUESTS FOR ASSISTANCE
Questions and requests for assistance or for additional copies of this Proxy
Statement and the proxy card may be directed to Mary Lay, Vice President
Finance, at the Company at (858) 909-3445.
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RISK FACTORS
You should carefully consider the following risk factors before you decide
to vote in favor of or against the restructuring proposals. These risks are not
intended to represent a complete list of the general or specific risks that may
affect shareholders in connection with the restructuring or that relate to us.
RISKS RELATED TO THE RESTRUCTURING TRANSACTION.
CONSUMMATION OF THE RESTRUCTURING WILL RESULT IN SIGNIFICANT DILUTION OF YOUR
EQUITY INTERESTS.
Upon consummation of the restructuring, the equity interests of our existing
common shareholders, as a percentage of the total number of the outstanding
shares of our common stock, will be significantly diluted. If the restructuring
transaction is consummated, and assuming the Exchange Debentures are convertible
into 17.5% of our common stock on a diluted basis, as of the date of the closing
of the restructuring transaction our existing holders of common stock will own
9.7% of our then outstanding common stock, plus New Warrants exercisable for an
additional 5.0% of our outstanding common stock, on a diluted basis. Assuming
exercise of the New Warrants, our existing shareholders would own approximately
12.5% of our common stock, on a diluted basis. Any exercise or conversion of our
other outstanding securities would further dilute the equity interests of our
existing shareholders.
We expect that we will need to issue additional shares of common stock in
the future to fund our business, which would lead to further dilution of our
common shareholders.
ALTHOUGH OUR BOARD OF DIRECTORS BELIEVES THAT EACH OF THE PROPOSALS IS IN THE
BEST INTEREST OF US AND OUR SHAREHOLDERS, SHAREHOLDERS SHOULD CONSIDER THE
FOLLOWING EFFECTS OF THE RESTRUCTURING TRANSACTION.
Assuming the Exchange Debentures are convertible into 17.5% of our common
stock on a diluted basis, the exchanging holders of the Outstanding
Debentures and Series A will receive shares of our common stock
representing approximately 90% of our common stock outstanding immediately
following the restructuring transaction. Upon conversion of the Exchange
Debentures, the exchanging holders of the Outstanding Debentures and the
Series A would own approximately 87.5% of our outstanding common stock, on
a diluted basis. In addition, the exchanging holders have the option to
designate two representatives to be nominated for election to our board of
directors, one to be selected by the holders of the Outstanding Debentures
and one by the holders of the Series A. The exchanging holders may have
interests with respect to their investment in our company that differ from
those of other shareholders.
Sales of the securities acquired in connection with the restructuring
transaction in the public market, or the perception that such sales could
occur, could adversely affect the prevailing market price of our common
stock and could make it more difficult for us to raise funds through a
public or private offering of our common stock or securities convertible
into our common stock.
UPON COMPLETION OF THE RESTRUCTURING TRANSACTION, THE EXCHANGING HOLDERS OF THE
OUTSTANDING DEBENTURES AND SERIES A WILL HOLD A SUBSTANTIAL PORTION OF OUR STOCK
AND WILL HAVE SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING SHAREHOLDER CONSENT.
Assuming the Exchange Debentures are convertible into 17.5% of our common
stock outstanding on a diluted basis, the exchanging holders of the Outstanding
Debentures and the Series A will own approximately 90% of our outstanding common
stock immediately following consummation of the restructuring. If all of the
Exchange Debentures were converted into shares of our common stock, the
exchanging holders would own approximately 87.5% of our common stock on a
diluted basis, and existing shareholders would own approximately 12.5% of our
common stock on a diluted basis. Accordingly, the exchanging holders will have
significant
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influence over matters requiring shareholder approval following the combination.
The exchanging holders of the Outstanding Debenture and Series A, if they act
in concert, will effectively control our company and the election of directors
to our board of directors. Consequently, they will be able to exercise
significant control over all matters requiring shareholder approval, including
the election of directors, if they act in concert.
FAILURE TO COMPLETE THE RESTRUCTURING TRANSACTION COULD NEGATIVELY AFFECT OUR
OPERATING RESULTS AND OUR ABILITY TO ENTER INTO AN ALTERNATIVE RESTRUCTURING
TRANSACTION.
If the restructuring transaction is not completed for any reason, regardless
of whether we seek an alternative plan of reorganization or liquidation,
including bankruptcy protection, we will likely experience a number of adverse
consequences, including the following:
the price of our common stock may decline, particularly if the current
market price of our common stock reflects a market assumption that the
restructuring transaction will be completed;
an adverse reaction from investors and potential investors may reduce
future financing opportunities;
our business customers may choose not to do future business with us due to
the uncertainties that would exist; and
our substantial costs related to these transactions, including legal and
accounting fees, must be paid even if the restructuring transaction is not
completed.
EVEN IF THE RESTRUCTURING TRANSACTION IS CONSUMMATED, WE WILL CONTINUE TO HAVE
SIGNIFICANT DEBT AND WE MAY NOT GENERATE SUFFICIENT CASH FLOW TO MEET OUR DEBT
SERVICE OBLIGATIONS.
Upon consummation of the restructuring transaction, our total debt will
likely consist primarily of approximately $13.5 million principal amount of New
Debentures. 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; and
making us more vulnerable if the current general economic downturn
continues or if our business experiences difficulties.
If we cannot generate sufficient revenue, we may not be able to meet our
debt service obligations or repay our debt when due or comply with other
covenants in the New Debentures. If we breach the terms of the New Debentures,
the holders could require repayment of all amounts owed, and we would not have
sufficient cash reserves to repay such amounts.
WHETHER OR NOT WE CONSUMMATE THE RESTRUCTURING TRANSACTION, WE MAY BE UNABLE TO
RAISE THE FUNDS NECESSARY TO REPAY OR REFINANCE OUR INDEBTEDNESS.
We are currently obligated to make principal and interest payments on the
Outstanding Debentures. If the restructuring transaction is consummated, we will
continue to have obligations under the terms of the New Debentures. We will be
obligated to make interest payments on the New Debentures each year until 2007,
when the New Debentures mature. Although under certain circumstances we may pay
interest in shares of our common stock or in additional New
9
Debentures, this obligation generally requires significant amounts of liquidity.
We will need additional capital to fund this obligation. Our ability to arrange
financing and the cost of this financing 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 MAY BE SOLD IN THE MARKET IN THE NEAR FUTURE. THIS
COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF
OUR BUSINESS IS DOING WELL.
As described in this proxy statement, we propose to issue a large number of
shares of our common stock to the holders of the Outstanding Debentures and the
Series A in connection with the restructuring transaction. The shares of common
stock issued in the restructuring will have been registered for resale and thus
may be sold into the public market immediately following the closing of the
restructuring. Subject to the restrictions described in this proxy statement,
the New Debentures will be immediately convertible into shares of common stock,
and the underlying shares of common stock also will have been registered for
resale. Sales of a substantial number of shares of our common stock by those
shareholders within any narrow period of time could cause our stock price to
fall. In addition, the issuance of the additional shares of our common stock as
a result of this transaction will reduce our earnings per share, if any. This
dilution could reduce the market price of our common stock unless and until we
achieve revenue growth or cost savings and other business economies sufficient
to offset the effect of this issuance. There can be no assurance that we will
achieve revenue growth, cost savings or other business economies, or that our
shareholders will achieve greater returns as shareholders of our company after
the restructuring transaction than as current shareholders of our company.
WE MAY NOT BE ABLE TO OBTAIN THE ADDITIONAL FINANCING WE ANTICIPATE WE WILL NEED
IN THE NEAR FUTURE TO CONTINUE OUR BUSINESS.
Whether or not the restructuring transaction is completed, we will need
additional funds to support operations in the future in order to continue to
enhance and expand our product offerings and to increase our market share in the
regional and metropolitan marketplace. If we are unable to obtain new
investment, we may have to reduce or cease operations, or attempt to sell some
or all of our operations or to merge with another entity. Although we believe
that consummation of the restructuring transaction will increase our ability to
obtain new financing, we cannot make any assurances that we will be able to
obtain this new financing.
The further development of our products as well as the expansion of
manufacturing capabilities or the establishment of additional sales, marketing
and distribution capabilities will likely require the commitment of substantial
funds. Our existing working capital will not be sufficient to meet these
expansion plans. Potential sources of additional funds include public or private
offerings of debt or equity securities, bank lines of credit or extensions of
existing arrangements by us. Additional financing may not be available on terms
favorable to us, or at all. Insufficient funds may require us to delay, scale
back or eliminate certain product development programs, or attempt to merge with
another entity or otherwise reduce or cease operations. We also expect that, as
a result of the slowdown in capital spending in the optical networking and
telecommunications industries, we will need to reduce our expenses in the near
future to bring
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them in line with reduced revenues in order to conserve our working capital.
Moreover, without adequate financing, potential customers who otherwise would
select our products to purchase may decide to buy from other vendors whom the
customers perceive to have greater financial stability.
AN ALTERNATIVE TO THE RESTRUCTURING TRANSACTION MAY NOT BE AVAILABLE TO US AND,
IF AVAILABLE AND COMPLETED, MAY BE LESS FINANCIALLY ATTRACTIVE TO US AND OUR
EQUITY HOLDERS THAN THE RESTRUCTURING TRANSACTION.
We believe that the completion of the restructuring transaction is critical
to our continuing viability. If the restructuring transaction is not completed,
we will be forced to consider an alternative plan of reorganization or
liquidation. We cannot assure you that any alternative reorganization
arrangement would be available, or if available, would result in a successful
reorganization or that any reorganization or liquidation would be on terms as
favorable to our equity holders as the terms of the restructuring transaction or
result in any distributions being made to our equity holders. Any alternative
plan of reorganization or liquidation may result in our existing shares of
common stock becoming worthless.
WE MAY INCUR INCOME TAX LIABILITY AS A RESULT OF THE RESTRUCTURING.
We will realize cancellation of indebtedness income as a result of the
restructuring transaction to the extent that the value of the common stock
issued in exchange for the Outstanding Debentures and Series A is less than
their 'adjusted issue price.' Thus, the precise amount of cancellation of
indebtedness income cannot be determined until the closing date of the
restructuring transaction.
We will not recognize cancellation of indebtedness income to the extent we
are considered insolvent from a tax perspective immediately prior to the
completion of the restructuring. If and to the extent cancellation of
indebtedness income is excluded from taxable income due to insolvency, we will
generally be required to reduce certain of our tax attributes, including, but
not limited to, net operating losses and loss carryforwards. This may result in
a significant reduction in, and possible elimination of, our tax attributes.
Taxable income will result to the extent cancellation of indebtedness income
exceeds the amount by which we are considered to be insolvent immediately prior
to the completion of the restructuring transaction.
To the extent that we are considered solvent from a tax perspective
immediately prior to the completion of the exchange and realize cancellation of
indebtedness income, our available losses may offset all or a portion of the
cancellation of indebtedness income for federal tax purposes. Cancellation of
indebtedness income realized in excess of available losses should result in a
tax liability.
Due to a variety of differences between federal and state tax laws, the
state implications of the restructuring transaction cannot be determined at this
time. However, the states generally reduce the benefits provided for in the
federal laws thereby increasing the likelihood of a state tax liability from the
restructuring transaction.
The determination of the solvency of each subsidiary will also affect the
determination of the income upon the merger and liquidation of the subsidiaries
into our company. A merger and liquidation of a solvent subsidiary into our
company should not result in gain to us whereas the merger and liquidation of an
insolvent subsidiary may result in the recognition of gain by us.
CERTAIN OF OUR DIRECTORS AND OFFICERS MAY HAVE CONFLICTS OF INTEREST THAT MAY
INFLUENCE THEM TO SUPPORT OR APPROVE THE RESTRUCTURING TRANSACTION.
Certain of our directors and officers participate in compensation
arrangements and have continuing indemnification against liabilities that
provide them with interests in the restructuring transaction that are different
from, or in addition to, yours. They could therefore be more likely to vote to
approve the restructuring transaction than if they did not hold these interests.
You should consider whether these interests may have influenced these directors
and officers to support or
11
recommend the restructuring transaction. See 'Interests of Certain Persons in
the Restructuring Transaction' on page 43.
EVEN IF WE SUCCESSFULLY CONSUMMATE THE RESTRUCTURING TRANSACTION, IN ADDITION TO
THE RISKS DESCRIBED ABOVE, WE WILL CONTINUE TO FACE MANY IF NOT ALL OF THE RISKS
WE CURRENTLY FACE, INCLUDING THE FOLLOWING:
We have a history of losses and expect to incur future losses.
We have incurred operating losses during the years ended January 31, 2002,
2001 and 2000 of $37.2 million, $50.4 million and $10.0 million, respectively,
and as of October 31, 2002, we had an accumulated deficit of $180.1 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 while
maintaining reasonable expense levels.
Our history of losses and future losses could have an impact on our ability
to finance our business and adversely affect our ability to continue operating,
even after the consummation of the restructuring transaction.
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 violations of minimum listing requirements for our
publicly traded stock on the Nasdaq National Market, which could cause
significant decline in shareholder value and stock price. These losses, as well
as such a decline, would have a negative effect on our ability to raise capital
necessary to our continued viability.
Our stock price is volatile.
The market price of our common stock, like that of many other optical
networking companies, has been and will likely continue to be volatile, whether
or not the restructuring transaction is consummated. Recently, the stock market
in general and the shares of optical networking companies in particular, have
experienced significant price fluctuations. The market price of our common stock
may continue to fluctuate significantly in response to various factors,
including without limitation:
changes in our business, operations or prospects;
the timing of the completion of the restructuring transaction;
the prospects of post-restructuring operations; and
general market and economic conditions.
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THE RESTRUCTURING
BACKGROUND OF AND REASONS FOR THE RESTRUCTURING
We have historically funded our business operations through the issuance of
debt and equity securities, along with internally generated cash flow and bank
loans. Two of our most recent capital raising transactions were the sale by SNI
of its Series A in March 2000 and our sale of $32.2 million principal amount of
the Outstanding Debentures in August 2001.
We believe that completing the restructuring of these two classes of
securities is essential to our continuing viability. We estimate that we have
sufficient cash to cover our estimated funding needs only through approximately
May 30, 2003. Whether or not the restructuring transaction is completed, we
anticipate that it will take at least several months and a significant amount of
additional funding before we may become self-sustaining from operating cash
flow. However, competitive pressures resulting from our current financial
situation will make it difficult ever to become self-sustaining and, if the
restructuring transaction is not consummated, we do not believe that we will be
able to raise the additional financing we will need to become self-sustaining.
SERIES A
SNI issued 8,596,333 shares of its Series A to a group of investors in March
2000 for gross proceeds of $46.8 million. Each share of Series A is convertible
into one share of SNI's common stock, or approximately 14% of SNI's common stock
in the aggregate. We currently own all of SNI's outstanding common stock. The
Series A has a liquidation preference of $5.45 per share, or $46.8 million in
the aggregate.
Because SNI did not complete an initial public offering by March 1, 2002,
the holders of more than 50% of the outstanding Series A shares had the right to
require those shares to be repurchased by SNI at $5.45 per share. In April 2001,
holders of a majority of those shares exercised that right. SNI has not
repurchased those shares because Delaware corporate law prohibits a repurchase
of equity securities when the capital of the corporation is impaired or when
such repurchase would cause an impairment of the capital of the corporation. SNI
has not had funds legally available to repurchase any of its equity securities
since April 2001 and most likely will not in the foreseeable future.
The governing documents relating to the Series A limited SNI's ability to
raise capital. Certain holders of the Series A took the position that this
prevented us from funding SNI, and we disagreed with that position. In September
2001, certain Series A holders obtained a preliminary injunction from the
Delaware Court of Chancery prohibiting SNI from issuing further shares of its
Series A or incurring any debt without the consent of the holders of a majority
of the outstanding Series A shares. This injunction was affirmed by the Delaware
Supreme Court in January 2002. In October 2001, the complaint in this litigation
was amended adding counts for common law fraud, securities fraud, breach of
fiduciary duty, conspiracy and intentional interference with contractual rights.
The complaint also sought the appointment of a receiver for SNI. Currently, the
litigation is stayed pending the restructuring.
OUTSTANDING DEBENTURES
In August 2001 we issued $32.2 million of Outstanding Debentures, which bear
interest at the rate of 9.75% per year, payable quarterly in cash or our common
stock, at our option. If we choose to pay interest by issuing all common stock,
the stock is valued at its then current market price. The Outstanding Debentures
can be converted by the holders into our common stock at a price of $144.20 per
share, after giving effect to our 1-for-20 reverse stock split in October 2002.
From September 2000 until August 2002, we had numerous discussions with the
holders of the Series A to restructure the repurchase obligation. In late August
2002, we began to investigate the feasibility of restructuring all of the Series
A and Outstanding Debentures obligations and liabilities.
13
During the second week of September 2002, we met with the holders of the
largest principal amount of Outstanding Debentures, Deutsche Bank, Zimmer Lucas
and Societe Generale, individually, and holders of a majority of the Series A,
Andersen Weinroth, United Pan-Europe Communications, N.V., and Telecom Ventures,
as a group, in New York to discuss a restructuring of our debt obligations and
SNI's obligation to repurchase the Series A. We met with additional holders of
the Outstanding Debentures in New York during the last week of September 2002 to
present our need to restructure.
In early October 2002, holders of our Outstanding Debentures representing a
majority of the outstanding dollar amount of the Outstanding Debentures formed a
committee to negotiate a restructuring.
During the first week of November 2002, we delivered a proposed term sheet
to the Outstanding Debenture holders' committee. Subsequently, we met with the
Outstanding Debenture holders' committee between November 10 and November 14 in
New York to negotiate the terms of a restructuring. In addition to the specific
meetings in New York, we had numerous telephone conversations with the
Outstanding Debenture holders' committee.
During the course of these negotiations, we exchanged several draft term
sheets with the Outstanding Debenture holders' committee. The primary economic
terms of a proposed restructuring related to the percentages of our equity and
principal amount of New Debentures that would be received in the exchange by the
holders of the Outstanding Debentures and the Series A and the percentage of our
equity that would be retained by our current shareholders, either directly or
through distribution of New Warrants. The Outstanding Debentures holders'
committee originally proposed that, following consummation of a restructuring
transaction, our current shareholders would own only approximately a 5%, or even
lesser percentage, equity interest following consummation of a restructuring
transaction, or in the case of a filing of a plan of reorganization a 0%
interest.
During this period, we continued to meet personally with the key
representatives of the holders of Series A, discussing with them the intent to
restructure both our Outstanding Debentures and Series A debt obligation. While
we had proposed a structure for our restructuring, we determined that we needed
to bring together both groups of securities holders to discuss their relative
positions before meaningful negotiations could be undertaken between us and both
groups of securities holders because their interests in a restructuring could
conflict. Accordingly, we proceeded to put key representatives of the holders of
the Series A into contact with the key representatives from the Outstanding
Debentures holders' committee.
On December 3 and 4, 2002, we met with the Outstanding Debenture holders'
committee and several holders of the Series A to negotiate the final terms of a
restructuring. At the onset of these discussions, the holders of the Outstanding
Debentures and the Series A demanded that we issue them shares of our common
stock aggregating 95% of our total outstanding common stock and new senior
convertible debentures in the aggregate principal amount of $15.0 million. After
negotiations, we agreed to issue the Exchange Debentures in the aggregate
principal amount of $12.5 million and shares of our common stock representing
87.5% of our outstanding common stock, on a diluted basis.
At a meeting on December 9, 2002, our board of directors approved the letter
of intent and the term sheet. On December 10, 2002, we executed a letter of
intent with the members of the Outstanding Debentures holders' committee and the
three largest holders of Series A.
During the week of December 16, 2002, the letter of intent and term sheet
were forwarded to the remaining holders of Outstanding Debenture and Series A
for review and signature. By January 7, 2003, we had received executed copies of
the letter of intent from all of the Outstanding Debenture holders and Series A
holders.
From December 13, 2002, until March 6, 2003, the definitive agreements
necessary for the restructuring were drafted. On January 9, 2003 and as
contemplated by the letter of intent, we paid $320,000 in fees to the holders of
the Outstanding Debentures, each of whom agreed to waive certain events of
default under the Outstanding Debentures, the January 1, 2003 interest
14
payment on the Outstanding Debentures, and to forbear from enforcing any rights
or remedies they may have under the Outstanding Debentures until March 28, 2003.
As of March , 2003, we, SNI, and all the holders of the Outstanding Debentures
and Series A executed the Exchange Agreement.
SUMMARY OF THE EXCHANGE AGREEMENT
We believe that the following summary describes the material terms of the
Exchange Agreement. We recommend that you carefully read the Exchange Agreement
in its entirety for a complete description of the terms and conditions of the
restructuring transaction. The Exchange Agreement is the legal document that
governs the restructuring transaction. The Exchange Agreement is attached to
this proxy statement as Appendix A.
STRUCTURE OF THE EXCHANGE
On the closing date of the restructuring transaction, the holders of the
Outstanding Debentures and Series A will exchange all the Outstanding Debentures
and all the Series A for newly issued shares of our common stock and the
Exchange Debentures, in an amount such that the shares issued at the closing and
the shares underlying the Exchange Debentures will represent 87.5% of our
outstanding common stock on a diluted basis. Exchanging holders of the
Outstanding Debentures and Series A will receive their respective pro rata share
of the shares of our common stock and Exchange Debentures to be issued at the
closing, based upon their respective ownership percentage of Outstanding
Debentures and Series A. The holders of the Outstanding Debentures will receive
42.5%, in the aggregate, and the holders of the Series A will receive 57.5%, in
the aggregate, of the total number of shares to be issued, including those
underlying the Exchange Debentures.
The Exchange Debentures will bear interest at 7.5% per annum, and will be
convertible at any time at the option of the holders into shares of the newly
issued common stock at a conversion price equal to the Reference Price. The
Exchange Debentures will be secured. A description of the collateral is provided
below.
FEE AMOUNT DEBENTURES
In addition to the shares of our common stock and Exchange Debentures to be
issued to the exchanging holders of our Outstanding Debentures and Series A, we
will issue up to $950,000 principal amount of Fee Amount Debentures to reimburse
certain Series A holders for legal fees and expenses incurred on or prior to
November 11, 2002. The holders of Series A who funded legal fees and costs on
behalf of the holders of Series A in certain Delaware Chancery Court cases will
receive the Fee Amount Debentures based upon the relative proportion of such
legal fees and costs expended by them. The amount of the Fee Amount Debentures
is $950,000 less, on a dollar for dollar basis, any amount paid by United
Pan-Europe Communications, N.V. to Sorrento Networks, Inc. from December 10,
2002 through the closing date of the restructuring transaction with respect to
the invoices at issue in the pending litigation between them and which is
thereafter paid to the holders of Series A who funded the Delaware litigation.
SNI has agreed to pay any such amounts received from United Pan-Europe
Communications, N.V. (up to $950,000) to such holders of Series A at or prior to
the closing of the restructuring transaction.
The Fee Amount Debentures will bear interest at 7.5% per annum, and will be
convertible at any time at the option of the holders at a conversion price equal
to the Reference Price into shares of the newly issued common stock. The Fee
Amount Debentures will also be secured. A description of the collateral is
provided below.
NEW WARRANTS
We will issue the New Warrants to our shareholders of record on a date to be
determined but which will be within ten days of the closing date of the
restructuring, as of the closing date of the
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restructuring transaction. The New Warrants will be exercisable into newly
issued shares of our common stock, which will, in the aggregate, total 5% on a
diluted basis. The exercise price of the New Warrants will be 110% of the
Reference Price, and must be paid in cash. The New Warrants may be exercised at
any time after the first anniversary of the closing of the restructuring
transaction and before August 2, 2007. We will have the right to repurchase the
New Warrants upon 30 days prior notice, for $0.01 per warrant share, at any time
after the volume-weighted average market price of our common stock for any ten
consecutive trading days equals or exceeds 150% of the exercise price. Exercise
of the New Warrants will also be subject to the effectiveness of a registration
statement with respect to the shares of our common stock to be issued upon
exercise of the New Warrants.
2003 EQUITY INCENTIVE PLAN
Our board of directors has adopted the 2003 Equity Incentive Plan subject to
the approval of our shareholders. Under the 2003 Plan, up to 15% of the newly
issued shares of common stock on a diluted basis (which for this purpose will
include the shares issuable upon conversion of the Fee Amount Debentures) will
be available for award to our employees, directors and consultants and those of
any of our subsidiaries on the grant date of the award. Up to half of the awards
would be issued at or promptly following the closing date of the restructuring
transaction at the then-current market price (but not less than 90% of the
Reference Price), and the remaining awards would be issuable from time to time
in such amounts and at such prices as approved by our board after the closing
date of the restructuring transaction.
REINCORPORATION AND MERGER OF SUBSIDIARIES
No later than the day before the closing date of the restructuring
transaction, we will merge with and into a to-be-formed Delaware corporation,
which will be formed solely for the purpose of effecting the change in our
state of incorporation from the State of New Jersey to the State of Delaware.
Promptly after the closing date of the restructuring transaction, and in no
event later than one year after the closing date, our subsidiaries, SNI, Meret
Communications, Inc., a California corporation ('Meret'), and Sorrento Valley
Real Estate Holdings, LLC ('SVREH'), a California limited liability company,
will be merged with and into us.
COLLATERAL
At the closing of the restructuring transaction, the New Debentures will be
secured by substantially all of our assets and those of our subsidiaries (with
certain exceptions, including the real estate owned by Meret and SVREH). No
later than one year following the closing date, we must provide a second
mortgage on such real estate as security for the New Debentures. When we have
done so and we have merged our subsidiaries into us, most of the remaining
collateral will be released or subordinated at our request to permit us to
obtain a secured loan from a bank.
REPRESENTATIONS, WARRANTIES, COVENANTS
The Exchange Agreement contains customary representations and warranties by
us and our subsidiaries, relating to, among other things: corporate organization
and qualification; authorization and binding obligation of the Exchange
Agreement; capitalization; validity and authorization of shares to be issued;
absence of conflicts and required filings and consents; required permits and
compliance with laws; absence of litigation; and provision of requested
information to exchanging holders.
The exchanging holders of the Outstanding Debentures and Series A have also
made customary representations and warranties relating to, among other things:
organization, standing and authority; authorization and binding obligation of
the Exchange Agreement; ownership of Outstanding Debentures or Series A, as
applicable; acquisition of New Debentures and shares of our common stock for
their own account; and accredited investor status.
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The Exchange Agreement also contains customary covenants by us and SNI. We
and SNI have also covenanted that until the closing date of the restructuring
transaction we and SNI will restrict our or its cash expenditures to ordinary
course transactions, compensation to currently-employed officers, and the
expenses directly associated with the restructuring transactions. Neither we nor
SNI will make any inter-company transfer of cash, other than the transfer by us
to Meret of not more than $200,000 for reimbursement of expenses incurred in the
ordinary course of business, provided, however, that if the closing is delayed
beyond March 28, 2003, we will have the right to transfer cash to SNI and Meret
in the ordinary course of and pursuant to the reasonable requirements of our
business in amounts not to exceed $1,500,000 per month for SNI and $100,000 per
month for Meret. Neither we nor SNI will issue any equity until the closing date
of the restructuring transaction, except in connection with the exercise of
options or conversion of our Series D Preferred Stock. We have granted the
exchanging holders of the Outstanding Debentures and the Series A the right to
appoint a new director (for a total of two possible new directors) to our board
of directors. If the exchanging holders of the Outstanding Debentures or the
Series A exercise that right, the new director(s) would continue in office until
the next regularly scheduled annual meeting of our shareholders and would be
nominated for re-election at such meeting.
After the closing of the restructuring transaction, none of SNI, Meret or
SVREH will incur indebtedness except as permitted by the terms of the New
Debentures. Under the New Debentures, we cannot obtain new secured debt until
our subsidiaries have merged into us and the New Debentures are secured by the
real property described above.
The exchanging holders of the Outstanding Debentures and Series A have
agreed that, in connection with any new underwriting of securities that becomes
effective prior to the first anniversary of the closing, they will be subject to
customary 'lock up' agreements in order to help facilitate a new underwriting.
These lock-ups will only apply to exchanging holders that beneficially own at
least one percent of our outstanding shares of common stock.
We, SNI, and the exchanging holders of the Series A who are plaintiffs in
the Series A litigation in Delaware, have agreed that concurrently with the
closing of the restructuring transaction, all proceedings in the Series A
litigation will be dismissed with prejudice against such exchanging holders,
SNI, us, and individual defendants who are currently our officers and directors,
and the Series A litigation will be dismissed without prejudice as to other
individual defendants.
CONDITIONS TO CLOSING
The Exchange Agreement contains customary conditions to closing including,
among other things, accuracy of representations; performance of covenants
contained in the Exchange Agreement; receipt by the exchanging holders of the
shares of our common stock and New Debentures, and opinions of our counsel; and
receipt by us and SNI of the Outstanding Debentures and associated warrants and
Series A.
In addition, the Exchange Agreement contains the following conditions to
closing:
A. There must be no injunction, stay or restraining order in effect
with respect to the restructuring transaction;
B. The SEC must have declared effective the Registration Statement
registering the resale of the shares of our common stock issued and issuable
in the restructuring transaction to the Exchanging Holders of the
Outstanding Debentures and Series A. No stop order suspending the
effectiveness of the Registration Statement or any part thereof may have
been issued;
C. All necessary or appropriate third party and governmental waivers
and consents to the restructuring transaction must have been received,
except for non-material waivers or consents;
D. We must have received shareholder approval of the restructuring
proposals;
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E. We and the holders of the Series A who are parties to the Series A
litigation must have dismissed the Series A Litigation; and
F. UPC and SNI must have settled the outstanding litigation between
them relating to receivables, and the case shall have been dismissed with
prejudice.
TERMINATION OF EXCHANGE AGREEMENT
The Exchange Agreement may be terminated at any time prior to the closing
date of the restructuring transaction by mutual consent of us, SNI and
exchanging holders of at least 80% of the shares of Series A and holders of a
majority of the outstanding principal amount of the Outstanding Debentures.
Holders of at least 80% of the shares of Series A and 80% of the outstanding
principal amount of the Outstanding Debentures may terminate the Exchange
Agreement at any time prior to the closing date of the restructuring transaction
if prior to such closing date those holders determine that there has been a
material adverse change in the business, financial or other condition of our
company, SNI, Meret and SVREH as a whole, or of SNI individually, or a
bankruptcy or similar filing by us, SNI, Meret or SVREH, or if the closing
conditions are not reasonably likely or capable of being satisfied at or prior
to the closing deadline, which currently is May 30, 2003.
If the closing of the restructuring transaction does not occur by the
closing deadline, which currently is May 30, 2003, the Exchange Agreement will
be null, void and of no effect, except for our obligation to pay certain fees
and expenses of the holders of the Outstanding Debentures and Series A.
RELEASES
Each of our company, SNI, Meret and SVREH will release and discharge each of
the exchanging holders of the Outstanding Debentures and Series A, and each of
the exchanging holders of the Outstanding Debentures and Series A will release
and discharge us, SNI, Meret and SVREH, from any claims, debts, liabilities,
obligations and causes of action of every nature relating to any matter, fact or
thing done prior to the closing date of the restructuring transaction, excluding
the claims against certain defendants in the Series A litigation who will be
dismissed without prejudice.
FEES AND EXPENSES
We will pay all reasonable legal and accounting expenses and fees in
connection with the restructuring transaction, and in connection with the
negotiation and preparation of the Exchange Agreement and related prior and
ancillary agreements, and the taking of the actions contemplated thereby, which
are incurred through the earlier of the closing date of the restructuring
transaction, for one law firm for the holders of the Outstanding Debentures, one
law firm for the holders of Series A, and one accounting firm which may perform
services for either or both of the law firms for the holders of Outstanding
Debentures and/or Series A.
ANTI-DILUTION PROTECTION
Until one year after the closing date of the restructuring transaction,
exchanging holders of Outstanding Debentures and Series A who continue to hold
shares of our common stock or New Debentures acquired as of the closing of the
restructuring transaction, or shares of our common stock issued upon conversion
of the New Debentures, will have weighted average anti-dilution protection with
respect to the issuance of any additional common stock, subject to certain
exceptions described below. These anti-dilution protections will also apply to
such shares and New Debentures, as well as any shares of common stock issued
upon conversion of the New Debentures, which are acquired by any exchanging
holder from another exchanging holder. In addition, under some circumstances,
the anti-dilution protections will apply to any of these
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securities which are held by anyone who received them as a result of a
distribution from an exchanging holder that is a so-called 'private investment
fund.' If, during the one-year period that the anti-dilution protection is
effective, we grant anti-dilution protection to another party that is more
favorable than the protections provided to the exchanging holders, we will
adjust the anti-dilution protection provided to the exchanging holders so that
it is equivalent to the more favorable treatment granted to others.
If we issue options or other securities convertible into shares of our
common stock at a conversion price that is lower than that of the New
Debentures, or if we issue shares of our common stock for a consideration per
share that is less than the conversion price of the New Debentures, the
conversion price of the New Debentures will be adjusted downward pursuant to a
customary, broad-based weighted average formula and we will issue shares of
common stock to offset the dilutive impact of the issuance (based on the same
broad-based weighted average formula) on the shares of our common stock which
were issued at the closing to the exchanging holders of the Outstanding
Debentures and Series A.
In addition, if, within one year following the closing date of the
restructuring transaction, we are required to issue shares of common stock upon
the exercise of any right, option or warrant for the purchase or issuance of or
payment in the form of common shares, which right, option, or warrant was issued
prior to the closing date of the restructuring transaction and was not disclosed
in the Exchange Agreement, then we will issue additional shares of common stock
to the exchanging holders of the Outstanding Debentures and the Series A, and
will adjust the conversion price of the New Debentures sufficient to offset the
dilutive impact of such issuances.
These anti-dilution provisions (other than the most favored nations'
treatment) do not apply to (1) any new underwritten public offerings for the
issuance of additional shares of our common stock for cash that are in
compliance with the Nasdaq Stock Market rules; (2) shares issued upon conversion
of the New Debentures; (3) shares issued as payment in kind of interest on the
New Debentures; (4) shares issued upon the exercise of the New Warrants or
employee stock options, or issued pursuant to our 2003 Equity Incentive Plan; or
any other public offering or private placement of common stock or securities
convertible into common stock for a cash consideration per share which is (i)
equal to or greater than the Reference Price or (ii) less than the Reference
Price but equal to or greater than the volume-weighted average market price for
the ten trading days immediately before the issuance of such additional common
stock (or execution of an agreement to issue such additional common stock) and
the issuance is approved by a majority vote of our board of directors, including
the designee of the Series A; and, in the case of both clauses (i) and (ii)
there is no additional consideration transferred to or received by the recipient
of the additional common stock.
SUMMARY OF OTHER AGREEMENTS RELATED TO THE EXCHANGE AGREEMENT
We believe that the following summary describes the material terms of the
material agreements related to the Exchange Agreement. We recommend that you
carefully read these agreements in their entirety for a complete description of
the terms and conditions of the agreements related to the restructuring
transaction. These agreements are included in this proxy statement as exhibits
to the Exchange Agreement, which is attached as Appendix A. The remaining
exhibits to the Exchange Agreement are available for inspection at the office of
our Corporate Secretary at the address set forth on the cover page of this proxy
statement and copies will be sent to shareholders at no charge upon their
written request.
REGISTRATION RIGHTS AGREEMENT
We will file a registration statement on Form S-3 with the Securities and
Exchange Commission, which, when declared effective by the Securities and
Exchange Commission, will permit the resale from time to time by the exchanging
holders of the Outstanding Debentures and Series A of the shares of our common
stock (i) issued at the closing of the restructuring transaction, (ii) into
which the New Debentures may be converted, and (iii) that we may issue as
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payment of interest and to prevent dilution of the exchanging holders' stock
ownership interest pursuant to the requirements of the Exchange Agreement (all
the foregoing shares of our common stock are referred to as 'Registrable
Securities').
We will use our reasonable best efforts to keep the Registration Statement
effective until the earlier of the third anniversary of the closing date of the
restructuring transaction (subject to extension in some circumstances) or the
date that there cease to be any Registrable Securities.
We may take any action required by any law or regulation that results in the
holders of the Registrable Securities being unable to offer and sell any of our
common stock during a given time period. In addition, if our board of directors
determines that the continued effectiveness of the Registration Statement would
require us to disclose a material financing, acquisition or other corporate
transaction that we are then contemplating, we may suspend the effectiveness of
the Registration Statement, but not for more than 30 consecutive days, and not
more than twice or for more than 60 days in any 12 month period.
We will also provide incidental, or 'piggyback' rights to the exchanging
holders of the Outstanding Debentures and Series A. This means that, with
certain exceptions, at any time during the period that the Registration
Statement is effective, if we propose to register any shares of our common
stock, we will provide the exchanging holders of the Outstanding Debentures and
Series A with the opportunity to register all or part of the Registrable
Securities in that registration statement.
We will seek to have the Registrable Securities listed on the Nasdaq
National Market, or other market or exchange where shares of our common stock
are then listed.
After the six month anniversary of the closing of the restructuring
transaction, and during the time that the Registration Statement is effective,
the exchanging holders of the Outstanding Debentures and Series A may sell their
Registrable Securities in an underwritten offering, provided that at least $7.5
million of Registrable Securities are included in the underwritten offering. We
will not be obligated to arrange for more than two such underwritten offerings
during the time the Registration Statement is effective or more than one such
underwritten offering in any 12 month period.
We will bear all the expenses in connection with any registration statement
filed pursuant to the Registration Rights Agreement other than the legal fees
and expenses, brokerage commissions and underwriting discounts and commissions
of the exchanging holders of the Outstanding Debentures and Series A and, under
some circumstances, certain expenses we incur in connection with a request by
the exchanging holders for an underwritten offering that is withdrawn by them.
We will indemnify and hold harmless the exchanging holders of the
Outstanding Debentures and Series A from and against all liabilities caused by
untrue or alleged untrue statements of, or omissions or alleged omissions to
state, material fact contained within a registration statement filed pursuant to
the Registration Rights Agreement. We are not obliged to indemnify or hold
harmless the exchanging holders of the Outstanding Debentures and Series A if
the statements or omissions were provided by or failed to be provided by the
exchanging holders of the Outstanding Debentures or Series A, or if we advised
the exchanging holders of the Outstanding Debentures and Series A of an event
that would make a statement contained within the Registration Statement,
prospectus or any document incorporated within those documents untrue, and,
notwithstanding the foregoing, the holders of the Outstanding Debentures and
Series A sold Registrable Securities.
The exchanging holders of the Outstanding Debentures and Series A have
agreed to indemnify us and hold us harmless from and against any liabilities
caused by any untrue or alleged untrue statement of a material fact or any
omission of a material fact required to be stated in the Registration Statement
or prospectus or supplement, which is included in or omitted from information
furnished to us by the exchanging holder for inclusion in the Registration
Statement. No exchanging holder of the Outstanding Debentures or Series A will
be liable to us in excess of the dollar amount of the proceeds received by such
exchanging holder upon the sale of the Registrable Securities giving rise to the
indemnification obligation.
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NEW DEBENTURES
The New Debentures, which will mature on August 2, 2007, bear interest at
the rate of 7.5% per annum, which is cumulative, accrues daily from the date of
issuance of the New Debentures, is calculated on the basis of a year composed of
twelve thirty-day months, and is due and payable on the first business day of
each calendar quarter following the date of issuance of the New Debentures.
Subject to certain limitations, interest on the New Debentures may be paid, at
our option, in cash, in additional New Debentures or in shares of our common
stock. Unpaid interest that is not paid within two business days of its due
date, shall bear interest at the lesser of 10.5% or the maximum amount allowed
to be charged by law.
The New Debentures and the related security agreements include covenants
restricting our ability to incur senior or subordinated debt or to purchase
preferred stock of our subsidiaries, as well as other standard covenants and
protective provisions.
At any time prior to the maturity date of the New Debentures, we may redeem
for cash on a pro rata basis some or all of the New Debentures at par, plus
accrued interest. We are also required to redeem the New Debentures on a pro
rata basis under certain circumstances upon the sale of certain of our assets or
those of our subsidiaries. The holders of the New Debentures have the right at
any time prior to the maturity date to convert the New Debentures into shares of
our common stock at the conversion price, which will be determined at the
closing of the restructuring transaction. If any New Debentures remain
outstanding on the maturity date, we will redeem them in cash. We are not
obligated, and New Debenture holders are not entitled, to convert New Debentures
if such conversion would mean that the New Debenture holder beneficially owns
9.99% or greater of the number of shares of our common stock which are then
issued and outstanding.
Upon a triggering event, Debenture holders may require us to redeem all or a
portion of the New Debentures held by them at a price equal to the greater of
(1) 101% of the outstanding principal amount of the New Debenture being redeemed
plus interest or (2) the product of (a) the aggregate number of shares for which
the New Debenture being redeemed would be converted into multiplied by (b) the
greater of (x) the conversion price and (y) the closing sale price then most
recently reported. A 'triggering event' is: a non-permitted lapse or suspension
in the effectiveness of the Registration Statement, if such lapse or
unavailability continues for five or more consecutive trading days; the
suspension from trading or failure of our common stock to be listed on its
principal market for five or more consecutive trading days, or for more than an
aggregate of ten trading days in a year; notice to New Debenture holders that we
do not intend to comply with a request for conversion of any New Debentures into
shares of our common stock (other than as a result of the restriction described
in the prior paragraph); or our failure to deliver all the shares of common
stock to which a New Debenture holder is entitled within ten days of the date
such delivery of shares was due after conversion of a New Debenture.
Events of default under the New Debentures include: a default in payment of
interest for two business days after the due date, failure to pay the principal
amount when due (including upon any required redemption), the entry of a money
judgment in excess of $1 million against us or our subsidiaries, if we or any of
our subsidiaries become insolvent, or if we or any of our subsidiaries fail to
pay a debt in excess of $1 million, or if we or our subsidiaries default under
any of the security or other agreements entered into as part of the
restructuring transaction.
Until one year after the closing of the restructuring transaction, and
subject to certain exceptions, holders of New Debentures will be entitled to
certain weighted average anti-dilution protection for the New Debentures with
respect to certain additional issuances of our common stock, as described above
under the description of the Exchange Agreement. The New Debentures will be
entitled to anti-dilution adjustments for stock dividends, stock splits, and
other similar events for their entire term.
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NEW WARRANTS
The New Warrants will be exercisable into an aggregate of approximately
591,000 shares of our common stock for an exercise price per share equal to 110%
of the Reference Price. The New Warrants will be exercisable at any time after
the one year anniversary of the closing date of the restructuring transaction
and before August 2, 2007. The exercise price must be paid in cash.
Each New Warrant can only be transferred by the holder to a third party if
the holder is a broker or dealer who will be transferring it to the actual
owner, pursuant to laws of descent and distribution, or in accordance with a
qualified domestic relations transfer order. We will adjust the amount of shares
of common stock that may be purchased under the New Warrants to prevent dilution
in the event we issue additional common stock to our shareholders in connection
with a dividend, subdivision, reclassification or combination of common stock,
or in the event of a merger, sale, lease or reorganization of our company. We
may repurchase the New Warrants at any time, upon 30 days prior notice, for
$0.01 per warrant share, at any time after the volume-weighted average market
price of the common stock for any 10 consecutive trading days equals or exceeds
150% of the exercise price.
We anticipate registering the common stock underlying the New Warrants with
the Securities and Exchange Commission by filing a registration statement with
the Securities and Exchange Commission and having it declared effective prior to
the one year anniversary of the closing of the restructuring transaction. The
New Warrants may not be exercised at any time that the registration statement is
not effective.
OPINION OF OUR FINANCIAL ADVISOR
We believe that the following summary describes the material features of the
opinion of our financial advisor, but is qualified in its entirety by reference
to the full text of the opinion, which is attached to this proxy statement as
Appendix B. We urge you to read the opinion in its entirety. The opinion was
provided in connection with the restructuring transaction and relates only to
the fairness of the restructuring, from a financial point of view, to the
holders of our common stock, does not address any other aspect of the
restructuring transaction or any aspect of any related transaction and does not
constitute a recommendation to any shareholder as to how such shareholder should
vote or act on any matters relating to the restructuring transaction or any
related transaction.
We retained Houlihan Lokey Howard & Zukin Financial Advisors, Inc.,
'Houlihan Lokey,' to provide an opinion to our board of directors regarding the
fairness of the restructuring transaction to the holders of our common stock,
from a financial point of view. Houlihan Lokey is a nationally recognized
investment banking firm that is continually engaged in providing financial
advisory services in connection with mergers and acquisitions, leveraged
buyouts, business valuations for a variety of regulatory and planning purposes,
recapitalizations, financial restructuring, and private placements of debt and
equity securities. Houlihan Lokey has no material prior relationship with us or
our affiliates. We have agreed to pay Houlihan Lokey a fee for its services in
connection with the restructuring transaction. We are also paying their
reasonable out-of-pocket expenses. We have also agreed to indemnify Houlihan
Lokey and related persons against certain liabilities, including liabilities
under Federal securities laws, arising out of the engagement of Houlihan Lokey.
Houlihan Lokey delivered its written opinion to our board of directors on
February 14, 2003. The opinion concluded that, as of that date and based on and
subject to the matters described in the opinion, the restructuring transaction
was fair, from a financial point of view, to our existing holders of common
stock. Houlihan Lokey's opinion speaks only as of February 14, 2003 and has not
been and will not be updated, revised or reaffirmed by Houlihan Lokey following
that date.
In arriving at its opinion, Houlihan Lokey:
1. reviewed our annual reports to shareholders and on Forms 10-K for the
fiscal years ended 2000 through 2002, quarterly reports on Forms 10-Q
for the three quarters ended October 31, 2002, our Form 8-K detailing
our restructuring plan dated December 10, 2002, and internally-prepared
interim financial statements for the five-month period ended December
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31, 2002, which our management has identified as being the most current
financial statements available;
2. reviewed copies of the SNI Investors' Rights Agreement dated March 3,
2000, the SNI Series A Preferred Stock Purchase Agreement dated March 3,
2000, and the Certificate of Determination of Preferences of Series A
Convertible Preferred Stock of SNI, dated February 18, 2000;
3. reviewed our presentation to NASDAQ dated January 16, 2003;
4. met with certain members of our senior management, independent
accountants, investment bankers and outside counsel to discuss (i) the
process, status and prospects of our solicitation of alternative sources
of financing and other potential strategic alternatives; and (ii) the
operations, financial condition, future prospects, projected operations
and performance of our company;
5. visited certain of our facilities and business offices;
6. reviewed forecasts and projections prepared by our management with
respect to our company for the years ended January 31, 2003 through
2004;
7. reviewed the historical market prices and trading volume for our
publicly traded securities;
8. reviewed certain other publicly available financial data for certain
companies that Houlihan Lokey deemed comparable to us, and publicly
available prices and premiums paid in other transactions that Houlihan
Lokey considered similar to the restructuring transaction;
9. reviewed drafts of certain documents to be delivered at the closing of
the restructuring transaction, including the Exchange Agreement; and
10. conducted such other studies, analyses and inquiries as they deemed
appropriate.
To assist Houlihan Lokey's evaluation of the information described above, we
advised Houlihan Lokey that based on our financial projections, (i) if we were
to meet all our existing and contingent payment obligations (including
obligations to holders of Outstanding Debentures and Series A), we would exhaust
our cash resources and would no longer be able to conduct our operations; (ii)
unless we consummate the restructuring transaction or an alternative
transaction, we will be forced to commence bankruptcy proceedings; and (iii) we
and our investment bankers have aggressively solicited indications of interest
for a new capital investment in our company or an acquisition of our company
from numerous financial and strategic investors, but have not received any
indications of interest that would adequately address our ability to pay our
existing and contingent liabilities.
In rendering its opinion, Houlihan Lokey assumed and relied, without
independent verification, on the accuracy and completeness of all financial and
other information and data publicly available or furnished to or otherwise
reviewed by or discussed with it. With respect to financial forecasts, estimates
and other information and data relating to our company provided to or otherwise
discussed with Houlihan Lokey, our management advised Houlihan Lokey that those
forecasts, estimates and other information and data were reasonably prepared on
bases reflecting the best currently available estimates and judgments of our
management as to the future financial performance of our company, our pro forma
capital structure and other matters, and Houlihan Lokey assumed, with our
consent, that the financial results reflected in those forecasts, estimates and
other information and data would be realized in the amounts and at the times
projected. Houlihan Lokey assumed, with our consent, that the transactions would
be consummated in accordance with their terms, without waiver, modification or
amendment of any material term, condition or agreement and that, in the course
of obtaining the necessary regulatory and third party approvals and consents for
the transactions, no delay, limitation, restriction or condition would be
imposed that would have an adverse effect on our company and our subsidiaries or
the contemplated benefits to us of the restructuring transactions.
Houlihan Lokey did not express any opinion as to what the value of our
common stock or our other securities issuable in connection with the
transactions actually will be when issued or the prices at which those
securities will trade or otherwise be transferable at any time. Houlihan
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Lokey did not make and was not provided with an independent evaluation or
appraisal of our assets or liabilities (contingent or otherwise). Accordingly,
with our consent, for purposes of Houlihan Lokey's opinion, Houlihan Lokey's
evaluation of the deemed aggregate consideration to be paid by the exchanging
holders in the restructuring transaction (by virtue of the securities being
exchanged) was based on a comparison of the estimated per share value of our
common stock before and after giving effect to the restructuring transactions.
Houlihan Lokey's opinion does not address any other aspect of the restructuring
transaction, the relative merits of the restructuring transaction as compared to
any alternative business strategies or financial alternatives that might exist
for us or the effect of any other transaction in which we might engage. Houlihan
Lokey's opinion is necessarily based on information available to Houlihan Lokey,
and financial, stock market and other conditions and circumstances existing and
disclosed to Houlihan Lokey, as of the date of its opinion. Houlihan Lokey did
not assume any responsibility for the independent verification of any of such
information. We imposed no instructions or limitations on Houlihan Lokey with
respect to the investigations made or procedures followed by Houlihan Lokey in
rendering its opinion.
THE FULL TEXT OF HOULIHAN LOKEY'S WRITTEN OPINION DATED FEBRUARY 14, 2003,
WHICH DESCRIBES THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED
AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED TO THIS PROXY STATEMENT AS
APPENDIX B AND INCORPORATED INTO THIS PROXY STATEMENT BY REFERENCE. HOULIHAN
LOKEY'S OPINION WAS PROVIDED IN CONNECTION WITH THE RESTRUCTURING TRANSACTION
AND RELATES ONLY TO THE FAIRNESS OF THE RESTRUCTURING, FROM A FINANCIAL POINT OF
VIEW, TO THE HOLDERS OF OUR COMMON STOCK, DOES NOT ADDRESS ANY OTHER ASPECT OF
THE RESTRUCTURING TRANSACTION OR ANY ASPECT OF ANY RELATED TRANSACTION AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER
SHOULD VOTE OR ACT ON ANY MATTERS RELATING TO THE RESTRUCTURING TRANSACTION OR
ANY RELATED TRANSACTION.
In preparing its opinion, Houlihan Lokey performed a variety of financial
and comparative analyses, including those described below. The summary of these
analyses is not a complete description of the analyses underlying Houlihan
Lokey's opinion. The preparation of a fairness opinion is a complex analytical
process involving various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances and, therefore, a fairness opinion is not readily
susceptible to summary description. Accordingly, Houlihan Lokey believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and factors without considering all analyses and factors or the
narrative description of the analyses could create a misleading or incomplete
view of the processes underlying its analyses and opinion.
In its analyses, Houlihan Lokey considered industry performance, general
business, economic, market and financial conditions and other matters existing
as of the date of its opinion, many of which are beyond our control. No company,
transaction or business used in those analyses as a comparison is identical to
ours or to the proposed transactions, and an evaluation of those analyses is not
entirely mathematical. Rather, the analyses involve complex considerations and
judgments concerning financial and operating characteristics and other factors
that could affect the transactions, public trading or other values of the
companies, business segments or transactions analyzed.
The estimates contained in Houlihan Lokey's analyses and the valuation
ranges resulting from any particular analysis are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by its analyses. In
addition, analyses relating to the value of businesses or securities do not
necessarily purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, Houlihan Lokey's
analyses and estimates are inherently subject to substantial uncertainty.
Houlihan Lokey's opinion and analyses were only one of many factors
considered by our board of directors in its evaluation of the restructuring
transaction and should not be viewed as determinative of the views of our board
or management with respect to the restructuring transaction or the aggregate
consideration to be paid by us in the restructuring transaction.
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The following is a summary of the material financial analyses performed by
Houlihan Lokey in connection with the rendering of its opinion.
FINANCIAL ANALYSES
Houlihan Lokey's evaluation of the fairness of the restructuring transaction
was based, in part, on a comparison of the existing common shareholders'
ownership interest in the enterprise value of our company before the
restructuring transaction versus after the restructuring transaction. Houlihan
Lokey applied the following approaches to determine the enterprise value for our
company: (1) market capitalization and (2) comparable transaction values, and
also analyzed the returns to common shareholders through negotiations in
prepackaged bankruptcies. Each of these analyses are summarized below.
MARKET CAPITALIZATION APPROACH
Houlihan Lokey selected ten publicly traded comparable companies to value
our company. Those companies design, develop, and market optical networking
solutions to the communications industry, which enable communications companies
to provision, manage and deliver high-bandwidth services to their customers.
Houlihan Lokey used enterprise value to revenue multiples from the selected
comparable companies in order to value our company. These multiples were
determined by the ratios of the comparable companies' market capitalizations to
historical and projected revenues for such companies. Houlihan Lokey compared
the financial condition, results and prospects of each company to our condition,
results and prospects to determine the appropriate range of revenue multiples to
use to value our company. Based on this analysis, Houlihan Lokey determined that
the appropriate range of enterprise value to revenue multiples for our company
was between 1.5 and 2.0 for fiscal year 2004. This multiple took into account
our projected revenues for fiscal year 2004 of approximately $46.355 million.
Using this metric yields an enterprise value for our company of between $69.533
million and $92.710 million.
COMPARABLE TRANSACTION APPROACH
Houlihan Lokey identified 32 transactions announced from January 2001 to
present, and identified one acquisition transaction of a company similar to us.
In such transaction, the initial enterprise value to revenue multiple was 3.8
times trailing twelve month revenues, but fell to an implied multiple of 1.9
prior to the closing of the transaction. After analyzing the 32 comparable
transactions, with a particular emphasis on the one particular transaction,
Houlihan Lokey concluded that our enterprise value to revenue multiple was
between 2.5 and 3.0 times fiscal year 2003 revenue. This metric indicated a
range of values for our company of between $65.7 million and $78.9 million.
VALUATION
Based on the average of the two selected valuation approaches, Houlihan
Lokey determined that the enterprise value for our company could be reasonably
stated to be between $68.0 million and $86.0 million. This estimated value range
assumes that we have access to additional financing to fund operations,
successful completion of the restructuring transaction and successful resolution
of ongoing litigation against us. However, given our current financial
condition, a sale transaction or access to additional capital is unlikely, as
discussed previously. Therefore, the most likely alternative to the proposed
transaction is bankruptcy.
Houlihan Lokey determined that if the restructuring transaction or an
alternative sale transaction is not consummated, we may be forced into
bankruptcy, leaving no value to the existing holders of our common stock.
Alternatively, Houlihan Lokey reviewed what our company may be able to negotiate
for its common shareholders in a pre-packaged bankruptcy. Their analysis
reviewed 45 pre-packaged bankruptcies over the last six years. The study
concluded that in similar situations, common shareholders received between 0%
and 4% of their respective companies.
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RECOMMENDATION OF THE BOARD OF DIRECTORS; REASONS OF THE BOARD OF DIRECTORS
At a meeting held on February 26, 2003, our board of directors determined
that the restructuring transaction is in the best interests of our shareholders
and recommends that our shareholders approve the restructuring. The board of
directors considered the following positive factors in reaching this conclusion:
The restructuring will strengthen our balance sheet and allow us to be in a
better position to focus on our business and to be more competitive. It
will also allow us an opportunity to raise the additional financing we need
to endeavor to become self-sustaining;
The restructuring will help in our efforts to return to compliance with
Nasdaq listing standards;
The restructuring will result in the termination of the lawsuits filed in
Delaware by the holders of the Series A, which have the potential to divert
the attention of management away from the business of the company;
Our financial strength will improve as a result of the restructuring
transaction. We currently have indebtedness of approximately $32.2 million
under the Outstanding Debentures and an obligation of approximately $48.8
million to the holders of the Series A due to the 'put' exercised by them.
The restructuring transaction will result in a reduction of these
obligations of approximately $81 million to not more than $13.5 million;
The recent trading prices of our common stock and the current conditions of
the United States capital markets make it unlikely that, without the
restructuring transaction, we could raise any additional capital through
the sale of equity or debt securities for the foreseeable future; and
The terms of the restructuring transaction were the result of extensive
arm's-length negotiations between our management and our advisors, and the
holders of the Outstanding Debentures and Series A and their advisors, and
resulted in improved terms for our shareholders from those that were
originally offered by those holders.
Our board of directors also believes that the restructuring transaction with
the holders of the Outstanding Debentures and the Series A is the only readily
available transaction that may give us the liquidity and flexibility we need to
fund our ongoing operations and offer an opportunity for us to achieve our
strategic objectives.
Our board of directors also considered the following negative factors
concerning the restructuring transaction:
Our potential inability to execute our new business strategy following
the restructuring transaction;
The risks discussed in 'Risk Factors';
Upon the closing of the restructuring transaction, our existing
shareholders will hold a substantially lesser proportion, approximately
10% (assuming the Exchange Debentures are convertible into 17.5% of our
common stock on a diluted basis), of our outstanding common stock than
they currently do. As a result of the restructuring, and assuming that
the Exchange Debentures will be convertible into 17.5% of our common
stock on a diluted basis, the holders of the Outstanding Debentures and
the Series A will receive approximately 8,269,000 shares of our common
stock, representing approximately 90% of our common stock outstanding
immediately following the consummation of the restructuring. Assuming
all the Exchange Debentures and New Warrants are converted into or
exercised for shares of our common stock, our existing shareholders
will hold approximately 12.5% of our outstanding shares of common
stock, on a diluted basis; and
Whether or not the restructuring transaction is consummated, we are
required to reimburse the holders of the Outstanding Debentures and the
Series A for all expenses incurred in connection with the restructuring
transaction.
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The foregoing discussion of information and factors considered by our board
of directors is not intended to be all-inclusive. Our board of directors
believes that, on balance, the possible benefits to our shareholders from the
positive factors outweigh the possible detriments from the negative factors
summarized above.
In view of the variety of factors considered, our board of directors found
it impracticable to, and did not, quantify, rank or otherwise assign relative
weights to the above factors considered or determine that any factor was of
particular importance in reaching its determination. Rather, our board of
directors views its position and its recommendation as being based upon its
judgment, in light of the totality of the information presented and considered,
of the overall effect of the restructuring transaction on the shareholders
compared to any reasonably available alternative transaction.
For the reasons discussed above, our board of directors has approved the
restructuring transaction and has determined that the restructuring transaction
is in the best interests of our shareholders. Accordingly, our board of
directors recommends that our shareholders vote FOR the approval of the
restructuring transaction.
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THE RESTRUCTURING PROPOSALS
Consummation of the restructuring transaction requires shareholder approval
of each of the following proposals. If any of the proposals are not approved by
our shareholders at the special meeting, then none of them will become
effective.
PROPOSAL 1 -- APPROVAL OF THE RESTRUCTURING TRANSACTION
On March 6, 2003, we entered into an Exchange Agreement with the holders of
our Outstanding Debentures and the holders of SNI's Series A to exchange the
Outstanding Debentures and Series A for shares of our common stock and New
Debentures. We recommend that you carefully read the complete Exchange Agreement
which sets forth the terms and conditions of the restructuring transaction and
other information that may be important to you. The Exchange Agreement is
included in this proxy statement as Appendix A.
On February 26, 2003, our board of directors adopted a resolution approving,
in connection with the transactions contemplated by the Exchange Agreement, the
issuance of up to approximately 13,197,000 shares of our common stock, the New
Warrants, the New Debentures, the adoption of our 2003 Equity Incentive Plan,
and our reincorporation in the State of Delaware.
The actual number of shares of our common stock that may be issued or
issuable in connection with the restructuring transaction may increase if the
anti-dilution protections to be provided to the exchanging holders are
triggered.
Our board of directors believes it is in the best interest of our company
and our shareholders to issue new shares of our common stock, the New Debentures
and New Warrants in the restructuring transaction. Although the restructuring
will result in significant dilution of the holdings of our common shareholders,
the completion of the restructuring is critical to our continuing viability. We
have significant additional funding needs until we reach cash flow breakeven and
substantial indebtedness which adversely affects our financial condition. The
restructuring will result in the elimination of a significant amount of our
outstanding indebtedness and should improve our ability to seek the additional
financing we need to try to become self-sustaining. If the restructuring
transaction is not consummated, we will be forced to consider an alternative
plan of reorganization, under which our shareholders may receive little or
nothing.
We are asking you to vote to approve the issuance of our common stock, New
Debentures and New Warrants in the restructuring transaction because, under the
listing rules of the Nasdaq Stock Market, we must obtain shareholder approval of
any issuance of common stock that constitutes a change in control of our
company, and the terms of the Exchange Agreement require that we obtain
shareholder approval of the proposed transactions. Unless we receive the
shareholder approval required, we will not be able to proceed with and complete
the restructuring transaction.
Assuming the New Debentures will be convertible into approximately 2,067,000
shares, representing 17.5% of our outstanding stock on a diluted basis, then,
pursuant to the Exchange Agreement, we propose to issue new shares of our common
stock in the following transactions:
approximately 3,514,000 shares of our common stock in exchange for all of
the Outstanding Debentures, plus 879,000 shares upon conversion of the
Exchange Debentures issued to the holders of the Outstanding Debentures;
approximately 4,755,000 shares of our common stock in exchange for all of
the outstanding Series A, plus 1,189,000 shares upon conversion of the
Exchange Debentures issued to the holders of the Series A; and
approximately 157,000 shares upon conversion of the Fee Amount Debentures.
The actual number of shares of our common stock that may be issued or
issuable in connection with the restructuring transaction may increase if the
anti-dilution protections to be provided to the exchanging holders are
triggered.
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In addition to the shares of common stock to be issued, discussed above, the
holders of our common stock of record on a date to be determined, but which will
be within 10 business days prior to the closing of the restructuring
transaction, will receive New Warrants to acquire approximately 591,000 shares
of our common stock, representing 5% of our outstanding stock on a diluted
basis, for a cash exercise price equal to 110% of the Reference Price.
Upon the closing of the restructuring transaction, and assuming the Exchange
Debentures are convertible into 17.5% of our outstanding common stock on a
diluted basis, our existing shareholders would own approximately 10% of our
issued and outstanding common stock, and the exchanging holders of the
Outstanding Debentures and the Series A would own approximately 90% of our then
issued and outstanding common stock;
If all the Exchange Debentures and New Warrants were converted into or
exercised for shares of our common stock, the exchanging holders of the
Outstanding Debentures and the Series A would own 10,337,000 shares,
representing 87.5% of our outstanding common stock on a diluted basis, and our
existing shareholders would own 1,477,000 shares, representing 12.5% of our
outstanding common stock on a diluted basis.
The affirmative vote of holders of at least a majority of all votes cast at
the special meeting is required to approve this proposal. An abstention or
failure to vote on this proposal is not an affirmative vote and therefore will
have the same effect as a negative vote on this proposal at the special meeting.
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE 'FOR' THIS PROPOSAL.
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PROPOSAL 2 -- APPROVAL OF THE CHANGE OF STATE OF INCORPORATION
FROM NEW JERSEY TO DELAWARE
It is a condition precedent to consummation of the proposed restructuring
transaction that, no later than the day before the effective date of the
consummation of the restructuring transaction, we will change our state of
incorporation from New Jersey to Delaware. Such a change requires the approval
of our shareholders. Because we are a corporation organized under the laws of
New Jersey, we are therefore subject to the New Jersey Business Corporation Act.
If approved, following our reincorporation in Delaware, Delaware corporation
law will govern the rights of our shareholders. The following is a summary of
the material differences in the rights of our shareholders under New Jersey law
and under Delaware law and is qualified in its entirety by reference to the
governing law, our certificate of incorporation and by-laws, and the certificate
of incorporation and by-laws of the new Delaware corporation.
The change in our state of incorporation will be accomplished through a
merger of our company into a to-be-formed wholly-owned subsidiary, which will be
formed as a Delaware corporation as a vehicle to effect the reincorporation. The
name of the surviving corporation following the reincorporation shall continue
to be 'Sorrento Networks Corporation.'
Upon consummation of the merger of our company into the new wholly-owned
Delaware subsidiary, the Delaware corporation will succeed to all the business,
properties, assets and liabilities of our company and to our name, and our
directors, officers and employees will become directors, officers and employees
of the surviving corporation. Our currently outstanding shares of common stock
will be converted into an equal number of common shares, par value $0.001 per
share, and outstanding shares of our Series D Convertible Preferred Stock will
be converted into an equal number of shares of preferred stock, par value $.01
per share, with the same rights and preferences as they currently have of the
surviving corporation. Pursuant to the provisions of the certificate of
incorporation of the new Delaware corporation, we will be authorized to issue up
to 150 million shares of common stock and up to two million shares of preferred
stock without further authorization or action by our shareholders (except as may
be required by law, regulation or Nasdaq rules). Approval of the proposal to
reincorporate in Delaware will not result in any change in the name, business,
management, location of our principal executive offices or other facilities,
capitalization, assets or liabilities. Our employee benefit plans and
arrangements will also be continued by the surviving corporation upon the same
terms and subject to the same conditions.
Within one year after the consummation of the restructuring transaction, we
will merge three of our subsidiaries, SNI, Meret, and SVREH, with and into our
company.
Our shareholders are not entitled to appraisal rights in connection with the
proposal to reincorporate in Delaware.
SUMMARY OF THE EFFECTS OF THE REINCORPORATION.
The reincorporation will change the law applicable to our corporate affairs
from New Jersey law to Delaware law and will result in some differences in
shareholders' rights. The material differences between the New Jersey Business
Corporation Act (the 'NJBCA') and the Delaware General Corporation Law ('DGCL')
are more fully discussed below.
The reincorporation will also mean that our corporate affairs will be
governed by the certificate of incorporation and bylaws which are attached to
this Proxy Statement as Appendix D and Appendix E respectively. The new
certificate of incorporation and new bylaws will carry over many of the
provisions of our certificate of incorporation and bylaws, as amended. Copies of
our current certificate of incorporation and bylaws are available for inspection
at the office of our Corporate Secretary at the address set forth on the cover
page of this proxy statement and copies will be sent to shareholders at no cost
upon written request.
There will be no interruption in the trading of our common stock as a result
of the merger.
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MANNER OF EFFECTING THE REINCORPORATION
The following summary does not purport to be a complete description of the
proposal to reincorporate and is qualified in its entirety by reference to the
certificate of incorporation and bylaws of the surviving corporation, and the
agreement of merger, into which we and our to-be-formed wholly-owned subsidiary
will enter. Copies of the agreement of merger are available for inspection at
the office of our Corporate Secretary at the address set forth on the cover page
of this proxy statement and copies will be sent to shareholders at no cost upon
written request.
The proposed reincorporation will be effected by merging our company with
and into the new Delaware corporation pursuant to the terms of the agreement of
merger. At the effective time of the merger, our separate corporate existence
will cease; the new Delaware corporation will succeed to all our business,
properties, assets and liabilities and to our name; and our directors, officers
and employees will become directors, officers and employees of the new Delaware
corporation. Our shares that are issued and outstanding immediately prior to the
effective time of the merger will, by virtue of the merger, be converted into an
equal number of fully paid and nonassessable shares of the new Delaware
corporation. Each of the new Delaware corporation's shares will have the same
terms as our shares, subject to the differences arising by virtue of the
differences between Delaware and New Jersey law, and between the provisions of
our current certificate of incorporation and bylaws and the new Delaware
corporation's certificate of incorporation and bylaws.
From and after the effective time of the merger, each holder of a
certificate representing our shares will be deemed for all purposes to be the
holder of the number of shares of the new Delaware corporation into which the
shares represented by the holder's current stock certificate have been
converted. The current stock certificates will continue to represent shares of
the new Delaware corporation and need not be surrendered for certificates
representing shares of the new Delaware corporation. It will not be necessary
for our shareholders to surrender their current stock certificates for
certificates representing shares of the new Delaware corporation, although you
may do so if you wish. Each holder of a current stock certificate outstanding
immediately prior to the effective time of the merger will, upon surrender of
his or her current certificate for cancellation, receive a new certificate
representing the same number of shares of the new Delaware corporation.
Approval of the proposal to reincorporate in Delaware will not result in any
change in our name, business, management, location of the principal executive
offices or other facilities, capitalization, assets or liabilities. Shares of
our common stock will continue to be traded without interruption on the Nasdaq
National Market, subject to favorable resolution of our current listing issues.
Our stock option and incentive plans will be continued by the new Delaware
corporation and each outstanding award issued pursuant to the plans will be
converted into an award for shares of the new Delaware corporation equal to the
number of current shares related to the plans immediately prior to the effective
time of the merger, at the same prices per share and upon the same terms and
subject to the same conditions as were in effect immediately prior to the
effective time of the merger. Our other employee benefit plans and arrangements
will also be continued by the new Delaware corporation upon the same terms and
subject to the same conditions.
We anticipate that the merger will become effective as soon as practicable
following shareholder approval, assuming that all of the proposals are approved
by our shareholders and the restructuring transaction is consummated. If for any
reason the restructuring transaction is not consummated, the merger will not
occur. The agreement of merger provides that the merger may be abandoned by our
board of directors prior to the effective time of the merger, either before or
after shareholder approval, if our board determines that such abandonment is in
our best interests. In addition, the agreement of merger may be amended prior to
the effective time of the merger, either before or after shareholder approval,
provided that the agreement of merger may not be amended after shareholder
approval if such amendment would (i) alter or change the number or kind of
shares to be received by our shareholders in the merger, (ii) alter or change
any term of the new Delaware corporation's articles of incorporation or bylaws,
or (iii) alter or change any of
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the terms and conditions of the agreement of merger if such alteration or change
would adversely affect our shareholders.
Approval by our shareholders of the proposed reincorporation will also
constitute approval of the agreement of merger, the certificate of incorporation
and by-laws of the new Delaware corporation and all provisions thereof.
FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION
We believe that for Federal income tax purposes, the reincorporation should
constitute a reorganization under Section 368 of the Internal Revenue Code and
that, consequently, our current shareholders should not recognize any gain or
loss as a result of the merger. For Federal income tax purposes, our
shareholders should retain the same tax basis in their shares of the new
Delaware corporation as they may have in shares of our stock held by them
immediately prior to the effective time of the merger, and their holding period
for the shares of the new Delaware corporation should include the period during
which they held our current shares. Shareholders should consult their own tax
advisors as to the effect of the reorganization to them under federal income tax
laws.
Although we do not anticipate that state or local income tax consequences
will vary from the Federal income tax consequences described above, shareholders
should consult their own tax advisors as to the effect of the reorganization
under state, local or foreign income tax laws.
COMPARISON OF SHAREHOLDER RIGHTS AND CORPORATE GOVERNANCE MATTERS
The new Delaware corporation's certificate of incorporation and by-laws are
generally similar to our existing certificate of incorporation and by-laws, but
there are some differences. Some of the differences, such as the change in the
number of authorized common shares or the par value of our common shares, do not
reflect differences between New Jersey and Delaware law, but have been
determined by our board of directors. Other differences are primarily the result
of differences between Delaware and New Jersey law. The identification of
specific differences is not meant to indicate that other differences do not
exist. As such, we urge you to read the certificate of incorporation and by-laws
of the new corporation, which are attached as Appendices D and E, respectively.
Copies of our current certificate of incorporation and by-laws have been
attached to our filings with the SEC, are available for inspection at our
principal executive offices, and will be sent without charge to our shareholders
upon written request.
NUMBER AND PAR VALUE OF AUTHORIZED SHARES OF STOCK.
The certificate of incorporation of the new Delaware corporation provides
that there will be 150 million shares of common stock authorized. Our current
certificate of incorporation authorizes 7.5 million shares of common stock. The
par value of the shares of common stock of the new Delaware corporation will be
$0.001 per share; the current par value of our common stock is $6.00 per share.
We are currently authorized to issue up to two million shares of preferred
stock. The new Delaware corporation will be similarly authorized. The par value
of our preferred stock, $0.01 per share, will remain the same.
VOTING REQUIREMENTS
Under the Delaware general corporation law or 'DGCL,' unless a different
vote is specified in the certificate of incorporation or bylaws of a
corporation, and except as otherwise provided in the DGCL, the vote of a
majority of the shares present in person or represented by proxy at a meeting is
the act of the corporation's shareholders, and the vote of a plurality of the
votes present at a meeting or represented by proxy is required to elect
directors. The DGCL generally provides that the resolution of a corporation's
board of directors and an approval of the majority of the outstanding shares of
a corporation's common stock entitled to vote is generally required to effect a
merger or consolidation, and to sell, lease or exchange all or substantially all
of the
32
corporation's assets. A resolution of the board of directors followed by the
affirmative vote of the majority of the outstanding shares of a corporation's
stock, is required for an amendment to that corporation's certificate of
incorporation. A Delaware corporation's by-laws may be adopted, amended or
repealed by the affirmative vote of the majority of the votes cast by
shareholders unless otherwise provided in the certificate of incorporation or
bylaws.
Under the NJBCA, unless a greater vote is specified in the certificate of
incorporation, the vote of a majority of the shares present in person or
represented by proxy at a meeting is the act of the corporation's shareholders,
and the vote of a plurality of the votes present at a meeting or represented by
proxy is required to elect directors. The NJBCA provides that the affirmative
vote of a majority of the votes cast by shareholders entitled to vote on the
matter is required to approve: (1) any amendment to a New Jersey corporation's
certificate of incorporation, (2) the voluntary dissolution of the corporation,
(3) the sale or other disposition of all or substantially all of the
corporation's assets otherwise than in the ordinary course of business, or (4)
the merger or consolidation of the corporation with another corporation.
Our certificate of incorporation does not currently contain provisions
specifying a greater vote in certain circumstances.
NUMBER OF DIRECTORS; REMOVAL OF DIRECTORS
The number of our directors is determined by our by-laws. We currently have
5 persons serving on our board of directors. Under the NJBCA, our directors are
elected at the annual meeting of shareholders to serve until the annual meeting
of the shareholders held in the following fiscal year, and each director elected
holds office until his or her successor is elected and qualified. Under the
NJBCA, a director may be removed, either with or without cause, at any time,
only by the holders of a majority of the shares entitled to vote at an election
of the directors.
The bylaws of the new Delaware corporation provide that there will be
between one and seven directors. The precise number will be as set forth in a
resolution adopted by the board. Each director will be elected at the annual
meeting of shareholders and will serve until the annual meeting of the
shareholders held in the following fiscal year, and each director elected will
hold office until his or her successor is elected and qualified. Under the DGCL,
with certain exceptions for 'classified' boards and cumulative voting, neither
of which apply to the new Delaware corporation, any director may be removed,
with or without cause, by the holders of a majority of the shares then entitled
to vote at an election of the directors.
CLASSIFICATION
Both the NJBCA and the DGCL permit, but do not require, the adoption of a
'classified' board of directors with staggered terms under which a part of the
board of directors is elected each year. Under the NJBCA, the authorization for
such as classified board of directors must be included in the corporation's
certificate of incorporation or an amendment thereto. Additionally, under the
NJBCA, the maximum term of each class of directors is five years. The DGCL
permits the authorization of a classified board of directors to be included in
the certificate of incorporation or by-laws of a corporation or an amendment to
either document. Because under Delaware law, there can be no more than three
classes of directors, the longest term a director on a classified board may
serve is three years. Neither our current board of directors nor that of the new
Delaware corporation is classified.
VACANCIES ON THE BOARD OF DIRECTORS
Under the NJBCA, unless the certificate of incorporation or by-laws provide
otherwise, a vacancy, however caused, and newly created directorships resulting
from an increase in the authorized number of directors may be filled by the
affirmative vote of a majority of the remaining directors. In addition, under
the NJBCA, any directorship not filled by the board may be filled by the
shareholders. Under the DGCL, vacancies may be filled by a majority of the
directors then in office unless the certificate of incorporation or by-laws
provide otherwise. Neither
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the certificate of incorporation nor the bylaws of the new Delaware corporation
include such a contrary provision.
AMENDMENTS TO CERTIFICATE OF INCORPORATION
Both the DGCL and the NJBCA provide that, in general, amendments to a
corporation's certificate of incorporation must be approved by the affirmative
vote of the holders of a majority of the outstanding stock of the corporation
entitled to vote thereon (and, if applicable, a majority of the outstanding
stock of each class entitled to vote thereon), unless the certificate of
incorporation requires a greater percentage. Neither our certificate of
incorporation nor that of the new Delaware corporation requires a greater
percentage.
AMENDMENT OF BY-LAWS
Under the DGCL, a corporation's by-laws may be adopted, amended or repealed
by the vote of its shareholders, unless the certificate of incorporation
provides otherwise. The certificate of incorporation of the new Delaware
corporation confers the power to adopt, amend or repeal the bylaws upon the
directors, but does not divest the shareholders of the power, or limit their
power to adopt, amend or repeal the bylaws.
Under the NJBCA, the board of directors has the power to adopt, amend, or
repeal the corporation's by-laws, unless such powers are reserved in the
certificate of incorporation to the shareholders. Our certificate of
incorporation currently does not reserve such powers to shareholders.
MEETINGS OF THE BOARD OF DIRECTORS
Our by-laws currently provide that regular meetings of the board of
directors may be held without notice at such time and at such place as shall
from time to time be determined by the board, and that special meetings of the
board may be called by the president on three days' notice to each director or
they may be called by the president or secretary on the written request of two
directors. At all meetings a majority of the board of directors shall constitute
a quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the board of directors.
The bylaws of the new Delaware corporation provide that an annual meeting of
our board of directors will be held immediately following the annual meeting of
shareholders. Additional regular meetings may also be held by resolution of the
board. Special meetings of the board of directors of the new Delaware
corporation may be called by the chairman of the board.
ANNUAL MEETING OF SHAREHOLDERS
Under both Delaware and New Jersey law and our current bylaws and those of
the new Delaware corporation, annual meetings of our shareholders are held on
the anniversary of the date of incorporation, if not a legal holiday, and if a
legal holiday, then on the next day following, or at such other date and time as
shall be designated from time to time by the board of directors, at which they
shall elect directors and transact such other business as may properly be
brought before the meeting. Written notice of the annual meeting stating the
place, date and hour of the meeting shall be given to each shareholder entitled
to vote at such meeting not less than ten nor more than sixty days before the
date of the meeting.
SPECIAL MEETINGS OF SHAREHOLDERS
The NJBCA provides that a special meeting of shareholders may be called by
the president, board of directors, any shareholder, director, officer or other
person as may be provided in the by-laws, and upon application of the holder or
holders of not less than 10% of all the shares entitled to vote at a meeting,
the Superior Court, for good cause shown, may order a special meeting to be
called.
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The DGCL provides that the board of directors or such persons as are
authorized by the certificate of incorporation or by-laws may call special
meetings of the shareholders. The by-laws of the newly-formed Delaware company
provide that special meetings of shareholders may be called by the Chairman,
President or the board of directors, provided that any such request must state
the purpose(s) of the proposed meeting. Written notice of the special meeting
shall be the same as that for the annual meeting.
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, constitute a quorum
at all meetings of the shareholders for the transaction of business. When a
quorum is present at any meeting, the affirmative vote of a majority of all
votes cast shall decide any question brought before such meeting, except as
otherwise provided by statute or by our certificate of incorporation.
SHAREHOLDER ACTION BY WRITTEN CONSENT
The NJBCA states that shareholders may act on all matters without a meeting
and without prior notice and a vote with the written consent of holders of the
minimum number of votes required for approval at the meeting at which all
shareholders are present and voting.
The DGCL permits shareholders to act on all matters without a meeting,
without prior notice and without a vote if a consent is signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to approve the action at a meeting at which all shareholders were
present and voting, unless such right to act by written consent is specifically
denied in the certificate of incorporation. The certificate of incorporation of
the new Delaware corporation does not include such a provision.
DIVIDENDS
The NJBCA prohibits a corporation from making any distribution to its
shareholders if, after giving effect to such distribution, the corporation would
be unable to pay its debts as they become due in the usual course of business or
the corporation's total assets would be less than its total liabilities.
The DGCL permits a corporation to pay dividends out of any surplus and, if
it does not have surplus, out of any net profits for the fiscal year in which
the dividend or for the preceding fiscal year (provided that such payment will
not reduce capital below the amount of capital represented by all classes of
shares having a preference upon the distribution of assets).
REPURCHASES OF STOCK
The NJBCA prohibits a corporation from repurchasing or redeeming its shares
if (i) after giving effect to such repurchase or redemption, the corporation
would be unable to pay its debts as they become due in the usual course of
business or the corporation's total assets would be less than its total
liabilities, (ii) after giving effect to such repurchase or redemption, the
corporation would have no equity outstanding, (iii) the redemption or repurchase
price exceeded that specified in the securities acquired, or (iv) such
repurchase or redemption is contrary to any restrictions contained in the
corporation's certificate of incorporation.
Under the DGCL, a corporation may repurchase or redeem its shares only out
of surplus and only if such purchase does not impair capital. However, a
corporation may redeem preferred stock out of capital if such shares will be
retired upon redemption and the stated capital of the corporation is thereupon
reduced in accordance with the DGCL.
INSPECTION OF BOOKS AND RECORDS
The NJBCA grants the right to inspect a corporation's minutes of shareholder
proceedings and its record of shareholders only for any proper purpose and only
(i) to shareholders of record for at least 6 months preceding the demand, (ii)
to holders of at least 5% of the outstanding shares of any class or series of
the corporation's stock or (iii) to shareholders upon receipt of court order.
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The DGCL provides that any stockholder may for a proper purpose inspect a
corporation's stock ledger, a list of its stockholders and its other books and
records.
RIGHTS OF DISSENTING SHAREHOLDERS
Under the DGCL, dissenting shareholders who follow prescribed statutory
procedures are entitled to appraisal rights in certain mergers or
consolidations, except in connection with certain so-called 'short-form mergers'
(a merger of a corporation with its 90% or more owned subsidiary). Such
appraisal rights are not provided when (1) the shares of the corporation are
listed on a national securities exchange or designated as a national market
system security by the NASD or held of record by more than 2,000 shareholders
and shareholders receive in the merger shares of the surviving corporation or of
any other corporation the shares of which are listed on a national securities
exchange or designated as a national market system security by the NASD, or held
of record by more than 2,000 shareholders or (2) the corporation is the
surviving corporation and no vote of its shareholders is required for the
merger.
Shareholders of a New Jersey corporation who dissent from a merger,
consolidation, sale of all or substantially all of the corporation's assets or
certain other corporate transactions are generally entitled to appraisal rights.
No statutory right of appraisal exists, however, when the stock of the New
Jersey corporation: (1) is listed on a national securities exchange; or (2) is
held of record by not less than 1,000 holders; or (3) is exchanged for
consideration to be received pursuant to the merger, consolidation or sale
consisting of cash or securities or other obligation which, after the
transaction, will be listed on a national securities exchange or held of record
by not less than 1,000 holders.
BUSINESS COMBINATIONS
Section 14A:10A-4 of the NJBCA provides, among other things, that no
resident domestic corporation may engage in any business combination with any
'interested shareholder' of such corporation (defined as a holder of 10% or more
stock) for a period of five years unless such business combination is approved
by the board of directors prior to the date on which the interested shareholder
made its stock acquisition. In addition to the restrictions stated in the
preceding sentence, no such corporation may engage in a business combination
with an interested shareholder other than one in which (i) the board of
directors has approved such business combination prior to such interested
shareholder's stock acquisition date; (ii) such business combination is approved
by the affirmative vote of the holders of two-thirds of the voting stock not
beneficially owned by that interested shareholder at a meeting called for such
purpose; or (iii) the aggregate amount of cash and the market value, as of the
consummation date, of consideration to be received per share by holders of
outstanding shares of common stock in the business combination is at least equal
to a certain 'fair price' as determined by various criteria set forth in the
statute, subject to certain exceptions.
Section 14A:10-5 of the NJBCA provides, among other things, that any person
making an offer to purchase in excess of 10% (or such amount which, when
aggregated with such person's present holdings, exceeds 10%) of any class of
equity securities of any corporation or other issuer of securities which is
organized under the laws of New Jersey must, 20 days before the offer is made
file a disclosure statement with the target company and the Bureau of Securities
in the Division of Consumer Affairs in the Department of Law and Public Safety
of the State of New Jersey (the 'Bureau'). Such takeover bid may not proceed
until after receipt of the Bureau's permission, which may not be denied unless
the Bureau, after public hearing, finds that (i) financial condition of the
offeror is such as to jeopardize the financial stability of the target company,
or prejudice the interests of any employees or security holders who are
unaffiliated with the offeror, (ii) the terms of the offer a unfair or
inequitable to the security holders of the target company, (iii) the plans and
proposals which the offeror has to make any material change in the target
company's business or corporate structure or management, are not in the interest
of the target company's remaining security holders or employees, (iv) the
competence, experience and integrity of those persons who would control the
operation of the target company are such that it
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would not be in the interest of the target company's remaining security holders
or employees to permit the takeover, or (v) the terms of the takeover bid do not
comply with the provisions of Section 14A:10A of the NJBCA.
Section 203 of the DGCL regulates a wide range of transactions between a
corporation and an interested stockholder, known as 'business combinations'. An
'interested stockholder' is, generally, any person who beneficially owns,
directly or indirectly, 15% of more of the corporation's outstanding voting
stock. 'Business combinations' are broadly defined to include (i) mergers or
consolidations with, (ii) sales or other dispositions of more than 10% of the
corporation's assets to, (iii) certain transactions resulting in the issuance or
transfer of any stock of the corporation or any subsidiary to, (iv) certain
transactions which would result in increasing the proportionate share of stock
of the corporation or any subsidiary owned by, or (v) receipt of the benefit
(other than proportionately as a stockholder) of any loans, advances of other
financial benefits by, an interested stockholder. Section 203 of the DGCL
provides that an interested stockholder may not engage in a business combination
with the corporation for a period of three years from the date of becoming an
interested stockholder unless (i) prior to such date the board of directors
approved either the business combination or the transaction which resulted in
the person becoming an interested stockholder, (ii) upon consummation of the
transaction which resulted in the person becoming an interested stockholder,
that the person owned at least 85% of the corporation's voting stock outstanding
at the time the transaction commenced (excluding shares owned by officers and
directors and shares owned by certain employee stock plans) or (iii) on or
subsequent to such date the business combination is approved by the board of
directors and authorized by the affirmative vote of at least 66 2/3% of the
outstanding voting stock not owned by the interested stockholder. These
restrictions placed on interested stockholders do not apply to a corporation
whose certificate of incorporation contains a provision expressly electing not
to be governed by the statute. The certificate of incorporation of the new
Delaware corporation does not contain such a provision.
DISSOLUTION
Each of the NJBCA and the DGCL provides that a corporation may be
voluntarily dissolved by (i) the written consent of all its shareholders or (ii)
the adoption by the corporation's board of directors of a resolution
recommending that the corporation be dissolved and submission of the resolution
to a meeting of shareholders, at which meeting the resolution is adopted. The
NJBCA requires the affirmative vote of the majority of votes cast (assuming the
number of votes cast constitutes a quorum), and the DGCL requires the
affirmative vote of at least a majority of the outstanding stock.
LIMITATION OF LIABILITY; INDEMNIFICATION
Under the NJBCA, a New Jersey corporation may include in its certificate of
incorporation a provision which could, subject to the limitations described
below, eliminate or limit directors' or officers' liability to the corporation
or to its shareholders, for monetary damages, for breaches of their fiduciary
duty of care. A director or officer cannot be relieved from liability or
otherwise indemnified for any breach of duty based upon an act or omission: (1)
in breach of such person's duty of loyalty to the entity or to its shareholders;
(2) not in good faith or involving a knowing violation of law; or (3) resulting
in receipt by such person of an improper personal benefit. Our certificate of
incorporation contains provisions which limit a director's or officer's
liability to the full extent permitted by New Jersey law.
Under Delaware law, Delaware corporations may indemnify directors from
liability if the director acted in good faith and in a manner reasonably
believed by the director to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal actions, if the director had no
reasonable grounds to believe his or her action was unlawful. In the case of an
action by or on behalf of a corporation, indemnification may not be made if the
person seeking indemnification is adjudged liable, unless the court in which
such action was brought determines such person is fairly and reasonably entitled
to indemnification. The indemnification provisions of
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Delaware law require indemnification of a director who has been successful on
the merits or otherwise in defense of any action, suit or proceeding that he or
she was a party to by reason of the fact that he or she is or was a director of
the corporation. Delaware law permits corporations to advance amounts to
directors in payment of expenses. The indemnification authorized by Delaware law
is not exclusive and is in addition to any other rights granted to directors
under the certificate of incorporation or by-laws of the corporation or to any
agreement between the directors and the corporation.
In the case of stockholder derivative suits under Delaware law, the
corporation may also indemnify if the director, officer, employee or agent acted
in good faith and in a manner the director reasonably believed to be in, and not
opposed to, the best interest of the corporation. Unless the court finds that an
individual is fairly and reasonably entitled to indemnity, the corporation
cannot indemnify an individual in shareholder derivative suits where there is
any claim, issue or matter in which the individual has been found liable to the
corporation.
The certificate of incorporation of the new Delaware corporation contains
provisions which indemnify our directors and officers and limit a director's or
officer's liability, in each case, to the full extent permitted by Delaware Law.
The affirmative vote of holders of at least a majority of all votes cast at
the special meeting is required to approve the proposal to change our state of
incorporation from New Jersey to Delaware. An abstention or failure to vote on
this proposal is not an affirmative vote and therefore will have the same effect
as a negative vote on this proposal at the special meeting.
OUR BOARD OF DIRECTORS RECOMMENDS THAT OUR SHAREHOLDERS VOTE 'FOR' THE
CHANGE IN OUR STATE OF INCORPORATION FROM NEW JERSEY TO DELAWARE.
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PROPOSAL 3 -- APPROVAL OF THE SORRENTO NETWORKS CORPORATION
2003 EQUITY INCENTIVE PLAN
On February 26, 2003, our board of directors adopted, subject to the
approval of our shareholders, the Sorrento Networks Corporation 2003 Equity
Incentive Plan. The following description of the 2003 Plan is a summary and so
is qualified by reference to the complete text of the 2003 Plan. The text of the
Sorrento Networks Corporation 2003 Equity Incentive Plan is attached to this
proxy statement as Appendix C.
GENERAL
The purpose of the 2003 Plan is to offer opportunities to eligible
individuals to participate in the growth in value of the equity of our company.
Stock options, stock appreciation rights, stock awards and cash awards may be
granted under the 2003 Plan (each an 'Award'). Options granted under the 2003
Plan may be either 'incentive stock options', as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the 'Code'), or non-statutory stock
options.
Administration. The 2003 Plan will be administered by the Compensation
Committee of our board of directors. The Compensation Committee has delegated to
the Chief Executive Officer the authority to grant Awards to non-executive level
employees in accordance with guidelines established by our board of directors,
and it may delegate certain responsibilities to a company employee (as
applicable, the 'Administrator').
Shares Reserved. The maximum number of shares that may be issued under the
2003 Plan is 2,112,000.
Eligibility. Non-statutory stock options, stock appreciation rights, stock
awards and cash awards may be granted under the 2003 Plan to our employees,
directors and consultants, and those of our affiliates and subsidiaries.
Incentive stock options may be granted only to our employees or employees of our
subsidiaries. The Administrator, in its discretion, approves options, stock
appreciation rights, stock awards and cash awards to be granted under the 2003
Plan. We intend the 2003 Plan to be a broad-based employee plan. As of December
31, 2002, we had approximately 113 employees and five directors who would be
eligible to participate in the 2003 Plan.
Termination of Awards. Generally, if an awardee's services to the company as
an employee, consultant or director terminates other than for death, disability,
retirement or for 'cause', vested Awards will remain exercisable for a period of
three months following the awardee's termination. Unless otherwise provided for
by the Administrator in the award agreement, if an awardee dies or becomes
totally and permanently disabled while an employee or consultant, the awardee's
vested Awards shall be exercisable for one year following the awardee's death or
disability, or if earlier, the expiration of the term of such Award.
Nontransferability of Awards. Unless otherwise determined by the
Administrator, Awards granted under the 2003 Plan are not transferable other
than by will, domestic relations order, or the laws of descent and distribution
and may be exercised during the awardee's lifetime only by the awardee.
STOCK OPTIONS
Exercise Price. The Administrator determines the exercise price of options
at the time the options are granted. The exercise price of an incentive stock
option may not be less than 100% of the fair market value of our common stock on
the effective date of grant of such option. The fair market value of our common
stock is generally the closing sales price as quoted on the Nasdaq National
Market.
Exercise of Option; Form of Consideration. The Administrator determines when
options become exercisable. The means of payment for shares issued on exercise
of an option are specified in each Award agreement. The 2003 Plan generally
permits payment to be made by cash, check, wire transfer, other shares of our
common stock (with some restrictions), broker-assisted same day sale, or full
recourse promissory note.
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Term of Option. The term of an option may be no more than ten years from the
date of grant. No option may be exercised after the expiration of its term.
STOCK APPRECIATION RIGHTS
The Administrator may grant stock appreciation rights ('SARs') in its
discretion which may entitle the recipient to receive an amount equal to the
excess of the fair market value of a fixed number of shares covered by the
exercised portion of the SAR on the date of exercise, over the fair market value
on the date of grant. The terms and conditions of an SAR award will be found in
an Award agreement. The grant or vesting of an SAR award may be made contingent
on achievement of performance conditions, including, without limitation, net
order dollars, net profit dollars, net profit growth, net revenue dollars,
revenue growth, individual performance, earnings per share, return on assets,
return on equity, and other financial objectives, customer satisfaction
indicators and guaranteed efficiency measures, each with respect to our company
and/or an individual business unit.
STOCK AWARDS
The Administrator may grant stock awards in its discretion. The terms and
conditions of a stock award will be found in an Award agreement. The grant or
vesting of a stock award may be made contingent on achievement of performance
conditions, including, without limitation, net order dollars, net profit
dollars, net profit growth, net revenue dollars, revenue growth, individual
performance, earnings per share, return on assets, return on equity, and other
financial objectives, customer satisfaction indicators and guaranteed efficiency
measures, each with respect to our company and/or an individual business unit.
CASH AWARDS
The Administrator may grant cash awards, which entitle the recipient to a
cash payment on satisfaction of goals described in the Award agreement. The
Administrator determines the terms, conditions and restrictions related to cash
awards.
ADJUSTMENTS ON CHANGES IN CAPITALIZATION, MERGER OR CHANGE OF CONTROL
In the event of any stock dividend, stock split, reverse stock split,
recapitalization, combination, reclassification, spin-off or similar change to
the capital structure of our company, appropriate adjustments will be made to
(i) the number and class of securities subject to the 2003 Plan, (ii) the number
and class of securities that may be awarded to any individual under the 2003
Plan, and (iii) the exercise price and number and class of securities under each
outstanding Award. Any such adjustments will be made by our board of directors
in its absolute discretion, and the decision of our board of directors will be
final, binding and conclusive.
In the event of a fundamental transaction, our board of directors will do
one or more of the following: (a) arrange for substitution of the Awards under
the 2003 Plan, (b) accelerate the vesting of Awards, in whole or in part, and
have unexercised Awards terminate immediately prior to the closing of the
fundamental transaction, (c) cancel Awards under the 2003 Plan in exchange for
cash payments, or (d) arrange for any of our repurchase rights to apply to the
securities issued in substitution for our common stock or terminate repurchase
rights.
In the event of a proposed dissolution or liquidation of our company, our
board of directors may cause Awards to be fully vested and exercisable (but not
after their expiration date) before the dissolution is completed but contingent
on its completion.
AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS
Under the 2003 Plan, non-employee directors receive a Non-Statutory Option
to purchase 15,000 shares of our common stock upon their initial election or
appointment to the Board. These options are immediately exercisable, but are
subject to our right of repurchase (at the original exercise price). The shares
underlying these options vest (or our right of repurchase lapses) in
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equal installments at the end of each quarter during the subsequent 12 month
period as measured from the grant date.
Directors who are re-elected to our board are automatically granted an
option to purchase 35,000 shares of our common stock, provided that the director
has served on our board for a period of at least six months. These options are
immediately exercisable, but are subject to our right of repurchase (at the
original exercise price). The shares underlying these options vest (or our right
of repurchase lapses) in equal installments at the end of each quarter during
the subsequent 12 month period as measured from the grant date.
Generally, upon a change in our ownership or control or a merger or sale of
all or substantially all of our assets, the options granted to directors, who
are then serving on the board, will accelerate and become immediately
exercisable. Any right of repurchase held by us will also generally lapse. In
the event of a hostile take-over, our directors then serving on the board will
receive a cash distribution for outstanding options, based upon the difference
between the per share exercise price and the per share consideration paid in the
transaction which constituted a hostile take-over.
AMENDMENT AND TERMINATION OF THE PLAN
Unless otherwise required by applicable laws, rules or regulations, our
board of directors may amend, alter, suspend or terminate the 2003 Plan, or any
part thereof, at any time and for any reason. Generally, no such action by our
board of directors or shareholders may alter or impair any Award previously
granted under the 2003 Plan without the written consent of the awardee. The 2003
Plan will terminate ten years from the date of approval by our board, but it may
also be terminated by our board at any time prior to such termination date.
FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS AND STOCK AWARDS UNDER THE 2003 PLAN
THE FOLLOWING IS A GENERAL SUMMARY OF THE TYPICAL FEDERAL INCOME TAX
CONSEQUENCES OF THE ISSUANCE AND EXERCISE OF OPTIONS, SARS OR AWARDS OF
RESTRICTED STOCK UNDER THE 2003 PLAN. IT DOES NOT DESCRIBE STATE OR OTHER TAX
CONSEQUENCES OF THE ISSUANCE AND EXERCISE OF OPTIONS OR OF GRANT OF RESTRICTED
STOCK.
Options. The grant of an incentive stock option has no federal income tax
effect on the optionee. Upon exercise the optionee does not recognize income for
'regular' tax purposes. However, the excess of the fair market value of the
stock subject to an option over the exercise price of such option (the 'option
spread') is includible in the optionee's 'alternative minimum taxable income'
for purposes of the alternative minimum tax. If the optionee does not dispose of
the stock acquired upon exercise of an incentive stock option until more than
two years after the option grant date and more than one year after exercise of
the option, any gain upon sale of the shares will be a long-term capital gain.
If shares are sold or otherwise disposed of before both of these periods have
expired (a 'disqualifying disposition'), the option spread at the time of
exercise of the option (but not more than the amount of the gain on the sale or
other disposition) is ordinary income in the year of such sale or other
disposition. If gain on a disqualifying disposition exceeds the amount treated
as ordinary income, the excess is taxable as capital gain (which will be
long-term capital gain if the shares have been held more than one year after the
date of exercise of the option). We are not entitled to a federal income tax
deduction in connection with incentive stock options, except to the extent that
the optionee has taxable ordinary income on a disqualifying disposition.
The grant of a non-statutory option has no federal income tax effect on the
optionee. Upon the exercise of a non-statutory option, the optionee has taxable
ordinary income (and we are entitled to a corresponding deduction) equal to the
option spread on the date of exercise. Upon the disposition of stock acquired
upon exercise of a non-statutory option, the optionee recognizes either
long-term or short-term capital gain or loss, depending on how long such stock
was held. We may allow non-statutory options to be transferred subject to
conditions and restrictions imposed by the Administrator; special tax rules may
apply on such a transfer.
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In the case of both incentive stock options and non-statutory options,
special federal income tax rules apply if our common stock is used to pay all or
part of the option price.
Stock Appreciation Rights.
Upon the grant of a stock appreciation right, the recipient will not
recognize ordinary income. However, upon the exercise of a stock appreciation
right, the recipient will, in general, recognize ordinary income in an amount
equal to the amount of cash (or the value of the shares) distributed to the
recipient. We would have a deduction equal to the income to the recipient.
Stock Awards. Upon receipt of a stock award, a recipient generally has
taxable income in the amount of the excess of the then fair market value of the
common stock over any consideration paid for the common stock (the 'spread').
However, if the common stock is subject to a 'substantial risk of forfeiture'
(such as a requirement that the recipient continue in our employ) and the
recipient does not make an election under section 83(b) of the Code, the
recipient will have taxable income upon the lapse of the risk of forfeiture,
rather than at receipt, in an amount equal to the spread on the date of lapse.
The taxable income constitutes supplemental wages subject to income and
employment tax withholding, and we receive a corresponding income tax deduction.
If the recipient makes an election under section 83(b) of the Internal Revenue
Code, the stock received by the recipient is valued as of the date of receipt
(without taking the restrictions into account) and the recipient has taxable
income equal to any excess of that value over the amount he or she paid for the
stock. We would again have a deduction equal to the income to the recipient. The
consequences upon sale or disposition of the shares awarded or sold generally
are the same as for common stock acquired under a non-statutory option (see
above).
Limitation on Deduction of Certain Compensation. A publicly-held corporation
may not deduct compensation of over a certain amount that is paid in any year to
one of its top five officers unless the compensation constitutes 'qualified
performance-based' compensation under the Internal Revenue Code. We generally
attempt to ensure that any awards under the 2003 Plan meet these standards,
but may not do so in every instance.
RESTRICTIONS ON RESALE OF COMMON STOCK
Although the 2003 Plan does not place restrictions on resales of shares
acquired thereunder, shares acquired under the plan by an 'affiliate' as the
term is defined in Rule 405 under the Securities Act of 1933, as amended (the
'Act'), may only be resold pursuant to the registration requirements of the Act,
Rule 144, or another applicable exemption therefrom. Generally, sales of
securities, including shares, are subject to the antifraud provisions contained
in federal and state securities laws. Acquisitions (including acquisitions under
the 2003 Plan) and dispositions of shares by an officer, director or certain
affiliates of us within any six-month period may give rise to our right to
recapture any profit from such transactions pursuant to Section 16(b) of the
Securities Exchange Act of 1934.
The affirmative vote of holders of at least a majority of all votes cast at
the special meeting is required to approve this proposal. An abstention or
failure to vote on this proposal is not an affirmative vote and therefore will
have the same effect as a negative vote on this proposal at the special meeting.
We will not implement the 2003 Plan if the restructuring plan is not
consummated.
OUR BOARD OF DIRECTORS RECOMMENDS THAT OUR SHAREHOLDERS VOTE 'FOR' THE ADOPTION
OF THE SORRENTO NETWORKS CORPORATION 2003 EQUITY INCENTIVE PLAN.
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REGULATORY APPROVALS
The transaction is not subject to any federal or state regulatory
requirements or approvals.
INTERESTS OF CERTAIN PERSONS IN THE RESTRUCTURING TRANSACTION
Mr. Donne Fisher has been a member of our board of directors since November
2001, is chairman of our audit committee, and is currently the president of
Fisher Capital Partners, a private venture capital and investment company he
founded in 1991. Fisher Capital Partners holds 183,486 shares of SNI's
Series A. Mr. Fisher is a director of Liberty Media Corporation which owns an
approximate 72% economic interest, representing an approximate 94% voting
interest in UnitedGlobalCom, Inc. ('UGC'). Belmarken Holding, B.V., an indirect
subsidiary of UGC, holds 3,027,523 shares of the Series A. Liberty Media also
holds convertible debt of United Pan-Europe Communications, N.V., a subsidiary
of UGC, which it has agreed to exchange for additional shares in UGC. Mr. Fisher
abstained from the vote of our board of directors on the restructuring
transaction.
Mr. Gary Parsons has been a member of our board of directors since October
2000. Mr. Parsons is a member of our audit committee. Since 1996, Mr. Parsons
has held the position of Chairman of the Board for Motient Corporation, a
wireless data firm, and XM Satellite Radio Holdings, Inc., and in October 2001
was named Chairman and Chief Executive Officer of Mobile Satellite Ventures,
LLP. Because of a long-standing personal and professional relationship with a
Series A investor, Mr. Parsons abstained from the vote of our board of directors
on the restructuring transaction.
Neither the execution of the Exchange Agreement nor the consummation of its
terms will cause any payments to be made by us to any of our executive officers
or directors pursuant to any change-in-control, severance, deferred compensation
or employment agreements currently in effect.
APPRAISAL OR DISSENTERS' RIGHTS
Under New Jersey corporate law, our shareholders are not entitled to
appraisal or dissenters' rights in connection with the restructuring
transaction.
ACCOUNTING TREATMENT OF THE EXCHANGE
EXCHANGE OF THE OUTSTANDING DEBENTURES FOR COMMON STOCK AND EXCHANGE DEBENTURES.
The exchange of the Outstanding Debentures for our common stock and Exchange
Debentures will be accounted for as a troubled debt restructuring pursuant to
Statement of Financial Accounting Standard No. 15, Accounting by Debtors and
Creditors for Troubled Debt Restructurings ('SFAS No. 15'). Assuming the
Exchange Debentures are convertible into 17.5% of our outstanding common stock,
on a diluted basis, the Outstanding Debentures will be exchanged for
approximately 3,514,000 shares of our common stock and $5,312,500 aggregate
principal amount of Exchange Debentures, and will be removed from our
consolidated balance sheet. The carrying value of the Outstanding Debentures
represents the face value of the Outstanding Debentures adjusted for unamortized
original issue discounts, unamortized debt issuance costs and the unamortized
value of warrants issued in connection with the debt. In accordance with SFAS
No. 15, we will record a gain on the exchange of our Outstanding Debentures as
the difference between the carrying value of the Outstanding Debentures,
including accrued interest, and the fair market value of the common stock issued
on the closing date of the restructuring transaction, net of unamortized debt
issuance costs and direct costs associated with the exchange of the Outstanding
Debentures. In addition, we will record a loss on the exchange as the difference
between the fair market value of the common stock issued in exchange for our
Outstanding Debentures on the closing date of the restructuring transaction and
the fair market value of the common stock which would have been issued under the
original conversion ratio, adjusted for unamortized debt issuance costs, accrued
interest and direct costs associated with the exchange of our Outstanding
Debentures.
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EXCHANGE OF SERIES A FOR COMMON STOCK AND EXCHANGE DEBENTURES
Assuming the Exchange Debentures are convertible into 17.5% of our
outstanding common stock, on a diluted basis, the Series A will be exchanged for
approximately 4,755,000 shares of our common stock, and $7,187,500 aggregate
principal amount of Exchange Debentures, and will be removed from our
consolidated balance sheet. We will record a deemed dividend on the Series A as
the difference between the fair market value of the common stock and Exchange
Debentures issued in exchange for the Series A on the closing date of the
restructuring transaction and the fair market value of the common stock which
would have been issued under the original conversion ratio, net of direct costs
associated with the exchange of the Series A.
ISSUANCE TO OUR SHAREHOLDERS OF WARRANTS EXERCISABLE INTO SHARES OF OUR COMMON
STOCK.
In addition to the Exchange Debentures and common stock that will be issued
in exchange for the Outstanding Debentures and Series A, on the closing of the
restructuring transaction, we will issue warrants exercisable into approximately
591,000 shares of our common stock, representing 5% of our outstanding common
stock on a diluted basis, to each of our shareholders of record as of a date to
be determined, but which will be within 10 business days of the closing of the
restructuring transaction.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The pro forma unaudited consolidated balance sheet reflects the effect of
the anticipated exchange of SNI's Series A and our Outstanding Debentures as of
October 31, 2002, and January 31, 2002 respectively, into shares of our common
stock and the New Debentures.
The October 31, 2002 consolidated balance sheet prior to restructuring shows
that $48.8 million of Series A classified as a current liability at SNI and $5.4
million of $32.2 million in our Outstanding Debentures classified as a long term
liability would result in a reduction in total liabilities of $40.8 million
after restructuring. In addition, shareholders' equity would increase by the
same amount from a negative $19.7 million to a positive $21.1 million after the
consummation of the restructuring transaction and restructuring of our balance
sheet. Our debt obligations associated with the Series A, which has been `put'
back to us, of $48.8 million and Outstanding Debentures in the principal amount
of $32.2 million would be reduced to $12.5 million after the exchange. We would
also have outstanding a maximum aggregate principal amount of $950 thousand of
Fee Amount Debentures. The maturity date of the New Debentures would be
August 2, 2007.
The January 31, 2002 consolidated balance sheet prior to restructuring shows
that $48.8 million of Series A classified as a current liability at SNI and $3.5
million of $32.2 million in our Outstanding Debentures classified as a long term
liability would result in a reduction in total liabilities of $38.8 million
after restructuring. In addition, shareholders' equity would increase by the
same amount from $18.2 million to $57.1 million after the consummation of the
restructuring transaction and restructuring of our balance sheet. Our debt
obligations associated with the Series A, which has been `put' back to us, of
$48.8 million and Outstanding Debentures in the principal amount of $32.2
million would be reduced to $12.5 million, after the exchange. We would also
have outstanding a maximum aggregate principal amount of $950 thousand of Fee
Amount Debentures. The maturity date of the New Debentures would be August 2,
2007.
The consolidated statement of operations for the nine months ended
October 31, 2002 and the twelve months ended January 31, 2002 show a decrease in
interest expense of $1.9 million and $1.0 million respectively. This reduction
in interest expense is a direct result of the elimination of interest payments
on the Outstanding Debentures and the addition of interest on the New
Debentures. The net loss on the restructuring transaction is $1.2 million for
the nine months ended October 31, 2002 and $14.6 million for the twelve months
ended January 31, 2002. This loss is attributable to the expense associated
with the issuance of New Warrants and new shares of common stock partially
offset by the gain associated with the elimination of the Series A and
Outstanding Debentures.
44
The unaudited pro forma financial data and the notes thereto should be read
in conjunction with our historical financial statements. The unaudited pro forma
financial data is based upon certain assumptions and estimates of management
that are subject to change. The unaudited pro forma financial data is presented
for illustrative purposes only and is not necessarily indicative of any future
results of operations or the results that might have occurred if the
restructuring transaction had actually occurred on the indicated date.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
OCTOBER 31, 2002 JANUARY 31, 2002
----------------------------- -----------------------------
PRE- POST- PRE- POST-
RESTRUCTURING RESTRUCTURING RESTRUCTURING RESTRUCTURING
------------- ------------- ------------- -------------
ACTUAL PROFORMA ACTUAL PROFORMA
ASSETS
Current Assets
Cash and securities................................. $ 18,411 $ 18,411 $ 42,363 $ 42,363
Accounts receivable, net............................ 7,587 7,587 8,081 8,081
Inventory, net...................................... 12,125 12,125 18,810 18,810
Other current assets................................ 459 459 1,252 1,252
--------- --------- --------- ---------
Total Current Assets............................ 38,582 38,582 70,506 70,506
--------- --------- --------- ---------
Property and Equipment, Net............................. 17,466 17,466 17,411 17,411
Other Assets............................................ 1,949 1,949 2,422 2,422
--------- --------- --------- ---------
Total Assets............................................ $ 57,997 $ 57,997 $ 90,339 $ 90,339
--------- --------- --------- ---------
--------- --------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities (Note A)............................ 68,426 19,626 64,667 15,867
Long Term Liabilities (Note B).......................... 9,224 17,245 7,455 17,415
--------- --------- --------- ---------
Total Liabilities............................... 77,650 36,871 72,122 33,282
--------- --------- --------- ---------
Stockholders' Equity
Preferred stock, $.01 par value; liquidation
preference $1,353................................. 1 1 1 1
Common stock and additional paid in capital (Note
C)................................................ 157,857 199,873 155,706 209,102
Accumulated deficit and other (Note D).............. (177,511) (178,748) (137,490) (152,046)
--------- --------- --------- ---------
Total Stockholders' Equity...................... (19,653) 21,126 18,217 57,057
--------- --------- --------- ---------
Total Liabilities and Stockholders' Equity (Note E)..... $ 57,997 $ 57,997 $ 90,339 $ 90,339
--------- --------- --------- ---------
--------- --------- --------- ---------
45
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED TWELVE MONTHS ENDED
OCTOBER 31, 2002 JANUARY 31, 2002
----------------------------- -----------------------------
PRE- POST- PRE- POST-
RESTRUCTURING RESTRUCTURING RESTRUCTURING RESTRUCTURING
------------- ------------- ------------- -------------
ACTUAL PROFORMA ACTUAL PROFORMA
Net Sales..................................... $ 16,727 $ 16,727 $ 40,827 $ 40,827
Cost of Sales................................. 16,577 16,577 31,507 31,507
-------- -------- -------- --------
Gross Profit.......................... 150 150 9,320 9,320
-------- -------- -------- --------
Operating Expenses
Selling and marketing..................... 9,496 9,496 16,165 16,165
Engineering, research and development..... 6,853 6,853 13,656 13,656
General and administrative................ 10,034 10,034 16,653 16,653
-------- -------- -------- --------
Total Operating Expenses.............. 26,383 26,383 46,474 46,474
-------- -------- -------- --------
Loss from Operations.......................... (26,233) (26,233) (37,154) (37,154)
-------- -------- -------- --------
Other Income (Charges)
Investment income......................... 232 232 (1,368) (1,368)
Interest expense (Note F)................. (4,589) (2,649) (3,311) (2,318)
Other income (expense).................... 182 182 (99) (99)
Net Loss on Restructuring (Note G)........ -- (1,237) -- (14,556)
Gain on sale of marketable securities..... 11,656 11,656 (1,204) (1,204)
-------- -------- -------- --------
Total Other Income (Charges).......... 7,481 8,184 (5,982) (19,545)
-------- -------- -------- --------
Loss Before Income Taxes...................... (18,752) (18,049) (43,136) (56,699)
Provision for Income Taxes.................... -- -- -- --
-------- -------- -------- --------
Net Income (Loss)............................. $(18,752) $(18,049) $(43,136) $(56,699)
-------- -------- -------- --------
-------- -------- -------- --------
PROFORMA BALANCE SHEET RECONCILING FOOTNOTES:
(A) Current liabilities will be reduced by $48,800 upon the exchange of the
Series A for shares of our common stock and the Exchange Debentures.
(B) Long term liabilities will increase by $8,021, upon the exchange of the
Outstanding Debentures for shares of our common stock and the Exchange
Debentures.
The Outstanding Debentures, in accordance with Emerging Issues Task Force
No. 00-27, were accounted for at less than their outstanding principal
amount in order to give effect to the fair value of warrants issued to the
purchasers and placement agent and the fair value of the deemed beneficial
conversion feature, which results solely as a result of the required
accounting of the Outstanding Debentures as a reduction to the face value
of the Outstanding Debentures with an offsetting increase to additional
paid in capital. These amounts as well as the issuance costs paid in cash,
were amortized as additional interest expense over the period the
Outstanding Debentures were outstanding. At the time of conversion, the
Outstanding Debentures will be revalued and any gain or loss will be netted
against the value of the Exchange Debentures.
The Exchange Debentures and New Warrants are accounted for at fair value
and any costs associated with the issuance will be treated as a current
period expense.
(C) Common stock and additional paid in capital will increase by $42,016, upon
the exchange of the Series A and Outstanding Debentures for shares of our
common stock and Exchange Debentures.
(D) Accumulated deficit and other will increase by $1,237 due the expenses
associated with the New Warrants partially off-set by the accounting 'gain'
associated with the exchange of the Series A and Outstanding Debentures for
shares of our common stock and Exchange Debentures.
(footnotes continued on next page)
46
(footnotes continued from previous page)
(E) The overall impact to the balance sheet will be an increase in total
stockholders' equity by $40,799.
(F) Interest expense decreased by $1,939 for the nine months ended October 31,
2002 and $993 for the twelve months ended January 31, 2002.
(G) There was a net loss associated with the restructuring transaction of
$1,237 for the nine-month period ended October 31, 2002 and $14,556
for the year ended January 31, 2002.
For financial statement presentation, the proforma numbers on the Balance
Sheet assume the restructuring transaction occurred on the last day of the
quarter ended October 31, 2002 or the last day of the year ended January 31,
2002 respectively. The Statement of Operations assumes the restructuring
transaction occurred on the first day of the nine month period ended
October 31, 2002 and year ended January 31, 2002 respectively.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The restructuring transaction may have significant tax consequences to our
company and to our shareholders.
As to the company, we believe the restructuring transaction may result in
income from the cancellation of debt to the extent we are not insolvent
immediately prior to such restructuring transaction. In addition, absent a
private letter ruling from the Internal Revenue Service, there can be no
assurance that our reincorporation in Delaware can be accomplished on a
tax-free basis under Section 368 of the Internal Revenue Code. Also, there is
the potential for income to us upon the merger and liquidation of our
subsidiaries, as well as the potential for income from and certain adjustments
under the federal (and certain states) alternative minimum tax system that
could result in the imposition of an alternative minimum tax. Finally, we
likely will undergo an ownership change as defined in Section 382 of the Code.
The application of this provision likely would result in a severe restriction
on our ability to use our net operating loss carryforwards for federal and
state. Thus, we may emerge from the restructuring and reorganization
transactions with minimal, if any, usable net operating loss carryforwards.
As to the shareholders, the effect of the restructuring transaction depends
upon the particular facts and circumstances of each shareholder (current common
shareholders, current preferred shareholders, potential shareholders through the
conversion of the debentures, and potential shareholders under the 2003 Equity
Incentive Plan). Our current common shareholders should not recognize any gain
or loss as a result of the merger. For federal income tax purposes, our current
common shareholders should retain the same tax basis in their shares of the new
Delaware corporation as they may have in shares of our stock held by them
immediately prior to the effective time of the merger, and their holding period
for the shares of the new Delaware corporation should include the period during
which they held our current shares. Each shareholder, or potential shareholder
should consult with his or her own tax advisors as to the federal and state tax
consequences of the restructuring transaction.
PAST CONTRACTS OR TRANSACTIONS
We are not an affiliate of the holders of the Outstanding Debentures or of
the holders of the Series A or any of their affiliates. Other than the Debenture
Agreements and the Series A Agreements, and the Exchange Agreement, and as
disclosed in this proxy statement (see 'Interests of Certain Persons in the
Restructuring Transaction' on page 43), neither we nor our executive officers,
directors, controlling persons or subsidiaries have any past contracts,
transactions or negotiations with the holders of the Outstanding Debentures or
the Series A, or their executive officers, directors, controlling persons or
subsidiaries.
47
DESCRIPTION OF CAPITAL STOCK
GENERAL
We are authorized to issue 7.5 million shares of common stock, par value
$6.00 per share and 2,000,000 shares of preferred stock, $0.01 par value per
share. As of January 31, 2003, there were 886,000 shares of common stock issued
and outstanding, and 1,353 shares of our Series D Preferred Stock issued and
outstanding.
COMMON STOCK
Each share of common stock has one vote on all matters presented to the
shareholders. Because the 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 common stock are
entitled to receive dividends when, as and if declared by the board of directors
out of funds legally available therefore. In the event of our liquidation,
dissolution or winding up, the holders of 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 no redemption provisions applicable to the common stock.
All of the outstanding shares of common stock are fully paid and nonassessable.
TRANSFER AGENT
The registrar and transfer agent for our common stock is American Stock
Transfer & Trust Co., 6201 15th Avenue, 3rd Floor, Brooklyn, New York 11219.
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of January 31, 2003,
as of the closing date of the restructuring transaction, and on a diluted basis,
regarding the ownership of our common stock by (i) each of our directors; (ii)
each of our present executive officers; (iii) each person known to us to
beneficially own 5% or more of our common stock; and (iv) all our directors and
executive officers as a group. Except as indicated, all persons named as
beneficial owners of common stock have sole voting and investment power with
respect to the shares indicated as beneficially owned by them. All persons named
have an address at c/o Sorrento Networks Corporation, 9990 Mesa Rim Road, San
Diego, California 92121, unless otherwise indicated. All numbers give effect to
our 1-for-20 reverse stock split, which took effect on October 28, 2002.
48
COMMON STOCK COMMON STOCK OWNED
BENEFICIALLY AS OF CLOSING DATE OF COMMON STOCK OWNED ON A
OWNED AS OF 01/31/03 TRANSACTION*** FULLY DILUTED BASIS****
----------------------- ----------------------- --------------------------
NUMBER OF % OF NUMBER OF % OF NUMBER OF % OF
NAME OF BENEFICIAL OWNER(A) SHARES OUTSTANDING SHARES OUTSTANDING SHARES OUTSTANDING(J)
--------------------------- ------ ----------- ------ ----------- ------ --------------
Phillip W. Arneson(B).............. 19,083 2.1% 19,083 * 19,083 *
Donne F. Fisher(C)................. 1,750 * 1,750 * 1,750 *
Robert L. Hibbard(D)............... 4,300 * 4,300 * 4,300 *
Gary M. Parsons(E)................. 1,834 * 1,834 * 1,834 *
Larry J. Matthews(F)............... 0 * 0 * 0 *
Joe R. Armstrong(G)................ 10,138 1.1% 10,138 * 10,138 *
Richard L. Jacobson(H)............. 11,788 1.3% 11,788 * 11,788 *
All Directors, Nominees and
Executive Officers as a Group.... 48,892 5.4% 48,892 * 48,892 *
Qila, LLC(I)
15332 Antioch Street
Pacific Palisades, CA 90272...... 55,370 6.3% 55,370 * 55,370 *
Deutsche Bank...................... 0 0 818,587 8.9 1,023,234 8.7
ZLP Master Technology Fund......... 0 0 491,152 5.4 613,940 5.2
Belmarken Holding B-V.............. 0 0 1,607,690 17.6 2,009,612 17.0
Telecom -- SNI Investors L.L.C..... 0 0 1,432,300 15.6 1,790,382 15.2
Sorrento Holdings LLC.............. 0 0 633,333 6.9 791,610 6.7
Barclays Global Investors, NA(K)... 46,877 5.3% 46,877 * 46,877 *
---------
* Less than 1%
** Based on 886,000 shares outstanding
*** Based on 9,155,000 shares outstanding (assuming the Exchange Debentures are
convertible into 17.5% of our outstanding common stock on a diluted basis)
**** Based on 11,814,000 shares outstanding
(A) All information with respect to beneficial ownership of the shares is based
upon filings made by the respective beneficial owners with the Securities
and Exchange Commission, information provided by such beneficial owners to
us, or, in the case of beneficial ownership as of the closing date of the
restructuring transaction, estimated, based on the issuance of an aggregate
of approximately 9,155,000 shares of common stock, New Debentures and New
Warrants convertible or exercisable into shares of our common stock at the
closing.
(B) Includes exercisable options held by Mr. Arneson to acquire 16,833 shares
of common stock, 2,000 options to acquire common stock that become
exercisable in 60 days and 250 shares of common stock purchased in June
2002.
(C) Includes options to acquire 1,750 shares of common stock. On March 7, 2000,
Mr. Fisher was granted options to acquire 100,000 shares of SNI's common
stock at $5.45 under its option plan for his services as an advisor to it.
Pursuant to an outstanding conversion offer, Mr. Fisher may elect to
convert the SNI options into options to acquire our common stock at a ratio
of 78 for 1. Mr. Fisher is President of Fisher Capital Partners which holds
183,486 shares of the Series A. Mr. Fisher is a director of Liberty Media
Corporation which owns an approximate 74% economic interest representing an
approximate 94% voting interest in UnitedGlobalCom, Inc. ('UGC'). Belmarken
Holding, B.V., an indirect subsidiary of UGC, holds 3,027,523 shares of the
Series A. Liberty Media also holds convertible debt of United Pan-Europe
Communications, N.V., a subsidiary of UGC, which it has agreed to exchange
for additional shares in UGC.
(D) Includes exercisable options held by Mr. Hibbard to acquire 4,250 shares of
common stock and 50 shares of common stock purchased in July 2002.
(footnotes continued on next page)
49
(footnotes continued from previous page)
(E) Includes exercisable options held by Mr. Parsons to acquire 1,834 shares of
common stock.
(F) Mr. Matthews was granted options to acquire 1,750 shares of our common
stock upon his election to our board of directors. Under the terms,
conditions and vesting schedules as option grants made to other members of
our board of directors, the options best upon completion of one year of
service measured from the grant date.
(G) Includes exercisable options held by Mr. Armstrong to acquire 8,875 shares
of common stock, 1,113 options to acquire shares of common stock that
become exercisable within 60 days and 150 shares of common stock purchased
in June 2002.
(H) Includes exercisable options held by Mr. Jacobson to acquire 10,760 shares
of common stock, 594 options to acquire common stock that become
exercisable within 60 days, and 434 shares of common stock held in a 401K
plan.
(I) Represents holdings reported by Qila, LLC and RII Partners, Inc. on
September 20, 2002 on Form 13-D, 'General Statement of Beneficial
Ownership'. Includes exercisable options to acquire 55,370 shares of
common stock held by RT Investments, Inc. Mr. and Mrs. Chadha
disclaim ownership in these shares.
(J) For each beneficial owner, the 'Percentage of Outstanding' equals each
owner's actual holdings of shares plus shares represented by vested,
unexercised options and warrants held, divided by our total shares
outstanding at January 31, 2003 plus the unexercised options and warrants
detailed above of the referenced holder only. In other words, individual
percentages of the listed holders will not add to the group total because
the calculations are made separately for each holder.
(K) Represents holdings reported by Barclays Global Investors, NA, Barclays
Global Fund Advisors, Barclays Global Investors, Ltd., Barclays Trust and
Banking Company (Japan) Ltd, Barclays Life Assurance Company Limited,
Barclays Bank PLC, Barclays Capital Securities Limited, Barclays Capital
Investments, Barclays Private Bank and Trust (Isle of Man) Limited,
Barclays Private Bank and Trust (Jersey) Limited, Barclays Bank Trust
Company Limited, Barclays Private Bank and Trust Limited (Sussie) on
February 10, 2003 on Form 13G.
50
OFFICER AND DIRECTOR OPTION GRANTS
PRE AND POST OCTOBER 28, 2002 1-FOR-20 STOCK SPLIT
The following table sets forth certain information as of January 31, 2003,
regarding the ownership of our common stock by each of our directors and our
present executive officers, and all our directors and executive officers as a
group. The table sets forth the number of shares for which option grants have
been made to our directors and executive officers, on a pre-1-for-20 reverse
stock split and post-1-for-20 reverse stock split basis. Our 1-for-20 reverse
stock split took effect on October 28, 2002.
PRIOR TO 1-FOR-20 POST 1-FOR-20
REVERSE SPLIT REVERSE SPLIT
------------------------ ------------------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
OPTIONS VESTED OPTIONS VESTED
NAME OF BENEFICIAL OWNER GRANTED OPTIONS GRANTED OPTIONS
------------------------ ------- ------- ------- -------
Phillip W. Arneson............................. 611,667 336,660 30,583 16,833
Donne F. Fisher................................ 60,000 35,000 3,000 1,750
Robert L. Hibbard.............................. 110,000 85,000 5,500 4,250
Gary M. Parsons................................ 61,667 36,680 3,083 1,834
Larry J. Matthews.............................. 35,000 -- 1,750 --
Joe R. Armstrong............................... 360,000 177,500 18,000 8,875
Richard L. Jacobson............................ 334,000 215,203 16,700 10,760
All Directors and Executive Officers as a
Group........................................ 1,572,334 886,043 78,616 44,302
SHAREHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, shareholders may present
proper proposals for inclusion in our proxy statement and for consideration at
the next annual meeting by submitting their proposals to us in a timely manner.
Any of our shareholders who wishes to present a proposal for the inclusion in
the proxy statement for action at our next annual meeting of shareholders must
comply with our by-laws and the rules and regulations of the Securities and
Exchange Commission then in effect. To be considered for inclusion in next
year's proxy statement, such a proposal must be mailed to us at our principal
executive offices at 9990 Mesa Rim Road, San Diego, California 92121, Attention:
Corporate Secretary, and must be received by us on or before March 31, 2003.
PRESENCE OF INDEPENDENT AUDITORS AT SPECIAL MEETING
A member of BDO Seidman, LLP will not be present at the special meeting.
INCORPORATION BY REFERENCE
The Securities and Exchange Commission allows us to 'incorporate by
reference' in this Proxy Statement other information we file with it, which
means that we can disclose important information to you by referring to those
documents. This Proxy Statement incorporates important business and financial
information about us that is not included in or delivered with this Proxy
Statement. The information we file later with the Securities and Exchange
Commission will automatically update and supersede this Proxy Statement. We
incorporate by reference the documents listed below and any future filings made
with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act until the date of the special meeting.
1. Our Annual Report on Form 10-K for the fiscal year ended January 31,
2002.
2. Our Quarterly Reports on Form 10-Q for the fiscal quarters ended April
30, 2002, July 31, 2002 and October 31, 2002.
3. Our Current Reports on Form 8-K dated December 16, 2002, November 25,
2002 and November 6, 2002.
51
We have filed each of these documents with the Securities and Exchange
Commission. You may read and copy any reports, statements, or other information
that we file at the Securities and Exchange Commission's public reference rooms
in Washington, D.C., New York, New York and Chicago, Illinois. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our
public filings are also available to the public from commercial document
retrieval services and at the Internet World Wide Web site maintained by the SEC
at http://www.sec.gov. You may also request a copy of these filings, at no cost,
by writing or calling us at the following address or telephone number:
Mary Lay, Vice President Finance
Sorrento Networks Corporation
9990 Mesa Rim Road
San Diego, California 92121
(858) 558-3960
You should rely only on the information incorporate by reference or provided
in this Proxy Statement. We have not authorized anyone else to provide you with
different information.
OTHER MATTERS
Our board of directors knows of no other matters to be presented for
shareholder action at the special meeting. However, if other matters do properly
come before the special meeting or any adjournments or postponements thereof,
the board of directors intends that the persons named in the proxy card will
vote upon such matters in accordance with their best judgment.
By Order of the Board of Directors
Phillip W. Arneson
---------------------------
PHILLIP W. ARNESON
Chairman and Chief Executive Officer
San Diego, California
March , 2003
IMPORTANT
TO ASSURE YOUR REPRESENTATION AND A QUORUM FOR THE TRANSACTION OF BUSINESS
AT THE SPECIAL MEETING, WE URGE YOU TO PLEASE COMPLETE, SIGN, DATE AND RETURN
THE ENCLOSED PROXY CARD PROMPTLY.
52
APPENDIX A
EXCHANGE AGREEMENT
This EXCHANGE AGREEMENT (the 'Agreement') is entered into as of the day
of March, 2003, by and among Sorrento Networks Corporation, a New Jersey
corporation (the 'Company'), Sorrento Networks, Inc., a Delaware corporation
('SNI'), each holder of the Company's outstanding Old Debentures and Old
Debenture Warrants (as those terms are defined below) (the 'Debentureholders')
and each holder of SNI's outstanding Series A Preferred (as defined below) (the
'Series A Preferred Holders'), with reference to the following facts and
circumstances (capitalized terms used but not otherwise defined herein shall
have the meanings set forth in Section 1 below):
A. The Company and SNI desire to exchange the outstanding Old
Debentures, the Old Debenture Warrants and the Series A Preferred for shares
of Common Stock and New Debentures, and the Debentureholders and Series A
Preferred Holders desire to participate in such exchange.
B. The Company, SNI, the Debentureholders and the Series A Preferred
Holders have executed the Letter of Intent. This Agreement is being entered
into to implement the provisions of the Letter of Intent.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
hereinafter contained, the parties hereto hereby agree as follows:
1. Definitions. For purposes of this Agreement, the following terms shall
have the following meanings:
'Agreement' means this Exchange Agreement.
'Approvals' is defined in Section 6.1(a).
'Board' means the Board of Directors of the Company.
'Business Days' means any day that is not a Saturday, Sunday or day on
which banks are authorized or required by law to close in the State of New
York.
'Closing' and 'Closing Date' are defined in Section 10.
'Closing Deadline' is defined in Section 10.
'Collateral' means the collateral securing the New Debentures.
'Collateral Agent' means the entity serving as collateral agent pursuant
to the Collateral Agent Agreement.
'Collateral Agent Agreement' means that certain Collateral Agent
Agreement substantially in the form of Exhibit 'A'.
'Common Stock' means the Company's common stock.
'Companies' means the Company, SNI, Meret and SVREH.
'Company' means Sorrento Networks Corporation, a New Jersey corporation
or its successor corporation as a result of the reincorporation which is
contemplated by the Merger.
'Company Permits' is defined in Section 6.7(b).
'Consent and Waiver' means that certain letter in the form attached
hereto as Exhibit 'B', executed by the Debentureholders and the Company,
providing for a waiver of certain matters under the Old Debentures on the
terms and conditions set forth in such letter.
'Consent Fee' is defined in Section 6.9.
'Conversion Price' means the Reference Price; provided however, that the
Conversion Price shall be subject to adjustment to ensure that the number of
shares issuable upon conversion of the Exchange Debentures as of the Closing
Date represents no less than 10.0%
A-1
nor more than 30% of the 87.5% of the Common Stock on a Diluted Basis
referred to in Section 2. The Conversion Price, as adjusted, will then apply
to all of the New Debentures.
'Conversion Shares' means the shares of Common Stock issuable upon
conversion of the New Debentures (except where specifically limited herein
to shares of Common Stock issuable upon conversion of the Exchange
Debentures).
'Debentureholders' is defined in the introductory paragraph of this
Agreement.
'Deeds of Trust' means those certain Deeds of Trust and Assignment of
Rents with respect to the Real Property Collateral substantially in the form
of Exhibit 'C', to be recorded on the Closing Date on the Real Property
Collateral as to which all necessary consents of prior lienholders are
obtained prior to the Closing Date or to be recorded after the Closing Date
on the Real Property Collateral in accordance with the provisions of
Section 8.1(n).
'Diluted Basis' means the total number of shares of Common Stock issued
and outstanding upon consummation of the Closing, after giving effect to
(i) the Exchange and the issuance of the Exchange Shares at the Closing,
(ii) the shares of Common Stock issuable upon conversion of the Exchange
Debentures and (iii) the shares of Common Stock issuable upon exercise of
the Warrants, but without giving effect to (a) the shares of Common Stock
issuable upon exercise of the New Options authorized by the New Option Plan,
(b) the shares of Common Stock issuable upon conversion of the Fee Amount
Debentures, (c) the shares of Common Stock issuable upon exercise of the
Existing Options and (d) the shares of Common Stock issuable upon conversion
of the Company's Series D Preferred Stock.
'Disclosure Schedule' is defined in Section 6.
'Exchange' means the exchange by the Exchanging Holders of all of their
Old Debentures and Series A Preferred for New Debentures and Common Stock in
accordance with this Agreement.
'Exchange Act' means the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder.
'Exchange Debentures' means $12,5000,000 aggregate principal amount of
the New Debentures issuable in connection with the Exchange.
'Exchange Shares' means the shares of Common Stock issuable at the
Closing.
'Exchanging Holders' means the Series A Preferred Holders and the
Debentureholders.
'Existing Deeds of Trust' means (i) that certain Multifamily Deed of
Trust, Assignment of Rents and Security Agreement dated as of April 24, 1996
in favor of Southern Pacific Thrift & Loan as beneficiary and encumbering
Meret's fee interest in the real estate located at 9990 Mesa Rim Road, San
Diego, CA 92121 and (ii) that certain Deed of Trust, Assignment of Rents,
Security Agreement and Fixture Filing dated as of December 8, 1997 currently
in favor of LaSalle National Bank as beneficiary and encumbering SVREH's fee
interest in the real estate located at 9940 Mesa Rim Road, San Diego, CA
92121.
'Existing Options' means the outstanding options to acquire equity in
the Company that are listed on Schedule 6.3, which are exercisable by the
persons and at the prices set forth in Schedule 6.3.
'Existing Shareholders' means the holders of the Company's Common Stock
on the Warrant Record Date.
'Fee Amount' is defined in Section 3.
'Fee Amount Debentures' means up to $950,000 in aggregate principal
amount of New Debentures to be delivered to the Funding Series A Holders in
accordance with Section 3.
'Funding Series A Holders' is defined in Section 3.
'Governmental Entity' is defined in Section 6.6(b).
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'Letter of Intent' means that certain Letter of Intent for Proposed
Exchange of Senior Convertible Debentures and Series A Preferred Stock dated
as of December 10, 2002 executed by the Company, SNI, the Series A Preferred
Holders and the Debentureholders, a copy of which is attached hereto as
Exhibit 'D'.
'Material Adverse Change' means the occurrence of one or more of the
following: (i) an event or development which has occurred and which has had
or is reasonably likely to have a material adverse effect on the business,
financial condition or other condition of the Companies taken as a whole (or
SNI individually); or (ii) with respect to any of the Companies, bankruptcy,
reorganization, insolvency or liquidation proceedings or other proceedings,
or relief under any bankruptcy law or any law for the relief of debt, has
been instituted by or against any of the Companies.
'Material Adverse Effect' means an event or development which has
occurred and which has had or is reasonably likely to have a material
adverse effect on the business, financial condition or other condition of
one or more of the Companies.
'Meret' means Meret Communications, Inc., a California corporation.
'Merger' means the reincorporation of the Company in the State of
Delaware on the Business Day immediately preceding the Closing Date.
'NASDAQ' means the Nasdaq Stock Market, Inc.'s National Market.
'New Debentures' means the 7.5% secured convertible debentures of the
Company in the aggregate principal amount of up to $13,450,000 substantially
in the form attached hereto as Exhibit 'E'.
'New Option Plan' means an employee incentive plan pursuant to which the
Company may issue stock options representing up to fifteen percent (15%) of
the Common Stock on a Diluted Basis (for this purpose, Diluted Basis shall
include the shares of Common Stock issuable upon the conversion of the Fee
Amount Debentures) (the 'New Options'), which shall be available for
issuance only to persons (including officers, directors and consultants)
employed by or rendering services to the Company or any subsidiary thereof
on the date of grant of the New Options.
'New Underwriting' means one or more underwritten public offerings for
the issuance of additional shares of Common Stock for cash that complies
with the NASDAQ rules.
'Old Debentures' means the Company's 9.75% Senior Convertible Debentures
Due August 2, 2004 in an aggregate principal amount of $32,200,000 and the
warrants issued in connection with such debentures (the 'Old Debenture
Warrants').
'Other Filings' is defined in Section 8.1(a).
'Pledge Agreement' means that certain Pledge Agreement with respect to
certain Collateral substantially in the form of Exhibit 'F', to be effected
on the Closing Date.
'Post-Closing Mergers' means the mergers following the Closing as
provided in Section 8.1(n) of Meret, SNI and SVREH into the Company.
'Pro Rata Share' means (a) with respect to the Exchange Shares and the
Exchange Debentures to be issued to the Series A Preferred Holders with
respect to their Series A Preferred, 57.5%, and (b) with respect to such
securities to be issued to the Debentureholders with respect to their Old
Debentures and Old Debenture Warrants, 42.5%.
'Proxy Statement' is defined in Section 8.1(a).
'Real Property Collateral' means (i) Meret's fee interest in the real
estate located at 9990 Mesa Rim Road, San Diego, CA 92121 and (ii) SVREH's
fee interest in the real estate located at 9940 Mesa Rim Road, San Diego, CA
92121.
'Reference Price' means an amount per share equal to the volume-weighted
average closing market price for the Common Stock for the ten (10) trading
days ending on the third trading day prior to the Closing Date.
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'Registration Rights Agreement' is defined in Section 8.1(k).
'Registration Statement' is defined in Section 8.1(a).
'SEC' is defined in Section 8.1(a).
'Secured Guaranties' means those certain Secured Guaranties in the form
of Exhibit 'G', to be executed by each of Meret and SNI and secured by the
respective assets of Meret (other than the Real Property Collateral owned by
Meret, unless the consent of the beneficiary of the applicable Existing Deed
of Trust is obtained prior to the Closing) and SNI.
'Securities Act' means the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
'Security Agreement' means that certain Security Agreement substantially
in the form of Exhibit 'H', to be executed on the Closing Date.
'Series A Litigation' means all claims and counterclaims that have been
or could be asserted in Delaware Chancery Court Cases 19038 or 18915.
'Series A Preferred' means the Series A Convertible Preferred Stock of
SNI, and 'Series A Preferred Holders' means the holders of Series A
Preferred.
'Shareholders' Meeting' is defined in Section 6.8.
'SNI' means Sorrento Networks, Inc., a Delaware corporation.
'SVREH' means Sorrento Valley Real Estate Holdings, LLC, a California
limited liability corporation.
'10-Q' means the Form 10-Q Quarterly Report filed with the SEC on
December 20, 2002 for the period ended October 31, 2002.
'Term Sheet' means the Term Sheet/Sorrento Networks Corporation
Convertible Debentures and Series A Preferred Stock Exchange attached to the
Letter of Intent as Exhibit A.
'Transaction Documents' means this Agreement and the other documents and
instruments to be executed and delivered in connection herewith at or prior
to the Closing, including without limitation the Collateral Agent Agreement,
the Security Agreement, the Pledge Agreement, the Secured Guaranties, the
Registration Rights Agreement and the other documents (other than the Deeds
of Trust) listed in the Schedule of Documents attached hereto as
Exhibit 'I'.
'UPC' means United Pan-Europe Communications, N.V.
'UPC Litigation' means all claims and counterclaims that have been filed
in Sorrento Networks, Inc. v. United Pan-Europe Communications, N.V.,
et al., Cause No. 02 Civ. 7734, in the United States District Court,
Southern District of New York.
'UPC Payments' is defined in Section 3.
'Warrant Record Date' means a date determined by the Company that is
within ten (10) Business Days prior to the Closing Date.
'Warrants' means the warrants for shares of Common Stock to be issued to
the Existing Shareholders pursuant to Section 4 hereof, substantially in the
form of Exhibit 'J'.
2. Exchange. On the Closing Date, subject to the terms and conditions of
this Agreement, the Exchanging Holders shall exchange their Old Debentures and
Series A Preferred for the Exchange Shares and Exchange Debentures in an amount
sufficient such that the Exchange Shares and the Conversion Shares issuable upon
conversion of the Exchange Debentures represent 87.5% of the Common Stock on a
Diluted Basis. Exchanging Holders of Old Debentures and Series A Preferred will
receive their respective Pro Rata Share of the Exchange Shares and the Exchange
Debentures, with the amounts to be received by each Exchanging Holder to be
based upon such holder's respective ownership percentage of Old Debentures and
Series A Preferred. Schedule 2 hereto sets forth, with respect to each of the
Old Debentureholders and the Series A Preferred
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Holders, using the assumptions set forth therein, (a) the number of shares of
Series A Preferred and/or principal amount of Old Debentures currently held by
such Exchanging Holder (based on the representations of the Exchanging Holders
set forth in Section 7.3) and (b) (i) the principal amount of the Exchange
Debentures to be received by each Exchanging Holder as of the Closing Date and
(ii) the Exchange Shares to be received by each Exchanging Holder and the
percentage ownership of each Exchanging Holder in the Exchange Shares as of the
Closing Date. The number of Exchange Shares and (assuming conversion of the
Exchange Debentures) Conversion Shares issuable upon conversion of the Exchange
Debentures that each Exchanging Holder will receive will be calculated promptly
following determination of the Conversion Price and will be set forth in an
exhibit to this Agreement substantially in the form of Exhibit 'K' hereto.
3. Fee Amount Debentures. In addition to the Exchange Debentures to be
issued in accordance with Section 2, the Series A Preferred Holders listed on
Schedule 3 hereto who incurred legal fees and expenses in connection with the
Series A Litigation (the 'Funding Series A Holders') prior to November 11, 2002
will receive at the Closing Fee Amount Debentures to reimburse them for such
legal fees and expenses up to the 'Fee Amount' (as hereinafter defined), in
accordance with the percentages set forth in Schedule 3. For purposes hereof,
the 'Fee Amount' means $950,000 less, on a dollar for dollar basis, the amount
paid to the Funding Series A Holders by SNI as a result of any cash payments
made by UPC to SNI (the 'UPC Payments') after December 10, 2002 and prior to the
Closing Date with respect to invoices at issue in the UPC Litigation. The
Company agrees to pay the Funding Series A Holders their percentage of any UPC
Payments on the earlier of (i) the date that is two Business Days after the
funds represented by the UPC Payments have cleared and are available to the
Company or (ii) the Closing Date.
4. Warrants for Existing Shareholders. As of the Closing Date, after giving
effect to the Merger and the consummation of the transactions contemplated by
this Agreement, the Common Stock held by the Existing Shareholders shall equal
in the aggregate seven and one-half percent (7.5%) of the Common Stock on a
Diluted Basis. In addition, the Existing Shareholders will receive
non-transferable Warrants to purchase in the aggregate that number of shares of
Common Stock equal to five percent (5%) of the Common Stock on a Diluted Basis
as of the Closing Date (with the distribution of the Warrants to the Existing
Shareholders to occur as soon as practicable following the Closing Date). The
Warrants will be distributed to the Existing Shareholders based on their
respective ownership percentage of the shares of Common Stock outstanding on the
Warrant Record Date.
5. New Option Plan and New Options. The Board of Directors of the Company
shall adopt the New Option Plan prior to the Closing and may issue New Options
equal to up to 7.5% of the Common Stock on a Diluted Basis (for this purpose,
Diluted Basis shall include the shares of Common Stock issuable upon the
conversion of the Fee Amount Debentures) on or promptly following the Closing
Date, at an exercise price equal to the then-current market price (but in any
event not less than 90% of the Reference Price). The remaining New Options
available for grant will be issuable from time to time in such amounts and at
such exercise prices as are approved by the Board after the Closing Date.
6. Representations and Warranties of the Companies. The Companies represent
and warrant to the Exchanging Holders, jointly and severally that, except as set
forth on Schedule 6 to be delivered prior to the execution of this Agreement
(the 'Disclosure Schedule'):
6.1 Organization and Qualification.
(a) Each of the Companies is a corporation or, in the case of SVREH, a
limited liability company, duly organized, validly existing and in good standing
under the laws of the jurisdiction of its formation and has the requisite
corporate or limited liability company power and authority to own, lease and
operate its assets and properties and to carry on its business as it is now
being conducted. Each of the Companies is duly qualified or licensed as a
foreign corporation or limited liability company to do business, and is in good
standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its activities makes such
qualification or licensing necessary, except for such failures to be so duly
qualified or licensed and
A-5
in good standing that would not, either individually or in the aggregate, have a
Material Adverse Effect (in this instance, determined by reference to all of the
Companies, taken as a whole).
(b) The Company's subsidiaries are listed in the Disclosure Schedule.
6.2 Authorization and Binding Obligation. (i) The execution and delivery of
the Transaction Documents and the performance by the Companies of their
respective obligations thereunder have been duly authorized by all necessary
corporate or limited liability company action, including any necessary approvals
by their respective boards of directors or managers, and no other corporate or
limited liability company proceedings on their part are necessary for the
execution and delivery of the Transaction Documents by the Companies that are
parties thereto and the performance of their obligations provided for therein,
except for (a) the approvals and consents of the Company's shareholders with
respect to the transactions contemplated hereby, including without limitation
(x) the Merger, (y) the Exchange, including the authorization of any increase in
the Common Stock approved by the Board in connection with the transactions
contemplated hereby, the issuances of the Exchange Shares and the other
issuances of Common Stock contemplated hereby, (z) the adoption of the New
Option Plan and any other matters as to which the Board determines shareholder
approval to be necessary or desirable and (b) any corporate action necessary to
effect the appointment of directors pursuant to Section 8.1(g); and (ii) this
Agreement has been duly executed and delivered by the Company, at the Closing
the other Transaction Documents will have been duly executed by the Companies
that are parties thereto and, assuming this Agreement and the other Transaction
Documents are binding obligations of the other parties thereto, and the receipt
of such approvals and consents as are set forth in clause (i), the Transaction
Documents will constitute valid and binding obligations of the Companies, as
applicable, enforceable against them in accordance with their respective terms,
except as may be limited by (x) bankruptcy, insolvency, reorganization,
moratorium and other similar laws now or hereafter in effect relating to or
affecting creditors' rights generally, and (y) general principles of equity,
regardless of whether enforcement is considered in a proceeding in equity or at
law.
6.3 Options. Schedule 6.3 contains a list of the holders of the Existing
Options, together with the number of options held, the number and type of equity
securities which may be acquired upon exercise of the Existing Options and the
exercise prices thereof. None of the Companies have any outstanding options,
warrants, rights to acquire equity, securities convertible into equity or
similar agreements that provide for the issuance of Common Stock or equity in
any of the Companies, except for the Old Debenture Warrants, the Company's
Series D Preferred Stock, the Series A Preferred and as listed in Schedule 6.3.
Except as set forth on Schedule 6.3, to the Company's knowledge there are no
outstanding options, warrants or other rights to acquire any of the Company's
equity securities held by any current or former employees. Schedule 6.3 sets
forth the number and type of equity securities which may be acquired pursuant to
such options, warrants or other rights and the exercise price for such options,
warrants or other rights.
6.4 Capitalization. The authorized and outstanding capital stock or other
equity of each of the Companies as of January 31, 2003 is set forth in the
Disclosure Schedule. The authorized and outstanding capital stock or other
equity of each of the Companies as of immediately prior to the Closing shall be
set forth in an officer's certificate to be delivered by the Company prior to
the Closing.
6.5 Shares to be Issued. The Exchange Shares to be issued pursuant to the
Exchange, when issued, and the shares of Common Stock to be issued upon
conversion of the New Debentures, when issued in accordance with the terms of
the New Debentures, will be duly authorized, validly issued, fully paid and
non-assessable.
6.6 No Conflict; Required Filings and Consents.
(a) Subject to receipt of the approvals, consents and actions referenced in
Sections 6.2(i)(a) and (c), the execution and delivery of this Agreement and the
other Transaction Documents by the Companies that are parties thereto do not,
and the performance of this Agreement and the other Transaction Documents by the
Companies that are parties thereto will not, (i) conflict with or violate the
organizational documents of any of the Companies, (ii) subject to compliance
with
A-6
the requirements set forth in Section 6.6(b), conflict with or violate any law,
rule, regulation, order, judgment or decree applicable to any of the Companies
or by which any of their respective properties is bound or affected, or
(iii) except as set forth in the Disclosure Schedule, result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or impair any of the Companies' rights or alter
the rights or obligations of any third party under, or give to others any rights
of termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the properties or assets of any of
the Companies pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which any of the Companies is a party or by which any of the Companies or any
of their respective properties are bound or affected, except where any of the
foregoing would not, either individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
(b) The execution and delivery of this Agreement and the other Transaction
Documents by the Companies that are parties thereto do not, and the performance
of this Agreement by the Companies will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any court,
administrative agency, commission, governmental or regulatory authority,
domestic or foreign (a 'Governmental Entity'), except (A) for applicable
requirements of the Securities Act, the Securities Exchange Act, state
securities laws, the rules and regulations of NASDAQ, the filing and recordation
of such certificates in connection with the Merger as are required by applicable
state laws and such filings and recordations as are necessary to perfect the
security interests granted pursuant to the Transaction Documents and (B) where
the failure to obtain such consents, approvals, authorizations or permits, or to
make such filings or notifications, would not reasonably be expected to have a
Material Adverse Effect, prevent consummation of the Exchange or the Merger or
otherwise prevent the parties hereto from performing their obligations under
this Agreement.
6.7 Compliance; Permits.
(a) None of the Companies is in conflict with, or in default or violation
of, (i) any law, rule, regulation, order, judgment or decree applicable to any
of the Companies or by which any of their respective properties is bound or
affected, or (ii) giving effect to the Consent and Waiver, any material note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which any of the Companies is a
party or by which any of the Companies or any of their respective properties is
bound or affected, except for (x) the determination of NASDAQ's staff to delist
the Company for failure to satisfy deadlines imposed by NASDAQ for the Company
to comply with NASDAQ's listing requirements, which determination is being
appealed by the Company to a Listing Qualifications Panel and (y) any other
conflicts, defaults or violations that (individually or in the aggregate) would
not reasonably be expected to have a Material Adverse Effect. No investigation
or review by any governmental or regulatory body or authority (except as
indicated in clause (x) with respect to the Company's appeal of the
determination of NASDAQ's staff) is pending or, to the knowledge of the Company,
threatened against any of the Companies, nor has any governmental or regulatory
body or authority indicated an intention to conduct the same, other than, in
each such case, those the outcome of which could not, individually or in the
aggregate, reasonably be expected to have the effect of prohibiting or
materially impairing any material business practice of any of the Companies
individually, any acquisition of material property by any of the Companies
individually or the conduct of business by any of the Companies individually.
(b) Each of the Companies holds all franchises, grants, authorizations,
permits, licenses, easements, consents, variances, exemptions, certificates,
orders and approvals from governmental authorities necessary for the operation
of their businesses (collectively, the 'Company Permits'), except where the
failure to hold any of the foregoing would not reasonably be expected to have a
Material Adverse Effect. The Companies are in compliance in all material
respects with the terms of the Company Permits.
6.8 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by the Companies for inclusion in (i) the
Registration Statement will, at the time the
A-7
Registration Statement becomes effective under the Securities Act, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading; and
(ii) the Proxy Statement will not, at the dates mailed to the shareholders of
the Company, at the times of the shareholders meeting of the Company (the
'Shareholders' Meeting') in connection with the transactions contemplated hereby
and as of the Closing Date, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. Notwithstanding the foregoing, none of the
Companies makes any representation or warranty with respect to any information
supplied by the Exchanging Holders which is contained in any of the foregoing
documents.
6.9 Consent Fee; Consent and Waiver. The Company has paid to each
Debentureholder its fractional share of the $320,000 fee set forth in the Term
Sheet for delivering executed copies of the Consent and Waiver and Letter of
Intent by 5:00 p.m. (New York time) on Thursday, January 9, 2003 (the 'Consent
Fee').
6.10 Absence of Litigation. As of the date hereof, there are no claims,
actions, suits or proceedings pending or, to the knowledge of the Company,
threatened against any of the Companies or any properties or rights of any of
the Companies, before any court, arbitrator or administrative, governmental or
regulatory authority or body, domestic or foreign that, if the claimant were
successful, would be materially adverse to the Companies, taken as a whole,
except as disclosed in the Disclosure Schedule.
6.11 UPC Payments. As of the date of this Agreement, neither the Company nor
SNI has received any UPC Payments.
6.12 Information Requested. To the Company's knowledge, the Company has
provided to the Exchanging Holders or their representatives all information
regarding the Companies that has been requested by them. To the Company's
knowledge, the information so provided, taken as a whole and at the time
provided (taking into account any updated or supplemented information provided)
and subject to the qualifications set forth in the Disclosure Schedule, did not
contain an untrue statement of a material fact.
6.13 Change of Control Agreements. As of the Closing Date, there will be no
employment, consulting, severance or deferred compensation agreements between
the Company and any person that would give such person the right to receive any
payment from the Company as a result of the consummation of the transactions
contemplated by the Transaction Documents.
6.14 'Piggyback' Registration Rights. The Company has not granted to any
person any 'piggyback' registration rights with respect to registrations under
the Securities Act.
7. Representations and Warranties of Exchanging Holders. Each Exchanging
Holder represents and warrants to the Companies, with respect to itself only, as
follows:
7.1 Organization, Standing, and Authority. Such Exchanging Holder, if it is
an entity, (i) is duly organized, validly existing and in good standing under
the laws of its state of organization and (ii) has the requisite corporate or
other entity power and authority to execute and deliver this Agreement and to
perform its obligations hereunder.
7.2 Authorization and Binding Obligation. (i) The execution and delivery of
this Agreement and the performance by it of its obligations hereunder have been
duly authorized by all necessary organizational action, including any necessary
approval by its board of directors or other governing body, and no other
organizational proceedings on its part are necessary for the execution and
delivery of this Agreement and the performance of its obligations provided for
herein; and (ii) this Agreement has been duly executed and delivered by it and,
assuming this Agreement is a binding obligation of the other parties, this
Agreement will constitute a valid and binding obligation of it enforceable
against it in accordance with its terms, except as may be limited by
(x) bankruptcy, insolvency, reorganization, moratorium and other similar laws
now or hereafter in effect relating to or affecting creditors' rights generally,
and (y) general principles of equity, regardless of whether enforcement is
considered in a proceeding in equity or at law.
A-8
7.3 Ownership of Securities. Such Exchanging Holder owns the Series A
Preferred and/or the Old Debentures and the Old Debenture Warrants set forth
opposite its name on Schedule 7.3 hereto free and clear of all liens, security
interests, assignments, claims or encumbrances, whether or not perfected, except
as indicated in Schedule 7.3. with respect to any Exchanging Holders who are
acting as agents or nominees.
7.4 Purchase New Debentures Entirely for Own Account. The Exchange Shares,
the New Debentures and the Conversion Shares to be acquired by such Exchanging
Holder will be acquired for investment for the Exchanging Holder's own account,
not as a nominee or agent (except as indicated in Schedule 7.3), and not with a
view to the resale or distribution of any part thereof in any manner that would
require registration under the Securities Act, but without prejudice, however,
to the right of such Exchanging Holder at all times to sell or otherwise dispose
of all or any part thereof under a registration statement to the extent
available under the Securities Act or an exemption from such registration to the
extent available under the Securities Act. With respect to any Exchange Shares,
New Debentures or Conversion Shares as to which an Exchanging Holder is acting
as nominee or agent, the Exchanging Holder makes the representations and
warranties set forth herein on behalf of both itself and the beneficial owner
thereof. Such Exchanging Holder has not been formed for the specific purpose of
acquiring any of the Exchange Shares, the New Debentures or the Conversion
Shares.
7.5 Knowledge. Such Exchanging Holder is aware of the business affairs and
financial condition of the Companies and has acquired sufficient information
about the Companies to reach an informed and knowledgeable decision to acquire
the New Debentures and the Exchange Shares.
7.6 Restricted Securities. Each Exchanging Holder understands that the
Exchange Shares, the New Debentures and the Conversion Shares, when issued, will
not have been registered under the Securities Act by reason of a specific
exemption from the registration provisions of the Securities Act which depends
upon, among other things, the bona fide nature of the investment intent and the
accuracy of the representations of the Exchanging Holders as expressed herein
(without prejudice, however, to the right of such Exchanging Holder at all times
to sell or otherwise dispose of all or any part thereof under a registration
statement to the extent available under the Securities Act or an exemption from
such registration to the extent available under the Securities Act). Such
Exchanging Holder understands that the Exchange Shares, the New Debentures and
the Conversion Shares are 'Restricted Securities' under applicable U.S. federal
and state securities laws and that, pursuant to these laws, such Exchanging
Holder must hold the Exchange Shares, the New Debentures and the Conversion
Shares indefinitely unless they are registered with the Securities and Exchange
Commission and qualified by state authorities, or an exemption from such
registration and qualification requirements is available. Such Exchanging Holder
acknowledges that the Company has no obligation to register or qualify the New
Debentures for resale. Such Exchanging Holder further acknowledges that if an
exemption from registration or qualification is available, it may be conditioned
on various requirements including, but not limited to, the time and manner of
sale, the holding period for the securities, and on requirements relating to the
Company which are outside of the Company's control, and which the Company is
under no obligation and may not be able to satisfy.
7.7 No Public Market. Such Exchanging Holder understands and acknowledges
that no public market now exists for the New Debentures and that the Company has
made no assurances that a public market will ever exist for the New Debentures.
7.8 Legends. Such Exchanging Holder understands that the Exchange Shares and
the New Debentures may bear one or all of the following legends:
(a) 'THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE 'ACT') AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED
UNDER THE ACT OR, IN THE OPINION OF COUNSEL OR BASED ON OTHER WRITTEN
EVIDENCE IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE ISSUER OF
THESE
A-9
SECURITIES, SUCH OFFER, SALE, TRANSFER, PLEDGE OR HYPOTHECATION IS IN
COMPLIANCE THEREWITH OR IS EXEMPT THEREFROM'.
(b) Any legend required by the Blue Sky laws of any state to the extent
such laws are applicable to the shares represented by the certificate so
legended.
7.9 Accredited Investor. Such Exchanging Holder is an accredited investor as
defined in Rule 501(a) of Regulation D promulgated under the Securities Act.
7.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by such Exchanging Holder for inclusion in: (i) the
Registration Statement will, at the time the Registration Statement becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading; and (ii) the Proxy Statement will
not, at the dates mailed to the shareholders of the Company, at the time of the
Shareholders' Meeting in connection with the transactions contemplated hereby
and as of the Closing Date, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. Notwithstanding the foregoing, such Exchanging
Holder makes no representation or warranty with respect to any information
supplied by any of the Companies which is contained in any of the foregoing
documents.
7.11 Information Requested. Such Exchanging Holder or its representatives
have received from the Company all information regarding the Companies that Such
Exchanging Holder or its representatives has requested.
8. Covenants.
8.1 Covenants of the Company and SNI. Each of the Company and SNI hereby
agrees as follows:
(a) Proxy Statement; Registration Statement. As promptly as practicable
after the execution of this Agreement, the Company shall prepare and file
with the Securities and Exchange Commission (the 'SEC') a Proxy Statement
(the 'Proxy Statement') seeking shareholder approval of (i) the Exchange,
the Merger and the New Option Plan and any ancillary or related matters to
the extent deemed necessary or desirable by the Company's Board of Directors
and (ii) a Registration Statement on Form S-3 for re-sale of the Exchange
Shares, the Conversion Shares, the shares of Common Stock issuable upon
conversion of the Fee Amount Debentures and any shares of Common Stock
issued as a result of the anti-dilution protection provided for in Exhibit
'L' or in satisfaction of interest payments due on the New Debentures (the
'Registration Statement'). The Company will respond to any comments of the
SEC, will use its commercially reasonable efforts to have the Registration
Statement declared effective under the Securities Act as promptly as
practicable after such filing, and the Company will cause the Proxy
Statement to be mailed to its shareholders at the earliest practicable time.
As promptly as practicable after the date of this Agreement, the Company
will prepare and file any other filings required to be filed by it under the
Exchange Act, the Securities Act or any other federal, foreign or 'Blue Sky'
or related laws relating to the Merger and the transactions contemplated by
this Agreement (the 'Other Filings'). The Company will notify the Exchanging
Holders promptly upon the receipt of any comments from the SEC or its staff
or any other government officials and of any request by the SEC or its staff
or any other government officials for amendments or supplements to the
Registration Statement, the Proxy Statement or any Other Filing or for
additional information and will supply the Exchanging Holders with copies of
all correspondence between the Company or any of its representatives, on the
one hand, and the SEC or its staff or any other government officials, on the
other hand, with respect to the Registration Statement, the Proxy Statement,
the Merger or any Other Filing. The Company will cause all documents that it
is responsible for filing with the SEC or other regulatory authorities under
this Section 8.1(a) to comply in all material respects with all applicable
requirements of law and the rules and regulations
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promulgated thereunder. Whenever any event occurs which is required to be
set forth in an amendment or supplement to the Proxy, the Registration
Statement or any Other Filing, the Company will promptly inform the
Exchanging Holders of such occurrence and cooperate in filing with the SEC
or its staff or any other government officials, and/or mailing to
shareholders of the Company, such amendment or supplement.
(b) Review of Filings. In addition to the matters described in Section
8.1(a), all requests for additional information made by the SEC or its staff
to the Company will be responded to within ten (10) Business Days of the
receipt thereof. The Exchanging Holders shall be given the opportunity to
review and comment upon the Proxy Statement, the Registration Statement, and
all amendments and supplements thereto, at least three (3) Business Days
prior to filing with the SEC, with such review to be completed and comments
provided within two (2) Business Days. If such review is not completed
within two (2) Business Days, the Closing Deadline shall be extended for one
(1) additional Business Day for each additional day, or portion thereof, of
such review time. The Company will not file the Registration Statement or
the Proxy Statement, or any amendment or supplement thereto, in a form to
which holders of 80% of the Series A Preferred or holders of 50.5% of the
outstanding principal amount of the Old Debentures object.
(c) Restrictions on Use of Cash. From the date of this Agreement through
the Closing Date, each of the Companies shall (i) restrict its respective
cash expenditures to ordinary course transactions, compensation to
currently-employed officers and the expenses directly associated with the
Exchange and (ii) refrain from making any inter-company transfers of cash,
other than the transfer from the Company to Meret of an amount not to exceed
$200,000 for reimbursement of ordinary course expenses; provided, however,
that if the Closing is delayed beyond March 28, 2003, the Company shall have
the right to transfer cash to SNI and Meret in the ordinary course, and
pursuant to the reasonable requirements, of their respective businesses in
an amount not to exceed $1,500,000 per month for SNI and $100,000 per month
for Meret.
(d) SEC and NASDAQ Reporting Requirements. From December 10, 2002
through the Closing Date, the Company shall comply with all applicable SEC
and NASDAQ reporting requirements.
(e) Liens and Leases. The Company has provided to the counsel and
accountants for the Exchanging Holders a list of all liens and leases
affecting the assets of the Companies and, to the extent that the Company
has been able to locate them, copies of such listed documents. The Company
shall promptly deliver to the counsel for the Exchanging Holders copies of
any such documents which the Company obtains after the date hereof.
(f) No Issuances. From December 10, 2002 to the Closing Date, none of
the Companies shall issue any equity, except in connection with the exercise
of Existing Options or conversion of shares of the Company's Series D
Preferred Stock in accordance with the terms thereof.
(g) Board Representation. The Exchanging Holders who are
Debentureholders and the Exchanging Holders who are Series A Preferred
Holders shall each have the right to appoint a new director (for a total of
two possible new directors) to the Board. The Exchanging Holders shall
notify the Company promptly when they have determined to exercise that
right. The Exchanging Holders agree to provide the Company with the
information regarding their appointees that is required to be disclosed in
the Proxy Statement pursuant to applicable securities laws and regulations
promptly following their decision on the appointees and, if the decision is
made prior to the Shareholders' Meeting, in sufficient time for the Company
to include such information in the Proxy Statement or in a supplement
thereto to be mailed to the Shareholders prior to the Shareholders' Meeting.
If the Exchanging Holders exercise that right, the new director(s) would
continue in office until the next regularly scheduled annual meeting of the
Company's shareholders and shall be nominated for re-election at such
meeting.
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(h) Anti-Dilution. The Exchanging Holders will be entitled to the
benefits of the anti-dilution provisions set forth in Exhibit 'L'. The
Company agrees that it will not, within five (5) business days after any
issuance of shares of Common Stock by it as payment of interest on the New
Debentures, engage in a transaction which would result in an anti-dilution
adjustment pursuant to such provisions.
(i) Disclosure. Any material non-public financial or other information
disclosed to the representatives of the Exchanging Holders in the course of
negotiating and documenting the Exchange that remains material shall be
publicly disclosed on or before the Closing Date. Upon the Closing, the
Exchanging Holders will not be subject to any restrictions in trading the
Common Stock as a result of any information previously provided to them by
the Companies.
(j) Draft Tax Returns. The Company shall provide counsel and accountants
for the Exchanging Holders with copies of the draft tax returns of the
Companies prepared by BDO Seidman for prior periods through 2002 that have
not previously been filed, promptly after their receipt by the Company.
(k) Maintain Effectiveness of Registration Statement. The Company shall
maintain in accordance with the terms of the Registration Rights Agreement
substantially in the form attached hereto as Exhibit 'M' (the 'Registration
Rights Agreement') the effectiveness of the Registration Statement with
respect to the Exchange Shares and the shares of Common Stock issuable upon
conversion of the New Debentures for as long as the Exchanging Holders
require the use of an effective registration statement in order to sell such
shares; provided, however, that the Company shall not be obligated to
maintain the effectiveness of the Registration Statement after the date that
is three (3) years after the Closing Date and provided further, upon
delivery of written notice to the Exchanging Holders, the Company may
suspend the effectiveness of the Registration Statement for a reasonable
period of time (not to exceed the shorter of 30 days or the Company's
completion of any Transaction (as defined below), if the Company determines
in good faith that maintaining such effectiveness might interfere with or
adversely affect the negotiations or completion of any transaction
(including without limitation a financing) that is being contemplated by the
Company at the time the right to suspend effectiveness is exercised (a
'Transaction') (any such suspension may not be utilized more than twice, or
for more than a total of 60 days, in any twelve (12) month period). The
Company and the Exchanging Holders agree that (i) the Company and the
Exchanging Holders shall execute and deliver the Registration Rights
Agreement in a timely manner prior to the Closing to permit the timely
filing of the Registration Statement and to permit the Registration
Statement to be declared effective in a timely manner and (ii) no Exchanging
Holder which fails to execute the Registration Rights Agreement shall be
entitled to have any shares of Common Stock registered thereunder or to
assert that the Registration Statement has not been declared effective in
a timely manner.
(l) Best Efforts: The Companies shall use their reasonable best efforts,
including allocating legal and financial resources, to take such actions to
consummate the Exchange in accordance with this Agreement.
(m) Removal of Restrictive Legends. The Company will cooperate with the
Exchanging Holders in removing the restrictive securities act legend from
certificates representing Exchange Shares or Conversion Shares (as well as
shares issued as a result of the anti-dilution provisions of Exhibit 'L' and
shares issued in lieu of cash interest payments in accordance with the New
Debentures) at such time as such legends may be removed. Such legend may be
removed in connection with any sale made in compliance with Rule 144
promulgated under the Securities Act, provided that the Exchanging Holder
delivers to the Company an appropriate Rule 144 representation letter and an
opinion of counsel in form and substance reasonably satisfactory to the
Company to the effect that such sale is in compliance with Rule 144 (the
restrictive legend will be placed on any balance certificate). Such legend
may also be removed at such time as the shares of Common Stock represented
by a particular certificate may be sold pursuant to Rule 144(k), provided
that the Exchanging Holder delivers
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to the Company an appropriate Rule 144(k) representation letter and an
opinion of counsel in form and substance reasonably satisfactory to the
Company to the effect that the restrictive securities act legend may be
removed at that time (provided that the Company reserves the right to impose
stop-transfer instructions or similar restrictions if subsequent to such
removal the Exchanging Holder otherwise become ineligible to rely on Rule
144(k)). In each such instance in which an Exchanging Holder has delivered
the necessary certificates and documents to the Company, the Company shall
cause its transfer agent promptly to supply unlegended certificates to such
Exchanging Holder. In addition, the Company will cooperate with each
Exchanging Holder who sells shares of Common Stock under the Registration
Statement to provide such Exchanging Holder with unlegended certificates in
such denominations and registered in such names as such Exchanging Holder
may request in writing at least three (3) Business Days prior to the
proposed sale (the restrictive legend will be placed on any balance
certificate). Any such request must be accompanied by certificate(s) for the
shares to be sold, together with stock powers executed in blank, with
signatures guaranteed, and such other documentation as may be required by
the Company's transfer agent.
(n) Post-Closing Mergers. The Companies will consummate the Post-Closing
Mergers promptly after obtaining the consents and/or effecting the
refinancings contemplated by the next sentence, but in no event later than
the first anniversary of the Closing Date; provided, however, that, without
limiting the obligation of the Company to consummate the Post-Closing
Mergers by such anniversary, in no event will the merger of SNI into the
Company occur before the merger of Meret into the Company. In addition, at
or prior to the consummation of the Post-Closing Mergers, Meret and SVREH
shall each either (i) obtain the consent of the lenders whose loans are
secured by the applicable Existing Deed of Trust (to the extent such consent
has not been obtained prior to the Closing) to (x) consummation of the
Post-Closing Mergers by Meret or SVREH, as applicable, and (y) the granting
by Meret or SVREH, as applicable, of junior liens on the applicable Real
Property Collateral to secure the Company's obligations under the New
Debentures or (ii) refinance such existing indebtedness on terms that will
permit such actions. The amount of indebtedness that may be incurred in
connection with any such refinancing shall be limited to the sum of the
principal amount refinanced, any prepayment penalty or premium paid in
connection with the refinancing and the reasonable costs and expenses
(including attorneys fees) incurred in connection with the refinancing.
(o) Debt Incurrence. Following the Closing, SNI, Meret and SVREH will
incur indebtedness only in compliance with the terms of the New Debentures.
8.2 Covenants of the Exchanging Holders. Each of the Exchanging Holders
hereby agrees as follows:
(a) Limitation on Transfer. During the period between the execution of
this Agreement and the Closing Date, such Exchanging Holder shall not assign
or transfer any interest in its Old Debentures or Series A Preferred except
in accordance with the terms of those securities or any agreements relating
thereto to a person or entity who executes (i) a joinder to this Agreement
in form and substance reasonably satisfactory to the Company and who thus
becomes an Exchanging Holder and makes the representations, warranties and
covenants of an Exchanging Holder provided for herein, (ii) joinders in form
and substance reasonably satisfactory to the Company to any of the other
Transaction Documents to which the Exchanging Holders are parties, including
the Collateral Agent Agreement and the Registration Rights Agreement, and
(iii) in the case of the Old Debentures, executes a Consent and Waiver.
(b) Lock-up in connection with New Underwriting. Each Exchanging Holder
hereby agrees that during the period of up to 90 days following the
effective date of any registration statement filed by the Company with
respect to a New Underwriting and which becomes effective on or prior to the
first anniversary of the Closing Date, it shall not, to the extent requested
by the managing underwriter(s), offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, any shares of Common Stock or
securities convertible into or exchangeable or exercisable for any shares of
Common Stock, enter into a transaction which
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would have the same effect, or enter into any swap, hedge or other
arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of any of such securities, whether any such
aforementioned transaction is to be settled by delivery of such securities
or such other securities, in cash or otherwise, or publicly disclose the
intention to make any such offer, sale, pledge or disposition, or to enter
into any such transaction, swap, hedge or other arrangement, with, in each
case, any securities of the Company held by it at any time during such
period except Common Stock included in such registration; provided, however,
that the obligations under this Section 8.2(b) are conditioned upon the
executive officers and the directors of the Company entering into similar
agreements with substantially the same restrictions; and provided further
that the obligations set forth in this Section 8.2(b) shall apply only to
Exchanging Holders which at the time of the request of the managing
underwriter(s) beneficially own at least one percent (1%) of the outstanding
shares of Common Stock. Each Exchanging Holder agrees to execute the form of
lock-up agreement requested by the underwriter in a New Underwriting. To
enforce the foregoing covenant, the Company may impose stop-transfer
instructions with respect to the Exchange Shares and the New Debentures of
the Exchanging Holder until the end of such period.
(c) Proxy Statement; Registration Statement. Each of the Exchanging
Holders shall provide promptly to the Company such information concerning
itself, its appointee to the Board of the Company and its plans with respect
to the Company as, in the reasonable judgment of the Company or its counsel,
may be required or appropriate for inclusion in the Proxy Statement and/or
the Registration Statement, or in any amendments or supplements thereto, or
as otherwise may be requested or required by the SEC, and to cause its
counsel to cooperate with the Company's counsel in the preparation of the
Proxy Statement and the Registration Statement.
(d) Securities. At the Closing, the Exchanging Holders shall deliver to
SNI the documents and instruments described in Section 9.3(c).
8.3 Covenants of the Company, SNI and certain of the Exchanging Holders.
Exchanging Holders who are plaintiffs in the Series A Litigation, SNI and the
Company shall stay all proceedings in the Series A Litigation until the earlier
of (i) the Closing or (ii) the termination of this Agreement in accordance with
Section 11. Concurrently with the Closing, the Exchanging Holders who are
plaintiffs in the Series A Litigation and SNI and the Company shall dismiss the
Series A Litigation with prejudice against such Exchanging Holders, SNI, the
Company and individual defendants who are currently officers and directors of
the Company and dismiss the Series A Litigation without prejudice as to other
individual defendants.
9. Conditions to the Closing.
9.1 Conditions to Each Party's Obligations to Close. The respective
obligations of each party to effect the Exchange and other transactions
contemplated hereby are subject to the fulfillment on or before the Closing Date
of the following:
(a) No Injunction. As of the Closing, there shall be no injunction, stay
or restraining order in effect with respect to the Exchange or any of the
other transactions provided for herein.
(b) Registration Statement Effective; Proxy Statement. The SEC shall
have declared the Registration Statement effective. No stop order suspending
the effectiveness of the Registration Statement or any part thereof shall
have been issued and no proceeding for that purpose, and no similar
proceeding in respect of the Proxy Statement shall have been initiated or
threatened in writing by the SEC.
(c) Third Party Consents. All necessary or appropriate third party and
governmental waivers and consents to the Exchange and all transactions
provided for herein, shall have been received, except for any such waivers
or consents with respect to which the failure to receive would not have a
material adverse effect on the Companies or on the ability of the Company to
consummate the transactions contemplated hereby or materially impair its
ability to perform its obligations hereunder.
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(d) Existing Shareholders. Holders of the Common Stock holding the
requisite percentage required by the Company's Articles of Incorporation or
Bylaws or by applicable law (including the rules and regulations of NASDAQ)
to approve the Exchange, the Merger, the New Option Plan and the other
matters submitted by the Board for approval by such shareholders at the
Shareholders' Meeting shall have approved such matters.
(e) Series A Litigation. The Company and the Series A Preferred Holders
who are parties to the Series A Litigation shall have dismissed the
Series A Litigation in accordance with Section 8.3.
(f) Litigation with UPC. UPC and SNI shall have settled the UPC
Litigation, and such Litigation shall have been dismissed with prejudice.
9.2 Conditions to the Obligations of the Exchanging Holders. The obligations
of the Exchanging Holders to close the Exchange and the other transactions
contemplated hereby are subject to the fulfillment on or before the Closing Date
of the following:
(a) Accuracy of Representations. The representations and warranties made
by the Companies in this Agreement shall have been accurate in all respects
as of the date of this Agreement (except for the representations and
warranties set forth in Section 6.3, which shall be accurate in all material
respects) and (except to the extent that any representation and warranty is
made as of a specified date) shall be accurate in all respects as of the
Closing Date as if made on the Closing Date (except for the representations
and warranties set forth in Section 6.3, which shall be accurate in all
material respects).
(b) Performance. The covenants and obligations that the Company or SNI
is required to comply with or to perform pursuant to this Agreement at or
prior to the Closing shall have been complied with and performed in all
material respects.
(c) Exchanging Holders shall have received:
(i) the Exchange Shares and the New Debentures, together with such
other documents and instruments as are required by the New Debentures in
the amounts to be set forth in Exhibit 'K'.
(ii) With respect to any Real Property Collateral as to which the
prior lienholder has consented to the recording of a Deed of Trust,
commitments to issue policies of title insurance on such Deeds of Trust
in amount, form and from an issuer reasonably satisfactory to Exchanging
Holders.
(iii) Opinions of the Company's counsel (including local counsel as
requested) substantially in the forms attached hereto as Exhibit 'N'.
(d) Transaction Documents. Executed originals of each of the Transaction
Documents (other than this Agreement, as to which the Collateral Agent shall
receive a copy) shall have been executed by the relevant Companies and
delivered to the Collateral Agent or the appropriate party as listed in the
Schedule of Documents.
(e) Fees and Expenses. The Company shall have paid the legal and
accounting fees and expenses provided for in Section 13.4.
9.3 Conditions to the Obligations of the Company.
(a) Accuracy of Representations. The representations and warranties made by
the Exchanging Holders in this Agreement shall have been accurate in all
material respects as of the date of this Agreement and shall be accurate in all
material respects as of the Closing Date as if made on the Closing Date.
(b) Performance. The other covenants and obligations that the Exchanging
Holders are required to comply with or to perform pursuant to this Agreement at
or prior to the Closing shall have been complied with and performed in all
material respects.
(c) Delivery of Securities. Each Exchanging Holder shall have delivered to
the Company (i) the stock certificates representing any shares of Series A
Preferred owned by it (or such affidavits and indemnities for lost stock
certificates, Old Debentures or Old Debenture Warrants as
A-15
are required by the terms of the documents governing such instruments or, in the
absence of such terms, as may be reasonably required by the Company), (ii) any
Old Debentures owned by it and (iii) any Old Debenture Warrants owned by it,
together, in each case, with stock or bond powers executed in blank or a letter
of transmittal in form and substance satisfactory to the Company and/or such
other documents as may be reasonably necessary to effect the Exchange and, in
each case, free and clear of any liens, security interests, assignments, claims
or encumbrances, whether or not perfected. The securities delivered as described
herein shall represent all of such outstanding securities.
9.4 Satisfaction of Conditions for the Benefit of Exchanging Holders. With
respect to any condition for the benefit of the Exchanging Holders that requires
their determination that such condition has been satisfied, the Exchanging
Holders shall be deemed to have agreed that such condition has been satisfied if
the Exchanging Holders holding at least (a) eighty percent (80%) of the shares
of Series A Preferred and (b) a majority of the outstanding principal amount of
the Old Debentures deliver the documents and instruments necessary to close
pursuant to Section 9.3(c) or otherwise indicate they are prepared to close the
Exchange.
10. Closing; Closing Deadline. The closing of the Exchange (the 'Closing')
shall occur as soon as possible after the satisfaction or waiver of the
conditions set forth in Section 9. The parties shall use reasonable efforts to
cause such conditions to be satisfied on or before March 28, 2003 to the extent
possible and in any event on or before May 30, 2003 or such extended date as may
be agreed in a writing signed before such date by the Company, SNI and
Exchanging Holders representing a majority of the principal amount of the Old
Debentures and eighty percent (80%) of the shares of Series A Preferred held by
the Exchanging Holders (the 'Closing Deadline').
11. Termination.
11.1 By Mutual Consent. This Agreement may be terminated at any time prior
to the Closing Date by the mutual written consent of the Company, SNI and
Exchanging Holders holding at least (a) eighty percent (80%) of the shares of
Series A Preferred and (b) a majority of the outstanding principal amount of the
Old Debentures.
11.2 By the Exchanging Holders. This Agreement may be terminated at any time
prior to the Closing Date by written notice to the Company and SNI by Exchanging
Holders holding at least (a) eighty percent (80%) of the shares of Series A
Preferred and (b) eighty percent (80%) of the outstanding principal amount of
the Old Debentures, if such Exchanging Holders determine that (i) between
December 10, 2002 and the Closing Date there has been a Material Adverse Change
or (ii) the conditions to the consummation of the Exchange set forth in
Section 9 hereof are not reasonably likely or capable of being satisfied at or
prior to the Closing Deadline (other than as result of a breach by the
Exchanging Holders of any of their representations, warranties or covenants set
forth in this Agreement).
11.3 Closing Deadline. If the Closing does not occur by the Closing
Deadline, this Agreement and the Letter of Intent shall be null, void and of no
effect. The execution of this Agreement and the Letter of Intent by the parties
hereto and thereto shall not waive, release or prejudice the rights, claims or
defenses of any person and shall not be deemed to be an admission against
interest of any person (including the Companies and/or any Exchanging Holder);
provided, however, that the Company and SNI shall pay and shall remain liable to
pay the legal and accounting fees and expenses of the Exchanging Holders of
Series A Preferred and the Exchanging Holders of the Old Debentures which fees
and expenses are incurred on or prior to the Closing Deadline, as set forth in
Section 13.4 of this Agreement, and such obligation to pay shall survive the
Closing and the Closing Deadline.
12. Releases.
12.1 Companies. Each of the Companies hereby agrees that, effective as of
the Closing, the Companies shall release and discharge each of the Exchanging
Holders and each of the Exchanging Holders' respective shareholders, partners,
members, directors, officers, agents, employees, accountants and attorneys from
any and all claims, debts, liabilities, obligations and causes of action of
every nature and character, whether known or unknown, now existing or
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hereafter arising, now owned or hereafter acquired (collectively 'Claims'),
which any of the Companies now has or may hereafter claim to have by reason of
any matter, fact or thing whatsoever occurred, done or admitted to be done,
prior to the Closing Date; provided, however, that the release excludes Claims
against the defendants as to whom a dismissal without prejudice will be filed in
the Series A Litigation.
12.2 Exchanging Holders. Each of the Exchanging Holders hereby agrees that,
effective as of the Closing, such Exchanging Holder shall release and discharge
each of the Companies and each of the Companies' respective shareholders,
partners, members, officers, directors, agents, employees, accountants and
attorneys from any and all Claims which any of the Exchanging Holders now has or
may hereafter claim to have by reason of any matter, fact or thing whatsoever
occurred, done or admitted to be done, prior to the Closing Date; provided,
however, that the release excludes Claims against the defendants as to whom a
dismissal without prejudice will be filed in the Series A Litigation.
12.3 Section 1542 Waiver. Each party expressly WAIVES any and all rights
under Section 1542 of the California Civil Code, or any other federal, state, or
local statutory rights or rules, or principles of common law or equity similar
to Section 1542 (each, a 'similar provision') with respect to any Claims
released by it in this Agreement. Section 1542 provides as follows:
A general release does not extend to claims which the creditor does not know
or suspect to exist in his favor at the time of executing the release, which
if known by him must have materially affected his settlement with the debtor.
13. Miscellaneous.
13.1 Governing Law. This Agreement shall be governed in all respects by the
internal laws of the State of New York without regard to principles of conflicts
of law or choice of law (other than Section 5-1401 of the New York General
Obligations Law).
13.2 Public Disclosure. Subject to Section 8.1(i), the timing and contents
of any announcements, press releases, or other public statements concerning the
transactions contemplated by the Transaction Documents and related matters will
occur upon and be determined only by mutual agreement and consent of the
parties, subject to SEC and NASDAQ disclosure rules. Each party to this
Agreement shall give reasonable advance notice to all other parties of any
disclosure such party is legally compelled to make. No party shall unreasonably
withhold approval of any such disclosure.
13.3 Additional Documents. The parties agree to take any such actions and
execute any additional documentation if necessary or desirable to carry out the
purposes of this Agreement.
13.4 Fees and Expenses. The Company shall pay all reasonable legal and
accounting expenses and fees in connection with the Exchange, and in connection
with the negotiation and preparation of the Transaction Documents, the Term
Sheet, the Letter of Intent and the Consent and Waiver, and the taking of the
actions contemplated thereby, which fees and expenses are incurred through the
earlier of the Closing Date or the Closing Deadline, for Winston & Strawn, the
law firm for the Consenting Holders of the Old Debentures, White & Case, LLP,
the law firm for the Consenting Holders of Series A Preferred, and Freeman &
Mills, the accounting firm which may perform services for either or both of the
law firms for the Old Debentures and/or Series A Preferred. The Company shall
also be responsible for its own fees and expenses incurred in connection
therewith.
13.5 Severability. If any term or provision of this Agreement is determined
by a court of competent jurisdiction to be invalid, illegal or incapable of
being enforced by any rule of law or public policy, all other terms and
provisions of this Agreement shall nevertheless remain in full force and effect
so long as the economic or legal substance of the transactions contemplated
hereby is not affected in any manner materially adverse to any party. Upon
determination that any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to attempt to agree on a modification of this Agreement so as to
effect the original intent of the parties as closely as possible to the fullest
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extent permitted by law in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled to the greatest extent possible.
13.6 Entire Agreement. This Agreement and the other Transaction Documents
represent the entire agreement and understandings between the parties concerning
the Exchange and the other matters described therein and supersedes and replaces
any and all prior agreements and understandings, specifically including, but not
limited to, the Letter of Intent and the Term Sheet.
13.7 No Oral Modification. This Agreement may only be amended in writing
signed by the Company and by Exchanging Holders holding at least (a) a eighty
percent (80%) of the shares of Series A Preferred and (b) a majority of the
outstanding principal amount of the Old Debentures; provided, however, that
Sections 2, 3, 4 and 5 hereof and this proviso may only be amended in writing
signed by the Company and by Exchanging Holders holding at least (a) eighty
percent (80%) of the shares of Series A Preferred and (b) eighty percent (80%)
of the outstanding principal amount of the Old Debentures.
13.8 No Strict Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement and the other Transaction Documents.
In the event an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties, and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any of the provisions of this Agreement.
13.9 Notices. All notices, requests and other communications hereunder shall
be in writing and shall be deemed to have been duly given at the time of receipt
if delivered by hand, by reputable overnight courier or by facsimile
transmission (with receipt of successful and full transmission) or three (3)
days after being mailed, registered or certified mail, return receipt requested,
with postage prepaid to the applicable parties hereto at the address stated
below or if any party shall have designated a different address or facsimile
number by notice to the other party given as provided above, then to the last
address or facsimile number so designated.
If to the Company or SNI:
Sorrento Networks Corporation
9990 Mesa Rim Road
San Diego, CA 92121
Facsimile: (310) 479-2959
Attn: Chief Financial Officer and General Counsel
with a copy to:
Irell & Manella LLP
1800 Avenue of the Stars, Suite 900
Los Angeles, CA 90067
Facsimile: (310) 203-7199
Attn: J. Christopher Kennedy, Esq.
If to the Exchanging Holders:
To the addresses listed on Exhibit 'O'
with copies to:
Winston & Strawn
101 California Street, Suite 3900
San Francisco, CA 94111
Facsimile: (415) 591-1400
Attn: Margaret Sheneman, Esq.
and
Winston & Strawn
333 South Grand Avenue
Los Angeles, CA 90071-1543
Facsimile: (213) 615-1750
Attn: Adam G. Spiegel, Esq.
A-18
and
White & Case LLP
1155 Avenue of the Americas
New York, NY 10036
Facsimile: (212) 354-8113
Attn: Evan C. Hollander, Esq.
13.10 Survival of Covenants. The covenants of the parties set forth in this
Agreement shall survive the consummation of the Exchange to the extent necessary
to serve their essential purposes.
13.11 Certain Distributions. If an Exchanging Holder is an investment fund
which is excluded from the definition of 'investment company (as that term is
defined in Section 3(a)(1) of the Investment Company Act of 1940, as amended) by
the exemptions provided by Section 3(c)(1) or Section 3(c)(7) (without regard to
Section 3(c)(7)(B)) of that act, and within sixty (60) days following the
Closing such Exchanging Holder distributes its Exchange Shares and Exchange
Debentures to such Exchanging Holder's investors in accordance with the terms
of such Exchanging Holder's governing documents, then such distributees may
become Exchanging Holders for all purposes under this Agreement and the other
Transaction Documents by delivering to the Company, within ten (10) business
days following such distribution, the joinders provided for in Section 8(2)(a).
Each Exchanging Holder which is an investment fund of the type described in
the first sentence of this section represents and warrants to the Companies
that all of its investors are accredited investors (as defined in Rule 501(a)
of Regulation D promulgated under the Securities Act) and that it has a
reasonable basis for making such representation and warranty.
13.12 Counterparts. This Agreement may be executed in one or more
counterparts each of which shall be deemed an original and all of which together
shall constitute one instrument.
[NEXT PAGE IS SIGNATURE PAGE]
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IN WITNESS WHEREOF the parties have executed this Agreement on the date set
forth below.
'COMPANY'
Dated: , 200 Sorrento Networks Corporation,
a New Jersey corporation
By: ...................................................
Name: .................................................
Its: ..................................................
'SNI'
Dated: , 200 Sorrento Networks, Inc.,
a Delaware corporation
By: ...................................................
Name: .................................................
Its: ..................................................
By executing the foregoing Agreement, the undersigned hereby agree to the
provisions of such Agreement that are applicable to them.
'MERET'
Dated: , 200 Meret Communications, Inc.
a California corporation
By: ...................................................
Name: .................................................
Its: ..................................................
'SVREH'
Dated: , 200 Sorrento Valley Real Estate Holdings, LLC,
a California limited liability corporation
By: ...................................................
Name: .................................................
Its: ..................................................
'DEBENTUREHOLDERS'
Dated: , 200
By: ...................................................
Name: .................................................
Its: ..................................................
Dated: , 200
Name: .................................................
'SERIES A PREFERRED HOLDERS'
Dated: , 200
By: ...................................................
Name: .................................................
Its: ..................................................
Dated: , 200
Name: .................................................
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REFERENCE SECTION IN EXCHANGE AGREEMENT EXHIBITS TO EXCHANGE AGREEMENT
--------------------------------------- ------------------------------
Definition................................... 'A' Form of Collateral Agent Agreement
Definition................................... 'B' Form of Consent and Waiver
Definition................................... 'C' Form of Deed of Trust
Definition................................... 'D' Letter of Intent
Definition................................... 'E' Form of New Debentures
Definition................................... 'F' Form of Pledge Agreement
Definition................................... 'G' Form of Secured Guaranties
Definition................................... 'H' Form of Security Agreement
Definition................................... 'I' Schedule of Documents
Definition................................... 'J' Form of Warrant
'SS' 2....................................... 'K' Final Determination of Ownership of Exchange
Shares and Conversion Shares (assuming
Conversion of Exchange Debentures)
'SS' 8.1(h).................................. 'L' Anti-Dilution Protection
'SS' 8.1(k).................................. 'M' Form of Registration Rights Agreement
'SS' 9.2(c)(iii)............................. 'N' Forms of Legal Opinions
'SS' 13.9.................................... 'O' Addresses of Exchanging Holders
REFERENCE SECTION IN EXCHANGE AGREEMENT SCHEDULES TO EXCHANGE AGREEMENT
--------------------------------------- -------------------------------
'SS' 2....................................... 2 Calculation of Ownership Exchange Shares and New
Debentures (Estimate based on Assumptions)
'SS' 3....................................... 3 List of Funding Series A Holders and Percentage of
Expenses Funded by Each.
'SS' 6....................................... 6 Disclosure Schedule
Definition................................... 6.3 Existing Options
'SS' 7.3..................................... 7.3 Ownership of Securities
A-21
EXHIBIT E
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY
NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF
(A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B) AN OPINION
OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS SOLD PURSUANT
TO RULE 144 UNDER SAID ACT. THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A
BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY THE SECURITIES. THE
OUTSTANDING PRINCIPAL AMOUNT REPRESENTED BY THIS DEBENTURE MAY BE LESS THAN THE
AMOUNT STATED ON THE FACE HEREOF PURSUANT TO SECTION 9 HEREOF.
No. [ ] $[ ]
SORRENTO NETWORKS CORPORATION
7.5% SENIOR CONVERTIBLE DEBENTURE DUE AUGUST 2, 2007
THIS DEBENTURE (this 'Debenture') is one of a duly authorized issue of
Debentures of SORRENTO NETWORKS CORPORATION, a corporation duly organized and
existing under the laws of the State of Delaware (the 'Company'), designated as
its 7.5% Senior Convertible Debentures Due August 2, 2007, in an aggregate
original principal amount of [ ] U.S. Dollars (U.S. $[ ]) issued
pursuant to the Exchange Agreement (as defined below) (collectively, the
'Debentures').
FOR VALUE RECEIVED, the Company promises to pay to [ ], the holder
hereof, or its order (the 'Holder'), the principal sum of [ ] U.S. Dollars
($[ ]), or such amount thereof as shall then be outstanding, on August 2,
2007 (the 'Maturity Date'), and to pay interest ('Interest Payments') on the
principal sum outstanding from time to time under this Debenture ('Outstanding
Principal Amount'), at the rate of 7.5% per annum which shall be cumulative,
accrue daily from the date of issuance of this Debenture, be calculated on the
basis of a year composed of twelve 30-day months, and be due and payable on the
first day of each calendar quarter following the date of issuance of this
Debenture commencing on [ ], 2003 (each, an 'Interest Payment Date'). If an
Interest Payment Date is not a Business Day, then the Interest Payment shall be
due and payable on the Business Day immediately following such Interest Payment
Date. Interest Payments shall be payable in cash (each such cash Interest
Payment being referred to herein as a 'Cash Interest Payment') or, at the option
of the Company, in cash and/or one or more of the Non-Cash Payment Methods to be
elected by the Company upon not less than three (3) Business Days' prior written
notice (such notice to detail the allocation between a Cash Interest Payment and
one or more of the Non-Cash Payment Methods available with respect to the
Interest Payment due on such Interest Payment Date); provided, that at all times
prior to the Consolidation Date, Interest Payments shall be made by one or more
of the Non-Cash Payment Methods to be so elected by the Company unless, in such
notice, the Company notifies Holder of its intent to make a Cash Interest
Payment.
Notwithstanding the foregoing, the Company shall be required to make Cash
Interest Payments (a) if the Company fails to give the notice of election of
Interest Payment on a timely basis; (b) if any event constituting a Triggering
Event or an Event of Default, or an event that with the passage of time and
without being cured would constitute a Triggering Event or Event of Default, has
occurred and is continuing on the Interest Payment Date or any date which is
within ten (10) Business Days prior to the Interest Payment Date, unless
otherwise consented to in writing by the Holder or Required Holders (in either
event constituting consent by the Holder); or (c) if, on such Interest Payment
Date or any date which is within ten (10) Business Days prior to
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such Interest Payment Date, a Registration Statement is not effective and
available for the resale by the Holder of all Registerable Securities to be
issued on such Interest Payment Date (provided that the Registration Statement
shall not be deemed to be effective and available to the extent an Allowable
Grace Period is in effect). Any accrued and unpaid Cash Interest Payments which
are not paid within two (2) Business Days of such accrued and unpaid Cash
Interest Payments' Interest Payment Date shall bear interest from such Interest
Payment Date at the rate of the lesser of (i) 10.5% per annum or (ii) the
maximum amount of interest allowed to be charged by applicable law for
commercial transactions of this nature from such Interest Payment Date until the
same is paid in full (the 'Default Interest'). Interest Payments will be paid to
the person in whose name this Debenture (or one or more predecessor Debentures)
is registered on the records of the Company regarding registration and transfers
of the Debentures (the 'Debenture Register'). When issuing Interest Payment
Shares, the Company will not issue any fraction of a share of Common Stock. If
any such issuance (but for the preceding sentence) would result in the issuance
of a fraction of a share of Common Stock, the Company shall round such fraction
of a share of Common Stock up or down to the nearest whole share.
This Debenture is subject to the following additional provisions:
1. Exchange. The Debentures are exchangeable for an equal aggregate
principal amount of Debentures of different denominations, as requested by the
Holder surrendering the same. No service charge will be charged to the Holder
for such registration transfer or exchange.
2. Transfers. This Debenture has been issued subject to investment
representations of the original purchaser hereof and may be transferred or
exchanged in the United States only in compliance with the Securities Act of
1933, as amended (the 'Act'), and applicable state securities laws. Prior to due
presentment for transfer of this Debenture, the Company may treat the person in
whose name this Debenture is duly registered on the Company's Debenture Register
as the owner hereof for the purpose of receiving payment as herein provided and
all other purposes, whether or not this Debenture be overdue, and the Company
shall not be affected by notice to the contrary.
3. Definitions. For purposes of this Debenture, the location of defined
terms in this Debenture is set forth on the Index of Terms attached hereto and
the following terms shall have the following meanings:
'Allowable Grace Period' shall mean any period during which the Company
may, under the provisions of the Registration Rights Agreement, suspend the
effectiveness of the Shelf Registration Statement (as defined in the
Registration Rights Agreement) without violating the provisions of the
Registration Rights Agreement.
'Bloomberg' shall mean Bloomberg Financial Services, L.P. or any other
similar financial reporting service as may be selected from time to time by
the Company and Required Holders.
'Business Day' shall mean any day other than Saturday, Sunday or any
other day on which commercial banks in The City of New York are authorized
or required by law to remain closed.
'Change of Control' shall mean: (i) the consolidation, merger or other
business combination of the Company with or into another Person (other than
(A) a consolidation, merger or other business combination in which holders
of the Company's voting power necessary to elect a majority of the members
of its board of directors immediately prior to the transaction continue
after the transaction to hold, directly or indirectly, the voting power
necessary to elect a majority of the members of the board of directors (or
their equivalent if other than a corporation) of the surviving entity or
entities, or (B) pursuant to a migratory merger effected solely for the
purpose of changing the jurisdiction of incorporation of the Company),
(ii) the sale or transfer of all or substantially all of the Company's
assets, or (iii) a purchase, tender or exchange offer made to and accepted
by the holders, directly or indirectly, of the Company's voting power
necessary to elect a majority of the members of its board of directors.
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'Closing Sale Price' shall mean, for any security as of any date, the
last closing trade price for such security on the Principal Market as
reported by Bloomberg, or if the Principal Market begins to operate on an
extended hours basis, and does not designate the closing trade price, then
the last trade price at 4:00 p.m., New York City Time, as reported by
Bloomberg, or if the foregoing do not apply, the last closing trade price of
such security in the over-the-counter market on the electronic bulletin
board for such security as reported by Bloomberg, or, if no last closing
trade price is reported for such security by Bloomberg, the last closing ask
price of such security as reported by Bloomberg, or, if no last closing ask
price is reported for such security by Bloomberg, the average of the highest
bid price and the lowest ask price of any market makers for such security as
reported in the 'pink sheets' by the National Quotation Bureau, Inc. If the
Closing Sale Price cannot be calculated for such security on such date on
any of the foregoing bases, the Closing Sale Price of such security on such
date shall be the fair market value as mutually determined by the Company
and Required Holders. If the Company and Required Holders are unable to
agree upon the fair market value of the Common Stock, then such dispute
shall be resolved pursuant to Section 8 hereof. All such determinations
shall be subject to adjustments from time to time as provided in Section 7
hereof.
'Collateral' shall mean the property covered by Collateral Documents and
any other property, real or personal, tangible or intangible, now existing
or hereafter acquired, that may at any time be or become subject to a lien
to secure payment and performance of the Obligations.
'Collateral Agent' shall mean [ ].
'Collateral Documents' shall mean the Pledge Agreements, the Security
Agreements, the Deeds of Trust (if any), and all similar agreements entered
into granting a lien upon property to secure payment and performance of the
Obligations.
'Collateral Agent Agreement' shall mean the Collateral Agent Agreement
of even date herewith by and among Collateral Agent and the holders of the
Debentures, as the same may be amended, restated, supplemented or otherwise
modified from time to time.
'Common Stock' shall mean (i) the Common Stock, no par value, of the
Company and (ii) any capital stock into which such Common Stock shall have
been changed or any capital stock resulting from a reclassification of such
Common Stock and all other stock of any class or classes (however
designated) of the Company the holders of which have the right, without
limitation as to amount, either to all or to a share of the balance of
current dividends and liquidating dividends after the payment of dividends
and distributions on any shares entitled to preference.
'Conversion Price' shall mean [ ] Dollars ($[ ]), subject to
adjustment as provided in Section 7 hereof.
'Deeds of Trust' shall mean the Deeds of Trust on the Real Property to
be delivered in accordance with the provisions of Section 16(a) hereof that
grant a lien upon the Real Property as security for the Obligations, as each
may be amended, supplemented. restated or otherwise modified from time to
time.
'Exchange Agreement' shall mean the Exchange Agreement dated as of
[ ], 2003, between Sorrento Networks Corporation, a New Jersey
corporation ('SNC'), SNI, each holder of the SNC's outstanding Debentures
and Debenture Warrants as of the date thereof, and each holder of SNI's
Series A Preferred as of the date thereof, as the same may be amended,
supplemented, restated or otherwise modified from time to time.
'Interest Conversion Price' shall mean with respect to any Interest
Payment Date, the Closing Sale Price of the Common Stock on the trading day
immediately preceding such Interest Payment Date.
'Issuance Date' shall mean [ ], 2003.
A-24
'Lien' shall mean any mortgage or deed of trust, pledge, hypothecation,
assignment, deposit arrangement, lien, charge, claim, security interest,
easement or encumbrance, or preference, priority or other security agreement
or preferential arrangement of any kind or nature whatsoever (including any
lease or title retention agreement, any financing lease having substantially
the same economic effect as any of the foregoing, and the filing of, or
agreement to give, any financing statement perfecting a security interest
under the Uniform Commercial Code or comparable law of any jurisdiction).
'Majority Holders' shall mean, at any time, holders of the Debentures
holding more than 50% of the Outstanding Principal Amount of Debentures at
such time.
'Meret' shall mean Meret Optical Communications, Inc., a California
corporation.
'NASDAQ' shall mean any tier of the Nasdaq Stock Market operated by The
Nasdaq Stock Market, Inc., a wholly owned subsidiary of the National
Association of Securities Dealers, Inc.
'Net Proceeds' shall mean the cash proceeds of any asset disposition net
of (a) reasonable and customary transaction costs and expenses properly
attributable to such transaction and payable by the seller in connection
therewith (in each case, paid to non-Affiliates), (b) transfer taxes,
(c) amounts payable to holders of senior Liens (to the extent such Liens
constitute Permitted Liens), if any, and (d) an appropriate reserve for
income taxes in accordance with GAAP in connection therewith.
'Non-Cash Payment Methods' shall mean the making of an Interest Payment
on any Interest Payment Date pursuant to this Debenture by either
(i) including such Interest Payment in the Outstanding Principal Amount by
the issuance of additional Debentures (A) in an amount not to exceed
thirty-three and one-third percent (33.3%) of such Interest Payment due on
such date, and (B) in an aggregate amount for all such Interest Payments not
to exceed the aggregate amount of two Interest Payments, or (ii) making such
Interest Payment (or such portion thereof as is not paid in cash and not
paid in kind pursuant to the preceding clause (i)) in fully paid and non
assessable shares of Common Stock ('Interest Payment Shares'), in an amount
equal to the quotient of the amount of such Interest Payment to be paid in
shares of Common Stock divided by the Interest Conversion Price on the
applicable Interest Payment Date.
'Non-Cash Proceeds' shall mean the non-cash proceeds received in
connection with asset sale permitted under Section 20.1(d)(ii) of the
Security Agreements.
'Obligations' shall mean all of the indebtedness, obligations and
liabilities of Company to the holders of the Debentures, individually or
collectively, whether direct or indirect, joint or several, absolute or
contingent, due or to become due, now existing or hereafter arising under or
in respect of the Debentures, the Collateral Documents, and all other
written matter whether heretofore, now or hereafter executed by or on behalf
of Company, or any employee of Company, and delivered in connection with the
transactions contemplated thereby.
'Organic Change' shall mean any recapitalization, reorganization,
reclassification, consolidation, merger, sale of all or substantially all of
the Company's assets to another Person or other transaction which is
effected in such a way that holders of Common Stock are entitled to receive
(either directly or upon subsequent liquidation) stock, securities or assets
with respect to or in exchange for Common Stock.
'Permitted Credit Line' shall mean a revolving line of credit in favor
of either Company or SNI in a minimum commitment amount of no less than
$1,000,000 and a maximum commitment amount of no more than $5,000,000 (or,
with the prior written consent of Majority Holders, $10,000,000), secured by
all the assets of Company (but expressly excluding the Real Property, the
Primary Preferred, and the Non-Cash Proceeds, if any).
'Permitted Equipment Financing' shall mean debt incurred in the ordinary
course of business with respect to the acquisition or capitalized lease of
production equipment and related tangible assets in an aggregate principal
amount outstanding not to exceed (i) at all
A-25
times prior to the Consolidation Date, $1,000,000 and (ii) at all times on
and after the Consolidation Date, $5,000,000; provided, that any Liens
securing any such debt shall be limited to the assets acquired thereby.
'Permitted Liens' shall mean (i) Liens on property of a Person existing
at the time such Person is merged into or consolidated with the Company so
long as such Liens were not incurred in anticipation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (ii) Liens limited to certain
property existing at the time of their acquisition by the Company, provided
that such Liens were not incurred in anticipation of such acquisition;
(iii) Liens to secure (or encumbering deposits or bonds securing) the
performance of workers compensation, unemployment insurance, social security
and other statutory or regulatory obligations (including any Lien securing
guarantees or reimbursement obligations relating to letters of credit issued
in connection therewith) incurred in the ordinary course of business;
(iv) Liens for taxes, levies, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings; provided that any reserve or other appropriate
provision as shall be required in conformity with GAAP shall have been made
therefor; (v) Liens securing stay and appeal bonds or judgment Liens in
connection with any judgment not giving rise to an Event of Default under
Section 20(a) hereof; (vi) statutory Liens of landlords and Liens of
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and
other Liens imposed by law incurred in the ordinary course of business;
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; (vii) Liens
incurred or deposits made in the ordinary course of business to secure the
performance of tenders, surety bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(including any Lien securing reimbursement obligations relating to letters
of credit issued in connection therewith); (viii) easements, rights-of-way,
zoning restrictions, reservations, encroachments and other similar
encumbrances in respect of real property that do not materially impair the
Company's use or the value of such real property; (ix) Liens to secure (or
encumbering deposits securing) obligations arising from warranty or
contractual service obligations of the Company incurred in the ordinary
course of business, including right of offset and set-off; (x) Liens (solely
on the assets thereby acquired) securing Permitted Equipment Financing;
(xi) Liens on assets (other than the Real Property, the Primary Preferred,
and the non-cash proceeds) securing a Permitted Credit Line; and
(xii) Liens existing on the date hereof (and any Liens securing the
refinancing of debt secured by such Liens) consisting of deeds of trust,
assignments of rent, fixture filings and security agreements pertaining to
the Real Property.
'Person' shall mean an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
'Pledge Agreements' shall mean (a) the Pledge Agreement of even date
herewith executed by Company in favor of Collateral Agent, pursuant to which
company is pledging as of the Issuance Date, the Primary Preferred and all
shares of SNI's Series A Preferred owned by Company, and (b) the Pledge
Agreement of even date herewith executed by Meret in favor of Collateral
Agent, pursuant to which Meret is pledging, as of the Issuance Date, 100% of
the outstanding common stock of SNI, as each may be amended, supplemented,
restated or otherwise modified from time to time.
'Primary Preferred' shall mean the [ ] shares of Series B Preferred
Stock, par value $0.001 per share, represented by certificate No.[ ]
and pledged by the Company to Collateral Agent under and identified in the
schedules to the Company's Pledge Agreement, including all additions thereto
and proceeds thereof, together with all of the Company's now existing or
hereafter arising rights and interests in or under any related Preferred
Stock Purchase Agreement, Co-Sale Agreement, Holders Agreement, and Investor
Rights Agreement, and all amendments and modifications thereto and thereof.
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'Principal Market' shall mean NASDAQ or, if the Common Stock is not
traded on NASDAQ, then the principal securities exchange or trading market
for the Common Stock.
'Real Property' shall mean the fee interest in the real estate located
at (i) 9990 Mesa Rim Road, San Diego, California, and (ii) 9940 Mesa Rim
Road, San Diego, California, together with all now existing or hereafter
arising rights and interests in buildings, improvements, fixtures, access,
easements, rents, and profits related to or located on said real estate.
'Registration Rights Agreement' shall mean that certain Registration
Rights Agreement between the Company and the initial holders of the
Debentures relating to the filing of a registration statement covering the
resale of the shares of Common Stock issuable upon conversion of the
Debentures and payment of Interest Payment Shares, as such agreement may be
amended from time to time as provided in such agreement.
'Registration Securities' shall mean those shares of the Company's
Common Stock subject to the Shelf Registration Statement, including all
Common Stock issued by the Company pursuant to a Non-Cash Payment Method or
pursuant to Section 4 hereof, as all provided for in the Registration Rights
Agreement.
'Required Holders' shall mean, at any time, holders of the Debentures
holding 66 2/3% or more of the Outstanding Principal Amount of Debentures at
such time.
'Security Agreements' shall mean (a) the Security Agreement of even date
herewith executed by Company in favor of Collateral Agent, (b) the Security
Agreement of even date herewith executed by Meret in favor of Collateral
Agent, and (c) the Security Agreement of even date herewith executed by SNI
in favor of Collateral Agent, as each may be amended, restated, supplemented
or otherwise modified from time to time.
'Shelf Registration Statement' shall mean that certain Shelf
Registration Statement provided for in the Registration Rights Agreement.
'SNI' shall mean Sorrento Networks, Inc., a Delaware corporation.
'Weighted Average Price' shall mean, for any security as of any date,
the dollar volume-weighted average price for such security on the Principal
Market during the period beginning at 9:30 a.m., New York City Time, and
ending at 4:00 p.m., New York City Time, as reported by Bloomberg through
its 'Volume at Price' function or, if the foregoing does not apply, the
dollar volume-weighted average price of such security in the
over-the-counter market on the electronic bulletin board for such security
during the period beginning at 9:30 a.m., New York City Time, and ending at
4:00 p.m., New York City Time, as reported by Bloomberg, or, if no dollar
volume-weighted average price is reported for such security by Bloomberg for
such hours, the average of the highest closing bid price and the lowest
closing ask price of any of the market makers for such security as reported
in the 'pink sheets' by the National Quotation Bureau, Inc. If the Weighted
Average Price cannot be calculated for such security on such date on any of
the foregoing bases, the Weighted Average Price of such security on such
date shall be the fair market value as mutually determined by the Company
and Required Holders. If the Company and Required Holders are unable to
agree upon the fair market value of the Common Stock, then such dispute
shall be resolved pursuant to Section 8 hereof. All such determinations
shall be appropriately adjusted for any stock dividend, stock split or other
similar transaction during such period.
4. Conversion at the Option of the Holder. The Holder shall have the
following conversion rights:
(a) Holder's Right to Convert. At any time or times on or after the
Closing Date and prior to the Maturity Date, this Debenture is convertible,
at the option of the Holder, into fully paid, validly issued and
nonassessable shares of Common Stock in accordance with Section 4(e) hereof.
If this Debenture remains outstanding on the Maturity Date, this Debenture
shall be redeemed by the Company in accordance with Section 5 hereof. The
Company shall not issue any fraction of a share of Common Stock upon any
conversion. If the issuance (but
A-27
for the preceding sentence) would result in the issuance of a fraction of a
share of Common Stock, the Company shall round such fraction of a share of
Common Stock up or down to the nearest whole share.
(b) Limitations on Number of Conversion Shares. Notwithstanding anything
to the contrary contained herein, the Company shall not be obligated, and
the Holder shall not be entitled, to convert any of the Debentures in excess
of the number of such Debentures upon the conversion of which the sum of (i)
the number of shares of Common Stock beneficially owned by the Holder (other
than the shares which would otherwise be deemed beneficially owned except
for being subject to a limitation on conversion analogous to the limitation
contained in this Section 4(b)) plus (ii) the number of shares of Common
Stock issuable upon the conversion of such Debentures would be equal to or
exceed 9.99% (the 'Exchange Cap') of the number of shares of Common Stock
then issued and outstanding (after giving effect to such conversion), it
being the intent of the Company and the Holder that the Holder not be deemed
at any time to have the power to vote or dispose of greater than 9.99% of
the number of shares of Common Stock issued and outstanding. As used herein,
beneficial ownership shall be determined in accordance with Section 13(d) of
the Securities Exchange Act of 1934, as amended (the 'Exchange Act'). For
purposes of this Section 4(b), in determining the number of outstanding
shares of Common Stock, a the Holder may rely on the number of outstanding
shares of Common Stock as reflected in (1) the Company's most recent Form
10-Q, Form 10-K or other public filing with the SEC, as the case may be, (2)
a more recent public announcement by the Company, or (3) any other notice by
the Company or its transfer agent setting forth the number of shares of
Common Stock outstanding. Upon the written request of the Holder, the
Company shall promptly, but in no event later than one (1) Business Day
following the receipt of such notice, confirm in writing to the Holder the
number of shares of Common Stock then outstanding. In any case, the number
of outstanding shares of Common Stock shall be determined after giving
effect to conversions of Debentures by the Holder and its affiliates since
the date as of which such number of outstanding shares of Common Stock was
reported. Nothing contained herein shall be deemed to restrict the right of
the Holder to convert the Debentures at such time as the conversion thereof
will not violate the provisions of this Section 4(b).
(c) Partial Conversion. If this Debenture is converted in part, the
remaining portion of this Debenture not so converted shall remain entitled
to the conversion rights provided herein.
(d) Determination of Conversion Shares. Subject to Section 7 hereof, the
Outstanding Principal Amount of this Debenture that is converted into shares
of Common Stock shall be convertible into the number of shares of Common
Stock (rounded up or down to the nearest whole share) which results from
application of the following formula:
P
---------------
Conversion Price
P = Outstanding Principal Amount of this Debenture submitted for conversion
including accrued interest thereon.
The number of shares of Common Stock into which this Debenture will be
converted pursuant to the foregoing formula is hereafter referred to as the
'Conversion Rate.'
(e) Mechanics of Conversion. The conversion of this Debenture shall be
conducted in the following manner:
(i) Holder's Delivery Requirements. To convert this Debenture (in
whole or in part) into shares of Common Stock on any date, the Holder
shall (A) transmit by facsimile (or otherwise deliver), on or prior to
11:59 p.m., New York City Time, on such date, a copy of a fully completed
notice of conversion executed by the Holder in the form attached hereto
as Exhibit 4(e)(i) (the 'Conversion Notice') to the Company and the
Company's designated transfer agent (the 'Transfer Agent'), and (B) if
required by Section 9 hereof, surrender to a common carrier for delivery
to the Company as soon as practicable following such date this Debenture.
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(ii) Company's Response. Upon receipt by the Company of copy of a
Conversion Notice, the Company shall (A) as soon as practicable, but in
any event within three (3) Business Days, send, by facsimile, a
confirmation of receipt of such Conversion Notice to the Holder and the
Transfer Agent, which confirmation shall constitute an instruction to the
Transfer Agent to process such Conversion Notice in accordance with the
terms herein, and (B) then on or before the fifth (5th) Business Day
following the date of receipt by the Company of such Conversion Notice
(the 'Share Delivery Date'), (1) issue and deliver to the address as
specified in the Conversion Notice, a certificate, registered in the name
of the Holder or its designee, for the number of shares of Common Stock
to which the Holder shall be entitled, or (2) provided the Transfer Agent
is participating in The Depository Trust Company ('DTC') Fast Automated
Securities Transfer Program, upon the request of the Holder, credit such
aggregate number of shares of Common Stock to which the Holder shall be
entitled to the Holder's or its designee's balance account with DTC
through its Deposit Withdrawal Agent Commission system. If the specified
principal amount submitted for conversion is less than the then
Outstanding Principal Amount of this Debenture and the Holder has
delivered this Debenture to the Company in accordance with Section 9
hereof, then the Company shall, as soon as practicable and in no event
later than five (5) Business Days after receipt of this Debenture (the
'Debenture Delivery Date') and at its own expense, issue and deliver to
the Holder a new Debenture representing the Outstanding Principal Amount
not converted. The effective date of conversion (the 'Conversion Date')
shall be deemed to be the date on which the Company receives by facsimile
the Conversion Notice, and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common
Stock on such date.
(iii) Company's Failure to Timely Convert.
(A) Cash Damages. If (1) within five (5) Business Days after the
Company's receipt of the facsimile copy of a Conversion Notice the
Company has failed to issue and deliver a certificate to the Holder
or credit the Holder's balance account for the number of shares of
Common Stock to which the Holder is entitled upon the Holder's
conversion of this Debenture, or (2) within five (5) Business Days of
the Company's receipt of this Debenture the Company has failed to
issue and deliver a Debenture representing the Outstanding Principal
Amount of this Debenture not so converted, then in addition to all
other available remedies which the Holder may pursue hereunder and
under the Exchange Agreement, the Company shall pay additional
damages in cash to the Holder for each day after the Share Delivery
Date that such conversion is not timely effected and/or each day
after the Debenture Delivery Date that this Debenture is not
delivered in an amount equal to 0.5% of the product of (I) the sum of
the number of shares of Common Stock not issued to the Holder on or
prior to the Share Delivery Date and to which the Holder is entitled
as set forth in the applicable Conversion Notice and, in the event
the Company has failed to deliver a Debenture to the Holder on or
prior to the Debenture Delivery Date, the number of shares of Common
Stock issuable upon conversion of this Debenture as of the Debenture
Delivery Date, and (II) the Closing Sale Price of Common Stock on the
Share Delivery Date, in the case of the failure to deliver Common
Stock, or the Debenture Delivery Date, in the case of failure to
deliver a Debenture. If the Company fails to pay the additional
damages set forth in this Section 4(e)(iii)(A) within five (5)
Business Days of the date incurred, then the Holder shall have the
right at any time, so long as the Company continues to fail to make
such payments, to require the Company, upon written notice, to
immediately issue, in lieu of such cash damages, the number of shares
of Common Stock equal to the quotient of (X) the aggregate amount of
the damages payments described herein divided by (Y) the Conversion
Price, rounded up to the nearest whole share.
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(B) Void Conversion Notice; Adjustment of Conversion Price. If
for any reason the Holder has not received all of the shares of
Common Stock to which the Holder is entitled prior to the tenth
(10th) Business Day after the Share Delivery Date with respect to a
conversion of this Debenture, then the Holder upon written notice to
the Company, with a copy to the Transfer Agent, may void its
Conversion Notice; provided, that the voiding of the Holder's
Conversion Notice shall not effect the Company's obligations to make
any payments which have accrued prior to the date of such notice.
Thereafter, the Conversion Price for that portion of this Debenture
subject to a Void Conversion Notice shall be adjusted to the lesser
of (1) the Conversion Price as in effect on the date on which the
Holder voided the Conversion Notice and (2) the lowest Weighted
Average Price of the Common Stock during the period beginning on the
applicable Conversion Date and ending on the date the Holder voided
the Conversion Notice, subject to further adjustment as provided in
this Debenture.
(C) Conversion Failure. If for any reason the Holder has not
received all of the shares of Common Stock to which the Holder is
entitled prior to the tenth (10th) Business Day after the Share
Delivery Date with respect to a conversion of this Debenture (a
'Conversion Failure'), then the Holder, upon written notice to the
Company, may require that the Company redeem the entire Outstanding
Principal Amount of all Debentures held by the Holder in an amount
equal to 101% of such Outstanding Principal Amount, including (except
to the extent the Holder has exercised its remedy under Section
4(e)(iv)(B) hereof) the specified principal amount previously
submitted for conversion and with respect to which the Company has
not delivered shares of Common Stock, in accordance with Section 4
hereof.
(iv) In addition to any other rights available to the Holder, if the
Company fails to deliver to the Holder a certificate or certificates
representing the Common Stock pursuant to Section 4(e)(ii) hereof by the
tenth (10th) Business Day after the Share Delivery Date, and if on or
after such tenth (10th) Business Day after the Share Delivery Date the
Holder purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by the Holder of the
Common Stock which the Holder anticipated receiving upon such exercise (a
'Buy-In'), then the Company shall, to the extent such a payment is not
then prohibited or restricted under this Debenture or under any then
existing Permitted Credit Line, (A) pay in cash to the Holder the amount
by which (1) the Holder's total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased exceeds
(2) the amount obtained by multiplying (x) the number of shares of Common
Stock that the Company was required pursuant to Section 4(e)(ii) hereof
to deliver to the Holder in connection with the exercise at issue and not
delivered by (y) the per share market value in the Holder's sale
transaction giving rise to such covering purchase, and (B) if the Holder
has not exercised remedies under Section 4(e)(iii)(C) hereof with respect
to the specified principal amount previously submitted for conversion,
deliver to the Holder the number of shares of Common Stock that would
have been issued had the Company timely complied with its exercise and
delivery obligations under Section 4(e)(ii) hereof. For example, if the
Holder purchases Common Stock having a total purchase price of $11,000 as
a Buy-In to cover a sale of shares anticipated to be received upon a
conversion where the net proceeds of such sale totaled $10,000, under
clause (A) of the immediately preceding sentence the Company shall be
required to pay the Holder $1,000. The Holder shall provide the Company
written notice indicating the amounts payable to the Holder in respect of
the Buy-In, including all pertinent details of the covering buy
transaction and the sale transaction so covered.
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5. Redemption by the Company.
(a) The Company may redeem in cash all or a portion of the Outstanding
Principal Amount of the Debentures on a pro rata basis at any time prior to the
Maturity Date upon thirty (30) days' prior written notice to the holders of the
Debentures.
(b) The Company shall redeem in cash all or a portion of the Outstanding
Principal Amount of the Debentures on a pro rata basis in an aggregate amount
equal to, to the extent permitted in accordance with Section 20 of the Security
Agreement, the Net Proceeds of any sale of (A) the Real Property, (B) the
Primary Preferred (C) the non-cash proceeds (including any proceeds collected or
distributed on account thereof), and (D) all or substantially all of the
intellectual property rights of Company and its Subsidiaries outside of the
ordinary course of business pursuant to which Company or such Subsidiary will be
defeased of its economic interest in such property rights, in each case within
three (3) Business Days of receipt of such cash proceeds; provided, that any
such redemption will not be required in connection with a sale that constitutes
a change in control or organic change.
(c) The Company shall redeem in cash the Outstanding Principal Amount of
this Debenture on the Maturity Date in an amount equal to 100% of the portion of
the Outstanding Principal Amount of the Debenture plus accrued interest as of
such date. If the Company fails to redeem the entire portion of the Outstanding
Principal Amount on the Maturity Date, then in addition to any remedy the Holder
may have under this Debenture, the Exchange Agreement and the Registration
Rights Agreement, the unredeemed Outstanding Principal Amount shall bear Default
Interest, prorated for partial months, until paid in full.
(d) On the applicable date of any redemption under this Section 5, the
Company shall pay the redeemed amount to the Holder by wire transfer of
immediately available funds to an account designated in writing by the Holder.
6. Redemption at Option of Holders.
(a) Redemption Option Upon Triggering Event. In addition to all other rights
of the Holder contained herein, after a Triggering Event, the Holder shall have
the right, at the Holder's option, to require the Company to redeem all or a
portion of the Debentures held by the Holder at a price equal to the greater of
(i) 101% of the Outstanding Principal Amount of the portion of the Debenture
being redeemed plus accrued and unpaid interest thereon and (ii) the product of
(A) the aggregate number of shares of Common Stock for which the Outstanding
Principal Amount of the Debenture being redeemed would be converted into as of
the date immediately preceding the Triggering Event without regard to any
limitations to conversions contained herein multiplied by (B) the greater of (x)
the Conversion Price and (y) the Closing Sale Price then most recently reported
(the 'Triggering Event Redemption Price').
(b) 'Triggering Event.' A 'Triggering Event' shall be deemed to have
occurred at such time as any of the following events:
(i) while the Registration Statement is required to be maintained
effective pursuant to the terms of the Registration Rights Agreement, the
effectiveness of the Registration Statement lapses or is suspended for any
reason (including, without limitation, the issuance of a stop order) or is
unavailable to the Holder for sale of all of the Registrable Securities in
accordance with the terms of the Registration Rights Agreement, and such
lapse or unavailability continues for a period of five (5) consecutive
trading days (excluding days during an Allowable Grace Period);
(ii) the suspension from trading or failure of the Common Stock to be
listed on its Principal Market for a period of five (5) consecutive trading
days or for more than an aggregate of ten (10) trading days in any 365-day
period;
(iii) the Company's notice or the Transfer Agent's notice, at the
Company's direction, to any holder of the Debentures, including by way of
public announcement, at any time, of its intention not to comply, as
required, with a request for conversion of any Debentures into
A-31
shares of Common Stock that is tendered in accordance with the provisions of
the Debentures; or
(iv) a Conversion Failure.
(c) Mechanics of Redemption at Option of Buyer Upon Triggering Event. Within
two (2) Business Days after the occurrence of a Triggering Event, the Company
shall deliver written notice thereof via facsimile and overnight courier
('Notice of Triggering Event') to each holder of Debentures. At any time after
the earlier of a holder's receipt of a Notice of Triggering Event and such
holder becoming aware of a Triggering Event, any holder of Debentures then
outstanding may require the Company to redeem the Debentures held by it by
delivering written notice thereof via facsimile and overnight courier ('Notice
of Redemption at Option of Buyer') to the Company, which Notice of Redemption at
Option of Buyer shall indicate the Outstanding Principal Amount of the Debenture
that such holder is electing to redeem.
(d) Payment of Triggering Event Redemption Price. Upon the Company's receipt
of a Notice(s) of Redemption at Option of Buyer from any holder of Debentures,
the Company shall immediately notify each holder of Debentures by facsimile of
the Company's receipt of such notice(s). The Company shall deliver on the fifth
(5th) Business Day after the Company's receipt of the first Notice of Redemption
at Option of Buyer the Triggering Event Redemption Price to all holders that
deliver a Notice of Redemption at Option of Buyer prior to the fifth (5th)
Business Day after the Company's receipt of the first Notice of Redemption at
Option of Buyer; provided that, if required by Section 9, a holder's Debentures
shall have been delivered to the Transfer Agent. If the Company is unable to
make payment in respect of all of the Debentures for which the redemption option
has been exercised, the Company shall (i) redeem a pro rata amount from each
holder of Debentures based on the Outstanding Principal Amount of the Debentures
submitted for redemption by such holder relative to the aggregate principal
Amount of the Debentures submitted for redemption by all holders of Debentures
and (ii) in addition to any remedy such holder of Debentures may have, pay to
each holder Default Interest (prorated for partial months) in respect of the
Outstanding Principal Amount of each Debenture not redeemed in full pursuant to
such holder's election until paid in full.
(e) Void Redemption. In the event that the Company does not pay the
Triggering Event Redemption Price within the time period set forth in Section
6(d) hereof, at any time thereafter and until the Company pays such unpaid
applicable Triggering Event Redemption Price in full, a holder of Debentures
shall have the option (the 'Void Optional Redemption Option') to, in lieu of
redemption, require the Company to promptly return to such holder any or all of
the Debentures that were submitted by such holder under this Section 6 and for
which the applicable Triggering Event Redemption Price (together with any
interest thereon) has not been paid, by sending written notice thereof to the
Company via facsimile (the 'Void Optional Redemption Notice'). Upon the
Company's receipt of such Void Optional Redemption Notice, (i) the Notice of
Redemption at Option of Buyer shall be null and void with respect to the
Outstanding Principal Amount of the Debentures subject to the Void Optional
Redemption Notice, (ii) the Company shall immediately return any Debentures
subject to the Void Optional Redemption Notice, and (iii) the Conversion Price
of such returned Debentures shall be adjusted to the lesser of (A) the
Conversion Price as in effect on the date on which the Void Optional Redemption
Notice is delivered to the Company and (B) the lowest Weighted Average Price of
the Common Stock during the period beginning on the date on which the Notice of
Redemption at Option of Buyer is delivered to the Company and ending on the date
on which the Void Optional Redemption Notice is delivered to the Company.
(f) Miscellaneous. A holder's delivery of a Void Optional Redemption Notice
and exercise of its rights following such notice shall not affect the Company's
obligations to make any payments with respect to the Outstanding Principal
Amount of the Debentures subject to the Void Optional Redemption Notice which
have accrued prior to the date of such notice. In the event of a redemption
pursuant to this Section 6 of less than all of the Outstanding Principal Amount
represented by a particular Debenture, the Company shall promptly cause to be
issued and
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delivered to the holder of such Debenture a new Debenture representing the
remaining Outstanding Principal Amount which has not been redeemed, if
necessary.
7. Adjustments to Conversion Price.
(a) Adjustments of Standard Conversion Price upon Subdivision or Combination
of Common Stock. If the Company at any time subdivides (by any stock split,
stock dividend, recapitalization or otherwise) its outstanding shares of Common
Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision will be proportionately reduced. If the
Company at any time combines (by combination, reverse stock split or otherwise)
its outstanding shares of Common Stock into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination will be
proportionately increased.
(b) Anti-Dilution. In addition to the adjustments provided by Section 7(a),
each holder of the Debentures who is an 'Exchanging Holder' under and as defined
in the Exchange Agreement will be entitled to the anti-dilution protections set
forth in Exhibit 7(b) attached hereto.
(c) Notices.
(i) Immediately upon any adjustment of the Conversion Price arising
under Sections 7(a) and (b) hereof, the Company will give written notice
thereof to the Holder, setting forth in reasonable detail, and certifying,
the calculation of such adjustment. In the case of a dispute as to the
determination of such adjustment, then such dispute shall be resolved in
accordance with the procedures set forth in Section 8 hereof
(ii) The Company will give written notice to the Holder at least ten
(10) Business Days prior to the date on which the Company closes its books
or takes a record (A) with respect to any dividend or distribution upon the
Common Stock, (B) with respect to any pro rata subscription offer to holders
of Common Stock or (C) for determining rights to vote with respect to any
Organic Change, Change of Control, dissolution or liquidation, provided that
such information shall be made known to the public prior to or in
conjunction with such notice being provided to such Holder.
(iii) The Company will also give written notice to the Holder at least
ten (10) Business Days prior to the date on which any Organic Change, Change
of Control, dissolution or liquidation will take place, provided that such
information shall be made known to the public prior to or in conjunction
with such notice being provided to the Holder.
(d) Taxes. The Company shall pay any and all documentary, stamp, transfer
(but only in respect of the registered holder thereof) and other similar taxes
that may be payable with respect to the issuance and delivery of Common Stock
upon the conversion of Debentures.
8. Dispute Resolution. In the case of a dispute as to the determination of
the Closing Sale Price, the Weighted Average Price or adjustments to the
Conversion Price under Section 7 hereof, or the arithmetic calculation of the
number of Conversion Shares or the Triggering Event Redemption Price, the
Company shall instruct the Transfer Agent to issue to the Holder the number of
shares of Common Stock that is not disputed and shall transmit an explanation of
the disputed determinations or arithmetic calculations to the Holder by
facsimile within three (3) Business Days of receipt of the Holder's Conversion
Notice or of Holder's written objection to a determination or calculation
provided to Holder by the Company. If the Holder and the Company are unable to
agree upon the determination or arithmetic calculation at issue within five (5)
Business Days of such disputed determination or arithmetic calculation being
transmitted to the Holder, then the Company shall within one (1) Business Day
submit by facsimile (A) the disputed determination to Houlihan Lokey Howard &
Zukin or another independent, reputable investment bank selected by the Company
and approved by Required Holders or (B) the disputed arithmetic calculation to
the Company's independent, outside accountant. The Company shall cause the
investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the holders of the
results no later than five (5) Business Days from the time it receives the
disputed determinations or calculations. Such investment bank's or accountant's
determination or calculation, as the case may be, shall be binding upon all
parties
A-33
absent manifest error. Such investment bank or accountant shall be engaged by
the Company and all fees and expenses of such investment bank or accountant
shall be paid by the Company.
9. Book-Entry. Notwithstanding anything to the contrary set forth herein,
upon conversion of this Debenture in accordance with the terms hereof, the
Holder may, but shall not be required to, physically surrender the Debenture to
the Company unless the entire Outstanding Principal Amount is being converted or
such conversion is a Maturity Date Mandatory Conversion. The Holder and the
Company shall maintain records showing the principal amount so converted and the
dates of such conversions or shall use such other method, reasonably
satisfactory to the Holder and the Company, so as not to require physical
surrender of the Debenture upon each such partial conversion. In the event of
any dispute or discrepancy, such records of the Company establishing the then
Outstanding Principal Amount shall be controlling and determinative in the
absence of manifest error. Notwithstanding the foregoing, if the principal
amount represented by the Debenture is converted as aforesaid, the Holder may
not transfer the Debenture unless the Holder first physically surrenders the
Debenture to the Company, whereupon the Company will forthwith issue and deliver
upon the order of the Holder a new Debenture or Debentures of like tenor,
registered as the Holder may request, representing in the aggregate the
Outstanding Principal Amount represented by such Debenture, as provided in
Section 4(e)(ii) hereof. The Holder and any assignee, by acceptance of a
Debenture, acknowledge and agree that, by reason of the provisions of this
Section 9, following conversion of any portion of the Debenture, the Outstanding
Principal Amount of the Debenture may be less than the amount stated on the face
hereof. Each Debenture shall bear the following legend:
THE OUTSTANDING PRINCIPAL AMOUNT REPRESENTED BY THIS DEBENTURE MAY
BE LESS THAN THE AMOUNT STATED ON THE FACE HEREOF PURSUANT TO
SECTION 9 HEREOF.
In addition to the foregoing, if Holder elects to physically surrender this
Debenture upon a partial conversion even where no transfer is contemplated, the
Company shall issue a Debenture representing the Outstanding Principal Amount of
this Debenture not so converted, as provided in Section 4(e)(ii) hereof.
10. Organic Changes; Change of Control. No sooner than twenty (20) Business
Days nor later than ten (10) Business Days prior to the consummation (the
'Consummation Date') of an Organic Change or Change of Control, but not prior to
the public announcement of such Organic Change or Change of Control, the Company
shall deliver written notice thereof by facsimile and overnight courier (a
'Notice of Change') to each holder of Debentures indicating the Company's (or
its successor's) intent to either:
(a) secure from the Person purchasing such assets or the successor (if
other than the Company or a successor who assumes the liabilities of the
Company as a matter of law (such assumption as a matter of law to be
confirmed to the holders of the Debentures by a legal opinion to such effect
from legal counsel to the Company) resulting from such Organic Change or
Change of Control (in each case, the 'Acquiring Entity') as of the
Consummation Date, a written agreement unconditionally assuming the
obligations of the Company with respect to the Debentures; or
(b) redeem on the Consummation Date all of the Debentures at a price
equal to 100% of the then Outstanding Principal Amount of the Debenture plus
accrued interest as of such date.
11. Reservation of Stock Issuable Upon Conversion. The Company shall, so
long as any of the Debentures are outstanding, take all action necessary to
reserve and keep available out of its authorized and unissued Common Stock,
solely for the purpose of effecting the conversion of the Debentures, such
number of shares of Common Stock as shall from time to time be sufficient to
effect the conversion at the Conversion Price (as adjusted in accordance with
Section 7 hereof) of all of the Debentures then outstanding. The initial number
of shares of Common Stock reserved for conversion of the Debentures and each
increase in the number of shares so reserved shall be allocated pro rata among
the holders of the Debentures based on the Outstanding Principal
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Amount of the Debentures held by each holder at the time of issuance of the
Debentures or increase in the number of reserved shares, as the case may be. In
the event a holder shall sell or otherwise transfer any portion of the
Outstanding Principal Amount of such holder's Debentures, each transferee shall
be allocated a pro rata portion of the number of reserved shares of Common Stock
reserved for such transferor. Any shares of Common Stock reserved and allocated
to any Person which ceases to hold any Debentures shall be allocated to the
remaining holders of Debentures, pro rata based on the Outstanding Principal
Amount of Debentures then held by such holders.
12. No Reissuance of Debentures. No Debentures acquired by the Company by
reason of redemption, purchase, conversion or otherwise shall be reissued, and
all such Debentures shall be retired. Other than additional Debentures issued as
part of a Non-Cash Payment Method permitted by the Debentures, no additional
Debentures shall be authorized or issued without the consent of Required
Holders.
13. No Impairment. The Company shall not intentionally take any action which
would impair the rights and privileges of the Debentures set forth herein or the
Holders thereof.
14. Incurrence of Debt; Liens. Except with the prior written consent of
Required Holders, the Company shall not, and shall not permit any of its
Subsidiaries, to
(a) issue, incur or guarantee any debt (including any and all
obligations of the Company or any of its Subsidiaries evidenced by any (A)
bond, (B) debenture, (C) note, (D) other like written obligation to pay
money, including any Subsidiary preferred stock, or (E) at all times prior
to the Consolidation Date, capital synthetic or operating lease), other than
(i) debt constituting a Permitted Equipment Financing; (ii) a Permitted
Credit Line entered into following the Consolidation Date; (iii) trade
payables arising in the ordinary course of business consistent with past
practices; and (iv) debt incurred in a refinancing of debt existing on the
date hereof and secured by Liens on the Real Property senior to the Liens
thereon (provided that the principal amount of such refinancing indebtedness
shall not exceed the sum of (A) the principal amount of the indebtedness so
refinanced, (B) the amount of any premium or penalty paid in connection with
such refinancing, and (C) the reasonable expenses incurred in connection
with such refinancing, and provided that the Liens securing such refinanced
debt are limited to those assets subject to Liens securing the debt being
refinanced and that the maturity date of such refinancing indebtedness is
later than the maturity date of the indebtedness being refinanced);
(b) create or suffer to exist any lien, mortgage, security interest,
charge or other encumbrance upon or with respect to any of its properties,
rights or other assets (other than Permitted Liens); or
(c) make any transfer of assets to its Subsidiaries or other Affiliate
except in the ordinary course of and pursuant to the reasonable requirements
of Company's business and upon fair and reasonable terms that are no less
favorable to Company than would be obtained in a comparable arm's length
transaction with a Person not an Affiliate of Company.
15. Secured Obligations. The obligations of the Company represented by this
Debenture are secured by the Collateral and entitled to the benefits of the
Collateral Documents.
16. Post-Issuance Date Covenants.
(a) By no later than the one year anniversary of the Issuance Date, Company
(i) shall cause SNI, Meret and Sorrento Valley Real Estate Holdings, LLC, a
California limited liability company, to be merged with and into Company, with
Company as the surviving entity, (ii) shall deliver second priority Deeds of
Trust with respect to the Real Property, as security for the Obligations
substantially in the form attached hereto as Exhibit 1.6, and (iii) shall obtain
from the holders of any senior Deeds of Trust on the Real Property their written
consent to the matters described in the immediately preceding clauses (i) and
(ii). The date all of the conditions set forth in clauses (i), (ii) and (iii)
are satisfied shall be the 'Consolidation Date.'
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(b) At all times prior to the Consolidation Date, Company and SNI shall be
parties to written leases, as lessees, with respect to the Real Property for a
base rent in an amount of not less the sum of all property taxes, insurance, and
debt service on the senior Deeds of Trust with respect to such Real Property.
17. Obligations Absolute. No provision of this Debenture shall alter or
impair the obligation of the Company, which is absolute and unconditional, to
pay the Outstanding Principal Amount of, and interest on, this Debenture at the
time, place and rate, and in the manner, herein prescribed.
18. Waivers of Demand, Etc. The Company hereby expressly waives demand and
presentment for payment, notice of nonpayment, protest, notice of protest,
notice of dishonor, notice of acceleration or intent to accelerate, bringing of
suit and diligence in taking any action to collect amounts called for hereunder
and will be directly and primarily liable for the payment of all sums owing and
to be owing hereon, regardless of and without any notice, diligence, act or
omission as or with respect to the collection of any amount called for
hereunder.
19. Replacement Debentures. In the event that any Holder notifies the
Company that its Debenture(s) have been lost, stolen or destroyed, replacement
Debenture(s) identical in all respects to the original Debenture(s) (except for
registration number and Outstanding Principal Amount, if different than that
shown on the original Debenture(s)) shall be issued by the Company to the
Holder, provided that the Holder executes and delivers to the Company an
agreement reasonably satisfactory to the Company to indemnify the Company from
any loss incurred by it in connection with such Debenture(s).
20. Payment of Expenses. The Company agrees to pay all reasonable expenses,
including reasonable attorneys' fees, which may be incurred by the Holder in
enforcing the provisions of this Debenture and/or collecting any amount due
under this Debenture, the Exchange Agreement the Registration Rights Agreement,
or the Collateral Documents, including, without limitation, all reasonable fees
and expenses of professionals (including attorneys, accountants and appraisers)
engaged by Holders or by Collateral Agent to enforce or protect the Liens of
Collateral Agent, for the benefit of Collateral Agent and Holders, including but
not limited to any reasonable professional fees and expenses incurred in any
bankruptcy or reorganization case or insolvency proceeding (including an
assignment for the benefit of creditors) related to the Company or any of its
subsidiaries.
21. Defaults. The following shall constitute 'Events of Default':
(a) The Company shall default in the payment of (i) interest on this
Debenture, and such default shall continue for two (2) Business Days after
the due date thereof, or (ii) the Outstanding Principal Amount of this
Debenture when due (including upon a redemption in accordance with Section 5
of 6 hereof); or
(b) Any money judgment (including any arbitration award, but only if
reduced to a judgment), writ or warrant of attachment, or similar process in
excess of One Million Dollars ($1,000,000) in the aggregate shall be entered
or filed against the Company, its subsidiaries or any of their properties or
other assets and which shall remain unpaid, unvacated, unbonded or unstayed
for a period of sixty (60) days; or
(c) Any of the representations or warranties made by the Company or any
of its subsidiaries herein, in any Collateral Document, the Exchange
Agreement, the Registration Rights Agreement, or in any certificate or
financial or other statements heretofore or hereafter furnished by or on
behalf of the Company in connection with the execution and delivery of this
Debenture, any Collateral Document or the Exchange Agreement shall be false
or misleading in any material respect at the time made and such condition
(to the extent capable of being cured) shall continue uncured for a period
of twenty (20) days after notice from Holder of such condition; or
(d) The Company or any of its subsidiaries shall fail to perform or
observe in any respect any covenant or agreement in any Collateral Document,
the Exchange Agreement, the Registration Rights Agreement or this Debenture,
including, without limitation, the failure to
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honor any Conversion Notice and deliver shares pursuant thereto, and such
failure shall continue uncured for a period of twenty (20) days after notice
from Holder of such failure; or
(e) The Company or any of its subsidiaries shall (i) become insolvent;
(ii) admit in writing its inability to pay its debts generally as they
mature; (iii) make an assignment for the benefit of creditors or commence
proceedings for its dissolution; or (iv) apply for or consent to the
appointment of a trustee, liquidator or receiver for it or for a substantial
part of its property or business; or
(f) A trustee, liquidator or receiver shall be appointed for the Company
or any of its subsidiaries or for a substantial part of its property or
business without its consent and shall not be discharged within sixty (60)
days after such appointment; or
(g) Any governmental agency or any court of competent jurisdiction at
the instance of any governmental agency shall assume custody or control of
the whole or any substantial portion of the properties or assets of the
Company or any of its subsidiaries and shall not be dismissed within sixty
(60) days thereafter; or
(h) Bankruptcy, reorganization, insolvency or liquidation proceedings or
other proceedings, or relief under any bankruptcy law or any law for the
relief of debt, shall be instituted by or against the Company or any of its
subsidiaries and, if instituted against the Company or any such subsidiary,
shall not be dismissed within sixty (60) days after such the Company or such
subsidiary shall by any action or answer approve of, consent to, or
acquiesce in any such proceedings or admit to any material allegations of,
or default in answering a petition filed in any such proceeding; or
(i) The Company or any of its subsidiaries shall fail to pay any debt
for borrowed money or other similar obligation or liability ('Indebtedness')
(excluding Indebtedness evidenced by this Debenture) in excess of $1,000,000
in the aggregate, or any interest or premium thereon, when due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise)
and such failure shall continue after the applicable grace period, if any,
specified in the agreement or instrument relating to such Indebtedness, or
any other default under any agreement or instrument relating to any such
Indebtedness, or any other event, shall occur and shall continue after the
applicable grace period, if any, specified in such agreement or instrument,
if the effect of such default or event is to accelerate, or to permit the
acceleration of, the maturity of such Indebtedness; or any such Indebtedness
shall be declared to be due and payable, or required to be prepaid (other
than by a regularly scheduled required prepayment), prior to the stated
maturity thereof; provided, that, notwithstanding anything to the contrary
contained in this Debenture, any acceleration of indebtedness secured by
Liens on the Real Property senior to the Liens thereon created by the Deeds
of Trust shall not constitute an Event of Default hereunder at any time
prior to the recordation of a notice of sale (within the meaning of Section
2924f of the California Civil Code) with respect thereto.
Unless an Event of Default shall have been waived in writing by Required
Holders (which waiver shall not be deemed to be a waiver of any subsequent
default), at the option of Required Holders, the Outstanding Principal Amount of
the Debentures may be declared immediately due and payable, without presentment,
demand, protest or notice of any kind, all of which are hereby expressly waived,
anything herein or in any other instruments contained to the contrary
notwithstanding, and the Holder may immediately, and without expiration of any
period of grace, enforce any and all of the Holder's rights and remedies
provided herein or any other rights or remedies afforded by law; provided, that
upon the occurrence of an Event of Default specified in clause (h) above, the
Debentures automatically shall become immediately due and payable without
presentment, demand, protest or notice of any kind. In such event, this
Debenture shall be redeemed at a redemption price equal to 101% of the
Outstanding Principal Amount of the Debenture, plus accrued interest on this
Debenture (including Default Interest from and after the occurrence of the Event
of Default until redemption). Any such interest which is not paid when due
shall, to the maximum extent permitted by law, accrue interest until paid at the
rate from time to time applicable to interest on the Debentures as to which the
Event of Default has occurred.
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22. Savings Clause. In case any provision of this Debenture is held by a
court of competent jurisdiction to be excessive in scope or otherwise invalid or
unenforceable, such provision shall be adjusted rather than voided, if possible,
so that it is enforceable to the maximum extent possible, and the validity and
enforceability of the remaining provisions of this Debenture will not in any way
be affected or impaired thereby.
23. Entire Agreement. This Debenture, and the agreements referred to in this
Debenture constitute the full and entire understanding and agreement between the
Company and the Holder with respect to the subject hereof.
24. Assignment, Etc. The Holder may, subject to compliance with the Exchange
Agreement, to applicable federal and state securities laws, transfer or assign
this Debenture or any interest herein and may pledge, encumber or transfer any
of its rights or interest in and to this Debenture or any part hereof and,
without limitation, each assignee, transferee and pledgee (which may include any
affiliate of the Holder) shall have the right to transfer or assign its
interest. Each such assignee, transferee and pledgee shall have all of the
rights of the Holder under this Debenture. The Company agrees that, subject to
compliance with the Exchange Agreement, after receipt by the Company of written
notice of assignment from the Holder or from the Holder's assignee, all
principal, interest and other amounts which are then, and thereafter become, due
under this Debenture shall be paid to such assignee, transferee or pledgee at
the place of payment designated in such notice. This Debenture shall be binding
upon the Company and its successors and shall inure to the benefit of the Holder
and its successors and assigns.
25. Amendments and Waivers. Except as hereinafter set forth in this Section
25, this Debenture may be supplemented or amended, and any non-compliance with
the terms of this Debenture may be waived (prospectively or retrospectively), by
written instrument signed (in counterparts) by the Company and Required Holders
(even if not signed by Holder). However, notwithstanding the foregoing, without
the consent of each Holder affected, a supplement, amendment or waiver may not
(with respect to Debentures held by a non-consenting holder):
(a) change the definition of Required Holders or change the terms of
this Section 25;
(b) reduce the Outstanding Principal Amount of a Debenture, or change
the Maturity Date;
(c) reduce the interest rate;
(d) amend the provisions of Section 6 hereof (including any related
definitions) in a manner adverse to the holders of the Debentures;
(e) change the calculation of Conversion Shares set forth in Section
4(d) in a manner adverse to the holders of the Debentures;
(f) otherwise impair any holder of the Debentures' right to receive
payments of interest when due; provided, that notwithstanding the generality
of the forgoing, Required Holders may waive payment of any Cash Interest
Payment so long as (i) such Cash Interest Payment remains unpaid for not
more than one year, (ii) such unpaid Cash Interest Payment accrues Default
Interest, and (iii) not more than one other Cash Interest Payment remains
unpaid at the time of such waiver; or
(g) otherwise impair any holder of the Debentures' right to receive
payments of principal when due.
26. No Waiver. No failure on the part of the Holder to exercise, and no
delay in exercising, any right, remedy or power hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise by the Holder of any
right, remedy or power hereunder preclude any other or future exercise of any
other right, remedy or power. Each and every right, remedy or power hereby
granted to the Holder or allowed it by law or other agreement shall be
cumulative and not exclusive of any other, and may be exercised by the Holder
from time to time.
27. Miscellaneous. Unless otherwise provided herein, any notice or other
communication to a party hereunder shall be sufficiently given if in writing and
personally delivered or sent by facsimile with copy sent in another manner
herein provided or sent by overnight courier or mailed to said party by
certified
A-38
mail, return receipt requested, at its address provided for in the Exchange
Agreement or such other address as either may designate for itself in such
notice to the other and communications shall be deemed to have been received
when delivered personally, on the scheduled arrival date when sent by next day
or 2-day courier service or if sent by facsimile upon receipt of transmittal
confirmation or if sent by mail then three days after deposit in the mail.
Whenever the sense of this Debenture requires, words in the singular shall be
deemed to include the plural and words in the plural shall be deemed to include
the singular. If more than one company is named herein, the liability of each
shall be joint and several. Paragraph headings are for convenience only and
shall not affect the meaning of this document.
28. Choice of Law and Venue; Waiver of Jury Trial. THIS DEBENTURE SHALL BE
CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAW OR CHOICE OF LAW (OTHER THAN SECTION 5-1401 OF THE NEW YORK
GENERAL OBLIGATIONS LAW). The parties hereto hereby agree that all actions or
proceedings arising directly or indirectly from or in connection with this
Debenture shall be litigated only in the United States District Court for the
Southern District of New York located in New York County, New York or in a state
court located in the borough of Manhattan. The parties hereto consent to the
exclusive jurisdiction and venue of the foregoing courts and consent that any
process or notice of motion or other application to either of said courts or a
judge thereof may be served inside or outside the State of New York or the
Southern District of New York by registered mail, return receipt requested,
directed as provided in Section 26 hereof (and service so made shall be deemed
complete five (5) days after the same has been posted as aforesaid) or by
personal service or in such other manner as may be permissible under the rules
of said courts. The parties hereto hereby waive any right to a jury trial in
connection with any litigation pursuant to this Debenture.
29. Rule 144. The Company agrees to use its reasonable best efforts to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 promulgated under the Securities Act
('Rule 144'), at all times;
(b) file with the SEC in a timely manner all reports and other documents
required of the Company under the Act and the Securities Exchange Act; and
(c) furnish to any Holder, forthwith upon request, a written statement
by the Company (provided true at the time) that it has complied with the
applicable reporting and filing requirements of the Act and the Exchange
Act, a copy of the most recent annual or quarterly report of the Company,
and such other reports and documents so filed by the Company as may be
reasonably requested to permit any such Holder to take advantage of any rule
or regulation of the SEC permitting the selling of any such securities
without registration.
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EXHIBIT 4(e)(i)
(To be Executed by Registered Holder in order to Convert Debenture)
CONVERSION NOTICE FOR
7.5% SENIOR CONVERTIBLE DEBENTURE DUE AUGUST 2, 2004
The undersigned, as Holder of the 7.5% Senior Convertible Debenture Due
August 2, 2007 of SORRENTO NETWORKS CORPORATION (the 'Company'), No. , in the
outstanding principal amount of $ (the 'Debenture'), hereby elects to
convert $ of the outstanding principal amount of the Debenture into
shares of Common Stock, par value $[ ] per share (the 'Common Stock') of the
Company, according to the conditions of the Debenture, as of the date written
below. The undersigned confirms that the representations and warranties
contained in Section [ ] of the Exchange Agreement entered into in connection
with the initial issuance of the Debentures are true and correct as to the
undersigned as of the date hereof and that the requested conversion will not
violate the limitations contained in Section 4 (b) of the Debenture.
a. Date of Conversion: ................................................
b. Principal Amount of Debentures to be converted: ....................
c. Interest accrued (from last Interest Payment Date to Date of
Conversion) on Principal Amount of Debenture to be converted: ......
d. Total amount to be converted (sum of (b) and (c)): .................
e. Tax ID Number (If applicable): .....................................
Please confirm the following information: .................................
f. Conversion Price: ..................................................
g. Number of shares of Common Stock to be issued: .....................
Please issue the Common Stock into which the Debentures are being converted
and, if applicable, any check drawn on an account of the Company in the
following name and to the following address:
Issue to: .............................................................
Address: ..............................................................
Telephone Number: .....................................................
Facsimile Number: .....................................................
Authorization: ........................................................
By: ...................................................................
Title: ................................................................
Dated: ................................................................
Account Number (if electronic book entry transfer): ...................
Transaction Code Number (if electronic book entry transfer): ..........
[NOTE TO HOLDER -- THIS FORM MUST BE SENT CONCURRENTLY TO
TRANSFER AGENT]
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INDEX OF TERMS
DEFINED TERM SECTION
------------ -------
Acquiring Entity ................................................. Section 10(a)
Act .................................................................. Section 2
Allowable Grace Period ............................................... Section 3
Bloomberg ............................................................ Section 3
Business Day ......................................................... Section 3
Buy-In ........................................................ Section 4(e)(iv)
Cash Interest Payment ................................................. Preamble
Change of Control .................................................... Section 3
Closing Sale Price ................................................... Section 3
Collateral ........................................................... Section 3
Collateral Agent ..................................................... Section 3
Collateral Agent Agreement ........................................... Section 3
Collateral Documents ................................................. Section 3
Common Stock ......................................................... Section 3
Company ............................................................... Preamble
Consolidation Date ............................................... Section 16(a)
Consummation Date ................................................... Section 10
Conversion Date ............................................... Section 4(e)(ii)
Conversion Failure ........................................ Section 4(e)(iii)(C)
Conversion Notice .............................................. Section 4(e)(i)
Conversion Price ..................................................... Section 3
Conversion Rate ................................................... Section 4(d)
Debenture ............................................................. Preamble
Debentures ............................................................ Preamble
Debenture Delivery Date ....................................... Section 4(e)(ii)
Debenture Register .................................................... Preamble
Deeds of Trust ....................................................... Section 3
Default Interest ...................................................... Preamble
DTC ........................................................... Section 4(e)(ii)
Events of Default ................................................... Section 20
Exchange Act ...................................................... Section 4(b)
Exchange Agreement ................................................... Section 3
Exchange Cap ...................................................... Section 4(b)
Holder ................................................................ Preamble
Indebtedness ..................................................... Section 20(i)
Interest Conversion Price ............................................ Section 3
Interest Payment Date ................................................. Preamble
Interest Payments ..................................................... Preamble
Interest Payment Shares .............................................. Section 3
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Issuance Date ........................................................ Section 3
Lien ................................................................. Section 3
Majority Holders ..................................................... Section 3
Maturity Date ......................................................... Preamble
Meret ................................................................ Section 3
NASDAQ ............................................................... Section 3
Net Proceeds ......................................................... Section 3
Notice of Change .................................................... Section 10
Notice of Triggering Event ........................................ Section 6(c)
Notice of Redemption at Option of Buyer ........................... Section 6(c)
Non-Cash Payment Methods ............................................. Section 3
Non-Cash Proceeds .................................................... Section 3
Obligations .......................................................... Section 3
Organic Change ....................................................... Section 3
Outstanding Principal Amount .......................................... Preamble
Permitted Credit Line ................................................ Section 3
Permitted Equipment Financing ........................................ Section 3
Permitted Liens ...................................................... Section 3
Person ............................................................... Section 3
Pledge Agreement ..................................................... Section 3
Primary Preferred .................................................... Section 3
Real Property ........................................................ Section 3
Redemption ........................................................ Section 5(a)
Redemption Price .................................................. Section 5(a)
Registration Rights Agreement ........................................ Section 3
Registration Securities .............................................. Section 3
Required Holders ..................................................... Section 3
Rule 144 ............................................................ Section 28
Security Agreement ................................................... Section 3
Share Delivery Date ........................................... Section 4(e)(ii)
Shelf Registration Statement ......................................... Section 3
SNI .................................................................. Section 3
Transfer Agent ................................................. Section 4(e)(i)
Triggering Event .................................................. Section 6(b)
Triggering Event Redemption Price ................................. Section 6(a)
Void Optional Redemption Notice ................................... Section 6(e)
Void Optional Redemption Option ................................... Section 6(e)
Weighted Average Price ............................................... Section 3
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EXHIBIT J
STOCK PURCHASE WARRANT
THE WARRANTS EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE
OFFERED OR SOLD WITHOUT REGISTRATION UNLESS AN EXEMPTION FROM REGISTRATION IS
AVAILABLE UNDER SUCH ACT, OR THE RULES OR REGULATIONS PROMULGATED THEREUNDER,
AND ANY APPLICABLE STATE SECURITIES LAWS
WARRANT TO PURCHASE SHARES OF COMMON STOCK AS
DESCRIBED HEREIN
Issue Date: , 2003 Series '[ ]' No. [ ]
Expiration Date: , 2007
This certifies that, for value received, , or its permitted
successors and assigns ('Holder') is entitled to purchase from [ ],
a Delaware corporation (the 'Company'), up to and including fully
paid and nonassessable shares (the 'Warrant Shares') of the Common Stock,
[$ ] par value per share, of the Company (the 'Common Stock') on the terms
set forth herein at an exercise price of $ per share (the 'Purchase Price').
The Warrant Shares and the Purchase Price may be adjusted from time to time as
described in this Warrant.
1. Exercise.
1.1 Time for Exercise. Subject to Section 7, this Warrant may be exercised
in whole or in part at any time, and from time to time, during the period
commencing on , 2004 [FIRST ANNIVERSARY OF THE CLOSING], or such
earlier time as the Company may direct in its sole discretion, and expiring on
August 2, 2007 (subject to extension as set forth in Section 8, the 'Exercise
Period'). Notwithstanding the foregoing, the Exercise Period may automatically
expire earlier as and upon the conditions set forth in Section 5.
1.2 Manner of Exercise. Subject to Section 7, this Warrant shall be
exercised by delivering it to the Company with the exercise form duly completed
and signed, specifying the number of shares as to which the Warrant is being
exercised at that time (the 'Exercise Number'). The Holder shall simultaneously
deliver to the Company, a certified check in an amount equal to the Exercise
Number multiplied by the Purchase Price. Any such deliveries must be made to the
Company's then-current principal executive offices, Attention: Chief Financial
Officer. The Holder shall be responsible for the manner of delivery and the
Company shall have no liability of any kind whatsoever for failure of the chosen
method of delivery.
1.3 Effect of Exercise. Subject to Section 7, promptly after any exercise,
the Company shall deliver to the Holder (i) duly executed certificates in the
name or names specified in the exercise notice representing the aggregate number
of shares issuable upon such exercise, and (ii) if this Warrant is exercised
only in part, a new Warrant of like tenor representing the balance of the
Warrant Shares. Such certificates shall be deemed to have been issued, and the
person receiving them shall be deemed to be a holder of record of such shares,
as of the close of business on the date the actions required in Section 1.2
shall have been completed or, if on that date the stock transfer books of the
Company are closed, as of the next business day on which the stock transfer
books of the Company are open.
2. Transfer of Warrants and Stock.
2.1 Transfer Restrictions. This Warrant may not be transferred or assigned
except (i) by the record holder, if a broker, dealer or other nominee, to the
beneficial owner as of [ , 2003] [THE RECORD DATE ESTABLISHED FOR
DISTRIBUTION OF THE WARRANTS], (ii) pursuant to the laws of descent and
distribution or (iii) pursuant to a qualified domestic relations transfer order.
In addition, this Warrant may not be transferred unless the Company shall have
been supplied with
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reasonably satisfactory evidence that such transfer is not in violation of the
Securities Act of 1933, as amended, and any applicable state securities laws and
is otherwise in compliance with the terms of this Warrant. The Company may place
a legend to that effect on this Warrant and any replacement Warrant.
2.2 Manner of Transfer. Upon delivery of this Warrant to the Company with
the assignment form duly completed and signed and if the transfer is otherwise
permitted by the terms of this Agreement, the Company will promptly execute and
deliver to each permitted transferee and, if applicable, the Holder, Warrants of
like tenor evidencing the rights (i) of the transferee(s) to purchase the number
of Warrant Shares specified for each in the assignment forms, and (ii) of the
Holder to purchase any untransferred portion, which in the aggregate shall equal
the number of Warrant Shares of the original Warrant. If this Warrant is
properly assigned in its entirety in compliance with this Section 2, it may be
exercised by an assignee without having a new Warrant issued.
2.3 Loss, Destruction or Mutilation of Warrant. Upon receipt of
(i) evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of any Warrant and (ii) except in the case of
mutilation, an indemnity or security reasonably satisfactory to the Company, the
Company will promptly execute and deliver a replacement Warrant of like tenor
representing the right to purchase the same number of Warrant Shares.
3. Cost of Issuances. The Company shall pay all expenses, transfer taxes and
other charges payable in connection with the preparation, issuance and delivery
of stock certificates or replacement Warrants, except for any transfer tax or
other charge imposed as a result of (a) any issuance of certificates in any name
other than the name of the Holder, or (b) any permitted transfer of the Warrant.
The Company shall not be required to issue or deliver any stock certificate or
Warrant until it receives reasonably satisfactory evidence that any such tax or
other charge has been paid by the Holder.
4. Anti-Dilution Provisions.
If any of the following events occur at any time hereafter during the life
of this Warrant, then the Purchase Price and the Warrant Shares immediately
prior to such event shall be changed as described in order to prevent dilution:
4.1 Stock Dividends, Subdivisions, Reclassifications or Combinations. If the
Company shall (i) declare a dividend or make a distribution on its Common Stock
in shares of its Common Stock, (ii) subdivide or reclassify the outstanding
shares of Common Stock into a greater number of shares, or (iii) combine or
reclassify the outstanding Common Stock into a smaller number of shares, the
Purchase Price in effect at the time of the record date for such dividend or
distribution or the effective date of such subdivision, combination or
reclassification shall be proportionately adjusted so that the Holder after such
date shall be entitled to receive the number of shares of Common Stock which
such Holder would have owned or been entitled to receive had this Warrant been
exercised immediately prior to such date. Successive adjustments in the Purchase
Price shall be made whenever any event specified above shall occur.
4.2 Consolidation, Merger, Sale, Lease or Conveyance or Reclassifications or
Reorganizations. In case the Company shall at any time after the date of
issuance of this Warrant consolidate with, or merge with or into, any other
corporation or entity or engage in any reorganization, recapitalization, sale of
all or substantially all of the Company's assets to any entity or any other
transaction which is effected in such a manner that the holders of Common Stock
are entitled to receive stock, securities or assets with respect to or in
exchange for the Common Stock, then this Warrant shall after the date of such
consolidation, merger, sale, lease or conveyance or such reclassification,
reorganization or other change be exercisable into the number of shares of stock
or other securities or property (including cash) to which the Common Stock
issuable (at the time of such consolidation, merger, sale, lease or conveyance
or such reclassification, recapitalization or other change) upon exercise of
this Warrant would have been entitled upon such consolidation, merger, sale,
lease or conveyance or such reclassification, recapitalization or other change;
and in any such case, if necessary, the provisions set forth in this Section 4
with respect to the rights and
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interests thereafter of the Holder shall be appropriately adjusted so as to be
applicable, as nearly as may reasonably be, to any shares of stock or other
securities or property thereafter deliverable on the exercise of this Warrant.
4.3 Notice to Holders. In the event the Company shall propose to take any
action of the type described in Section 4.1 or Section 4.2, the Company shall
give notice to the Holder, which notice shall specify the record date, if any,
with respect to any such action and the approximate date on which such action is
to take place. Such notice shall also set forth such facts with respect thereto
as shall be reasonably necessary to indicate the effect of such action on the
Purchase Price and the number, kind or class of shares or other securities or
property which shall be deliverable upon exercise of this Warrant. In the case
of any action which would require the fixing of a record date, such notice shall
be given at least 15 days prior to the date so fixed, and in the case of all
other action, such notice shall be given at least 20 days prior to the taking of
such proposed action.
4.4 Statement Regarding Adjustments. Upon the occurrence of each adjustment
or readjustment of the Purchase Price pursuant to this Section 4, the Company
shall compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to the Holder a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Company may satisfy this requirement by
including information about such adjustments in the documents it files publicly
with the Securities and Exchange Commission (the 'SEC').
5. Repurchase of Warrant.
5.1 Repurchase Right of the Company. The Company may repurchase this Warrant
at any time, upon at least thirty (30) days prior written notice (the
'Repurchase Notice'), which such notice may be in the form of a press release or
a public filing by the Company with the SEC and which shall set forth the date
on which this Warrant shall be repurchased (the 'Repurchase Date'), for [$.01]
per Warrant Share (the 'Repurchase Price') at any time after the Market Price
(as defined in Section 5.4) of the Common Stock equals or exceeds 150% of the
Exercise Price. The Company may, but need not, condition payment of the
Repurchase Price on surrender of this Warrant to the Company in a manner to be
prescribed in writing by the Company. Whether or not this Warrant is surrendered
to the Company, this Warrant shall not be exercisable and shall be deemed
cancelled on the Repurchase Date if the Repurchase Price is paid on such date or
is irrevocably set aside for payment to the Holder as described below. In
addition, if the Company issues a Repurchase Notice, this Warrant may be
exercised in accordance with Section 1 hereof no later than the fifth (5th)
business day prior to the Repurchase Date; unless the Company otherwise consents
to such exercise. Unless otherwise specified by the Company, payment of the
Repurchase Price shall be made to the Holder at the last address of the Holder
on the Company's warrant transfer books.
5.2 Payment of Repurchase Price. On or prior to the Repurchase Date, the
Company shall deposit the Repurchase Price for this Warrant with a bank or trust
company having aggregate capital and surplus in excess of $50,000,000, as a
trust fund, with irrevocable instructions and authority to the bank or trust
company to pay, on and after such Repurchase Date, the Repurchase Price of the
Warrant to the Holder upon, at the Company's election, the surrender of the
Warrant. Any monies deposited by the Company pursuant to this Section 5.2 for
the redemption of this Warrant which, prior thereto in accordance with
Section 5.1 hereof, are exercised for Warrant Shares shall be returned to the
Company forthwith upon such exercise. The balance of any funds deposited by the
Company pursuant to this Section 5.2 remaining unclaimed at the expiration of
one (1) year following such Repurchase Date shall be returned to the Company
promptly upon its written request.
5.3 Surrender of Warrant. On or after the Repurchase Date, the Holder shall,
at the Company's election, surrender this Warrant to the Company in the manner
and at the place designated in the Repurchase Notice, and thereupon the
Repurchase Price shall be payable to the order of the Holder and this Warrant
shall be canceled. From and after the Repurchase Date, unless there shall have
been a default in payment of the Repurchase Price, all rights of the Holder
(except the right to receive the Repurchase Price without interest upon, at the
Company's election,
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surrender of the Warrant), shall cease and terminate with respect to this
Warrant; provided, however, that in the event that this Warrant is not
repurchased due to a default in payment by the Company, this Warrant shall
remain outstanding and shall be entitled to all of the rights provided herein.
5.4 Market Price. As used in this Warrant, 'Market Price' per share of
Common Stock means, as of any specified date on which the Common Stock is
publicly traded, the volume-weighted average of the daily market prices of the
Common Stock over the ten (10) consecutive trading days immediately preceding
(and not including) such date. The `daily market price' for each such trading
day shall be (i) the closing sales price on such day on the principal securities
exchange on which the Common Stock is then listed or admitted to trading or on
Nasdaq, as applicable, (ii) if no sale takes place on such day on any such
securities exchange or system, the average of the closing bid and asked prices,
regular way, on such day for the Common Stock as officially quoted on any such
securities exchange or system, (iii) if the Common Stock is not then listed or
admitted to trading on any securities exchange or system, the last reported sale
price, regular way, on such day for the Common Stock, or if no sale takes place
on such day, the average of the closing bid and asked prices for the Common
Stock on such day, as reported by Nasdaq or the National Quotation Bureau, and
(iv) if the Common Stock is not then listed or admitted to trading on any
securities exchange and if no such reported sale price or bid and asked prices
are available, the average of the reported high bid and low asked prices on such
day, as reported by a reputable quotation service, or a newspaper of general
circulation in the City of Los Angeles, State of California, customarily
published on each business day.
6. Covenants. The Company agrees that:
6.1 Reservation of Stock. During the period in which this Warrant may be
exercised, the Company will reserve sufficient authorized but unissued
securities (and, if applicable, property) to enable it to satisfy its
obligations on exercise of this Warrant. If at any time the Company's authorized
securities shall not be sufficient to allow the exercise of this Warrant, the
Company shall take such corporate action as may be necessary to increase its
authorized but unissued securities to be sufficient for such purpose;
6.2 No Liens, etc. All securities that may be issued upon exercise of this
Warrant will, upon issuance, be validly issued, fully paid, nonassessable and
free from all taxes, liens and charges with respect to the issue thereof, and
shall be listed on any exchanges on which that class of securities is listed;
6.3 No Diminution of Value. The Company will not take any action to
terminate this Warrant or to diminish it in value;
6.4 Furnish Information. The Company will promptly deliver to the Holder
upon request copies of all financial statements, reports and proxy statements
which the Company shall have sent to its stockholders generally; and
6.5 Stock and Warrant Transfer Books. Except upon dissolution, liquidation
or winding up or for ordinary holidays and weekends, the Company will not at any
time close its stock or warrant transfer books so as to result in preventing or
delaying the exercise or transfer of this Warrant.
7. Status of Holder.
7.1 Not Stockholder. Unless the Holder exercises this Warrant in writing,
the Holder shall not be entitled to any rights (i) as a stockholder of the
Company with respect to the shares as to which the Warrant is exercisable,
including, but not limited to, the right to vote or receive dividends or other
distributions, or (ii) to receive any notice of any proceedings of the Company
except as otherwise provided in this Warrant.
7.2 Limitation of Liability. Unless the Holder exercises this Warrant in
writing, the Holder's rights and privileges hereunder shall not give rise to any
liability for the Purchase Price or as a stockholder of the Company, whether to
the Company or its creditors.
8. Registration. The Company intends to file a registration statement (the
'Registration Statement') with the Securities and Exchange Commission to
register its sale of the Warrant
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Shares to the Holder upon the Holder's exercise of this Warrant. The Company
will use its commercially reasonable efforts to maintain the effectiveness of
the Registration Statement throughout the Exercise Period, but reserves the
right to suspend the effectiveness of the Registration Statement at any time and
from time to time in its discretion. Any such suspension will not affect the
Exercise Period, except if any such suspension occurs during the last thirty
(30) days of the Exercise Period, in which case the Exercise Period will be
extended on a day-for-day basis for each day the effectiveness of the
Registration Statement is suspended. Any attempt by a Holder to exercise this
Warrant at a time when the effectiveness of the Registration Statement has been
suspended shall be null and void. The Company will promptly return to the Holder
any documents and the Exercise Price delivered by the Holder in connection with
any such null and void attempted exercise. In addition, the Company will use its
commercially reasonable efforts to send notice to the Holder within fifteen (15)
business days of receipt of any such null and void attempted exercise that such
attempted exercise was null and void and to subsequently inform such Holder when
the Registration Statement is again effective.
9. General Provisions.
9.1 Complete Agreement; Modifications. This Warrant and any documents
referred to herein or executed contemporaneously herewith constitute the
parties' entire agreement with respect to the subject matter hereof and
supersede all agreements, representations, warranties, statements, promises and
understandings, whether oral or written, with respect to the subject matter
hereof. This Warrant may not be amended, altered or modified except by a writing
signed by the parties hereto.
9.2 Additional Documents. The Company and, by accepting this Warrant, the
Holder agrees to execute any and all further documents and writings and to
perform such other actions which may be or become necessary or expedient to
effectuate and carry out this Warrant.
9.3 Notices. Except as otherwise provided herein, all notices under this
Warrant shall be in writing and shall be delivered by personal service or
telecopy or certified mail (if such service is not available, then by first
class mail), postage prepaid, to the Company's principal business address, and
the Holder's last address as set forth in the Warrant transfer records of the
Company. Any notice sent by certified mail shall be deemed to have been given
three (3) days after the date on which it is mailed. All other notices shall be
deemed given when received. No objection may be made to the manner of delivery
of any notice actually received in writing by an authorized agent of a party.
9.4 No Third-Party Benefits; Successors and Assigns. None of the provisions
of this Warrant shall be for the benefit of, or enforceable by, any third-party
beneficiary. Except as provided herein to the contrary, this Warrant shall be
binding upon and inure to the benefit of the parties, their respective
successors and permitted assigns.
9.5 Governing Law. This Agreement will be governed by Delaware substantive
law, regardless of the choice of law provisions of any jurisdiction.
9.6 Waivers Strictly Construed. With regard to any power, remedy or right
provided herein or otherwise available to any party hereunder (i) no waiver or
extension of time shall be effective unless expressly contained in a writing
signed by the waiving party; and (ii) no alteration, modification or impairment
shall be implied by reason of any previous waiver, extension of time, delay or
omission in exercise, or other indulgence.
9.7 Severability. The validity, legality or enforceability of the remainder
of this Warrant shall not be affected even if one or more of its provisions
shall be held to be invalid, illegal or unenforceable in any respect.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
by its authorized officer.
[ ]
Dated: , 2003 By: ..........................
[ ]
[ ]
ATTEST:
.....................................
[ ]
[ ]
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EXERCISE FORM
(To be executed if the Holder desires
to exercise the Warrant Certificate)
The undersigned hereby irrevocably exercises this Warrant to purchase
shares of Common Stock and herewith makes payment of $ in payment
of the Purchase Price thereof on the terms and conditions specified in this
Warrant Certificate, surrenders this Warrant Certificate and all right, title
and interest herein to the Company and directs that the Warrant Shares
deliverable upon the exercise of such Warrants be registered in the name and at
the address specified below and delivered thereto.
Name ....................................................
(PLEASE PRINT OR TYPE)
Address .................................................
City, State and Zip Code ................................
Taxpayer Identification
or Social Security Number .............................
Dated: ........................ ..............................
SIGNATURE OF REGISTERED HOLDER
NOTICE
The signature to the foregoing Subscription Form must correspond to the name
as written upon the face of this Warrant Certificate in every particular,
without alteration or enlargement or any change whatsoever.
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WARRANT ASSIGNMENT FORM
(To be executed by the Holder if such Holder desires to transfer the Warrant
Certificate as and solely to the extent permitted by the Warrant.)
FOR VALUE RECEIVED, hereby sells, assigns and transfers to:
Name ....................................................
(PLEASE PRINT)
Address .................................................
City, State and Zip Code ................................
Taxpayer Identification
or Social Security Number .............................
the right to purchase up to Warrant Shares represented by this Warrant
Certificate and does hereby irrevocably constitute and appoint
to transfer said Warrant on behalf of the Company, with
full power of substitution in the premises.
Dated: ........................ ..............................
SIGNATURE OF REGISTERED HOLDER
NOTICE
The signature to the foregoing Warrant Assignment Form must correspond to
the name as written upon the face of this Warrant Certificate in every
particular, without alteration or enlargement or any change whatsoever.
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EXHIBIT L
ANTI-DILUTION PROTECTION
1. General. For a period of one year after the Closing Date (the
'Anti-Dilution Period'), subject to Section 2 below, Exchanging Holders as of
the Closing Date who thereafter continue to hold Exchange Shares, New Debentures
acquired as of the Closing (the 'Closing Debentures') or Conversion Shares
issued upon conversion of Closing Debentures shall be entitled to the weighted
average anti-dilution protection set forth in Sections 5 and 6 of this Exhibit L
for such securities for issuances of Common Stock at less than the Reference
Price. If during the Anti-Dilution Period the Company grants to any person or
entity more favorable anti-dilution protection than the weighted average
protection provided for herein, the Exchanging Holders who continue to hold
Exchange Shares, Closing Debentures or Conversion Shares issued upon conversion
of Closing Debentures shall be entitled to such more favorable protection for
the duration of the Anti-Dilution Period after such grant.
2. Exclusions. The anti-dilution protection provided in Section 1 shall not
apply (each, an 'Exempt Issuance') to (A) any New Underwriting, (B) the issuance
of any shares pursuant to conversion of the New Debentures, as payment in kind
of interest on the New Debentures in accordance with the provisions thereof or
the exercise of the Warrants, the New Options or the Existing Options or (C) any
other public offering (other than a New Underwriting) or private placement of
Common Stock or securities convertible into Common Stock for consideration which
is all cash to the Company and with respect to which (1) the effective price per
share of Common Stock is equal to or greater than the Reference Price or (2) (x)
the price per share of Common Stock is less than the Reference Price but equal
to or greater than the volume-weighted average market price for the ten (10)
trading days immediately before the issuance of, or, if earlier, the date of any
agreement to issue, such Common Stock and (y) such issuance is approved by a
majority vote of the Board, including the designee of the Series A Preferred
Holders, and, in the case of both clauses (1) and (2), no additional
consideration is transferred to or received by the recipient of the Common Stock
or securities convertible into Common Stock.
3. Additional Anti-Dilution Protection for Issuances Upon Exercise of
Certain Options. In addition to the anti-dilution protection provided in Section
5 and Section 6 of this Exhibit L, if during the Anti-Dilution Period, the
Company is required to issue Common Stock upon the exercise of any right, option
or warrant that was issued prior to the Closing Date that is not an Existing
Option (an 'Undisclosed Option'), the Company will notify the Exchanging Holders
who continue to hold the Exchange Shares, Closing Debentures or Conversion
Shares issued upon conversion of Closing Debentures and will issue additional
shares of Common Stock to such Exchanging Holders, and will adjust the
Conversion Price of the Closing Debentures then held by the Exchanging Holders,
sufficient to offset the dilutive impact of such issuances, in accordance with
the provisions of Sections 5 and 6 of this Exhibit L. To implement this Section
3, the exercise of any Undisclosed Option shall be treated as the grant and
exercise of an Option (as defined in Section 4(i), below) after the Original
Issue Date.
4. Definitions. For purposes of this Exhibit L, the following definitions
apply (other capitalized terms used herein and not otherwise defined in this
Exhibit L shall have the meaning set forth in the Agreement):
(i) 'Options' shall mean rights, options, or warrants to subscribe for,
purchase or otherwise acquire either Common Stock or Convertible Securities.
(ii) 'Original Issue Date' shall mean the Closing Date.
(iii) 'Convertible Securities' shall mean any evidences of indebtedness,
shares (other than Common Stock) or other securities convertible into or
exchangeable for Common Stock.
(iv) 'Conversion Price' shall mean the Reference Price.
(v) 'Additional Shares of Common Stock' shall mean all shares of Common
Stock issued (or, pursuant to Section 5.1(2) deemed to be issued) by the
Company after the Original Issue
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Date, other than shares of Common Stock issued or deemed to be issued in
connection with any Exempt Issuance.
5. Anti-Dilution Protection for Closing Debentures
5.1 Adjustments of Conversion Price of Closing Debentures for Certain
Diluting Issues.
(1) No Adjustment of Conversion Price. No adjustment in the Conversion Price
of the Closing Debentures shall be made in respect of the issuance of Additional
Shares of Common Stock unless the consideration per share for an Additional
Share of Common Stock issued or deemed to be issued by the Company is less than
the Conversion Price in effect on the date of, and immediately prior to such
issue.
(2) Deemed Issue of Additional Shares of Common Stock. If the Company at any
time or from time to time after the Original Issue Date issues any Options or
Convertible Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
designed to protect against dilution) of Common Stock issuable upon the exercise
of such Options or, in the case of Convertible Securities and Options therefor,
the conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of such issuance of
Options or Convertible Securities; provided, however, that Additional Shares of
Common Stock shall not be deemed to have been issued unless the consideration
per share (determined pursuant to Section 5.1.4 hereof) of such Additional
Shares of Common Stock would be less than the Conversion Price in effect on the
date of and immediately prior to such issuance of Options or Convertible
Securities, or such record date, as the case may be; and provided further that
in any such case in which Additional Shares of Common Stock are deemed to be
issued:
(i) no further adjustments in the Conversion Price shall be made upon
the subsequent issue of Convertible Securities or shares of Common Stock
upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(ii) if such Options or Convertible Securities by their terms provide,
with the passage of time or otherwise, for any increase in the consideration
payable to the Company, or decrease in the number of shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof, the Conversion
Price computed upon the original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent adjustments based
thereon, shall, upon any such increase or decrease becoming effective, be
recomputed to reflect such increase or decrease insofar as it affects such
Options or the rights of conversion or exchange under such Convertible
Securities; provided, however, that no such adjustment of the Conversion
Price shall affect shares of Common Stock previously issued upon conversion
of the Closing Debentures (although such Conversion Shares issued upon
conversion of Closing Debentures shall be entitled to the benefits of
Section 6 hereof);
(iii) Upon the expiration of any such Options or any rights of
conversion or exchange under such Convertible Securities which shall not
have been exercised, the Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and
any subsequent adjustments based thereon, shall, upon such expiration, be
recomputed as if:
(A) in the case of Convertible Securities or Options for Common
Stock, the only Additional Shares of Common Stock issued were the shares
of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities and
the consideration received therefor was the consideration actually
received by the Company for the issue of all such Options, whether or not
exercised, plus the consideration actually received by the Company upon
such exercise, or for the issue of all such Convertible Securities which
were actually converted or exchanged, plus additional consideration, if
any, actually received by the Company upon such conversion or exchange,
and
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(B) in the case of Options for Convertible Securities, only the
Convertible Securities, if any, actually issued upon the exercise thereof
were issued at the time of issue of such Options and the consideration
received by the Company for Additional Shares of Common Stock deemed to
have been then issued was the consideration actually received by the
Company for the issue of all such Options, whether or not exercised, plus
the consideration deemed to have been received by the Company (determined
pursuant to Section 5.1(4)) upon the issue of the Convertible Securities
with respect to which such Options were actually exercised;
(iv) no readjustment pursuant to Sections 5.1(2)(ii) or (iii) above
shall have the effect of increasing the Conversion Price to an amount which
exceeds the lower of (1) the Conversion Price on the original adjustment
date, or (2) the Conversion Price that would have resulted from any issuance
of Additional Shares of Common Stock between the original adjustment date
and such readjustment date;
(v) in the case of any Options which expire by their terms not more than
sixty (60) days after the date of issue thereof, no adjustment of the
Conversion Price shall be made, except to the extent the Option is exercised
in such period, until the expiration or exercise of all such Options,
whereupon such adjustment shall be made in the same manner provided in
Section 5.1(2)(iii) above; and
(vi) if any such record date shall have been fixed and such Options or
Convertible Securities are not issued on the date fixed therefor, the
adjustment previously made in the Conversion Price which became effective on
such record date shall be canceled as of the close of business on such
record date, and shall instead be made on the actual date of issuance, if
any, of such Options or Convertible Securities.
(3) Adjustment of Conversion Price Upon Issuance of Additional Shares of
Common Stock. If the Company issues Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Section
5.1(2)) without consideration or for a consideration per share less than the
Conversion Price in effect on the date of and immediately prior to such issue,
then and in such event, the Conversion Price shall be reduced, concurrently with
such issue, to a price (calculated to the nearest cent) determined by
multiplying the Conversion Price by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding (determined on a Fully Diluted
Basis (as defined below)) immediately prior to such issue plus the number of
shares of Common Stock which the aggregate consideration received or to be
received by the Company for the total number of Additional Shares of Common
Stock so issued would purchase at the Conversion Price, and the denominator of
which shall be the number of shares of Common Stock outstanding (determined on a
Fully Diluted Basis) immediately prior to such issue plus the number of such
Additional Shares of Common Stock so issued. For the purposes of the above
calculation, the number of shares of Common Stock outstanding immediately prior
to such issuance shall be calculated on a 'Fully Diluted Basis,' meaning as if
all shares of Convertible Securities had been fully converted into shares of
Common Stock immediately prior to such issuance and the New Debentures and any
outstanding Options (other than Options issued to directors, officers, employees
or advisors of, or consultants to, the Company that were outstanding prior to
the Closing Date) had been fully converted or exercised, as applicable,
immediately prior to such issuance (and the resulting securities fully converted
into shares of Common Stock, if so convertible) as of such date but not
including in such calculation any additional shares of Common Stock issuable
with respect to the Exchange Shares, the New Debentures, Convertible Securities
or outstanding Options solely as a result of the adjustment of the Conversion
Price (or other conversion ratios) resulting from the issuance of Additional
Shares of Common Stock causing such adjustment. For the purposes of the
foregoing, outstanding Options shall be deemed to include (without duplication)
any Options issued to directors, officers, employees or advisors of, or
consultants to, the Company in accordance with plans or other arrangements
approved by the Board of Directors of the Company (other than those issued prior
to the Closing Date).
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(4) Determination of Consideration. For purposes of Section 5.1(3), the
consideration received by the Company for the issuance of any Additional Shares
of Common Stock shall be computed as follows:
(i) Cash and Property. Such consideration shall:
(A) insofar as it consists of cash, be computed at the aggregate
amount of cash received by the Company, excluding amounts paid or payable
for accrued interest or accrued dividends;
(B) insofar as it consists of services, goods or other property other
than cash, be computed at the fair value thereof at the time of such
issue, as determined in good faith by the Board of Directors of the
Company; and
(C) if Additional Shares of Common Stock are issued together with
other shares or securities or other assets of the Company for
consideration which covers both cash and services, goods or other
property other than cash, be in the proportion of such consideration so
received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors of the Company.
(ii) Options and Convertible Securities. The consideration per share
received by the Company for Additional Shares of Common Stock deemed to have
been issued pursuant to Section 5.1(2) relating to Options and Convertible
Securities, shall be determined by dividing:
(A) the total amount, if any, received or receivable by the Company
as consideration for the issue of such Options or Convertible Securities,
plus the maximum aggregate amount of additional consideration (as set
forth in the instruments relating thereto, without regard to any
provision contained therein designed to protect against dilution) payable
to the Company upon the exercise of such Options or the conversion or
exchange of such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities
by
(B) the maximum number of shares of Common Stock (as set forth in the
instruments relating thereto, without regard to any provision contained
therein designed to protect against dilution) issuable upon the exercise
of such Options or the conversion or exchange of such Convertible
Securities.
5.2 Notice to Holders. If the Company takes any action of the type that
would require an adjustment on the Conversion Price pursuant to this Section 5,
the Company shall give written notice to the holders of the Closing Debentures
entitled to the benefits of this Section 5, which notice shall specify the
record date, if any, with respect to any such action and the approximate date on
which such action took place. Such notice shall also set forth such facts with
respect thereto as shall be reasonably necessary to indicate the effect of such
action on the Conversion Price.
6. Anti-Dilution Protection for Exchange Shares
6.1 Issuances of Additional Shares of Common Stock for Certain Diluting
Issuances.
(1) Issuance of Additional Shares Following Issuance or Deemed Issue of
Additional Shares of Common Stock. If the Company issues Additional Shares of
Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to Section 5.1(2)) without consideration or for a consideration
(determined as provided in Section 5.1(3)) per share less than the Reference
Price, then and in such event, the Company shall issue a number of additional
shares of Common Stock to each Exchanging Holder that continues to hold Exchange
Shares or Conversion Shares issued upon conversion of Closing Debentures
(collectively, the 'Protected Shares') determined by (x) multiplying the number
of Protected Shares then owned by such Exchanging Holder by a fraction, the
denominator of which shall be the number of shares of Common Stock outstanding
(determined on a Fully Diluted Basis) immediately prior to such issue of
Additional Shares of Common Stock plus the number of such Additional Shares of
Common Stock so issued, and the numerator of which shall be the number of shares
of Common Stock outstanding (determined on
A-54
a Fully Diluted Basis) immediately prior to such issue plus the number of shares
of Common Stock which the aggregate consideration received by the Company for
the total number of Additional Shares of Common Stock so issued would purchase
at the Reference Price (with the resulting amount being rounded to the nearest
whole number), and subtracting from such amount (y) the number of Protected
Shares then owned by such Exchanging Holder.
6.2 Notice to Exchanging Holders and Delivery of Common Stock. If the
Company takes any action of the type that would require an issuance of shares of
Common Stock pursuant to this Section 6, the Company shall give written notice
to Exchanging Holders who continue to hold Exchange Shares and/or Conversion
Shares issued upon conversion of Closing Debentures and are entitled to the
benefits of this Section 6, which notice shall specify the record date, if any,
with respect to any such action and the approximate date on which such action
took place. Such notice shall also set forth such facts with respect thereto as
shall be reasonably necessary to indicate the effect of such action on the
Reference Price and the anti-dilutive share issuances required as a result
thereof pursuant to Section 6.1. The Company will include with the notice sent
to each such holder a certificate representing the shares of Common Stock
issuable to such holder as the result of the operation of Section 6.1. Such
certificate will include the same restrictive and other legends as are included
on the certificate for the underlying shares of Common Stock with respect to
which such shares are being issued, as well as any other legend required by law.
7. Record Holder. Each Exchanging Holder agrees to hold its Exchange Shares,
Closing Debentures and any Conversion Shares issued upon conversion of Closing
Debentures as to which it claims anti-dilution protection pursuant to this
Exhibit L in its own name and in an account segregated from any other shares of
Common Stock or New Debentures it may own in order for the Company to be able to
make the determinations, calculations and issuances, if any, required by Section
5 or Section 6. Each Exchanging Holder also agrees to provide the Company with
such information as the Company may reasonably request for the purpose of
verifying such information and complying with its obligations under Section 5
and Section 6, including providing the Company with information about such
segregated account.
8. Trades Between Exchanging Holders. Any Exchange Shares, Closing
Debentures or Conversion Shares issued upon conversion of Closing Debentures
that are acquired by any Exchanging Holder (the 'Acquiring Holder') from another
Exchanging Holder shall continue to be entitled to the benefits of the
anti-dilution provisions set forth herein and shall be deemed to be Exchange
Shares, Closing Debentures or Conversion Shares issued upon conversion of
Closing Debentures, as applicable, for purposes hereof.
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EXHIBIT M
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this 'Agreement') is entered into this
day of , 2003, by and between SORRENTO NETWORKS CORPORATION, a New
Jersey corporation (the 'Company'), and each of the persons and entities set
forth on the signature pages hereto (the 'Exchanging Holders' and, collectively
with the Company, the 'Parties').
A. The Company and the Exchanging Holders are parties to that certain
Exchange Agreement (the 'Exchange Agreement') dated as of March , 2003
pursuant to which, among other things, the Exchanging Holders have agreed,
subject to the terms and conditions set forth in the Exchange Agreement, to
exchange certain securities of the Company and one of its subsidiaries owned by
them for shares (the 'Exchange Shares') of common stock (the 'Common Stock'), of
the Company and 7.5% secured convertible debentures of the Company in the
aggregate principal amount of up to $13,450,000 (the 'New Debentures'). Under
certain circumstances, the Company may be required to issue additional shares of
Common Stock (the 'Dilution Shares') to Exchanging Holders which continue to
hold Exchange Shares. The New Debentures will be convertible into shares of
Common Stock (the 'Conversion Shares') and interest on the New Debentures may be
paid by the Company in shares of Common Stock (the 'Interest Shares'). In
addition, the Company may be required to issue additional shares of Common Stock
(the 'Anti-Dilution Shares') to the Exchanging Holders pursuant to certain
anti-dilution protective provisions set forth in the Exchange Agreement and the
New Debentures.
B. The Company and the Exchanging Holders desire to set forth the respective
rights of the Company and the Exchanging Holders with respect to the
registration of the resale of the Exchange Shares, the Conversion Shares, the
Dilution Shares and the Interest Shares by the Exchanging Holders.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises contained herein, the Parties agree as follows:
1. Definitions.
1.1 As used in this Agreement, the following capitalized terms shall have
the following meanings:
Advice: Shall have the meaning set forth in Section 7.2 hereof.
Controlling Person: Shall have the meaning set forth in Section 9.1
hereof.
Effectiveness Period: Shall have the meaning set forth in Section 2
hereof.
Exchange Act: The Securities Exchange Act of 1934, as amended from time
to time (including the rules and regulations promulgated thereunder).
Holders: The Exchanging Holders and any Person to which Registrable
Securities are transferred and to which the registration rights set forth in
this Agreement are assigned pursuant to Section 11 of this Agreement.
Indemnified Parties: Shall have the meaning set forth in Section 9.1
hereof.
Person: An individual; a corporation; a general, limited or limited
liability partnership; a limited liability company; a trust; an
unincorporated organization or other legal entity; or a government or any
agency or political subdivision thereof.
Prospectus: Shall mean the prospectus included in any Registration
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an
effective registration statement in reliance upon Rule 430A under the
Securities Act), as amended or supplemented by any prospectus supplement,
with respect to the terms of the offering of any portion of the Registrable
Securities.
Registrable Securities: The Exchange Shares, the Conversion Shares, the
Interest Shares, the Anti-Dilution Shares, plus any Shares (as defined
below) received with respect to or in
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replacement of any of the foregoing by reason of splits, dividends and
recapitalizations and other changes in the Company's capital structure;
provided, however, that such Shares shall cease to be Registrable Securities
when either (i) a Shelf Registration Statement covering such Registrable
Securities has been declared effective and such Registrable Securities have
been disposed of pursuant to such effective Shelf Registration Statement or
(ii) such Registrable Securities have been disposed of pursuant to Rule 144
promulgated under the Securities Act .
Registration Statement: Any registration statement (including, but not
limited to, the Shelf Registration Statement) of the Company filed under the
Securities Act which covers Registrable Securities pursuant to the
provisions of this Agreement, including the Prospectus, amendments and
supplements to such Registration Statement, including post-effective
amendments, all exhibits and all material incorporated by reference in such
Registration Statement.
SEC: The Securities and Exchange Commission.
Securities Act: The Securities Act of 1933, as amended from time to time
(including the rules and regulations promulgated thereunder).
Selling Holders: Holders of Registrable Securities who seek to sell such
securities under any Registration Statement.
Selling Holder Expenses: Shall have the meaning set forth in Section 6
hereof.
Shares: The shares of Common Stock of the Company or any securities of
the Company or any other Person received in respect of or in replacement of
such shares, including by reason of splits, dividends, recapitalizations,
reorganizations, mergers, exchange offers, business combinations or other
changes in the Company's or its successors' capital structure.
Shelf Registration Statement: A shelf registration statement of the
Company pursuant to the provisions of Section 2 hereof filed with the SEC
which covers all of the Registrable Securities on an appropriate form under
Rule 415 under the Securities Act, or any similar rule that may be adopted
by the SEC, amendments and supplements to such registration statement,
including post-effective amendments, in each case including the Prospectus
contained therein, all exhibits thereto and all material incorporated by
reference therein.
Transaction: Shall have the meaning set forth in Section 2 hereof.
2. Shelf Registration. As a condition to the consummation of the Exchange,
the Company agrees:
(i) to file a Shelf Registration Statement covering the offer and sale
from time to time by the Holders of the Registrable Securities in accordance
with the methods of distribution elected by such Holders and set forth in
such Shelf Registration Statement and to use its reasonable best efforts
cause such Shelf Registration Statement to be declared effective and to
maintain the effectiveness of such Shelf Registration Statement until the
earlier of the third anniversary of the Closing Date (as that term is
defined in the Exchange Agreement) or the date there cease to be any
Registrable Securities (the 'Effectiveness Period'); provided, however, that
the Effectiveness Period shall be extended on a day-for day basis for the
number of days that the Holders are subject to an underwriter's lock-up that
is not otherwise required by the terms of this Agreement and shall also be
subject to extension as provided in Section 6.3; and
(ii) after the effectiveness of the Shelf Registration Statement,
promptly upon the request of any Holder, to take any action reasonably
necessary to register the sale of any Registrable Securities of such Holder
and to identify such Holder as a selling securityholder.
The Company shall not be deemed to have violated its obligation to use its
reasonable best efforts to keep the Shelf Registration Statement effective
during the requisite period if, among other things, (i) the Company takes any
action required by applicable law or regulations that would result in Holders of
Registrable Securities covered thereby not being able to offer and sell any such
Registrable Securities during that period, or (ii) the continued effectiveness
of the Shelf Registration Statement would require the Company to disclose a
material financing, acquisition or
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other corporate transaction that is being contemplated by the Company (a
'Transaction'), and the Board of Directors shall have determined in good faith
that such disclosure might interfere with or adversely affect the negotiations
or completion of any such Transaction or is not otherwise in the best interests
of the Company and its stockholders. In the case of clause (i) above, the
Company shall promptly thereafter comply with the requirements of Section 5.8
below. In the case of clause (ii) above, the Company may suspend the
effectiveness of the Shelf Registration Statement (x) for not more than thirty
(30) consecutive days and (y) in any twelve (12) month period, not more than
twice, or for more than a total of sixty (60) days.
3. Incidental Registration.
3.1 Incidental Registration Rights. If at any time after the Closing Date
and during the Effectiveness Period, the Company proposes to register any shares
of Common Stock under the Securities Act (except pursuant to a registration
statement (i) on Form S-8, Form S-4 or comparable forms, or (ii) with respect to
an employee benefit plan, or (iii) solely in connection with a Rule 145
transaction under the Securities Act), or if any other stockholder is being
afforded an opportunity to register shares of Common Stock, the Company will at
each such time give written notice to the Holders as provided in Section 12.2
hereof of its intention to do so. Within twenty (20) days after receipt of such
notice, such Holders may request that the Company register all or part of the
Registrable Securities, stating in such request the intended method of
distribution of such securities (the 'Designated Securities'). Upon receipt of
such request, the Company shall use its commercially reasonable efforts to
effect the registration of the Designated Securities by including the Designated
Securities in such Registration Statement.
3.2 Cutback. In the event that securities of the same class as the
Registrable Securities are being registered by the Company in such Registration
Statement and such securities as well as any of the Designated Securities are to
be distributed in an underwritten offering, such Designated Securities shall be
included in such underwritten offering on the same terms and conditions
(including, but not limited to, any required 'hold back' or 'lock up'
arrangements) as the securities being issued by the Company for distribution
pursuant to such underwritten offering; provided, however, that if the managing
underwriter of such underwritten offering reasonably determines in good faith
and advises the parties that the number of securities (including Designated
Securities) requested and otherwise proposed to be included in such registration
exceeds the number which can be sold in such offering without adversely
affecting the offering and/or the offering price, then the Company will include
in such registration to the extent of the number of securities which the Company
is so advised can be sold in such offering without such adverse effect, first,
the securities, if any, being sold by the Company (or, if the registration is
being effected pursuant to a demand registration right of any other security
holders, the securities being sold by the Company and such security holders, in
such proportions as may be agreed upon by the Company and such security holders)
and second, the Registerable Securities of the Selling Holders and other
security holders exercising similar contractual incidental or 'piggy-back'
registration rights. As to the Selling Holders exercising incidental
registration rights pursuant to Section 3.1, any reduction in the number of
Designated Securities to be sold that may be required by the foregoing
allocation shall be pro rata (based on the number of shares held by each) with
respect to the Designated Securities with other Persons holding contractual
incidental or 'piggy-back' registration rights in such underwritten offering.
Without limiting the generality of the foregoing, the Holders acknowledge and
agree that the application of the foregoing provisions may result in the Holders
not being able to sell any Designated Securities in a particular offering.
3.3 Underwriter Hold-Back Arrangement. As a further condition to the ability
of any Selling Holder to include any Designated Securities in a Company
registration pursuant to Section 3.1, each Holder must agree to any 'hold back'
or 'lock up' arrangement required by the managing underwriter of the offering.
3.4 Discontinuation of Registration. Notwithstanding anything to the
contrary contained in this Agreement, if, at any time after giving written
notice pursuant to Section 3.1 of its intention to register equity securities,
the Company shall determine for any reason not to register such equity
securities or, following effectiveness of registration thereof, to suspend or
terminate such
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effectiveness, the Company may, at its election, give written notice of such
determination to each holder of Registrable Securities and, thereupon, shall not
be obligated to register, or continue to have registered, any Registrable
Securities in connection with such registration or comply with any of the
requirements of Section 5 (but shall nevertheless pay the Registration Expenses
in connection therewith).
4. Hold-Back Agreements. The Holders understand, agree and acknowledge that
they will be subject to hold-back agreements under the circumstances and as
described in Section 8.2(b) of the Exchange Agreement.
5. Registration Procedures. In connection with the Company's registration
obligations pursuant to Section 2 hereof, or (subject to Section 3.4) any
registration subject to Section 3.1, the Company will:
5.1 Maintaining Effectiveness. Promptly prepare and file with the SEC such
amendments to the Shelf Registration Statement as may be necessary to keep such
Shelf Registration Statement effective throughout the Effectiveness Period.
5.2 Notification. Immediately notify the Selling Holders and (if requested
by any such Person) confirm such notice in writing, (i) when a Prospectus or any
Prospectus supplement or post-effective amendment has been filed, and, with
respect to a Registration Statement or any post-effective amendment, when the
same has become effective, (ii) of the issuance by the SEC of any stop order
suspending the effectiveness of a Registration Statement or the initiation of
any proceeding for that purpose, (iii) of the receipt by the Company of any
notification with respect to the suspension of the qualification of any of the
Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose, and (iv) of the happening of any
event which makes any statement made in the Registration Statement, the
Prospectus or any document incorporated therein by reference untrue or which
requires the making of any changes in the Registration Statement, the
Prospectus, or any document incorporated therein by reference so that they will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statement
therein not misleading.
5.3 Stop Orders. Make every reasonable best effort to obtain the withdrawal
of any order suspending the effectiveness of a Shelf Registration Statement or
the qualification of any Registrable Securities for sale in any jurisdiction at
the earliest practicable moment.
5.4 Consultation with Holders. Prior to the filing of any amendment to the
Shelf Registration Statement or of any other Registration Statement that
includes Registrable Securities, provide copies of such document to the Selling
Holders, make the Company's representatives and the Company's counsel available
for discussion of such document and make such changes in such document relating
to the Selling Holders prior to the filing thereof as such Selling Holders or
counsel for such Selling Holders may reasonably request.
5.5 Copies of Registration Statements. Furnish to each Selling Holder,
without charge, at least one originally executed copy of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules, all materials incorporated therein by reference and
all exhibits (including those incorporated by reference).
5.6 Prospectuses. Deliver to each Selling Holder, without charge, as many
copies of the Prospectus (and each preliminary prospectus) and any amendment or
supplement thereto as such Persons may reasonably request so long as the
Registration Statement to which such Prospectus or any amendment or supplement
thereto relates is effective.
5.7 Blue Sky Laws. Prior to any public offering of Registrable Securities,
use its reasonable best efforts to register or qualify or cooperate with the
Selling Holders and their respective counsel in connection with the registration
or qualification of such Registrable Securities for offer and sale under the
securities or blue sky laws of such jurisdictions within the United States as
any Selling Holder reasonably requests, and do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by the Registration Statement; provided, however,
that the Company will not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action
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which would subject it to general service of process or taxation in any such
jurisdiction where it is not then so subject.
5.8 Amendments Upon Changes. Upon the occurrence of any event contemplated
by Sections 5.2(ii), (iii) or (iv) or 5.3 above, prepare, as promptly as
practicable, a supplement or post-effective amendment to the Registration
Statement or related Prospectus or any document incorporated therein by
reference, or file any other required document so that, as thereafter delivered
to the purchasers of the Registrable Securities being sold thereunder, such
Prospectus will not contain an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading.
5.9 Compliance with Laws; Section 11(a). Otherwise use its best efforts to
comply with all applicable federal and state securities laws (including without
limitation the rules and regulations of the SEC), and make generally available
to its security holders earning statements satisfying the provisions of
Section 11(a) of the Securities Act no later than 45 days after the end of each
12-month period (or within 90 days after the end of a fiscal year).
5.10 Listing. Cause all Registrable Securities registered hereunder to be
listed on each securities exchange on which the same class of securities of the
Company are then listed.
5.11 Transfer Agent and Registrar. Maintain a transfer agent and registrar
for Registrable Securities registered hereunder.
5.12 Stock Certificates. The Company shall cooperate with the Holders of the
Registrable Securities to facilitate the timely preparation and delivery of
certificates representing the Registrable Securities to be sold pursuant to a
Registration Statement free of any restrictive legends and in such denominations
and registered in such names as the Selling Holders may request in connection
with the sale of Registrable Securities pursuant to a Registration Statement.
5.13 Underwritten Offering. The Company shall, if requested and subject to
Section 6.3, promptly include or incorporate in a Prospectus supplement or
post-effective amendment to the Shelf Registration Statement such information as
the managing underwriters reasonably request should be included therein and to
which the Company does not reasonably object and shall make all required filings
of such Prospectus supplement or post-effective amendment as soon as practicable
after it is notified of the matters to be included or incorporated therein.
6. Underwritten Offering.
6.1 Request for Underwritten Offering. The Holders of Registrable Securities
covered by the Shelf Registration Statement who desire to do so may sell such
Registrable Securities in an underwritten offering. Any such desire shall be
communicated to the Company by the written request (an 'Underwriting Request')
of the Holders of a majority of the Registrable Securities held by all Holders
(the 'Requesting Holders'), or their proposed managing underwriter, which such
Underwriting Request may not be made sooner than the six-month anniversary of
the Closing Date. In any such underwritten offering, the investment banker or
bankers and manager or managers that will administer the offering will be
selected by, and the underwriting arrangements with respect thereto, will be
approved by the Holders of a majority of the Registrable Securities to be
included in such offering; provided, however, that (i) such investment bankers
and managers and underwriting arrangements must be reasonably satisfactory to
the Company and (ii) the Company shall not be obligated to arrange for more than
(a) two underwritten offerings during the Effectiveness Period or (b) one such
underwritten offering during any twelve month period. No Holder may participate
in any underwritten offering contemplated hereby unless (a) such Holder agrees
to sell such Holder's Registrable Securities in accordance with any approved
underwriting arrangements, (b) such Holder completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements,
lock-up letters and other documents required under the terms of such approved
underwriting arrangements and (c) at least $7,500,000 of Registrable Securities
(based on fair market value as of the day the Underwriting Request is made) are
included by all Selling Holders in such underwritten offering. The Company
agrees to provide reasonable cooperation to the underwriters selected by the
Holders.
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6.2 Notice to Other Holders. Upon receipt of such Underwriting Request, the
Company shall provide written notice to the other Holders notifying them of the
receipt of such request. Such other Holders may, upon written notice delivered
to the Company within fifteen (15) days of the date of the Company's notice,
elect to participate in the Underwriting Request. Allocations and cutbacks as
between the Selling Holders in connection with an Underwriting Request shall be
as agreed by the Selling Holders.
6.3 Company Offering. Notwithstanding Section 6.1 or the provisions of
Section 5.13 hereof, if at the time an Underwriting Request is made, the Company
is contemplating filing a registration statement in connection with the offering
of its securities (a 'Company Offering'), then the Company, by written notice to
the Requesting Holders or the proposed managing underwriter, need not take any
efforts with respect to the Underwriting Request in order to permit the Company
Offering to proceed; provided, however, that if the Company does not file a
registration statement with respect to the Company Offering within sixty (60)
days of the Company's written notice to informing the requesting Selling Holders
of the contemplated Company Offering, then the Company will proceed with the
Underwriting Request. If the Company proceeds with the Company Offering, then
the Underwriting Request shall be deemed to have been withdrawn. In addition,
the Company need not take any action with respect to an Underwriting Request
that would cause it to be in violation of any underwriting agreement it may be a
party to. In addition, upon receipt of a request from the managing underwriters
to prepare and file an amendment or supplement to the Shelf Registration
Statement and related Prospectus in connection with an underwritten offering,
the Company may delay the filing of any such amendment or supplement for up to
ninety (90) days if such filing would require the Company to disclose a
Transaction and the Board of Directors shall have determined in good faith that
such disclosure might interfere with or adversely affect the negotiations or
completion of such any such Transaction or is not otherwise in the best
interests of the Company and its stockholders. The Effectiveness Period shall be
extended on a day-for-day basis as a result of any such delay which occurs
within ninety (90) days of the end of the then-current Effectiveness Period.
6.4 Cooperation. The Company shall not have any obligation to cooperate with
an Underwriting Request, unless it receives a written representation from the
Selling Holders (which may be part of such Underwriting Request) that (i) such
Selling Holders believe they collectively own more than a majority of the
Registrable Securities held by all Holders, and (ii) such underwriting will be
conducted in accordance with the terms of an underwriting agreement entered into
with the managing underwriter.
6.5 Underwriter Holdback Arrangement. Any Selling Holders representing a
majority of the Registrable Securities held by all Holders, that make an
Underwriting Request and enter into an Underwriting Agreement for some or all of
their Registrable Securities shall have the right to require any other Holders
('Non-Requesting Holders') to agree to the terms of such Underwriting Agreement,
including any lock-up provisions; provided, however, that such Non-Requesting
Holders have the right to participate in such underwriting on substantially
identical terms as other Selling Holders.
7. Selling Holders' Obligations.
7.1 Provision of Information. The Company may require each Selling Holder of
Registrable Securities as to which any registration contemplated by this
Agreement is being effected to furnish to the Company such information regarding
the distribution of such securities by, and such other information relevant to,
the Selling Holder for inclusion in such Registration Statement, as the Company
may from time to time reasonably request in writing. The Company shall not be
obligated to include in any Registration Statement any securities owned by a
Holder that does not comply with its obligations under this Agreement. Each
Selling Holder agrees to promptly notify the Company of any change in the
information it has provided and to not sell any Registrable Securities pursuant
to a Registration Statement or the related Prospectus until the Company has
filed any required amendment to the Registration Statement, or made any required
changes to the Prospectus, as may be necessary to reflect such revised
information.
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7.2 Discontinued Use of Prospectus. Each Holder of Registrable Securities
agrees by execution of this Agreement that, upon receipt of any written notice
from the Company of the happening of any event of the kind described in
clauses (ii), (iii) or (iv) of Section 5.2 or Section 5.3 hereof, such Holder
will forthwith discontinue disposition of Registrable Securities until such
Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 5.8 hereof, or until it is advised in writing (the
'Advice') by the Company that the use of the Prospectus may be resumed, and has
received copies of any additional or supplemental filings which are incorporated
by reference in such Prospectus, and, if so directed by the Company, such Holder
will deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such Holder's possession, of the Prospectus
covering such Registrable Securities current at the time of receipt of such
notice.
7.3 Delay of Registration. No Holder shall have any right to obtain or seek
an injunction restraining or otherwise delaying any registration as the result
of any controversy that might arise with respect to the interpretation or
implementation of this Agreement.
8. Registration Expenses. The Company shall bear all expenses other than
Selling Holder Expenses (defined below) incurred in connection with any
Registration Statement, including, but not limited to, all registration and
filing fees, fees with respect to any filings required to be made with the
National Association of Securities Dealers, listing fees relative to any stock
exchange or national market system, fees and expenses of compliance with state
securities or blue sky laws, printing expenses, fees and disbursements of
counsel for the Company, and fees and disbursements of all independent public
accountants of the Company. Each Selling Holder shall bear his or its pro rata
share of any Selling Holder Expenses. 'Selling Holder Expenses' shall consist of
and be limited to (i) the Selling Holder's legal costs, including the fees and
expenses of any counsel selected by the Selling Holder to represent him or it,
and (ii) the brokerage and underwriting discounts and commissions of each
Selling Holder; provided, however, that if an Underwriting Request is withdrawn
at the request of the Selling Holders for any reason other than disclosure by
the Company of material adverse information not known to the Holders requesting
the underwritten offering at the time of the request, or due to the breach of
this Agreement by the Selling Holders, then 'Selling Holder Expenses' shall also
include the Company's reasonable and documented out-of-pocket expenses
(including, but not limited to, attorneys' and accountants' fees and expenses)
incurred in connection with complying with such Underwriting Request, which
shall be paid pro rata by the Selling Holders (based on the number of
Registrable Securities requested by them to be included in such Registration
Statement.
9. Indemnification.
9.1 Indemnification by the Company. The Company agrees to indemnify and hold
harmless, to the full extent permitted by law, each Holder of Registrable
Securities, each Person who controls such Holder (within the meaning of the
Securities Act or the Exchange Act) (a 'Controlling Person'), and each officer,
director, employee and agent of such Holder and each Controlling Person and each
selling agent and underwriter (the 'Indemnified Parties') from and against all
losses, claims, damages, liabilities and expenses caused by any untrue or
alleged untrue statement of a material fact contained in the Shelf Registration
Statement or other Registration Statement which includes Registrable Securities,
Prospectus or preliminary prospectus or any amendment or supplement thereto or
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as (i) the same are caused by or contained in any information
furnished in writing to the Company by such Holder, expressly for use therein,
or (ii) the Company has advised such Holder or such Holder's representatives in
writing of a Section 5.2(iv) event and the Holder has sold Registrable
Securities notwithstanding receipt of such notice prior to receipt of a
supplement or amended Prospectus pursuant to Section 5.8 herein; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or expense arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any preliminary prospectus if (i) such Holder failed to
send or deliver a copy of the Prospectus with or prior to the delivery of
written confirmation of the sale of Registrable
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Securities and (ii) the Prospectus corrected such untrue statement or omission;
provided, further, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage, liability or expense arises out of or
is based upon an untrue statement or alleged untrue statement or omission or
alleged omission in the Prospectus, if such untrue statement or alleged untrue
statement, omission or alleged omission is corrected in an amendment or
supplement to the Prospectus and if, having previously been furnished by or on
behalf of the Company with copies of the Prospectus as so amended or
supplemented, such Holder thereafter fails to deliver such Prospectus as so
amended or supplemented, prior to or concurrently with the sale of Registrable
Securities to the Person asserting such loss, claim, damage, liability or
expense who purchased such Registrable Securities that are the subject thereof
from such Holder. The indemnity provided herein shall remain in full force and
effect regardless of any investigation made by or on behalf of an Indemnified
Party and shall survive the transfer of Registrable Securities by the Selling
Holder. The Company shall be obligated to give to, and shall be entitled to
receive from, selling brokers, underwriters and similar securities industry
professionals participating in the distribution customary indemnities.
9.2 Indemnification by Holders. In connection with the Shelf Registration
Statements hereunder, each Selling Holder agrees to indemnify and hold harmless,
to the full extent permitted by law, the Company, and each Person who controls
the Company (within the meaning of the Securities Act or the Exchange Act), each
selling agent and underwriter and each manager, director, officer, employee and
agent of each such Person from and against any losses, claims, damages,
liabilities and expenses caused by any untrue or alleged untrue statement of a
material fact or any omission of a material fact required to be stated in the
Shelf Registration Statement or other Registration Statement which includes
Registrable Securities or Prospectus or preliminary prospectus or necessary to
make the statements therein not misleading, to the extent, but only to the
extent, that such untrue statement or omission is contained in any information
or affidavit so furnished by such Holder to the Company specifically for
inclusion in such Registration Statement or Prospectus. In no event, however,
shall the liability of any Selling Holder hereunder be greater in amount than
the dollar amount of the proceeds (net of commissions) received by such Holder
upon the sale of the Registrable Securities giving rise to such indemnification
obligation.
9.3 Conduct of Indemnification Proceedings. Any Person entitled to
indemnification hereunder will (i) give prompt notice to the indemnifying party
of any claim with respect to which it seeks indemnification; provided, however,
that the failure to provide such notice to the indemnifying party shall not
relieve it from any liability which it may have to any indemnified party
otherwise than under the indemnification provisions set forth in Section 9.1 and
Section 9.2; and (ii) permit such indemnifying party to assume the defense of
such claim with counsel reasonably satisfactory to the Indemnified Party;
provided, however, that any person entitled to indemnification hereunder shall
have the right to employ separate counsel and to participate in the defense of
such claim, but the fees and expenses of such counsel shall be at the expense of
such Person unless (a) the indemnifying party has agreed to pay such fees or
expenses, or (b) the indemnifying party shall have failed to assume within a
reasonable period of time the defense of such claim and employ counsel
reasonably satisfactory to such person or (c) in the reasonable judgment of any
such Person, based upon written advice of its counsel, a conflict of interest
exists between such Person and the indemnifying party with respect to such
claims or such Person has separate or additional defenses, in either case such
as would make the representation of such Person by the same counsel as the
indemnifying party improper under applicable standards of professional conduct
(in which case, if the Person notifies the indemnifying party in writing that
such Person elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the defense of
such claim on behalf of such Person). If such defense is not assumed by the
indemnifying party, the indemnifying party will not be subject to any liability
for any settlement made without its consent (but such consent will not be
unreasonably withheld). No indemnifying party will consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation. An
indemnifying party who is not entitled to, or elects not to, assume the defense
of a claim will not
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be obligated to pay the fees and expenses of more than one principal and one
local counsel for all Indemnified Parties who are indemnified by such
indemnifying party with respect to such claim.
9.4 Contribution. If the indemnification provided for in Sections 9.1 or 9.2
is unavailable to the Indemnified Parties in respect of any losses, claims,
damages or liabilities referred to herein, then each such indemnifying party, in
lieu of indemnifying such Indemnified Party, shall contribute to the amount paid
or payable by such Indemnified Party as a result of such losses, claims, damages
or liabilities, as between the Company on the one hand and each Selling Holder
on the other hand, in such proportion as is appropriate to reflect the relative
fault of the Company and of each Selling Holder in connection with such
statements or omissions, as well as any other relevant equitable considerations.
The relative fault of the Company on the one hand and of each Selling Holder on
the other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
such party, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company and the Selling Holders agree that it would not be just and
equitable if contribution pursuant to this Section 9.4 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Party as a result of the
losses, claims, damages or liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or defending any such action or claim. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The Selling
Holders' obligations to contribute pursuant to this Section 9.4 are several in
proportion to the proceeds of any offering received by each Selling Holder bears
to the total proceeds of the offering received by all the Selling Holders and
not joint.
9.5 Survival. The obligations of the Company and the Holders under this
Section 7 shall survive the completion of any offering of Registrable Securities
in a Shelf Registration Statement under this Agreement or otherwise.
9.6 Underwriting Agreement. In the event of a conflict between the terms of
any underwriting agreement and this Section 9, the terms of the underwriting
agreement shall govern.
10. Reports Under Exchange Act. With a view to making available to the
Holders the benefits of Rule 144 promulgated under the Securities Act and any
other rule or regulation of the SEC that may at any time permit a Holder to sell
securities of the Company to the public without registration, the Company agrees
to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 promulgated under the Securities Act, at
all times after ninety (90) days after the effective date of the first
registration statement filed by the Company for the offering of its
securities to the general public or of the first registration statement
filed by the Company pursuant to the Exchange Act;
(b) file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act; and
(d) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company
that it has complied with the reporting requirements of Rule 144 promulgated
under the Securities Act (at any time after ninety (90) days after the
effective date of the first registration statement filed by the Company),
the Securities Act and the Exchange Act, (ii) a copy of the most recent
annual or quarterly report of the Company and such other reports and
documents so filed by the Company under the Exchange Act, and (iii) such
other information as may be reasonably requested in availing any Holder of
any rule or regulation of the SEC which permits the selling of any such
securities without registration or pursuant to such form.
A-64
11. Transfer of Registration Rights. The right to cause the Company to
register Registrable Securities pursuant to this Agreement may be assigned by a
Holder to (i) a transferee or assignee of Registrable Securities who acquires
pursuant to such transfer, not less than 25,000 Registrable Securities (as
adjusted for any stock dividends, combinations, splits, recapitalizations and
the like), (ii) a subsidiary, parent or other affiliate, member, shareholder,
officer, general partner, limited partner or former or retired partner of a
Holder, or (iii) a Holder's family member, family partnership or trust for the
benefit of an individual Holder or any family member; provided, however, that
such assignment shall be effective only if (a) the transferee agrees in writing
to be bound by and subject to the terms and conditions of this Agreement,
including, but not limited to, the provisions of Section 4 above, (b) the
Company is, within a reasonable time after such transfer, furnished with written
notice of the name and address of such transferee or assignee and the securities
with respect to which such registration rights are being transferred and
(c) such transfer of any Registrable Securities is lawful under all applicable
securities laws.
12. Miscellaneous.
12.1 Remedies. In the event of a breach by the Company of its obligations
under this Agreement, each Holder of Registrable Securities, in addition to
being entitled to exercise all rights granted by law, including recovery of
damages, will be entitled to specific performance of its rights under this
Agreement, subject to Section 7.3 hereof. The Company agrees that monetary
damages would not be adequate compensation for any loss incurred by reason of a
breach by it of any of the provisions of this Agreement and hereby waives the
defense in any action for specific performance that a remedy at law would be
adequate.
12.2 Notices. All notices or other communications hereunder shall be in
writing and shall be given by (i) personal delivery, (ii) courier or other same
day or overnight delivery service which obtains a receipt evidencing delivery,
(iii) registered or certified mail (postage prepaid and return receipt
requested), or (iv) facsimile or similar electronic device, to such address as
may be designated from time to time by the relevant party, and which shall
initially be:
If to the Company: Sorrento Networks Corporation
9990 Mesa Rim Road
San Diego, CA 92121
Facsimile: (310) 479-2959
Attn: Chief Financial Officer and General Counsel
with a copy to:
Irell & Manella LLP
1800 Avenue of the Stars, Suite 900
Los Angeles, CA 90067
Facsimile: (310) 203-7199
Attn: J. Christopher Kennedy, Esq.
If to the Holders: To the persons and addresses listed on Exhibit A
with copies to:
Winston & Strawn
101 California Street, Suite 3900
San Francisco, CA 94111
Facsimile: (415) 421-7879
Attn: Margaret Sheneman, Esq.
and
White & Case LLP
1155 Avenue of the Americas
New York, NY 10036
Facsimile: (212) 354-8113
Attn: Evan C. Hollander, Esq.,
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All notices and other communications shall be deemed to have been given
(i) if delivered by the United States mail, three business days after mailing
(five business days if delivered to an address outside of the United States),
(ii) if delivered by a courier or other delivery service, one business day after
dispatch (two business days if delivered to an address outside of the United
States), and (iii) if personally delivered or sent by facsimile or similar
electronic device, upon receipt by the recipient or its agent or employee
(which, in the case of a notice sent by facsimile or similar electronic device,
shall be the time and date indicated on the transmission confirmation receipt).
No objection may be made by a party to the manner of delivery of any notice
actually received in writing by an authorized agent of such party.
12.3 Complete Agreement; Modifications. This Agreement and any documents
referred to herein or executed contemporaneously herewith constitute the
Parties' entire agreement with respect to the subject matter hereof and
supersede all agreements, representations, warranties, statements, promises and
understandings, whether oral or written, with respect to the subject matter
hereof. This Agreement may be amended, altered or modified only by a writing
signed by the Company and Holders of a majority of the Registrable Securities
then held by all Holders.
12.4 Calculation of Registrable Securities. For the purposes of this
Agreement, if the Registrable Securities consist of Common Stock and another
class of securities convertible into Common Stock, then the calculation of the
number of Registrable Securities shall include any shares of Common Stock
acquired or which may be acquired by the Holders upon conversion of any such
convertible securities comprising part of the Registrable Securities.
12.5 Successors and Assigns. Except as provided herein to the contrary, this
Agreement shall be binding upon and inure to the benefit of the Parties, their
respective successors and permitted assigns, including, without limitation and
without the need for an express assignment, subsequent Holders of Registrable
Securities who are assigned registration rights pursuant to Section 11 hereof.
The Parties understand and acknowledge that, as required by the Exchange
Agreement, the Company intends to engage in a reincorporation merger to
reincorporate in the State of Delaware. The Parties agree that upon the
consummation of such reincorporation merger, all references to the 'Company'
herein shall be deemed to be references to the surviving Delaware corporation in
such merger.
12.6 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to the choice
of law provisions thereof.
12.7 Attorneys' Fees. Should any litigation be commenced (including any
proceedings in a bankruptcy court) between the Parties or their representatives
concerning any provision of this Agreement or the rights and duties of any
Person or entity hereunder, the party or parties prevailing in such proceeding
shall be entitled, in addition to such other relief as may be granted, to the
reasonable attorneys' fees and court costs incurred by reason of such
litigation.
12.8 Headings. The Article and Section headings in this Agreement are
inserted only as a matter of convenience, and in no way define, limit, extend or
interpret the scope of this Agreement or of any particular Article or Section.
12.9 Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable, such provision shall be fully severable, and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part of this Agreement;
furthermore, the remaining provisions of this Agreement shall remain in full
force and effect, and, in place of such illegal, invalid or unenforceable
provision, there automatically shall be added as a part of this Agreement a
provision as similar to such illegal, invalid or unenforceable provision as may
be possible and be legal, valid and enforceable.
12.10 Gender. Throughout this Agreement, as the context may require, the
masculine gender includes the feminine and neuter; and the neuter gender
includes the masculine and feminine.
12.11 Counterparts. This Agreement may be executed in any number of
counterparts and by the Parties in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
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12.12 Termination. This Agreement shall automatically terminate and be of no
further force or effect if the Exchange Agreement is terminated for any reason
without the transactions contemplated thereby being consummated.
[Remainder of this page intentionally left blank.]
A-67
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
In WITNESS WHEREOF the parties have executed this Agreement on the date set
forth below.
'COMPANY'
Dated: ........................... , 2003 Sorrento Networks Corporation,
a New Jersey corporation
By: ......................................
Name: ....................................
Its: .....................................
'EXCHANGING HOLDERS'
Dated: ........................... , 2003 ..........................................
By: ......................................
Name: ....................................
Its: .....................................
Dated: ........................... , 2003 ..........................................
Name: ....................................
Name: ....................................
A-68
APPENDIX B
FAIRNESS OPINION OF
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
February 14, 2003
To the Board of Directors of
Sorrento Networks Corporation
9990 Mesa Rim Road
San Diego, CA 92121
Attn: Mr. Phillip Arneson
Chairman of the Board, President and Chief Executive Officer
Dear Sirs:
We understand that Sorrento Networks Corporation ('Sorrento' or the
'Company' hereinafter) has entered into a Letter of Intent (the 'Letter of
Intent') with holders of the Company's 9.75% Senior Convertible Debentures (the
'Debentures') and the Series A Convertible Preferred Stock (the 'Preferred
Stock') of Sorrento Networks, Inc., a majority-owned subsidiary of the Company.
The Letter of Intent and associated term sheet (the 'Term Sheet') contemplate an
exchange of the Debentures and the Preferred Stock at a closing into shares (the
'Exchange Shares') of common stock and $12.5 million (the 'Exchange Debentures',
and together with the Fee Amount Debentures (defined below), the 'New
Debentures') of new 7.5% secured convertible debentures of the Company (the
'Exchange'). Certain holders of the Series A Preferred would also receive
additional New Debentures of up to $0.95 million (the 'Fee Amount Debentures')
to pay certain legal fees. The Exchange Shares and the shares of Common Stock
issuable upon conversion of the Exchange Debentures (the 'Conversion Shares')
would represent 87.5% of the Company's Common Stock (the 'Common Stock') on a
diluted basis. As of closing, holders of the outstanding Common Stock
immediately before the date of the Closing (the 'Common Holders') would own 7.5%
of the Common Stock on a diluted basis. In addition, the Common Holders would
receive warrants to acquire Common Stock, in the aggregate, totaling 5% on a
diluted basis for a cash exercise price equal to 110% of the Reference Price (as
defined in the Term Sheet).
Such transactions as disclosed to Houlihan Lokey Howard & Zukin Financial
Advisors, Inc. ('Houlihan Lokey' hereinafter) are referred to as the
'Transaction.'
You have requested our opinion (the 'Opinion') as to the fairness of the
Transaction, from a financial point of view, to the Common Holders. This Opinion
does not address the Company's underlying business decision to effect the
Transaction. We have not been requested to, and did not, solicit third party
indications of interest in acquiring all or any part of the Company.
Furthermore, at your request, we have not negotiated the Transaction or
advised you with respect to alternatives to the Transaction. In addition, this
opinion does not address the viability of the Company following consummation of
the Transaction or at any other time.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's annual reports to shareholders and on Form 10-K
for the fiscal years ended 2000 through 2002 and quarterly reports on
Form 10-Q for the three quarters ended October 31, 2002, and
Company-prepared interim financial statements for the five-month period
ended December 31, 2002, which the Company's management has identified as
being the most current financial statements available;
2. reviewed copies of the following agreements:
Sorrento Networks, Inc. Investors' Rights Agreement dated March 3, 2000
B-1
Sorrento Networks, Inc. Series A Preferred Stock Purchase Agreement
dated March 3, 2000
Certificate of Determination of Preferences of Series A Convertible
Preferred Stock of Sorrento Networks, Inc. date February 18, 2000
Memo from management detailing Series D Preferred Stock dated
February 10, 2003
Capitalization table and Restructuring Worksheet as of February 3, 2003
Company 8-K detailing restructuring plan dated December 10, 2002
Company Proxy dated August 28, 2002;
3. reviewed the draft proxy statement related to the Transaction, dated
February 12, 2003;
4. reviewed Sorrento Networks Presentation to NASDAQ dated January 16,
2003;
5. met with certain members of the Company's senior management to discuss
(i) the process, status and prospects of the Company's solicitation of
alternative sources of financing and other potential strategic
alternatives; and (ii) the operations, financial condition (including
current cash position and the excess of liabilities over assets), future
prospects, projected operations and performance of the Company and its
ability to meet its obligations as the come due.
6. visited certain facilities and business offices of the Company;
7. reviewed forecasts and projections prepared by the Company's management
with respect to the Company for the years ended January 31, 2003 through
2004;
8. reviewed the historical market prices and trading volume for the
Company's publicly traded securities;
9. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Company, and publicly available
prices and premiums paid in other transactions that we considered
similar to the Transaction;
10. reviewed drafts of certain documents to be delivered at the closing of
the Transaction, including the Definitive Agreement; and
11. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
In evaluating the information described above, we have been advised by the
Company that, based on the Company's financial projections, (i) if the Company
were to meet all its existing and contingent payment obligations (including
obligations to holders of Debentures and Preferred Stock), the Company would
exhaust its cash resources and would no longer be able to conduct its operations
after such date; (ii) unless the Company consummates the Transactions or an
alternative transaction, it will not be able to pay its liabilities as they come
due; and (iii) the Company and its investment bankers have aggressively
solicited indications of interest for a new capital investment in the Company or
an acquisition of the Company from numerous financial and strategic investors,
but have not received any indications of interest that would adequately address
the Company's ability to pay its existing and contingent liabilities.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company, and that there has been no material change
in the assets, financial condition, business or prospects of the Company since
the date of the most recent financial statements made available to us. We have
also assumed that the Transaction will be consummated in accordance with terms
disclosed to us, without waiver, modification or amendment or any material term,
condition or agreement and that no delay, limitation, restriction or condition
will be imposed that would have an adverse effect on the benefits to the Company
and its stockholders of the Transactions.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and do not assume any
responsibility with respect to it. We have not made any physical inspection or
independent appraisal of any of the properties or assets
B-2
of the Company. Our opinion is necessarily based on business, economic, market
and other conditions as they exist and can be evaluated by us at the date of
this letter.
This opinion may be reproduced in full in any proxy statement mailed to
stockholders of the Company in connection with the Transactions but may not
otherwise be quoted, referred to or reproduced at any time or in any manner
without our prior written consent. This opinion does not constitute a
recommendation to any stockholder or any other person as to how such holder or
person should vote with respect to the Transactions, and should not be relied
upon by any stockholder or other person as such.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the Transaction is fair to the Common Holders of the Company from a financial
point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
B-3
APPENDIX C
2003 EQUITY INCENTIVE PLAN
OF
SORRENTO NETWORKS CORPORATION
TABLE OF CONTENTS
PAGE
----
1. Purpose of this Plan........................................ 1
2. Definitions and Rules of Interpretation..................... 1
2.1 Definitions............................................. 1
2.2 Rules of Interpretation................................. 4
3. Shares Subject to this Plan; Term of this Plan.............. 4
3.1 Number of Award Shares.................................. 4
3.2 Source of Shares........................................ 4
3.3 Term of this Plan....................................... 4
4. Administration.............................................. 5
4.1 General................................................. 5
4.2 Authority of Administrator.............................. 5
4.3 Scope of Discretion..................................... 6
5. Persons Eligible to Receive Awards.......................... 6
5.1 Eligible Individuals.................................... 6
5.2 Section 162(m) Limitation............................... 6
6. Terms and Conditions of Options............................. 7
6.1 Price................................................... 7
6.2 Term.................................................... 7
6.3 Vesting................................................. 7
6.4 Form of Payment......................................... 7
6.5 Nonassignability of Options............................. 8
6.6 Substitute Options...................................... 8
6.7 Cancellation and Regrant of Options..................... 8
7. Incentive Stock Options..................................... 8
8. Stock Appreciation Rights, Stock Awards and Cash Awards..... 9
8.1 Stock Appreciation Rights............................... 9
8.2 Stock Awards............................................ 10
8.3 Cash Awards............................................. 11
9. Exercise of Awards.......................................... 11
9.1 In General.............................................. 11
9.2 Time of Exercise........................................ 11
9.3 Issuance of Award Shares................................ 11
9.4 Termination............................................. 12
10. Certain Transactions and Events............................. 13
10.1 In General............................................. 13
10.2 Changes in Capital Structure........................... 13
10.3 Fundamental Transactions............................... 13
10.4 Divestiture............................................ 14
10.5 Dissolution............................................ 14
10.6 Cut-Back to Preserve Benefits.......................... 14
11. Automatic Option Grants to Nonemployee Directors............ 14
11.1 Grant Dates............................................ 14
11.2 Exercise Price......................................... 14
11.3 Option Term............................................ 14
11.4 Exercise and Vesting of Options........................ 14
11.5 Limited Transferability of Options..................... 15
11.6 Termination of Board Service........................... 15
11.7 Certain Transactions and Events........................ 15
ii
12. Withholding and Tax Reporting............................... 16
12.1 Tax Withholding Alternatives........................... 16
12.2 Reporting of Dispositions.............................. 17
13. Compliance with Law......................................... 17
14. Amendment or Termination of this Plan or Outstanding
Awards.................................................... 17
14.1 Amendment and Termination.............................. 17
14.2 Shareholder Approval................................... 17
14.3 Effect................................................. 17
15. Reserved Rights............................................. 17
15.1 Nonexclusivity of this Plan............................ 17
15.2 Unfunded Plan.......................................... 18
16. Special Arrangements Regarding Award Shares................. 18
16.1 Escrows and Pledges.................................... 18
16.2 Repurchase Rights...................................... 18
17. Beneficiaries............................................... 18
18. Miscellaneous............................................... 19
18.1 Governing Law.......................................... 19
18.2 Determination of Value................................. 19
18.3 Reservation of Shares.................................. 19
18.4 Contractual Arrangements............................... 19
18.5 Prior Plans............................................ 19
18.6 Electronic Communications.............................. 19
18.7 Notices................................................ 20
iii
1. PURPOSE OF THIS PLAN
The purpose of this 2003 Equity Incentive Plan is to enhance the long-term
shareholder value of Sorrento Networks Corporation by offering opportunities to
eligible individuals to participate in the growth in value of the equity of
Sorrento Networks Corporation.
2. DEFINITIONS AND RULES OF INTERPRETATION
2.1 Definitions
This Plan uses the following defined terms:
(a) 'Administrator' means the Board, the Committee, or any officer or
employee of the Company to whom the Board or the Committee delegates
authority to administer this Plan.
(b) 'Affiliate' means a 'parent' or 'subsidiary' (as each is defined in
Section 424 of the Code) of the Company and any other entity that the Board
or Committee designates as an 'Affiliate' for purposes of this Plan.
(c) 'Applicable Law' means any and all laws, rules and regulations of
whatever jurisdiction, within or without the United States, and the rules of
any stock exchange or quotation system on which Shares are listed or quoted,
applicable to the taking or refraining from taking of any action under this
Plan, including the administration of this Plan and the issuance or transfer
of Awards or Award Shares.
(d) 'Award' means a Stock Award, SAR, Cash Award, or Option granted in
accordance with the terms of the Plan.
(e) 'Award Agreement' means the document evidencing the grant of an
Award.
(f) 'Award Shares' means Shares covered by an outstanding Award or
purchased under an Award.
(g) 'Awardee' means: (i) a person to whom an Award has been granted,
including a holder of a Substitute Award, (ii) a person to whom an Award has
been transferred in accordance with all applicable requirements of Sections
6.5, 7(h), 11.4 and 17, and (iii) a person who holds Option Shares subject
to any right of repurchase under Section 16.2.
(h) 'Board' means the board of directors of the Company.
(i) 'Cash Award' means the right to receive cash as described in Section
8.3.
(j) 'Change of Control' means a change in ownership or control of the
Company effected through either of the following transactions:
(i) The acquisition, directly or indirectly by any person or related
group of persons (other than the Company or an Affiliate), of beneficial
ownership (within the meaning of Rule 13d]-3 of the Exchange Act) of
securities possessing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding securities pursuant to a tender
or exchange offer made directly to the Company's shareholders; or
(ii) A change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to consist of individuals who either (A) have been
Board members continuously since the beginning of such period or
(B) have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in
clause (A) who were still in office at the time the Board approved such
election or nomination.
(k) 'Code' means the Internal Revenue Code of 1986.
(l) 'Committee' means a committee composed of Company Directors
appointed in accordance with the Company's charter documents and Section 4.
(m) 'Company' means Sorrento Networks Corporation, a Delaware
corporation.
(n) 'Company Director' means a member of the Board.
C-1
(o) 'Consultant' means an individual who, or an employee of any entity
that, provides bona fide services to the Company or an Affiliate not in
connection with the offer or sale of securities in a capital-raising
transaction, but who is not an Employee.
(p) 'Director' means a member of the board of directors of the Company
or an Affiliate.
(q) 'Divestiture' means any transaction or event that the Board
specifies as a Divestiture under Section 10.4.
(r) 'Domestic Relations Order' means a 'domestic relations order' as
defined in, and otherwise meeting the requirements of, Section 414(p) of the
Code, except that reference to a 'plan' in that definition shall be to this
Plan.
(s) 'Employee' means a regular employee of the Company or an Affiliate,
including an officer or Director, who is treated as an employee in the
personnel records of the Company or an Affiliate, but not individuals who
are classified by the Company or an Affiliate as: (i) leased from or
otherwise employed by a third party, (ii) independent contractors, or
(iii) intermittent or temporary workers. The Company's or an Affiliate's
classification of an individual as an 'Employee' (or as not an 'Employee')
for purposes of this Plan shall not be altered retroactively even if that
classification is changed retroactively for another purpose as a result of
an audit, litigation or otherwise. An Awardee shall not cease to be an
Employee due to transfers between locations of the Company, or between the
Company and an Affiliate, or to any successor to the Company or an Affiliate
that assumes the Awardee's Options under Section 10. Neither service as a
Director nor receipt of a director's fee shall be sufficient to make a
Director an 'Employee.'
(t) 'Exchange Act' means the Securities Exchange Act of 1934.
(u) 'Executive' means, if the Company has any class of any equity
security registered under Section 12 of the Exchange Act, an individual who
is subject to Section 16 of the Exchange Act or who is a 'covered employee'
under Section 162(m) of the Code, in either case because of the individual's
relationship with the Company or an Affiliate. If the Company does not have
any class of any equity security registered under Section 12 of the Exchange
Act, 'Executive' means any (i) Director, (ii) officer elected or appointed
by the Board, or (iii) beneficial owner of more than 10% of any class of the
Company's equity securities.
(v) 'Expiration Date' means, with respect to an Award, the date stated
in the Award Agreement as the expiration date of the Award or, if no such
date is stated in the Award Agreement, then the last day of the maximum
exercise period for the Award, disregarding the effect of an Awardee's
Termination or any other event that would shorten that period.
(w) 'Fair Market Value' means the value of Shares as determined under
Section 18.2.
(x) 'Fundamental Transaction' means either of the following
shareholder-approved transactions:
(i) the Company or an Affiliate is a party to a merger,
consolidation, amalgamation, or other transaction in which the beneficial
shareholders of the Company, immediately before the transaction,
beneficially own securities representing 50% or less of the total
combined voting power or value of the Company immediately after the
transaction, or
(ii) The sale, transfer or other disposition of all or substantially
all of the Company's assets in complete liquidation or dissolution of the
Company.
(y) 'Grant Date' means the date the Administrator approves the grant of
an Award. However, if the Administrator specifies that an Award's Grant Date
is a future date or the date on which a condition is satisfied, the Grant
Date for such Award is that future date or the date that the condition is
satisfied.
(z) 'Hostile Take-Over' shall mean the acquisition, directly or
indirectly, by any person or related group of persons (other than the
Company or an Affiliate) of beneficial ownership (within the meaning of Rule
13d-3 of the Exchange Act) of securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding
C-2
securities pursuant to a tender or exchange offer made directly to the
Company's shareholders which the Board does not recommend such shareholders
to accept.
(aa) 'Incentive Stock Option' means an Option intended to qualify as an
incentive stock option under Section 422 of the Code and designated as an
Incentive Stock Option in the Award Agreement for that Option.
(bb) 'Nonemployee Director' means any person who is a member of the
Board but is not an Employee of the Company or any Affiliate of the Company
and has not been an Employee of the Company or any Affiliate of the Company
at any time during the preceding twelve months. Service as a director does
not in itself constitute employment for purposes of this definition.
(cc) 'Nonstatutory Option' means any Option other than an Incentive
Stock Option.
(dd) 'Objectively Determinable Performance Condition' shall mean a
performance condition (i) that is established (A) at the time an Award is
granted or (B) no later than the earlier of (1) 90 days after the beginning
of the period of service to which it relates, or (2) before the elapse of
25% of the period of service to which it relates, (ii) that is uncertain of
achievement at the time it is established, and (iii) the achievement of
which is determinable by a third party with knowledge of the relevant facts.
Examples of measures that may be used in Objectively Determinable
Performance Conditions include, without limitation, net order dollars, net
profit dollars, net profit growth, net revenue dollars, revenue growth,
individual performance, earnings per share, return on assets, return on
equity, and other financial objectives, objective customer satisfaction
indicators and efficiency measures, each with respect to the Company and/or
an individual business unit.
(ee) 'Officer' means an officer of the Company as defined in Rule 16a-1
adopted under the Exchange Act.
(ff) 'Option' means a right to purchase Shares of the Company granted
under this Plan.
(gg) 'Option Price' means the price payable under an Option for Shares,
not including any amount payable in respect of withholding or other taxes.
(hh) 'Option Shares' means Shares covered by an outstanding Option or
purchased under an Option.
(ii) 'Plan' means this 2003 Equity Incentive Plan of Sorrento Networks
Corporation.
(jj) 'Prior Plans' means the Company's 1997 Incentive and Non-Qualified
Stock Option Plan, the 1997 Directors Stock Option Plan, and the 2000 Stock
Option/Stock Issuance Plan in effect.
(kk) 'Purchase Price' means the price payable under a Stock Award for
Shares, not including any amount payable in respect of withholding or other
taxes.
(ll) 'Reverse Vesting' means that an Option is or was fully exercisable
but that, subject to a 'reverse' vesting schedule, the Company has a right
to repurchase the Option Shares as specified in Section 15.2(a), with the
Company's right of repurchase expiring in accordance with a 'forward'
vesting schedule that would otherwise have applied to the Option under which
the Option Shares were purchased or in accordance with some other vesting
schedule described in the Award Agreement. With respect to a Stock Award,
Reverse Vesting means that the Company has a right to repurchase the Award
Shares purchased pursuant to the Stock Award, as specified in Section
16.2(a), with the Company's right of repurchase expiring in accordance with
the vesting schedule in the Award Agreement.
(mm) 'Rule 16b-3' means Rule 16b-3 adopted under Section 16(b) of the
Exchange Act.
(nn) 'SAR' or 'Stock Appreciation Right' means a right to receive cash
based on a change in the Fair Market Value of a specific number of Shares
pursuant to an Award Agreement, as described in Section 8.1.
(oo) 'Securities Act' means the Securities Act of 1933.
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(pp) 'Share' means a share of the common stock of the Company or other
securities substituted for the common stock under Section 10.
(qq) 'Stock Award' means an offer by the Company to sell shares subject
to certain restrictions pursuant to the Award Agreement as described in
Section 8.2.
(rr) 'Substitute Award' means a Substitute Option, Substitute SAR or
Substitute Stock Award granted in accordance with the terms of the Plan.
(ss) 'Substitute Option' means an Option granted in substitution for, or
upon the conversion of, an option granted by another entity to purchase
equity securities in the granting entity.
(tt) 'Substitute SAR' means a SAR granted in substitution for, or upon
the conversion of, a stock appreciation right granted by another entity with
respect to equity securities in the granting entity.
(uu) 'Substitute Stock Award' means a Stock Award granted in
substitution for, or upon the conversion of, a stock award granted by
another entity to purchase equity securities in the granting entity.
(vv) 'Take-Over Price' shall mean the greater of (i) the Fair Market
Value per share of Company's Common Stock on the date the option is
surrendered to the Company in connection with a Hostile Take-Over or
(ii) the highest reported price per share of the Company's Common Stock paid
by the tender offeror in effecting such Hostile Take-Over.
(ww) 'Termination' means that the Awardee has ceased to be, with or
without any cause or reason, an Employee, Director or Consultant. However,
unless so determined by the Administrator, 'Termination' shall not include a
change in status from an Employee, Consultant or Director to another such
status. An event that causes an Affiliate to cease being an Affiliate shall
be treated as the 'Termination' of that Affiliate's Employees, Directors,
and Consultants.
2.2 Rules of Interpretation. Any reference to a 'Section,' without more, is
to a Section of this Plan. Captions and titles are used for convenience in this
Plan and shall not, by themselves, determine the meaning of this Plan. Except
when otherwise indicated by the context, the singular includes the plural and
vice versa. Any reference to a statute is also a reference to the applicable
rules and regulations adopted under that statute. Any reference to a statute,
rule or regulation, or to a section of a statute, rule or regulation, is a
reference to that statute, rule, regulation, or section as amended from time to
time, both before and after the effective date of this Plan and including any
successor provisions.
3. SHARES SUBJECT TO THIS PLAN; TERM OF THIS PLAN
3.1 Number of Award Shares. Subject to adjustment under Section 10, the
maximum number of Shares that may be issued under this Plan is [ ]. When an
Award is granted, the maximum number of Shares that may be issued under this
Plan shall be reduced by the number of Shares covered by that Award. However, if
an Award later terminates or expires without having been exercised in full, the
maximum number of shares that may be issued under this Plan shall be increased
by the number of Shares that were covered by, but not purchased under, that
Award. By contrast, the repurchase of Shares by the Company shall not increase
the maximum number of Shares that may be issued under this Plan.
3.2 Source of Shares. Award Shares may be: (a) Shares that have never been
issued, (b) Shares that have been issued but are no longer outstanding, or
(c) Shares that are outstanding and are acquired, including shares repurchased
by the Company on the open market, to discharge the Company's obligation to
deliver Award Shares.
3.3 Term of this Plan
(a) This Plan shall be effective on, and Awards may be granted under
this Plan after, the date it has been both adopted by the Board and approved
by the Company's shareholders.
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(b) Subject to Section 13, Awards may be granted under this Plan for a
period of ten years from the earlier of the date on which the Board approves
this Plan and the date the Company's shareholders approve this Plan.
Accordingly, Awards may not be granted under the Plan after the earlier of
those dates.
(c) One or more provisions of the Plan, including (without limitation)
the provisions of Section 10, may, in the Administrator's discretion, be
extended to one or more options granted under Prior Plans which do not
otherwise contain such provisions, provided, however, that no modification
of any option shall impair any existing contractual rights of any awardee
unless the affected awardee consents to such modification. When
contemplating a modification of awards granted under Prior Plans pursuant to
this Section 3.3(d), the Administrator shall give due consideration to the
effect of such modification under Applicable Law, tax laws and any adverse
accounting treatment that may be incurred.
4. ADMINISTRATION
4.1 General
(a) The Board shall have ultimate responsibility for administering this
Plan. The Board may delegate certain of its responsibilities to a Committee,
which shall consist of at least two members of the Board. The Board or the
Committee may further delegate its responsibilities to any Employee of the
Company or any Affiliate. Where this Plan specifies that an action is to be
taken or a determination made by the Board, only the Board may take that
action or make that determination. Where this Plan specifies that an action
is to be taken or a determination made by the Committee, only the Committee
may take that action or make that determination. Where this Plan references
the 'Administrator,' the action may be taken or determination made by the
Board, the Committee, or other Administrator. However, only the Board or the
Committee may approve grants of Awards to Executives, and an Administrator
other than the Board or the Committee may grant Awards only within
guidelines established by the Board or Committee. Moreover, all actions and
determinations by any Administrator are subject to the provisions of this
Plan.
(b) So long as the Company has registered and outstanding a class of
equity securities under Section 12 of the Exchange Act, the Committee shall
consist of Company Directors who are 'Non-Employee Directors' as defined in
Rule 16b-3 and, after the expiration of any transition period permitted by
Treasury Regulations Section 1.162-27(h)(3), who are 'outside directors' as
defined in Section 162(m) of the Code.
4.2 Authority of Administrator. Subject to the other provisions of this
Plan, the Administrator shall have the authority to:
(a) grant Awards, including Substitute Awards;
(b) determine the Fair Market Value of Shares;
(c) determine the Option Price and the Purchase Price of Awards;
(d) select the Awardees;
(e) determine the times at which Awards are granted;
(f) determine the number of Shares subject to each Award;
(g) determine the types of payment that may be used to purchase Award
Shares;
(h) determine the types of payment that may be used to satisfy
withholding tax obligations;
(i) determine the other terms of each Award, including but not limited
to the time or times at which Awards may be exercised, whether and under
what conditions an Award is assignable, and whether an Option is a
Nonstatutory Option or an Incentive Stock Option;
(j) modify or amend any Award;
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(k) authorize any person to sign any Award Agreement or other document
related to this Plan on behalf of the Company;
(l) determine the form of any Award Agreement or other document related
to this Plan, and whether that document, including signatures, may be in
electronic form;
(m) interpret this Plan and any Award Agreement or document related to
this Plan;
(n) correct any defect, remedy any omission, or reconcile any
inconsistency in this Plan, any Award Agreement or any other document
related to this Plan;
(o) adopt, amend, and revoke rules and regulations under this Plan,
including rules and regulations relating to sub-plans and Plan addenda;
(p) adopt, amend, and revoke special rules and procedures which may be
inconsistent with the terms of this Plan, set forth (if the Administrator so
chooses) in sub-plans regarding (for example) the operation and
administration of this Plan and the terms of Awards, if and to the extent
necessary or useful to accommodate non-U.S. Applicable Laws and practices as
they apply to Awards and Award Shares held by, or granted or issued to,
persons working or resident outside of the United States or employed by
Affiliates incorporated outside the United States;
(q) determine whether a transaction or event should be treated as a
Change of Control, a Divestiture or neither;
(r) determine the effect of a Fundamental Transaction and, if the Board
determines that a transaction or event should be treated as a Change of
Control or a Divestiture, then the effect of that Change of Control or
Divestiture; and
(s) make all other determinations the Administrator deems necessary or
advisable for the administration of this Plan.
4.3 Scope of Discretion. Subject to the last sentence of this Section 4.3,
on all matters for which this Plan confers the authority, right or power on the
Board, the Committee, or other Administrator to make decisions, that body may
make those decisions in its sole and absolute discretion. Those decisions will
be final, binding and conclusive. Moreover, but again subject to the last
sentence of this Section 4.3, in making those decisions the Board, Committee or
other Administrator need not treat all persons eligible to receive Awards, all
Awardees, all Awards or all Award Shares the same way. However, except as
provided in Section 13.3, the discretion of the Board, Committee or other
Administrator is subject to the specific provisions and specific limitations of
this Plan, as well as all rights conferred on specific Awardees by Award
Agreements and other agreements.
5. PERSONS ELIGIBLE TO RECEIVE AWARDS
5.1 Eligible Individuals. Awards (including Substitute Awards) may be
granted to, and only to, Employees, Directors and Consultants, including to
prospective Employees, Directors and Consultants conditioned on the beginning of
their service for the Company or an Affiliate. However, Incentive Stock Options
may only be granted to Employees, as provided in Section 7(g).
5.2 Section 162(m) Limitation.
(a) Options and SARs. So long as the Company is a 'publicly held
corporation' within the meaning of Section 162(m) of the Code: (i) no Employee
or prospective Employee may be granted one or more SARs and Options within any
fiscal year of the Company under this Plan to purchase more than 1,300,000
Shares under Options or to receive compensation calculated with reference to
more than that number of Shares under SARs, subject to adjustment under
Section 10, and (ii) Options and SARs may be granted to an Executive only by the
Committee (and, notwithstanding Section 4.1(a), not by the Board). If an Option
or SAR is cancelled without being exercised or if the Option Price of an Option
is reduced, that cancelled or repriced Option or SAR shall continue to be
counted against the limit on Awards that may be granted to any individual under
this Section 5.2.
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(b) Cash Awards and Stock Awards. Any Cash Award or Stock Award intended as
'qualified performance-based compensation' within the meaning of Section 162(m)
of the Code must vest or become exercisable contingent on the achievement of one
or more Objectively Determinable Performance Conditions. The Committee shall
have the discretion to determine the time and manner of compliance with Section
162(m) of the Code.
6. TERMS AND CONDITIONS OF OPTIONS
The following rules apply to all Options:
6.1 Price. No Option intended as 'qualified incentive-based
compensation' within the meaning of Section 162(m) of the Code may have an
Option Price less than 100% of the Fair Market Value of the Shares on the
Grant Date. In no event will the Option Price of any Option be less than the
par value of the Shares issuable under the Option if that is required by
Applicable Law. The Option Price of an Incentive Stock Option shall be
subject to Section 7(f).
6.2 Term. No Option shall be exercisable after its Expiration Date. No
Option may have an Expiration Date that is more than ten years after its
Grant Date. Additional provisions regarding the term of Incentive Stock
Options are provided in Sections 7(a) and 7(e).
6.3 Vesting. Options shall be exercisable: (a) on the Grant Date, or
(b) in accordance with a schedule related to the Grant Date, the date the
Optionee's directorship, employment or consultancy begins, or a different
date specified in the Option Agreement. If so provided in the Option
Agreement, an Option may be exercisable subject to the application of
Reverse Vesting to the Option Shares. Additional provisions regarding the
vesting of Incentive Stock Options are provided in Section 7(c). No Option
granted to an individual who is subject to the overtime pay provisions of
the Fair Labor Standards Act may be exercised before the expiration of six
months after the Grant Date.
6.4 Form of Payment.
(a) The Administrator shall determine the acceptable form and method of
payment for exercising an Option.
(b) Acceptable forms of payment for all Option Shares are cash, check or
wire transfer, denominated in U.S. dollars except as specified by the
Administrator for non-U.S. Employees or non-U.S. sub-plans.
(c) In addition, the Administrator may permit payment to be made by any of
the following methods:
(i) other Shares, or the designation of other Shares, which (A) are
'mature' shares for purposes of avoiding variable accounting treatment under
generally accepted accounting principles (generally mature shares are those
that have been owned by the Optionee for more than six months on the date of
surrender), and (B) have a Fair Market Value on the date of surrender equal
to the Option Price of the Shares as to which the Option is being exercised;
(ii) provided that a public market exists for the Shares, consideration
received by the Company under a procedure under which a broker-dealer that
is a member of the National Association of Securities Dealers advances funds
on behalf of an Optionee or sells Option Shares on behalf of an Optionee (a
'Cashless Exercise Procedure'), provided that if the Company extends or
arranges for the extension of credit to an Optionee under any Cashless
Exercise Procedure, no Officer or Director may participate in that Cashless
Exercise Procedure;
(iii) with respect only to Optionees who are neither Officers nor
Directors as of the date of exercise, one or more promissory notes meeting
the requirements of Section 6.4(e), provided, however, that promissory notes
may not be used for any portion of an Award which is not vested at the time
of exercise;
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(iv) cancellation of any debt owed by the Company or any Affiliate to
the Optionee by the Company including without limitation waiver of
compensation due or accrued for services previously rendered to the Company;
and
(v) any combination of the methods of payment permitted by any paragraph
of this Section 6.4.
(d) The Administrator may also permit any other form or method of payment
for Option Shares permitted by Applicable Law.
(e) The promissory notes referred to in Section 6.4(c)(iii) must be full
recourse. Unless the Committee specifies otherwise after taking into account any
relevant accounting issues, the notes shall bear interest at a fair market value
rate when the Option is exercised. Interest on the notes shall also be at least
sufficient to avoid imputation of interest under Sections 483, 1274, and 7872 of
the Code. The notes and their administration shall at all times comply with any
applicable margin rules of the Federal Reserve. The notes may also include such
other terms as the Administrator specifies. Payment may not be made by
promissory note by Officers or Directors if Shares are registered under
Section 12 of the Exchange Act.
6.5 Nonassignability of Options. Except as determined by the Administrator,
no Option shall be assignable or otherwise transferable by the Optionee except
by will or by the laws of descent and distribution. However, Options may be
transferred and exercised in accordance with a Domestic Relations Order and may
be exercised by a guardian or conservator appointed to act for the Optionee.
Incentive Stock Options may only be assigned in compliance with Section 7(h).
6.6 Substitute Options. The Board may cause the Company to grant Substitute
Options in connection with the acquisition by the Company or an Affiliate of
equity securities of any entity (including by merger, tender offer, or other
similar transaction) or of all or a portion of the assets of any entity. Any
such substitution shall be effective when the acquisition closes. Substitute
Options may be Nonstatutory Options or Incentive Stock Options. Unless and to
the extent specified otherwise by the Board, Substitute Options shall have the
same terms and conditions as the options they replace, except that (subject to
Section 10) Substitute Options shall be Options to purchase Shares rather than
equity securities of the granting entity and shall have an Option Price
determined by the Board.
6.7 Cancellation and Regrant of Options. The Administrator shall have the
authority to effect, at any time and from time to time, with the consent of the
affected Option holders, the cancellation of any or all outstanding Options
granted under this Plan and to grant in substitution new Options covering the
same or a different number of shares of the Company's common stock but with an
Option Price based on the Fair Market Value per share of the Company's common
stock on the new Grant Date.
7. INCENTIVE STOCK OPTIONS
The following rules apply only to Incentive Stock Options and only to the
extent these rules are more restrictive than the rules that would otherwise
apply under this Plan. With the consent of the Optionee, or where this Plan
provides that an action may be taken notwithstanding any other provision of this
Plan, the Administrator may deviate from the requirements of this Section,
notwithstanding that any Incentive Stock Option modified by the Administrator
will thereafter be treated as a Nonstatutory Option.
(a) The Expiration Date of an Incentive Stock Option shall not be later
than ten years from its Grant Date, with the result that no Incentive Stock
Option may be exercised after the expiration of ten years from its Grant
Date.
(b) No Incentive Stock Option may be granted more than ten years from
the date this Plan was approved by the Board.
(c) Options intended to be incentive stock options under Section 422 of
the Code that are granted to any single Optionee under all incentive stock
option plans of the Company and its Affiliates, including incentive stock
options granted under this Plan, may not vest at a rate of
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more than $100,000 in Fair Market Value of stock (measured on the grant
dates of the options) during any calendar year. For this purpose, an option
vests with respect to a given share of stock the first time its holder may
purchase that share, notwithstanding any right of the Company to repurchase
that share. Unless the administrator of that option plan specifies otherwise
in the related agreement governing the option, this vesting limitation shall
be applied by, to the extent necessary to satisfy this $100,000 rule,
treating certain stock options that were intended to be incentive stock
options under Section 422 of the Code as Nonstatutory Options. The stock
options or portions of stock options to be reclassified as Nonstatutory
Options are those with the highest option prices, whether granted under this
Plan or any other equity compensation plan of the Company or any Affiliate
that permits that treatment. This Section 7(c) shall not cause an Incentive
Stock Option to vest before its original vesting date or cause an Incentive
Stock Option that has already vested to cease to be vested.
(d) In order for an Incentive Stock Option to be exercised for any form
of payment other than those described in Section 6.4(b), that right must be
stated at the time of grant in the Option Agreement relating to that
Incentive Stock Option.
(e) Any Incentive Stock Option granted to a Ten Percent Shareholder,
must have an Expiration Date that is not later than five years from its
Grant Date, with the result that no such Option may be exercised after the
expiration of five years from the Grant Date. A 'Ten Percent Shareholder' is
any person who, directly or by attribution under Section 424(d) of the Code,
owns stock possessing more than ten percent of the total combined voting
power of all classes of stock of the Company or of any Affiliate on the
Grant Date.
(f) The Option Price of an Incentive Stock Option shall never be less
than the Fair Market Value of the Shares at the Grant Date. The Option Price
for the Shares covered by an Incentive Stock Option granted to a Ten Percent
Shareholder shall never be less than 110% of the Fair Market Value of the
Shares at the Grant Date.
(g) Incentive Stock Options may be granted only to Employees. If an
Optionee changes status from an Employee to a Consultant, that Optionee's
Incentive Stock Options become Nonstatutory Options if not exercised within
the time period described in Section 7(i).
(h) No rights under an Incentive Stock Option may be transferred by the
Optionee, other than by will or the laws of descent and distribution. During
the life of the Optionee, an Incentive Stock Option may be exercised only by
the Optionee. The Company's compliance with a Domestic Relations Order, or
the exercise of an Incentive Stock Option by a guardian or conservator
appointed to act for the Optionee, shall not violate this Section 7(h).
(i) An Incentive Stock Option shall be treated as a Nonstatutory Option
if it remains exercisable after, and is not exercised within, the
three-month period beginning with the Optionee's Termination for any reason
other than the Optionee's death or disability (as defined in Section 22(c)
of the Code). In the case of Termination due to death, an Incentive Stock
Option shall continue to be treated as an Incentive Stock Option if it
remains exercisable after, and is not exercised within, the three-month
period after the Optionee's Termination provided it is exercised before the
Expiration Date. In the case of Termination due to disability, an Incentive
Stock Option shall be treated as a Nonstatutory Option if it remains
exercisable after, and is not exercised within, one year after the
Optionee's Termination.
(j) An Incentive Stock Option may only be modified by the Board.
8. STOCK APPRECIATION RIGHTS, STOCK AWARDS AND CASH AWARDS
8.1 Stock Appreciation Rights. SARs may be granted either alone, in addition
to, or in tandem with other Awards granted under the Plan. The Administrator may
grant SARs subject to terms and conditions not inconsistent with the Plan and
determined by the Administrator. The specific terms and conditions applicable to
the Awardee shall be provided for in the Award Agreement. The following rules
apply to SARs:
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(a) Term. No SAR shall be exercisable after its Expiration Date. No SAR
may have an Expiration Date that is more than ten years after its Grant
Date.
(b) Vesting. SARs shall be exercisable: (i) on the Grant Date, (ii) in
accordance with a schedule related to the Grant Date, the date the Awardee's
directorship, employment or consultancy begins, or a different date
specified in the Award Agreement, or (iii) or upon the achievement of
Objectively Determinable Performance Conditions.
(c) Exercise of SARs. Upon the exercise of an SAR, in whole or in part,
an Awardee shall be entitled to a payment in an amount equal to the excess
of the Fair Market Value of a fixed number of Shares covered by the
exercised portion of the SAR on the date of exercise, over the Fair Market
Value of the Shares covered by the exercised portion of the SAR on the Grant
Date. The amount due to the Awardee the exercise of a SAR will be paid in
cash or Shares over the period or periods specified in the Award Agreement.
An Award Agreement may place limits on the amount that may be paid over any
specified period or periods upon the exercise of a SAR, on an aggregate
basis or as to any Awardee. A SAR shall be considered exercised when the
Company receives written notice of exercise in accordance with the terms of
the Award Agreement from the person entitled to exercise the SAR.
(d) Nonassignability of SARs. Except as determined by the Administrator,
no SAR shall be assignable or otherwise transferable by the Awardee except
by will or by the laws of descent and distribution. However, SARs may be
transferred and exercised in accordance with a Domestic Relations Order.
(e) Substitute SARs. The Board may cause the Company to grant Substitute
SARs in connection with the acquisition by the Company or an Affiliate of
equity securities of any entity (including by merger) or all or a portion of
the assets of any entity. Any such substitution shall be effective when the
acquisition closes. Unless and to the extent specified otherwise by the
Board, Substitute SARs shall have the same terms and conditions as the
options they replace, except that (subject to Section 10) Substitute SARs
shall be exercisable with respect to the Fair Market Value of Shares rather
than equity securities of the granting entity and shall be on terms that, as
determined by the Board in its sole and absolute discretion, properly
reflects the substitution.
(f) Cancellation and Regrant of SARs. The Administrator shall have the
authority to effect, at any time and from time to time, with the consent of
the affected Awardee, the replacement or re-grant, through cancellation or
modification, of Stock Awards granted under the Plan.
8.2 Stock Awards. Stock Awards may be granted either alone, in addition to,
or in tandem with other Awards granted under the Plan. The specific terms and
conditions applicable to the Awardee shall be provided for in the Award
Agreement. The Award Agreement shall state the number of Shares that the Awardee
shall be entitled to receive or purchase, the terms and conditions on which the
Shares shall vest, the price to be paid, if any, and, if applicable, the time
within which the Awardee must accept such offer. The following rules apply to
all Stock Awards:
(a) Term. No Stock Award shall be exercisable after its Expiration Date.
No Stock Award may have an Expiration Date that is more than ten years after
its Grant Date.
(b) Vesting. Stock Awards shall be exercisable: (i) on the Grant Date,
or (ii) in accordance with a schedule related to the Grant Date, the date
the Awardee's directorship, employment or consultancy begins, or a different
date specified in the Award Agreement.
(c) Right of Repurchase. If so provided in the Award Agreement, Award
Shares acquired pursuant to a Stock Award may be subject to Reverse Vesting.
(d) Form of Payment. The Administrator shall determine the acceptable
form and method of payment for exercising a Stock Award.
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(i) Acceptable forms of payment for all Award Shares are cash, check
or wire transfer, denominated in U.S. dollars except as specified by the
Administrator for non-U.S. Employees or non-U.S. sub-plans.
(ii) In addition, the Administrator may permit payment to be made by
any of the methods permitted with respect to the exercise of Options
pursuant to Section 6.4.
(e) Nonassignability of Stock Awards. Except as determined by the
Administrator, no Stock Award shall be assignable or otherwise transferable
by the Awardee except by will or by the laws of descent and distribution.
However, Options may be transferred and exercised in accordance with a
Domestic Relations Order.
(f) Substitute Stock Award. The Board may cause the Company to grant
Substitute Stock Awards in connection with the acquisition by the Company or
an Affiliate of equity securities of any entity (including by merger) or all
or a portion of the assets of any entity. Unless and to the extent specified
otherwise by the Board, Substitute Stock Awards shall have the same terms
and conditions as the options they replace, except that (subject to Section
10) Substitute Stock Awards shall be Stock Awards to purchase Shares rather
than equity securities of the granting entity and shall have a Purchase
Price that, as determined by the Board in its sole and absolute discretion,
properly reflects the substitution.
(g) Cancellation or Regrant of Stock Awards. The Administrator shall
have the authority to effect, at any time and from time to time, with the
consent of the affected Awardee, the replacement or re-grant, through
cancellation or modification, of Stock Awards granted under the Plan.
8.3 Cash Awards. Cash Awards may be granted either alone, in addition to, or
in tandem with other Awards granted under the Plan. Once the Administrator
determines that it will grant a Cash Award, it shall advise the Awardee, by
means of an Award Agreement, of the terms, conditions and restrictions related
to the Cash Award. The following rules apply to all Cash Awards:
(a) Term. No Cash Award shall be payable after its Expiration Date. No
Cash Award may have an Expiration Date that is more than ten years after its
Grant Date.
(b) Vesting. Cash Awards shall be payable: (i) on the Grant Date, (ii)
in accordance with a schedule related to the Grant Date, the date the
Awardee's directorship, employment or consultancy begins, or a different
date specified in the Award Agreement, or (iii) or upon the achievement of
Objectively Determinable Performance Conditions.
9. EXERCISE OF AWARDS
9.1 In General. An Award shall be exercisable in accordance with this Plan
and the Award Agreement under which it is granted.
9.2 Time of Exercise. Options and Stock Awards shall be considered exercised
when the Company receives: (a) written notice of exercise from the person
entitled to exercise the Option or Stock Award, (b) full payment, or provision
for payment, in a form and method approved by the Administrator, for the Shares
for which the Option or Stock Award is being exercised, and (c) with respect to
Nonstatutory Options, payment, or provision for payment, in a form approved by
the Administrator, of all applicable withholding taxes due upon exercise. An
Award may not be exercised for a fraction of a Share. SARs and Cash Awards shall
be considered exercised when the Company receives written notice of the exercise
from the person entitled to exercise the SAR or Cash Award.
9.3 Issuance of Award Shares. The Company shall issue Award Shares in the
name of the person properly exercising the Award. If the Awardee is that person
and so requests, the Award Shares shall be issued in the name of the Awardee and
the Awardee's spouse. The Company shall endeavor to issue Award Shares promptly
after an Award is exercised. However, until Award Shares are actually issued, as
evidenced by the appropriate entry on the stock books of the Company or its
transfer agent, the Awardee will not have the rights of a shareholder with
respect to those Award Shares, even though the Awardee has completed all the
steps necessary to exercise
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the Award. No adjustment shall be made for any dividend, distribution, or other
right for which the record date precedes the date the Award Shares are issued,
except as provided in Section 10.
9.4 Termination
(a) In General. Except as provided in an Award Agreement or in writing
by the Administrator, including in an Award Agreement, and as otherwise
provided in Sections 9.4(b), (c), (d), (e), (f), (g) and (h), after an
Awardee's Termination, the Awardee's Awards shall be exercisable to the
extent (but only to the extent) they are vested on the date of that
Termination and only during the three months after the Termination, but in
no event after the Expiration Date. To the extent the Awardee does not
exercise an Award within the time specified for exercise, the Award shall
automatically terminate.
(b) Leaves of Absence. Unless otherwise provided in the Award Agreement,
no Award may be exercised more than three months after the beginning of a
leave of absence, other than a personal or medical leave approved by an
authorized representative of the Company with employment guaranteed upon
return. Awards shall not continue to vest during a leave of absence, unless
otherwise determined by the Administrator with respect to an approved
personal or medical leave with employment guaranteed upon return.
(c) Death or Disability. Unless otherwise provided by the Administrator,
if an Awardee's Termination is due to death or disability (as determined by
the Administrator with respect to all Awards other than Incentive Stock
Options and as defined by Section 22(e) of the Code with respect to
Incentive Stock Options), all Awards of that Awardee to the extent
exercisable at the date of that Termination may be exercised for one year
after that Termination, but in no event after the Expiration Date. In the
case of Termination due to death, an Award may be exercised as provided in
Section 16. In the case of Termination due to disability, if a guardian or
conservator has been appointed to act for the Awardee and been granted this
authority as part of that appointment, that guardian or conservator may
exercise the Award on behalf of the Awardee. In the case of an Awardee who
dies or become disabled within three months after Termination, if the
Termination was not due to Cause, the Awardee's Awards may be exercised for
one year after that Termination. To the extent an Award is not so exercised
within the time specified for its exercise, the Award shall automatically
terminate.
(d) Divestiture. If an Awardee's Termination is due to a Divestiture,
the Board may take any one or more of the actions described in Section 10.3
with respect to the Awardee's Awards.
(e) Retirement. Unless otherwise provided by the Administrator, if an
Awardee's Termination is due to the Awardee's retirement in accordance with
the Company's or an Affiliate's retirement policy, all Awards of that
Awardee to the extent exercisable at the Awardee's date of retirement may be
exercised for one year after the Awardee's date of retirement, but in no
event after the Expiration Date. To the extent the Awardee does not exercise
an Option within the time specified for exercise, the Award shall
automatically terminate.
(f) Severance Programs. Unless otherwise provided by the Administrator,
if an Awardee's Termination results from participation in a voluntary
severance incentive program of the Company or an Affiliate approved by the
Board, all Awards of that Employee to the extent exercisable at the time of
that Termination shall be exercisable for one year after the Awardee's
Termination, but in no event after the Expiration Date. If the Awardee does
not exercise an Award within the time specified for exercise, the Award
shall automatically terminate.
(g) Termination for Cause. If an Awardee's Termination is due to Cause,
all of the Awardee's Awards shall automatically terminate and cease to be
exercisable at the time of Termination and the Administrator may rescind any
and all exercises of Awards by the Awardee that occurred after the first
event constituting Cause. 'Cause' means employment-related dishonesty,
fraud, misconduct or disclosure or misuse of confidential information, or
other employment-related conduct that is likely to cause significant injury
to the Company, an
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Affiliate, or any of their respective employees, officers or directors
(including, without limitation, commission of a felony or similar offense),
in each case as determined by the Administrator. 'Cause' shall not require
that a civil judgment or criminal conviction have been entered against or
guilty plea shall have been made by the Awardee regarding any of the matters
referred to in the previous sentence.
(h) Administrator Discretion. Notwithstanding the provisions of Section
9.4 (a)-(g), the Plan Administrator shall have complete discretion,
exercisable either at the time an Award is granted or at any time while the
Award remains outstanding, to:
(i) Extend the period of time for which the Award is to remain
exercisable, following the Awardee's Termination, from the limited
exercise period otherwise in effect for that Award to such greater period
of time as the Administrator shall deem appropriate, but in no event
beyond the expiration of the option term; and/or
(ii) Permit the Award to be exercised, during the applicable
post-Termination exercise period, not only with respect to the number of
vested shares of the Company's common stock for which such Award may be
exercisable at the time of the Awardee's Termination but also with
respect to one or more additional installments in which the Awardee would
have vested had the Awardee not been subject to Termination; and/or
(iii) Permit the lapse of some or all of the Company's repurchase
rights, as to any given Award, that is subject to Reverse Vesting.
(i) Consulting or Employment Relationship. Nothing in this Plan or in
any Award Agreement, and no Award or the fact that Award Shares remain
subject to repurchase rights, shall: (A) interfere with or limit the right
of the Company or any Affiliate to terminate the employment or consultancy
of any Awardee at any time, whether with or without cause or reason, and
with or without the payment of severance or any other compensation or
payment, or (B) interfere with the application of any provision in any of
the Company's or any Affiliate's charter documents or Applicable Law
relating to the election, appointment, term of office, or removal of a
Director.
10. CERTAIN TRANSACTIONS AND EVENTS
10.1 In General. Except as provided in this Section 10, no change in the
capital structure of the Company, merger, sale or other disposition of assets or
a subsidiary, change of control, issuance by the Company of shares of any class
of securities convertible into shares of any class, conversion of securities, or
other transaction or event shall require or be the occasion for any adjustments
of the type described in this Section 10. Additional provisions with respect to
the foregoing transactions are set forth in Section 13.3.
10.2 Changes in Capital Structure. In the event of any stock split, reverse
stock split, recapitalization, combination or reclassification of stock, stock
dividend, spin-off, or similar change to the capital structure of the Company
(not including a Fundamental Transaction or Change of Control), the Board shall
make whatever adjustments it concludes are appropriate to: (a) the number and
type of Awards that may be granted under this Plan, (b) the number and type of
Options that may be granted to any individual under this Plan, (c) the Terms of
any SAR, (d) the Purchase Price of any Stock Award, (e) the Option Price and
number and class of securities issuable under each outstanding Option, and
(f) the repurchase price of any securities substituted for Option Shares that
are subject to repurchase rights. The specific adjustments shall be determined
by the Board. Unless the Board specifies otherwise, any securities issuable as a
result of any such adjustment shall be rounded to the next lower whole security.
The Board need not adopt the same rules for each Award or each Awardee.
10.3 Fundamental Transactions. If the Company engages in a Fundamental
Transaction, then, subject to Section 18.4 of this Plan, but notwithstanding any
other provision of this Plan, the Board shall do one or more of the following
contingent on the closing or completion of the Fundamental Transaction:
(a) arrange for the substitution, in exchange for Awards, of options to purchase
equity securities other than Shares (including, if appropriate, equity
securities of an entity
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other than the Company) (an 'assumption' of Awards) on such terms and conditions
as the Board determines are appropriate, (b) accelerate the vesting and
termination of outstanding Awards, in whole or in part, so that Awards can be
exercised before or otherwise in connection with the closing or completion of
the Fundamental Transaction or event but then terminate, (c) cancel or arrange
for the cancellation of Awards in exchange for cash payments to Awardees, or
(d) either arrange for any repurchase rights of the Company with respect to
Award Shares to apply to the securities issued in substitution for Shares or
terminate repurchase rights on Award Shares.
10.4 Divestiture. If the Company or an Affiliate sells or otherwise
transfers equity securities of an Affiliate to a person or entity other than the
Company or an Affiliate, or leases, exchanges or transfers all or any portion of
its assets to such a person or entity, then the Board may specify that such
transaction or event constitutes a 'Divestiture'. In connection with a
Divestiture, notwithstanding any other provision of this Plan, the Board may
take one or more of the actions described in Section 10.3 with respect to Awards
or Award Shares held by, for example, Employees, Directors or Consultants for
whom that transaction or event results in a Termination. The Board need not
adopt the same rules for each Award or each Awardee.
10.5 Dissolution. If the Company adopts a plan of dissolution, the Board may
cause Awards to be fully vested and exercisable (but not after their Expiration
Date) before the dissolution is completed but contingent on its completion and
may cause the Company's repurchase rights on Award Shares to lapse upon
completion of the dissolution. The Board need not adopt the same rules for each
Award or each Awardee. However, to the extent not exercised before the earlier
of the completion of the dissolution or their Expiration Date, Awards shall
terminate just before the dissolution is completed.
10.6 Cut-Back to Preserve Benefits. If the Administrator determines that the
net after-tax amount to be realized by any Awardee, taking into account any
accelerated vesting, termination of repurchase rights, or cash payments to that
Awardee in connection with any transaction or event addressed in this Section 10
would be greater if one or more of those steps were not taken or payments were
not made with respect to that Awardee's Awards or Award Shares, then and to that
extent one or more of those steps shall not be taken and payments shall not be
made.
11. AUTOMATIC OPTION GRANTS TO NONEMPLOYEE DIRECTORS
11.1 Grant Dates. Option grants to Nonemployee Directors shall be made on
the dates specified below:
(a) Each individual who is first elected or appointed as a Nonemployee
Board member at any time after the 2003 annual meeting of shareholders shall
automatically be granted, on the date of such initial election or
appointment, a Nonstatutory Option to purchase 15,000 Shares (the 'Initial
Grant').
(b) Commencing in 2004, on the date of each annual shareholders meeting,
each individual who is to continue to serve as a Nonemployee Director shall
automatically be granted a Nonstatutory Option to purchase 35,000 Shares
(the 'Annual Grant'), provided such individual has served as a Nonemployee
Director for at least six (6) months. The Annual Grant for 2003 will be made
within forty-five (45) days of shareholder approval of this Plan.
11.2 Exercise Price
(a) The Option Price shall be equal to one hundred percent (100%) of the
Fair Market Value of the Shares on the Option grant date.
(b) The Option Price shall be payable in one or more of the alternative
forms authorized pursuant to Section 6.4. Except to the extent the sale and
remittance procedure specified thereunder is utilized, payment of the Option
Price must be made on the date of exercise.
11.3 Option Term. Each option shall have a term of ten (10) years measured
from the Option grant date.
11.4 Exercise and Vesting of Options. Each Option granted pursuant to
Section 11 of this Plan shall be immediately exercisable for any or all of the
Option Shares. However, any unvested
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Shares purchased under the Option shall be subject to a right of repurchase by
the Company, at the Option Price paid per share, upon the Awardee's cessation of
Board service prior to vesting in those Shares. The Shares subject to each
Initial Grant and Annual Grant shall vest, and the Company's repurchase right
shall lapse, in equal installments at the end of each quarter, during the
subsequent twelve (12) month period measured from the grant date.
11.5 Limited Transferability of Options. Each Option granted pursuant to
this Section 11 may be assigned in whole or in part during the Awardee's
lifetime to one or more members of the Awardee's family or to a trust
established exclusively for one or more such family members or to an entity in
which the Awardee is majority owner or to the Awardee 's former spouse, to the
extent such assignment is in connection with the Awardee 's estate or financial
plan or pursuant to a Domestic Relations Order. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the Option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Administrator may deem appropriate. The Awardee may also designate one or
more persons as the beneficiary or beneficiaries of his or her outstanding
Options under this Section 11, and those Options shall, in accordance with such
designation, automatically be transferred to such beneficiary or beneficiaries
upon the Awardee 's death while holding those Options. Such beneficiary or
beneficiaries shall take the transferred Options subject to all the terms and
conditions of the applicable Award Agreement evidencing each such transferred
Option, including (without limitation) the limited time period during which the
Option may be exercised following the Awardee 's death.
11.6 Termination of Board Service. The following provisions shall govern the
exercise of any Options held by the Awardee at the time the Awardee ceases to
serve as a Board member:
(a) The Awardee (or, in the event of Awardee 's death, the personal
representative of the Awardee's estate or the person or persons to whom the
option is transferred pursuant to the Awardee's will or the laws of
inheritance or the designated beneficiary or beneficiaries of such option)
shall have a twelve (12) month period following the date of such cessation
of Board service in which to exercise each such Option.
(b) During the twelve (12) month exercise period, the Option may not be
exercised in the aggregate for more than the number of vested Shares for
which the Option is exercisable at the time of the Awardee's cessation of
Board service.
(c) Should the Awardee cease to serve as a Board member by reason of
death or permanent disability (as determined by the Administrator), then all
Shares at the time subject to the Option shall immediately vest so that such
Option may, during the twelve (12) month exercise period following such
cessation of Board service, be exercised for any or all of those Shares as
fully vested.
(d) In no event shall the Option remain exercisable after the expiration
of the Option term. Upon the expiration of the twelve (12) month exercise
period or (if earlier) upon the expiration of the Option term, the Option
shall terminate and cease to be outstanding for any vested Shares for which
the Option has not been exercised. However, the Option shall, immediately
upon the Awardee 's cessation of Board service for any reason other than
death or permanent disability, terminate and cease to be outstanding to the
extent the Option is not otherwise at that time exercisable for vested
Shares.
11.7 Certain Transactions and Events
(a) In the event of a Fundamental Transaction while the Awardee remains a
Board member, the Shares at the time subject to each outstanding Option held by
such Awardee pursuant to Section 11, but not otherwise vested, shall
automatically vest in full so that each such Option shall, immediately prior to
the effective date of the Fundamental Transaction, become exercisable for all
the Shares as fully vested Shares and may be exercised for any or all of those
vested Shares. Immediately following the consummation of the Fundamental
Transaction, each Option grant shall
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terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or Affiliate thereof).
(b) In the event of a Change of Control while the Awardee remains a Board
member, the Option Shares held by such Awardee pursuant to Section 11, but not
otherwise vested, shall automatically vest in full so that each such Option
shall, immediately prior to the effective date of the Change of Control, become
exercisable for all the Shares as fully vested Shares and may be exercised for
any or all of those vested Shares. Each such Option shall remain exercisable for
such fully vested Shares until the expiration or sooner termination of the
Option term or the surrender of the Option in connection with a Hostile
Take-Over.
(c) All outstanding repurchase rights shall automatically terminate, and the
Shares subject to those terminated rights shall immediately vest in full, in the
event of any Fundamental Transaction or Change of Control.
(d) Upon the occurrence of a Hostile Take-Over while the Awardee remains a
Board member, such Awardee shall have a thirty (30) day period in which to
surrender to the Company each of his or her outstanding Options granted pursuant
to Section 11. The Awardee shall in return be entitled to a cash distribution
from the Company in an amount equal to the excess of:
(i) The Take-Over Price of the Shares at the time subject to each
surrendered Option (whether or not the Awardee is otherwise at the time
vested in those Shares) over
(ii) The aggregate Option Price payable for such Shares.
Such cash distribution shall be paid within five (5) days following the
surrender of the Option to the Company. No approval or consent of the Board or
Administrator shall be required at the time of the actual Option surrender and
cash distribution.
(e) Each Option which is assumed in connection with a Fundamental
Transaction shall be appropriately adjusted, immediately after such Fundamental
Transaction, to apply to the number and class of securities which would have
been issuable to the Awardee in consummation of such Fundamental Transaction had
the Option been exercised immediately prior to such Fundamental Transaction.
Appropriate adjustments shall also be made to the Option Price payable per share
under each outstanding Option, provided the aggregate Option Price payable for
such securities shall remain the same. To the extent the actual holders of the
Company's outstanding Common Stock receive cash consideration for their Common
Stock in consummation of the Fundamental Transaction, the successor corporation
may, in connection with the assumption of the outstanding Options granted
pursuant to Section 11, substitute one or more shares of its own common stock
with a fair market value equivalent to the cash consideration paid per share of
Common Stock in such Fundamental Transaction.
(f) The grant of Options pursuant to Section 11 shall in no way affect the
right of the Company to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
(g) The remaining terms of each Option granted pursuant to Section 11 shall,
as applicable, be the same as terms in effect for Awards granted under the Plan.
Notwithstanding the foregoing, the provisions of Section 9.4 and Section 10
shall not apply to Options granted pursuant to Section 11.
(h) For so long as Initial Grants and/or Annual Grants shall be made to
Nonemployee Directors pursuant to Section 11 of this Plan, no other initial or
annual grants will be made to Nonemployee Directors under Prior Plans.
12. WITHHOLDING AND TAX REPORTING
12.1 Tax Withholding Alternatives
(a) General. Whenever Award Shares are issued or become free of
restrictions, the Company may require the Awardee to remit to the Company an
amount sufficient to satisfy any applicable tax withholding requirement, whether
the related tax is imposed on the Awardee or the Company.
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The Company shall have no obligation to deliver Award Shares or release Award
Shares from an escrow or permit a transfer of Award Shares until the Awardee has
satisfied those tax withholding obligations. Whenever payment in satisfaction of
Awards is made in cash, the payment will be reduced by an amount sufficient to
satisfy all tax withholding requirements.
(b) Method of Payment. The Awardee shall pay any required withholding using
the forms of consideration described in Section 6.4(b), except that, in the
discretion of the Administrator, the Company may also permit the Awardee to use
any of the forms of payment described in Section 6.4(c). The Administrator may
also permit Award Shares to be withheld to pay required withholding. If the
Administrator permits Award Shares to be withheld, the Fair Market Value of the
Award Shares withheld, as determined as of the date of withholding, shall not
exceed the amount determined by the applicable minimum statutory withholding
rates.
12.2 Reporting of Dispositions. Any holder of Option Shares acquired under
an Incentive Stock Option shall promptly notify the Administrator, following
such procedures as the Administrator may require, of the sale or other
disposition of any of those Option Shares if the disposition occurs during:
(a) the longer of two years after the Grant Date of the Incentive Stock Option
and one year after the date the Incentive Stock Option was exercised, or
(b) such other period as the Administrator has established.
13. COMPLIANCE WITH LAW
The grant of Awards and the issuance and subsequent transfer of Award Shares
shall be subject to compliance with all Applicable Law, including all applicable
securities laws. Awards may not be exercised, and Award Shares may not be
transferred, in violation of Applicable Law. Thus, for example, Awards may not
be exercised unless: (a) a registration statement under the Securities Act is
then in effect with respect to the related Award Shares, or (b) in the opinion
of legal counsel to the Company, those Award Shares may be issued in accordance
with an applicable exemption from the registration requirements of the
Securities Act and any other applicable securities laws. The failure or
inability of the Company to obtain from any regulatory body the authority
considered by the Company's legal counsel to be necessary or useful for the
lawful issuance of any Award Shares or their subsequent transfer shall relieve
the Company of any liability for failing to issue those Award Shares or
permitting their transfer. As a condition to the exercise of any Award or the
transfer of any Award Shares, the Company may require the Awardee to satisfy any
requirements or qualifications that may be necessary or appropriate to comply
with or evidence compliance with any Applicable Law.
14. AMENDMENT OR TERMINATION OF THIS PLAN OR OUTSTANDING AWARDS
14.1 Amendment and Termination. The Board may at any time amend, suspend, or
terminate this Plan.
14.2 Shareholder Approval. The Board shall have complete and exclusive power
and authority to amend or modify the Plan in any or all respects. However, the
Company shall obtain the approval of the Company's shareholders for any
amendment to this Plan if shareholder approval is necessary or desirable to
comply with any Applicable Law or with the requirements applicable to the grant
of Awards intended to be Incentive Stock Options. The Board may also, but need
not, require that the Company's shareholders approve any other amendments to
this Plan.
14.3 Effect. No such amendment or modification as contemplated in Section
14.2 of this Plan shall adversely affect the rights and obligations with respect
to Awards at the time outstanding under the Plan unless the Awardee consents to
such amendment or modification.
15. RESERVED RIGHTS
15.1 Nonexclusivity of this Plan. This Plan shall not limit the power of the
Company or any Affiliate to adopt other incentive arrangements including, for
example, the grant or issuance of stock options, stock, or other equity-based
rights under other plans or independently of any plan.
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15.2 Unfunded Plan. This Plan shall be unfunded. Although bookkeeping
accounts may be established with respect to Awardees, any such accounts will be
used merely as a convenience. The Company shall not be required to segregate any
assets on account of this Plan, the grant of Awards, or the issuance of Award
Shares. The Company and the Administrator shall not be deemed to be a trustee of
stock or cash to be awarded under this Plan. Any obligations of the Company to
any Awardee shall be based solely upon contracts entered into under this Plan,
such as Award Agreements. No such obligations shall be deemed to be secured by
any pledge or other encumbrance on any assets of the Company. Neither the
Company nor the Administrator shall be required to give any security or bond for
the performance of any such obligations.
16. SPECIAL ARRANGEMENTS REGARDING AWARD SHARES
16.1 Escrows and Pledges. To enforce any restrictions on Award Shares
including restrictions related to Reverse Vesting, the Administrator may require
their holder to deposit the certificates representing Award Shares, with stock
powers or other transfer instruments approved by the Administrator endorsed in
blank, with the Company or an agent of the Company to hold in escrow until the
restrictions have lapsed or terminated. The Administrator may also cause a
legend or legends referencing the restrictions to be placed on the certificates.
Any Awardee who delivers a promissory note as partial or full consideration for
the purchase of Award Shares will be required to pledge and deposit with the
Company some or all of the Award Shares as collateral to secure the payment of
the note. However, the Administrator may require or accept other or additional
forms of collateral to secure the note and, in any event, the Company will have
full recourse against the maker of the note, notwithstanding any pledge or other
collateral.
16.2 Repurchase Rights
(a) Reverse Vesting. If an Option or Stock Award is subject to Reverse
Vesting, the Company shall have the right, during the seven months after the
Awardee's Termination, to repurchase any or all of the Award Shares that were
unvested as of the date of that Termination. If the Award Shares were purchased
with a promissory note, the repurchase price shall be the lower of: the Option
Price or Purchase Price for such Shares, (minus the amount of any cash dividends
paid or payable with respect to the Award Shares for which the record date
precedes the repurchase) and the Fair Market Value at the date of Termination.
In all other cases, the repurchase price shall be determined by the
Administrator in accordance with this Section 16.2. The repurchase determined by
the Administrator shall be either (i) the Option Price or Purchase Price for the
Award Shares (minus the amount of any cash dividends paid or payable with
respect to the Award Shares for which the record date precedes the repurchase)
or (ii) the lower of (A) the Option Price or Purchase Price for the Shares or
(B) the Fair Market Value of those Option Shares as of the date of the
Termination. The repurchase price shall be paid in cash or, if the Option Shares
were purchased in whole or in part with a promissory note, cancellation of
indebtedness under that note, or a combination of those means. The Company may
assign this right of repurchase.
(b) Procedure. The Company or its assignee may choose to give the Awardee a
written notice of exercise of its repurchase rights under this Section 16.2.
However, the Company's failure to give such a notice shall not affect its rights
to repurchase Award Shares. The Company must, however, tender the repurchase
price during the period specified in this Section 16.2 for exercising its
repurchase rights in order to exercise such rights.
17. BENEFICIARIES
An Awardee may file a written designation of one or more beneficiaries who
are to receive the Awardee's rights under the Awardee's Awards after the
Awardee's death. An Awardee may change such a designation at any time by written
notice. If an Awardee designates a beneficiary, the beneficiary may exercise the
Awardee's Awards after the Awardee's death. If an Awardee dies when the Awardee
has no living beneficiary designated under this Plan, the Company shall allow
the executor or administrator of the Awardee's estate to exercise the Award or,
if there is none,
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the person entitled to exercise the Option under the Awardee's will or the laws
of descent and distribution. In any case, no Award may be exercised after its
Expiration Date.
18. MISCELLANEOUS
18.1 Governing Law. This Plan, the Award Agreements and all other agreements
entered into under this Plan, and all actions taken under this Plan or in
connection with Awards or Award Shares, shall be governed by the substantive
laws, but not the choice of law rules, of the state of incorporation of the
Company.
18.2 Determination of Value. Fair Market Value shall be determined as
follows:
(a) Listed Stock. If the Shares are traded on any established stock
exchange or quoted on a national market system, Fair Market Value shall be
the closing sales price for the Shares as quoted on that stock exchange or
system for the date the value is to be determined (the 'Value Date') as
reported in The Wall Street Journal or a similar publication. If no sales
are reported as having occurred on the Value Date, Fair Market Value shall
be that closing sales price for the last preceding trading day on which
sales of Shares are reported as having occurred. If no sales are reported as
having occurred during the five trading days before the Value Date, Fair
Market Value shall be the closing bid for Shares on the Value Date. If
Shares are listed on multiple exchanges or systems, Fair Market Value shall
be based on sales or bids on the primary exchange or system on which Shares
are traded or quoted.
(b) Stock Quoted by Securities Dealer. If Shares are regularly quoted by
a recognized securities dealer but selling prices are not reported on any
established stock exchange or quoted on a national market system, Fair
Market Value shall be the mean between the high bid and low asked prices on
the Value Date. If no prices are quoted for the Value Date, Fair Market
Value shall be the mean between the high bid and low asked prices on the
last preceding trading day on which any bid and asked prices were quoted.
(c) No Established Market. If Shares are not traded on any established
stock exchange or quoted on a national market system and are not quoted by a
recognized securities dealer, the Administrator (following guidelines
established by the Board or Committee) will determine Fair Market Value in
good faith. The Administrator will consider the following factors, and any
others it considers significant, in determining Fair Market Value: (i) the
price at which other securities of the Company have been issued to
purchasers other than Employees, Directors, or Consultants, (ii) the
Company's net worth, prospective earning power, dividend-paying capacity,
and non-operating assets, if any, and (iii) any other relevant factors,
including the economic outlook for the Company and the Company's industry,
the Company's position in that industry, the Company's goodwill and other
intellectual property, and the values of securities of other businesses in
the same industry.
18.3 Reservation of Shares. During the term of this Plan, the Company will
at all times reserve and keep available such number of Shares as are still
issuable under this Plan.
18.4 Contractual Arrangements. Notwithstanding anything to the contrary set
forth within this Plan, the terms and conditions of all existing and future
employment and consulting agreements with the Company, including without
limitation, any definitions contained in those agreements, shall be unaffected
by and shall supersede the terms of this Plan.
18.5 Prior Plans. All options outstanding under the Prior Plans shall
continue to be governed solely by the terms of the documents evidencing such
options, and no provision of the Plan shall be deemed to affect or otherwise
modify the rights or obligations of the holders of such transferred options with
respect to their acquisition of shares of the Company's Common Stock.
18.6 Electronic Communications. Any Award Agreement, notice of exercise of
an Award, or other document required or permitted by this Plan may be delivered
in writing or, to the extent determined by the Administrator, electronically.
Signatures may also be electronic if permitted by the Administrator.
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18.7 Notices. Unless the Administrator specifies otherwise, any notice to
the Company under any Option Agreement or with respect to any Awards or Award
Shares shall be in writing (or, if so authorized by Section 18.4, communicated
electronically), shall be addressed to the Secretary of the Company, and shall
only be effective when received by the Secretary of the Company.
Adopted by the Board on:
Approved by the shareholders on:
Effective date of this Plan:
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APPENDIX D
CERTIFICATE OF INCORPORATION
OF
SORRENTO NETWORKS II CORPORATION
THE UNDERSIGNED, being a natural person for the purpose of organizing a
Corporation under the General Corporation Law of the State of Delaware, hereby
certifies that:
FIRST: The name of the Corporation is Sorrento Networks II Corporation (the
'Corporation').
SECOND: The address of the registered office of the Corporation in the State
of Delaware is 2711 Centerville Road, Suite 400, in the city of Wilmington,
County of New Castle, and the name of the registered agent of the Corporation in
the State of Delaware at such address is Corporation Service Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which Corporations may be organized under the General Corporation
Law of the State of Delaware, as it may from time to time be amended.
FOURTH: The total number of shares of all classes of capital stock which the
Corporation shall have the authority to issue is one hundred fifty million
(152,000,000) shares, of which: (i) on hundred fifty million (150,000,000)
shares shall be shares of common stock, with a par value of $.001 per share
('Common Stock') and (ii) two million (2,000,000) shares of preferred stock,
with a par value of $.001 per share ('Preferred Stock'). Three thousand (3,000)
of the shares of Preferred Stock shall be designated as Series D Convertible
Preferred Stock, and shall have such designation and relative voting, dividend,
liquidation and other rights, preferences and limitations as stated in the
Certificate of Designation on Exhibit A, attached hereto and made a part hereof,
and as may be stated in further amendments to the Certificate of Incorporation.
The remaining shares of Preferred Stock shall have such designation and relative
voting, dividend, liquidation and other rights, preferences and limitations as
may be stated in further amendments to the Certificate of Incorporation.
FIFTH: The name and mailing address of the incorporator is W. Raymond
Felton, c/o Greenbaum, Rowe, Smith, Ravin, Davis & Himmel, LLP, 99 Wood Avenue
South, P.O. Box 5600, Woodbridge, New Jersey 07095.
SIXTH: The number of directors constituting the Corporation's initial Board
of Directors shall be five (5), and the names of the persons who are to serve as
directors until the first meeting of stockholders or until their successors are
elected and qualified are as follows:
NAME
Phillip W. Arneson
Donne Fisher
Robert Hibbard
Gary M. Parsons
Larry J. Matthews
Each director has an address c/o Sorrento Networks Corporation, 9990 Mesa
Rim Road, San Diego, California 92121.
SEVENTH: In furtherance and not in limitation of the powers conferred by
law, subject to any limitations contained elsewhere in these articles of
incorporation, By-laws of the Corporation may be adopted, amended or repealed by
a majority of the board of directors of the Corporation, but any By-laws adopted
by the board of directors may be amended or repealed by the stockholders
entitled to vote thereon.
EIGHTH:
(a) No director of the Corporation shall be liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that nothing in this
D-1
Article Eighth shall eliminate or limit the liability of any director for
any act, omission or transaction or under any statutory provision if and to
the extent that the General Corporation Law of the State of Delaware does
not permit such elimination or limitation. Neither amendment nor repeal of
this paragraph (a) nor the adoption of any provision of the Certificate of
Incorporation inconsistent with this paragraph (a) shall be applicable in
respect of any matter occurring, or any cause of action, suit or claim that,
but for this paragraph (a) of this Article, would accrue or arise, prior to
such amendment, repeal or adoption of an inconsistent provision.
(b) The Corporation shall indemnify any person who is or was a party to
any threatened, pending or completed action, suit or proceeding (whether
civil, criminal, administrative or investigative (including, without
limitation, any action, suit or proceeding by or in the right of the
Corporation or any partnership, Corporation, joint venture, trust or other
enterprise with respect to which such person serves or has served as a
director, officer, fiduciary, employee or agent) by reason of the fact that
such person is or was at any time a director, officer, fiduciary, employee
or agent of the Corporation, including any predecessor thereto or
constituent thereof, or while an officer or director of the Corporation is
or was serving at the request of the Corporation, including any predecessor
thereto or constituent thereof, as a director, officer, fiduciary, employee
or agent of another Corporation, partnership, joint venture, trust or other
enterprise, and irrespective of when the acts or omissions involved in such
action, suit or proceeding occurred or allegedly occurred, against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, whenever paid or payable, to the fullest extent and in the
manner that a Corporation organized under Delaware law is from time to time
permitted to indemnify its directors, officers, fiduciaries, employees and
agents.
(c) To the extent that a present or former director or officer of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in paragraph (b) of this Article, or
in defense of any claim, issue or matter therein, such person shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
(d) Expenses incurred by an officer, director, employee or agent in
defending or testifying in a civil, criminal, administrative or
investigative action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that such director or
officer is not entitled to be indemnified by the Corporation against such
expenses as authorized by this Article, and the Corporation may adopt
By-laws or enter into agreements with such persons for the purpose of
providing for such advances.
(e) The indemnification permitted by this Article shall not be deemed
exclusive of any other rights to which any person may be entitled under any
agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in such person's official capacity and as to action in
another capacity while holding an office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure
to the benefit of the heirs, executors and administrators of such person.
(f) The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another
Corporation, partnership, joint venture, employee benefit plan trust or
other enterprise against any liability asserted against such person and
incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the Corporation would have the power
to indemnify such person against such liability under the provisions of this
Article or otherwise.
D-2
IN WITNESS WHEREOF, the undersigned has duly executed this Certificate of
Incorporation and hereby acknowledges that the facts stated herein are true,
this day of , 2003.
.....................................
W. Raymond Felton, Sole Incorporator
D-3
EXHIBIT A
CERTIFICATE OF DESIGNATION
OF
SORRENTO NETWORKS II CORPORATION
RESOLVED: That pursuant to the authority vested in the Board of Directors by
Article 4 of the Certificate of Incorporation of Sorrento Networks II
Corporation (the 'Corporation'), the Board of Directors hereby authorizes the
issuance of three thousand (3,000) shares of Series D Convertible Preferred
Stock, par value $.001 per share, and hereby fixes the designations, powers,
preferences, rights, qualifications, limitations and restrictions of such
shares, in addition to any set forth in the Certificate of Incorporation, as
follows:
1. Designation. The Series D Convertible Preferred Stock shall be
designated the 'Series D Convertible Preferred Stock.'
2. Dividends. The Series D Convertible Preferred Stock will not bear any
cumulative dividend. Dividends may be declared in the discretion of the
Board of Directors.
3. Liquidation Preference. In the event of any liquidation, dissolution
or winding up of the affairs of the Corporation, either voluntarily or
involuntarily, the holders of Series D Convertible Preferred Stock shall be
entitled to receive, prior and in preference to any distribution of any of
the assets or surplus funds of the Corporation to the holders of any Common
Stock or any other stock of the Corporation having rights or preferences as
to assets junior to the rights or preferences of the Series D Convertible
Preferred Stock ('Junior Stock') by reason of their ownership thereof, in
cash an amount per share of Series D Convertible Preferred Stock equal to
$1,000.00 per share (which amount shall be adjusted approximately in the
event the outstanding shares of Series D Convertible Preferred Stock shall
be subdivided, combined or consolidated, by any capital reorganization,
reclassification or otherwise into a greater or lesser number of shares of
Series D Convertible Preferred Stock).
For purposes of this Section 3, a liquidation, dissolution or winding up
of the Corporation shall be deemed to be occasioned by, and to include, but
not be limited to (i) the Corporation's sale of all or substantially all of
its assets coupled with a distribution of any of the proceeds of such sale
to any holders of Junior Stock, or (ii) the acquisition of this Corporation
by another entity by means of merger or consolidation resulting in the
exchange of outstanding shares of this Corporation for securities or
consideration issued, or caused to be issued, by the acquiring corporation
or its subsidiary; provided, however, that a reorganization, merger or
consolidation involving only a change in the state of incorporation of the
Corporation shall not be deemed a liquidation, dissolution or winding up of
the Corporation.
4. Voting.
(a) Except as set forth in paragraph 4(b) below and except as
otherwise required by law, the holders of the Series D Convertible
Preferred Stock shall have no voting rights. On matters in which the law
requires the holders of the Series D Convertible Preferred Stock to have
voting rights, the Series D Convertible Preferred Stock shall vote as a
single class, and the holders of the Series D Convertible Preferred Stock
shall be entitled to the number of votes equal to the largest integral
number of shares of Common Stock into which such holder's shares of
Series D Convertible Preferred Stock could be converted in accordance
with Section 5 hereof, as of the record date, in the case of a meeting,
or the effective date of any consent given in lieu of a meeting.
(b) Approval by affirmative vote or written consent, or holders of at
least a majority of the outstanding shares of Series D Convertible
Preferred Stock shall be required for any of the following transactions:
(i) any amendment to the Certificate of Incorporation of the Corporation
or to this Certificate of Designation if such amendment would alter the
aggregate number of authorized shares, the par value, or the liquidation
value of the
D-4
Series D Convertible Preferred Stock, or would adversely affect the
powers, preferences or rights of the shares of the Series D Convertible
Preferred Stock, or (ii) any issuance by the Corporation of equity
securities, including shares of Series D Convertible Preferred Stock,
having a dividend or liquidation preference senior to or on parity with,
the Series D Convertible Preferred Stock.
5. Conversion Rights. The Series D Convertible Preferred Stock shall be
convertible into Common Stock as follows:
(a) Conversion by Holders. Subject to and upon compliance with the
provisions of this paragraph 5, the holders of the shares of the
Series D Convertible Preferred Stock shall have the right, at such
holder's option, to convert all or part of such holder's shares of
Series D Convertible Preferred Stock into the number of shares of Common
Stock determined as provided in paragraph 5(b) below upon the terms
hereinafter set forth at any time such shares are outstanding.
(b) Conversion Rate. The applicable rate of conversion pursuant to
subparagraph 5(a) shall be as follows: Each share of Series D Convertible
Preferred Stock shall be converted into the number of shares of Common
Stock determined by dividing the product of [$1,000.00] times the number
of shares of Series D Convertible Preferred Stock being converted by a
price per share of which shall equal the average of the closing 'bid' and
'ask' price of the Corporation's Common Stock as reported on NASDAQ for
the TEN (10) trading days preceding the date of such optional conversion.
(c) Mechanics of Conversion. Any holder of Series D Convertible
Preferred Stock shall be entitled to convert such Series D Convertible
Preferred Stock into Common Stock, upon surrender of the stock
certificate or certificates evidencing such Series D Convertible
Preferred Stock therefore, duly endorsed with signature guaranteed, at
the office of the Corporation or of the Transfer Agent for Series D
Convertible Preferred Stock or Common Stock, accompanied by a written
notice of such holder's election to convert the same and the number of
shares of Series D Convertible Preferred Stock to be so converted. Upon
receipt of such stock certificates and notice, the Corporation shall, as
soon as practicably thereafter, issue and deliver at such office to such
holder of Series D Convertible Preferred Stock a stock certificate or
certificates for the number of shares of Common Stock to which such
holder shall be entitled and a check or cash with respect to any
fractional interest in a share of Common Stock as provided in
subparagraph 5(d). The Corporation may also, at its option, upon such
conversion and the issue and delivery of such stock certificate or
certificates representing Common Stock, pay in shares of Common Stock
(valued at the Common Stock's value as set forth in this paragraph 5) all
accrued and unpaid dividends computed to the effective date of conversion
on the shares of Series D Convertible Preferred Stock so converted. Each
conversion shall be deemed to have been made immediately prior to the
close of business of the Corporation on the date of the surrender to the
Corporation of the shares of Series D Convertible Preferred Stock to be
converted, and the person or persons entitled to receive the shares of
Common stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock
on such date.
(d) Fractional Shares. No fractional shares of Common Stock or scrip
shall be issued upon conversion of shares of Series D Convertible
Preferred Stock. If more than one share of Series D Convertible Preferred
Stock shall be surrendered for conversion at any one time by the same
holder, the number of full shares of Common Stock issuable upon
conversion thereof shall be computed on the basis of the aggregate number
of shares of Series D Convertible Preferred Stock so surrendered. Instead
of any fractional shares of Common Stock which would otherwise be
issuable upon conversion of any shares of Series D Convertible Preferred
Stock, the Corporation shall pay a cash adjustment in respect of such
fractional interest.
(e) Restrictive Legend and Stop-Transfer Orders. The certificates
evidencing the shares of Common Stock issued hereunder shall be endorsed
on the face thereof with a legend
D-5
restricting transfer in the absence of an effective Registration
Statement filed pursuant to the Securities Act of 1933 or an available
exemption from such registration. In addition, the Transfer Agent for the
shares of Series D Convertible Preferred Stock shall be instructed to
place stop-transfer orders against the further transfer of such shares in
the absence of an effective Registration Statement filed pursuant to the
Securities Act of 1933 or an opinion from counsel to the Corporation that
there is an available exemption from such registration requirements.
6. Optional Redemption by Corporation.
(a) The Series D Convertible Preferred Stock shall be redeemable by
the Corporation, in whole at any time or in part from time to time, upon
not less than 5 nor more than 10 days written notice of such election
(the date set forth in such notice for the redemption of said shares of
Series D Convertible Preferred Stock pursuant to this paragraph 6, shall
hereinafter be referred to as the 'Redemption Date'), at the principal
offices of the Corporation, in cash at a price per share equal to the sum
of one thousand ($1,000.00) dollars (which amount shall be adjusted
appropriately in the event the outstanding shares of Series D Convertible
Preferred Stock shall be subdivided, combined or consolidated, by any
capital reorganization, reclassification or otherwise, into a greater or
lesser number of shares of Series D Convertible Preferred Stock) (the
'Redemption Price').
(b) If less than all of the outstanding shares of Series D
Convertible Preferred Stock are to be redeemed, such shares shall be
redeemed pro rata or by lot as determined by the Board of Directors in
its sole discretion.
(c) The redemption by the Corporation of all or any part of the
Series D Convertible Preferred Stock pursuant to this paragraph 6 is
subject to the provisions of applicable law with respect to such
redemption. Nothing contained herein shall preclude the Corporation from
purchasing any Series D Convertible Preferred Stock in separate
transactions or in any other manner.
(d) Notice of every redemption of Series D Convertible Preferred
Stock ('Redemption Notice') shall be sent by or on behalf of the
Corporation, by first class mail, postage prepaid to the holders of
record of the shares to be redeemed at their respective addresses as they
shall appear on the records of the Corporation, notifying the holders of
(i) the Corporation's election to redeem shares of Series D Convertible
Preferred Stock, (ii) the Redemption Date, (iii) the number of shares of
Series D Convertible Preferred Stock to be redeemed, (iv) the Redemption
Price, and (v) the name and address of any redemption agent ('Redemption
Agent') selected by the Corporation and the name and address of the
Corporation's transfer agent ('Transfer Agent') for the Series D
Convertible Preferred Stock. The Corporation may act as the Redemption
Agent and the Transfer Agent. Such Redemption Notice may be rescinded by
the Corporation delivering a notice of rescission to the holder(s) at any
time prior to the applicable Redemption Date.
(e) Prior to any redemption, the Corporation shall deliver to the
Redemption Agent irrevocable written instruction authorizing the
Redemption Agent, on behalf and at the expense of the Corporation, to
cause such notice of redemption to be duly mailed as herein provided as
soon as practicable after receipt of such irrevocable instructions and in
accordance with the above provisions. All funds necessary for the
redemption shall be deposited with the Redemption Agent in trust at least
one business day prior to the Redemption Date, for the pro rata benefit
of the holder of the shares so called for redemption, so as to be and
continue to be available therefore. Neither failure to mail any such
notice to one or more such holders nor any defect in any notice shall
affect the sufficiency of the proceedings for redemption as to other
holders.
(f) Each holder of shares of Series D Convertible Preferred Stock to
be redeemed shall surrender the certificate or certificates representing
such shares to the Corporation at
D-6
the place designated in the Redemption Notice, and thereupon the
applicable Redemption Price for such shares as set forth in this
paragraph 6 shall be paid to the order of the person whose name appears
on such certificate or certificates and each surrendered certificate
shall be cancelled and retired. In the event some but not all of the
shares of Series D Convertible Preferred Stock represented by a
certificate or certificates surrendered by a holder are being redeemed,
the Corporation shall execute and deliver to or to the order of the
holder, at the expense of the Corporation, a new certificate representing
the number of shares of Series D Convertible Preferred Stock not
redeemed.
(g) If the Redemption Notice shall have been given, and the
Corporation shall not default in the payment of the Redemption Price,
then each holder of shares of Series D Convertible Preferred Stock called
for redemption shall be entitled to all preferences and relative and
other rights accorded by this Certificate until and included the date
prior to the Redemption Date. If the Corporation shall default in making
payment or delivery as aforesaid on the Redemption Date, then each holder
of the shares of Series D Convertible Preferred Stock called for
redemption shall be entitled to all preferences and relative and other
rights accorded by this Certificate until and including the date prior to
the date (the 'Final Redemption Date') when the Corporation makes payment
or delivery as aforesaid to the holders of the Series D Convertible
Preferred Stock. From and after the Redemption Date or, if the
Corporation shall default in making payment or delivery as aforesaid, the
Final Redemption Date, the shares called for redemption shall no longer
be deemed outstanding, and all rights of the holders of such shares shall
cease and terminate, except the right of the holders of such shares, upon
surrender of certificates therefore, to receive amounts to be paid
hereunder. The deposit of monies in trust with the Redemption Agent shall
be irrevocable except that the Corporation shall be entitled to receive
from the Redemption Agent the interest or other earnings, and any balance
of monies so deposited by the Corporation and unclaimed by the holders of
the Series D Convertible Preferred Stock entitled thereto at the
expiration of two (2) years from the Redemption Date (or the Final
Redemption Date, as applicable) shall be repaid, together with any
interest or other earnings thereon, to the corporation, and after any
such repayment, the holders of the shares entitled to the funds so repaid
to the Corporation shall look only to the Corporation for such payment,
without interest.
7. Severability of Provisions. If any right, preference or limitation of
the Series D Convertible Preferred Stock set forth herein is invalid,
unlawful or incapable of being enforced by reason of any rule, law or public
policy, all other rights, preferences and limitations set forth herein which
can be given effect without the invalid, unlawful or unenforceable right,
preference or limitation shall, nevertheless, remain in full force and
effect, and no right, preference or limitation herein shall be deemed
dependent upon any other such right, preference or limitation unless so
expressed herein.
IN WITNESS WHEREOF, Sorrento Networks II Corporation has caused this
Certificate of Designation to be duly executed in its corporate name by a duly
authorized officer as of the day of , 2003.
SORRENTO NETWORKS II CORPORATION
By: .................................
Attest:
By: .................................
Assistant Secretary
D-7
APPENDIX E
BYLAWS
OF
SORRENTO NETWORKS II CORPORATION
ADOPTED , 2003
TABLE OF CONTENTS
PAGE
----
Section 1. Offices.......................................................... 1
1.1 Registered Office and Registered Agent...................... 1
1.2 Principal Office............................................ 1
1.3 Other Offices............................................... 1
Section 2. Shareholders..................................................... 1
2.1 Annual Meeting.............................................. 1
2.2 Special Meetings............................................ 1
2.3 Place of Meeting............................................ 1
2.4 Notice of Meeting........................................... 1
2.5 Business for Shareholders' Meetings......................... 2
2.5.1 Business at Annual Meetings........................... 2
2.5.2 Business at Special Meetings.......................... 2
2.5.3 Notice to Corporation................................. 2
2.6 Waiver of Notice............................................ 2
2.6.1 Waiver in Writing..................................... 2
2.6.2 Waiver by Attendance.................................. 3
2.7 Fixing of Record Date for Determining Shareholders.......... 3
2.7.1 Meetings.............................................. 3
2.7.2 Consent to Corporate Action Without a Meeting......... 3
2.7.3 Dividends, Distributions and Other Rights............. 3
2.8 Voting List................................................. 4
2.9 Quorum...................................................... 4
2.10 Manner of Acting............................................ 4
2.11 Proxies..................................................... 4
2.11.1 Appointment.......................................... 4
2.11.2 Delivery to Corporation; Duration.................... 5
2.12 Voting of Shares............................................ 5
2.13 Voting for Directors........................................ 5
2.14 Action by Shareholders Without a Meeting.................... 5
2.15 Inspectors of Election...................................... 6
2.15.1 Appointment.......................................... 6
2.15.2 Duties............................................... 6
Section 3. Board of Directors............................................... 6
3.1 General Powers.............................................. 6
3.2 Qualification, Number and Tenure............................ 6
3.3 Nomination and Election..................................... 7
3.3.1 Nomination............................................ 7
3.3.2 Election.............................................. 7
3.4 Annual and Regular Meetings................................. 7
3.5 Special Meetings............................................ 7
3.6 Meetings by Telephone....................................... 8
3.7 Notice of Special Meetings.................................. 8
3.8 Waiver of Notice............................................ 8
3.8.1 In Writing............................................ 8
3.8.2 By Attendance......................................... 8
3.9 Quorum...................................................... 8
3.10 Manner of Acting............................................ 8
3.11 Presumption of Assent....................................... 9
3.12 Action by Board of Committees Without a Meeting............. 9
3.13 Resignation................................................. 9
3.14 Vacancies................................................... 9
3.15 Committees.................................................. 9
ii
PAGE
----
3.15.1 Creation and Authority of Committees................. 9
3.15.2 Minutes of Meetings.................................. 10
3.15.3 Quorum and Manner of Acting.......................... 10
3.15.4 Resignation.......................................... 10
3.15.5 Removal.............................................. 10
3.16 Compensation................................................ 10
Section 4. Officers......................................................... 10
4.1 Number...................................................... 10
4.2 Election and Term of Office................................. 10
4.3 Resignation................................................. 11
4.4 Removal..................................................... 11
4.5 Vacancies................................................... 11
4.6 Power and Duties............................................ 11
4.6.1 Chairman of the Board................................. 11
4.6.2 President............................................. 11
4.6.3 Duties and Authority of Vice Presidents............... 11
4.6.4 Duties and Authority of Secretary..................... 11
4.6.5 Treasurer............................................. 12
4.6.6 Duties and Authority of the Chief Financial Officer... 12
4.7 Vacancies................................................... 12
4.8 Salaries.................................................... 12
Section 5. Contracts, Loans, Checks and Deposits............................ 12
5.1 Contracts................................................... 12
5.2 Loans to the Corporation.................................... 12
5.3 Checks, Drafts, Etc......................................... 12
5.4 Deposits.................................................... 13
Section 6. Certificates for Shares and Their Transfer....................... 13
6.1 Issuance of Shares.......................................... 13
6.2 Certificates for Shares..................................... 13
6.3 Stock Records............................................... 13
6.4 Transfer of Shares.......................................... 13
6.5 Lost or Destroyed Certificates.............................. 13
6.6 Shares of Another Corporation............................... 14
Section 7. Books and Records................................................ 14
Section 8. Accounting Year.................................................. 14
Section 9. Seal............................................................. 14
Section 10. Indemnification................................................. 14
10.1 Right to Indemnification.................................... 14
10.2 Right of Indemnitee to Bring Suit........................... 15
10.3 Nonexclusivity of Rights.................................... 15
10.4 Insurance, Contracts and Funding............................ 15
10.5 Indemnification of Employees and Agents of the
Corporation................................................. 15
10.6 Persons Serving other Entities.............................. 16
10.7 Procedures for the Submission of Claims..................... 16
Section 11. Amendments or Repeal............................................ 16
iii
SECTION 1
OFFICES
1.1 REGISTERED OFFICE AND REGISTERED AGENT
The registered office of the corporation in the State of Delaware is at 2711
Centerville Road, Suite 400, Wilmington, Delaware 19808. The registered agent of
the Corporation at that office is Corporation Service Company.
1.2 PRINCIPAL OFFICE
The principal office of the corporation shall be located at its principal
place of business or such other place as the Board of Directors (the 'Board')
may designate.
1.3 OTHER OFFICES
The corporation may have such other offices, either within or without the
State of Delaware, as the Board may designate or as the business of the
corporation may require from time to time.
SECTION 2
SHAREHOLDERS
2.1 ANNUAL MEETING
The annual meeting of the shareholders shall be held each year at such time
and place as is designated by the Board, for the purpose of electing directors
and transacting such other business as may properly come before the meeting.
2.2 SPECIAL MEETINGS
The Chief Executive Officer or the Board may call a special meeting of
shareholders for any purpose.
2.3 PLACE OF MEETING
All meetings shall be held at the principal office of the corporation or at
such other place within or without the State of Delaware designated by the Board
or by any persons entitled to call a meeting hereunder.
2.4 NOTICE OF MEETING
The party calling an annual or special meeting of shareholders as provided
for herein, shall cause to be delivered to each shareholder entitled to notice
of or to vote at the meeting either personally or by mail, not less than ten
(10) or more than sixty (60) days before the meeting, written notice stating the
place, day and hour of the meeting and, in the case of a special meeting, the
purpose or purposes for which the meeting is called. If such notice is mailed,
it shall be deemed delivered when deposited in the official government mail
properly addressed to the shareholder at such shareholder's address as it
appears on the stock transfer books of the corporation with postage prepaid.
Notice given in any other manner shall be deemed delivered when dispatched to
the shareholder's address, telephone number or other number, or electronic mail
address appearing on the stock transfer records of the corporation.
E-1
2.5 BUSINESS FOR SHAREHOLDERS' MEETINGS
2.5.1 Business at Annual Meetings
In addition to the election of directors, other proper business may be
transacted at an annual meeting of shareholders, provided that such business
must be properly brought before such meeting. To be properly brought before an
annual meeting, business must be (a) brought by or at the direction of the Board
or (b) brought before the meeting by a shareholder pursuant to written notice
thereof, in accordance with subsection 2.5.3 hereof, and received by the
Secretary not fewer than 90 days prior to the date of the annual meeting (or if
less than 90 days' notice or prior public disclosure of the date of the annual
meeting is given or made to the shareholders, not later than the seventh (7th)
day following the day on which the notice of the date of the annual meeting was
mailed or such public disclosure was made). No business shall be conducted at
any annual meeting of shareholders except in accordance with this subsection
2.5.1, unless the application of this subsection 2.5.1 to a particular matter is
waived in writing by the Board of Directors. If the facts warrant, the Board, or
the chairman of an annual meeting of shareholders, may determine and declare
that (A) a proposal does not constitute proper business to be transacted at the
meeting or (B) business was not properly brought before the meeting in
accordance with the provisions of this subsection 2.5.1 and, if, it is so
determined in either case, any such business shall not be transacted. The
procedures set forth in this subsection 2.5.1 for business to be properly
brought before an annual meeting by a shareholder are in addition to, and not in
lieu of, the requirements set forth in Rule 14a-8 under Section 14 of the
Securities Exchange Act of 1934, as amended, or any successor provision.
2.5.2 Business at Special Meetings
At any special meeting of the shareholders, only such business as is
specified in the notice of such special meeting given by or at the direction of
the person or persons calling such meeting, in accordance with subsection 2.4
hereof, shall come before such meeting.
2.5.3 Notice to Corporation
Any written notice required to be delivered by a shareholder to the
corporation pursuant to subsections 2.2, 2.4, 2.5.1 or 2.5.2 hereof must be
given, either by personal delivery or by registered or certified mail, postage
prepaid, to the Secretary at the corporation's executive offices. Any such
shareholder notice shall set forth (a) the name and address of the shareholder
proposing such business; (b) a representation that the shareholder is entitled
to vote at such meeting and a statement of the number of shares of the
corporation that are beneficially owned by the shareholder; (c) a representation
that the shareholder intends to appear in person or by proxy at the meeting to
propose such business; and (d) as to each matter the shareholder proposes to
bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting, the language of the proposal (if appropriate), and any material
interest of the shareholder in such business.
2.6 WAIVER OF NOTICE
2.6.1 Waiver in Writing
Whenever any notice is required to be given to any shareholder under the
provisions of these Bylaws, the Certificate of Incorporation or the Delaware
General Corporate Law, as now or hereafter amended (the 'GCL'), a waiver thereof
in writing, signed by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be deemed equivalent to the
giving of such notice.
E-2
2.6.2 Waiver by Attendance
The attendance of a shareholder at a meeting shall constitute a waiver of
notice of such meeting, except when a shareholder attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
2.7 FIXING OF RECORD DATE FOR DETERMINING SHAREHOLDERS
2.7.1 Meetings
For the purpose of determining shareholders entitled to notice of and to
vote at any meeting of shareholders or any adjournment thereof, the Board may
fix a record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board, and which record date
shall not be more than 60 (or the maximum number permitted by applicable law) or
less than ten (10) days before the date of such meeting. If no record date is
fixed by the Board, the record date for determining shareholders entitled to
notice of and to vote at a meeting of shareholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of shareholders of record entitled to
notice of and to vote at the meeting of shareholders shall apply to any
adjournment of the meeting; provided, however, that the Board may fix a new
record date for the adjourned meeting.
2.7.2 Consent to Corporation Action Without a Meeting
For the purpose of determining shareholders entitled to consent to corporate
action in writing without a meeting, the Board may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board, and which date shall not be more than ten
(10) days (or the maximum number permitted by applicable law) after the date
upon which the resolution fixing the record date is adopted by the Board. If no
record date has been fixed by the Board, the record date for determining
shareholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board is required by the GCL, shall be the
first date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the corporation by delivery to its
registered office in the State of Delaware, its principal place of business, or
an officer or agent of the corporation having custody of the book in which
proceedings of meetings of shareholders are recorded. Delivery made to the
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested. If no record date has been fixed by the Board
and prior action by the Board is required by the GCL, the record date for
determining shareholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the day on which the
Board adopts the resolution taking such prior action.
2.7.3 Dividends, Distributions and Other Rights
For the purpose of determining shareholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
shareholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the Board may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted, and which record
date shall be not more than sixty (60) days (or the maximum number permitted by
applicable law) prior to such action. If no record date is fixed, the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the Board adopts the resolution relating thereto.
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2.8 VOTING LIST
At least ten (10) days before each meeting of shareholders, a complete list
of the shareholders entitled to vote at such meeting, or any adjournment
thereof, shall be made, arranged in alphabetical order, with the address of and
number of shares registered in the name of each shareholder. Such list shall be
open to the examination of any shareholder for any purpose germane to the
meeting for a period of at least 10 days prior to the meeting: (i) on a
reasonably accessible electronic network, provided that the information required
to gain access to such list is provided with the notice of the meeting, or (ii)
during ordinary business hours, at the principal place of business of the
corporation. In the event that the corporation determines to make the list
available on an electronic network, the corporation may take reasonable steps to
ensure that such information is available only to shareholders of the
corporation. If the meeting is to be held at a place, then the list shall be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any shareholder who is present. If the meeting
is to be held solely by means of remote communication, then the list shall also
be open to the examination of any shareholder during the whole time of the
meeting on a reasonably accessible electronic network, and the information
required to access such list shall be provided with the notice of the meeting.
2.9 QUORUM
The presence at a meeting in person or by proxy of the holders of shares
entitled to cast a majority of the votes shall constitute a quorum. If less than
a majority of the outstanding shares entitled to vote are represented at a
meeting, a majority of the shares so represented may adjourn the meeting from
time to time without further notice. If a quorum is present or represented at a
reconvened meeting following such an adjournment, any business may be transacted
that might have been transacted at the meeting as originally called. The
shareholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
2.10 MANNER OF ACTING
In all matters other than the election of directors, if a quorum is present,
the affirmative vote of the majority of the outstanding shares present in person
or represented by proxy at the meeting and entitled to vote on the subject
matter shall be the act of the shareholders, unless the vote of a greater number
is required by these Bylaws, the Certificate of Incorporation or the GCL. Where
a separate vote by a class or classes is required, if a quorum of such class or
classes is present, the affirmative vote of the majority of outstanding shares
of such class or classes present in person or represented by proxy at the
meeting shall be the act of such class or classes, unless the vote of a greater
number is required by these Bylaws, the Certificate of Incorporation or the GCL.
Directors shall be elected by a plurality of the votes of the shares present in
person or represented by proxy at the meeting and entitled to vote on the
election of directors.
2.11 PROXIES
2.11.1 Appointment
Each shareholder entitled to vote at a meeting of shareholders or to express
consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for such shareholder by proxy. Such
authorization may be accomplished by (a) the shareholder or such shareholder's
authorized officer, director, employee or agent executing a writing or causing
his or her signature to be affixed to such writing by any reasonable means,
including facsimile signature or (b) by transmitting or authorizing the
transmission of a facsimile, electronic mail, or other means of electronic
transmission to the intended holder of the proxy or to a proxy solicitation
firm, proxy support service or similar agent duly authorized by the intended
proxy holder to receive such transmission; provided, that any such facsimile,
electronic mail, or other electronic transmission must either set forth or be
accompanied by information from which it
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can be determined that the facsimile, electronic mail, or other electronic
transmission was authorized by the shareholder. Any copy, facsimile
telecommunication or other reliable reproduction of the writing or transmission
by which a shareholder has authorized another person to act as proxy for such
shareholder may be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used, provided that such copy, facsimile telecommunication
or other reproduction shall be a complete reproduction of the entire original
writing or transmission.
A proxy shall be revocable at will unless it states that it is irrevocable
and is coupled with an interest sufficient to support an irrevocable power,
including in the stock itself or in the corporation. A proxy shall not be
revoked by the death or incapacity of the shareholder, but the proxy shall
continue in force until revoked by the personal representative or guardian of
the shareholder.
2.11.2 Delivery to Corporation; Duration
A proxy shall be filed with the Secretary before or at the time of the
meeting or the delivery to the corporation of the consent to corporate action in
writing. A proxy shall become invalid three (3) years after the date of its
execution unless otherwise provided in the proxy. A proxy with respect to a
specified meeting shall entitle the holder thereof to vote at any reconvened
meeting following adjournment of such meeting but shall not be valid after the
final adjournment thereof.
2.12 VOTING OF SHARES
Each outstanding share entitled to vote with respect to the subject matter
of an issue submitted to a meeting of shareholders shall be entitled to one vote
upon each such issue.
2.13 VOTING FOR DIRECTORS
Each shareholder entitled to vote at an election of directors may vote, in
person or by proxy, the number of shares owned by such shareholder for as many
persons as there are directors to be elected and for whose election such
shareholder has a right to vote; provided, however, that no cumulative voting
shall be permitted in the election of directors.
2.14 ACTION BY SHAREHOLDERS WITHOUT A MEETING
Any action that could be taken at an annual or special meeting of
shareholders may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall (a) be signed by the holders of outstanding shares of capital stock
entitled to be voted with respect to the subject matter thereof having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted (as determined in accordance with subsection 2.6.2 hereof) and
(b) be delivered to the corporation by delivery to its registered office in the
State of Delaware, its principal place of business, or an officer or agent of
the corporation having custody of the records of proceedings of meetings of
shareholders. Delivery made to the corporation's registered office shall be by
hand or by certified mail or registered mail, return receipt requested. Every
written consent shall bear the date of signature of each shareholder who signs
the consent, and no written consent shall be effective to take the corporate
action referred to therein unless written consents signed by the requisite
number of shareholders entitled to vote with respect to the subject matter
thereof are delivered to the corporation, in the manner required by this Section
2, within 60 (or the maximum number permitted by applicable law) days of the
earliest dated consent delivered to the corporation in the manner required by
this Section 2. The validity of any consent executed by a proxy for a
shareholder pursuant to a facsimile, electronic mail, or other means of
electronic transmission transmitted to such proxy holder by or upon the
authorization of the shareholder shall be determined by or at the direction of
the Secretary. A written record of the information upon which the person making
such
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determination relied shall be made and kept in the records of the proceedings of
the shareholders. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
shareholders who have not consented in writing. Any such consent shall be
inserted in the minute book as if it were the minutes of a meeting of the
shareholders.
2.15 INSPECTORS OF ELECTION
2.15.1 Appointment
The Board may, in advance of any meeting of shareholders, appoint one or
more persons to act as inspectors of election at such meeting and to make a
written report thereof. The Board may designate one or more persons to serve as
alternate inspectors to serve in place of any inspector who is unable or fails
to act. If no inspector or alternate is able to act at a meeting of
shareholders, the chairman of such meeting shall appoint one or more persons to
act as inspector of elections at such meeting.
2.15.2 Duties
The inspectors of election shall:
(a) ascertain the number of shares of the corporation outstanding and
the voting power of each such share;
(b) determine the shares represented at the meeting and the validity of
proxies and ballots;
(c) count all votes and ballots;
(d) determine and retain for a reasonable period of time a record of the
disposition of any challenges made to any determination by them; and
(e) certify their determination of the number of shares represented at
the meeting and their count of the votes and ballots.
The validity of any proxy or ballot shall be determined by the inspectors of
election in accordance with the applicable provisions of these Bylaws and the
GCL as then in effect. In determining the validity of any proxy transmitted by
telegram, facsimile or other electronic transmission, the inspectors shall
record in writing the information upon which they relied in making such
determination. Each inspector of elections shall, before entering upon the
discharge of his or her duties, take and sign an oath to faithfully execute the
duties of inspector with strict impartiality and according to the best of his or
her ability. The inspectors of election may appoint or retain other persons or
entities to assist them in the performance of their duties.
SECTION 3
BOARD OF DIRECTORS
3.1 GENERAL POWERS
The business and affairs of the corporation shall be managed by the Board of
Directors subject only to the limitations imposed by law and by the
corporation's Certificate of Incorporation.
3.2 QUALIFICATION, NUMBER AND TENURE
Each director shall be at least eighteen (18) years of age. A director need
not be a shareholder, a citizen of the United States of America or a resident of
Delaware. The Board shall be composed of not less than one (1) nor more than
seven (7) members, the specific number to be determined by the Board. No
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director. Each director shall serve for the term he or she
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was elected, or until his or her successor shall have been elected and
qualified, or until his or her death, resignation or removal from office.
3.3 NOMINATION AND ELECTION
3.3.1 Nomination
Only persons who are nominated in accordance with the following procedures
shall be eligible for election as directors. Nominations for the election of
directors may be made (a) by or at the direction of the Board or (b) by any
shareholder of record entitled to vote for the election of directors at such
meeting; provided, however, that a shareholder may nominate persons for election
as directors only if written notice (in accordance with subsection 2.5.3 hereof)
of such shareholder's intention to make such nominations is received by the
Secretary not later than ninety (90) days prior to the date specified for such
meeting or if less than ninety (90) days' notice or prior public disclosure of
the date of the meeting is given or made to the shareholders, not later than the
seventh (7th) day following the day on which such notice of the date of the
meeting was mailed or such public disclosure was made. Any such shareholder's
notice shall set forth (a) the name and address of the shareholder who intends
to make a nomination; (b) a representation that the shareholder is entitled to
vote at such meeting and a statement of the number of shares of the corporation
that are beneficially owned by the shareholder; (c) a representation that the
shareholder intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice; (d) as to each person the
shareholder proposes to nominate for election or re-election as a director, the
name and address of such person and, such other information regarding such
nominee as would be required in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had such nominee been nominated
by the Board, and a description of any arrangements or understandings, between
the shareholder and such nominee and any other persons (including their names),
pursuant to which the nomination is to be made; and (e) the consent of each such
nominee to serve as a director if elected. If the facts warrant, the Board, or
the chairman of a shareholders' meeting at which directors are to be elected,
may determine and declare that a nomination was not made in accordance with the
foregoing procedure and, if it is so determined, the defective nomination shall
be disregarded. The procedures set forth in this subsection 3.3.1 for nomination
for the election of directors by shareholders are in addition to, and not in
limitation of, any procedures now in effect or hereafter adopted by or at the
direction of the Board or any committee thereof.
3.3.2 Election
At each election of directors, the persons receiving the greatest number of
votes shall be the directors.
3.4 ANNUAL AND REGULAR MEETINGS
An annual Board meeting shall be held without notice immediately after and
at the same place as the annual meeting of shareholders for the purposes of
electing officers and conducting such other business as may come before the
Board. By resolution, the Board may specify the time and place either within or
without the State of Delaware for holding regular meetings thereof without other
notice, except to members not present at the time of the adoption of the
resolution.
3.5 SPECIAL MEETINGS
Special meetings of the Board may be called by or at the request of the
Chairman of the Board, the President or any two (2) directors. The person or
persons authorized to call special meetings may fix any place either within or
without the State of Delaware as the place for holding any special meeting
called by them.
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3.6 MEETINGS BY TELEPHONE
Members of the Board or any committee designated by the Board may
participate in a meeting of the Board or such committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can speak to and hear each other. Participation by
such means shall constitute presence in person at a meeting.
3.7 NOTICE OF SPECIAL MEETINGS
Notice of a special Board or committee meeting stating the place, day and
hour of the meeting shall be given to a director in writing or orally by
telephone or in person. Neither the business to be transacted at, nor the
purpose of, any special meeting need be specified in the notice of such meeting.
If notice is given by personal delivery, by private carrier, by facsimile, or by
electronic mail, the notice shall be effective if delivered to a director at
least three (3) days before the meeting. If notice is delivered by mail, the
notice shall be deemed effective if deposited in the official government mail
properly addressed to a director at his or her address shown on the records of
the corporation with postage prepaid at least five (5) days before the meeting.
If notice is delivered orally, by telephone or in person, the notice shall be
deemed effective if personally given to the director at least three (3) days
before the meeting. Notwithstanding this, in the event emergent action is
required, as determined by the Chairman of the Board, a special meeting may be
called by giving twenty-four (24) hours notice by telephone, telefax, electronic
mail or in person.
3.8 WAIVER OF NOTICE
3.8.1 In Writing
Whenever any notice is required to be given to any director under the
provisions of these Bylaws, the Certificate of Incorporation or the GCL, a
waiver thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice. Neither the business to be transacted
at, nor the purpose of, any regular or special meeting of the Board or any
committee appointed by the Board need be specified in the waiver of notice of
such meeting.
3.8.2 By Attendance
The attendance of a director at a Board or committee meeting shall
constitute a waiver of notice of such meeting, except when a director attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened.
3.9 QUORUM
A majority of the total number of directors then serving on the Board shall
constitute a quorum for the transaction of business at any Board meeting. In no
event shall a quorum consist of less than one-third of the total number of
directors then serving on the Board. If less than a majority are present at a
meeting, a majority of the directors present may adjourn the meeting from time
to time without further notice.
3.10 MANNER OF ACTING
The act of the majority of the directors present at a Board or committee
meeting at which there is a quorum shall be the act of the Board or committee,
unless the vote of a greater number is required by these Bylaws, the Certificate
of Incorporation or the GCL.
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3.11 PRESUMPTION OF ASSENT
A director present at a Board or committee meeting at which action on any
corporate matter is taken shall be presumed to have assented to the action taken
unless his or her dissent is entered in the minutes of the meeting, or unless
such director files a written dissent to such action with the person acting as
the secretary of the meeting before the adjournment thereof, or forwards such
dissent by registered mail to the Secretary of the corporation immediately after
the adjournment of the meeting. A director who voted in favor of such action may
not dissent.
3.12 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING
Any action that could be taken at a meeting of the Board or of any committee
appointed by the Board may be taken without a meeting if, prior or subsequent to
such action, a written consent setting forth the action so taken is signed by
each of the directors or by each committee member. Any such written consent
shall be inserted in the minute book as if it were the minutes of a Board or a
committee meeting.
3.13 RESIGNATION
Any director may resign at any time by delivering written notice to the
Chairman of the Board, the Chief Executive Officer, the President, the Secretary
or the Board, or to the registered office of the corporation. Any such
resignation shall take effect at the time specified therein, or if the time is
not specified, upon delivery thereof and, unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make it effective.
When one or more directors shall resign from the Board effective at a future
date, a majority of the directors then in office, including those who have so
resigned, shall have power to fill such vacancy or vacancies, the vote thereon
to take effect when such resignation or resignations shall become effective. A
resigning director's office may be left vacant provided the total number of
directors in office is not less than four (4) directors.
3.14 VACANCIES
Any vacancy occurring on the Board may be filled by the affirmative vote of
a majority of the remaining directors, whether or not they constitute a quorum
of the Board. A director elected to fill a vacancy shall be elected for the
unexpired term of his or her predecessor in office, if any. Any directorship to
be filled by reason of an increase in the number of directors may be filled by
the Board for a term of office continuing only until the next election of
directors, and until his or her successor shall be elected and qualify.
3.15 COMMITTEES
3.15.1 Creation and Authority of Committees
The Board may, by resolution passed by a majority of the number of directors
then serving, appoint standing or temporary committees, each committee to
consist of one or more directors of the corporation. The Board may designate one
or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the Board to act at the meeting in the place of any such absent or disqualified
member. Any such Committee, to the extent provided in the resolution of the
Board establishing such committee or as otherwise provided in these Bylaws,
shall have and may exercise all the powers and authority of the Board in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that require it; but no such
committee shall have the power or authority in reference to (a) making,
replacing or amending these Bylaws, or (b) submitting to shareholders any action
that requires shareholders' approval.
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3.15.2 Minutes of Meetings
All committees so appointed shall keep regular minutes of their meetings and
shall cause them to be recorded in books kept for that purpose.
3.15.3 Quorum and Manner of Acting
A majority of the number of directors composing any committee of the Board,
as established and fixed by resolution of the Board, shall constitute a quorum
for the transaction of business at any meeting of such committee but, if less
than a majority are present at a meeting, a majority of such directors present
may adjourn the meeting from time to time without further notice. The act of a
majority of the members of a committee present at a meeting at which a quorum is
present shall be the act of such committee.
3.15.4 Resignation
Any member of any committee may resign at any time by delivering written
notice to the Chairman of the Board, the Chief Executive Officer, the President,
the Secretary, the Board or the Chairman of such committee. Any such resignation
shall take effect at the time specified therein or, if the time is not
specified, upon delivery thereof and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
3.15.5 Removal
The Board may remove from office any member of any committee elected or
appointed by it, but only by the affirmative vote of not less than a majority of
the number of directors fixed by or in the manner provided in these Bylaws.
3.16 COMPENSATION
By Board resolution, directors and committee members may be paid their
expenses, if any, of attendance at each Board or committee meeting, a fixed sum
for attendance at each Board or committee meeting, or a stated salary as
director or a committee member, or a combination of the foregoing. No such
payment shall preclude any director or committee member from serving the
corporation in any other capacity and receiving compensation therefor.
SECTION 4
OFFICERS
4.1 NUMBER
The officers of the corporation shall be a President and Chief Executive
Officer, Chief Financial Officer, Treasurer and a Secretary, each of whom shall
be elected by the Board. The Board may appoint a Chairman and any other officer
it determines. The President or the Board may appoint one or more vice
presidents and other officers and assistant officers, who shall hold office for
such period, have such authority, and perform such duties as are prescribed from
time to time by the Board or the President. Any officer may be assigned by the
Board any additional title that the Board deems appropriate. The Board may
delegate to any officer or agent the power to appoint any such subordinate
officers or agents and to prescribe their respective terms of office, authority
and duties. Any two or more offices may be held by the same person.
4.2 ELECTION AND TERM OF OFFICE
The officers of the corporation shall be elected annually by the Board at
the Board meeting held after the annual meeting of the shareholders. If the
election of officers is not held at such meeting, such election shall be held as
soon thereafter as a Board meeting conveniently may be held. All officers shall
hold office at the pleasure of the Board.
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4.3 RESIGNATION
Any officer may resign at any time by delivering written notice to the
President, the Secretary or the Board. Any such resignation shall take effect at
the time specified therein or, if the time is not specified, upon delivery
thereof and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
4.4 REMOVAL
Any officer or agent may be removed by the Board whenever in its judgment
the best interests of the corporation would be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed. Election or appointment of an officer shall not of itself create
contract rights.
4.5 VACANCIES
A vacancy in any office because of death, resignation, removal,
disqualification, creation of a new office or any other cause may be filled by
the Board for the unexpired portion of the term, or for a new term established
by the Board.
4.6 POWER AND DUTIES
The officers shall each have such authority and perform such duties in the
management of the corporation as from time to time may be prescribed by the
Board and as may be delegated by the Chairman or President. Without limiting the
foregoing, the following officers shall have the following authority:
4.6.1 Chairman of the Board
The Chairman of the Board shall perform such duties as shall be assigned to
him by the Board from time to time and shall preside over meetings of the Board
and shareholders unless another officer is appointed or designated by the Board
as chairman of such meeting.
4.6.2 President
The president shall be chief executive officer of the corporation. Subject
only to the authority of the Board, he shall have general charge and supervision
over, and responsibility for, the business and affairs of the corporation.
Unless otherwise directed by the Board, all other officers shall be subject to
the authority and supervision of the president. The president may enter into and
execute in the name of the corporation contracts or other instruments in the
regular course of business or contracts or other instruments not in the regular
course of business which are authorized, either generally or specifically, by
the Board. He shall have the general powers and duties of management usually
vested in the office of president of a corporation.
4.6.3 Duties and Authority of Vice Presidents
Vice presidents shall have such powers and perform such duties as may be
assigned to them by the Board or the president. A vice president may sign and
execute contracts and other obligations pertaining to the regular course of his
duties.
4.6.4 Duties and Authority of Secretary
The secretary shall cause notices of all meetings to be served as prescribed
in these by-laws and shall keep or cause to be kept the minutes of all meetings
of the shareholders and the Board. The secretary shall have charge of the seal
of the Corporation. The secretary shall perform such other duties and possess
such other powers as are incident to that office or as are assigned by the
president or the Board.
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4.6.5 Treasurer
The Treasurer shall have charge and custody of and be responsible for all
funds and securities of the corporation; receive and give receipts for moneys
due and payable to the corporation from any source whatsoever, and deposit all
such moneys in the name of the corporation in banks, trust companies or other
depositories selected in accordance with the provisions of these Bylaws; sign
certificates for shares of the corporation; and in general perform all of the
duties incident to the office of Treasurer and such other duties as from time to
time may be assigned to him or her by the President or chief financial officer
by the Board. In the absence of the Treasurer, an Assistant Treasurer may
perform the duties of the Treasurer.
4.6.6 Duties and Authority of the Chief Financial Officer
The chief financial officer shall render to the president and directors
whenever they request it, an account of the financial condition of the
corporation and shall cause the preparation of all financial reports of the
corporation including the quarterly and annual reports of the corporation. The
chief financial officer shall oversee the vice president of finance and the
treasurer and shall oversee all other financial matters of the corporation and
perform such other duties as may be assigned to her or him by the president or
the board of directors.
4.7 VACANCIES
In case of the absence or disability of both the president and/or the vice
president, the Board may fill or delegate the powers or duties of those officers
to other officers or directors for the time being. The Board may also fill or
delegate the powers or duties of any other officer to another officer or
director.
4.8 SALARIES
The salaries of the officers shall be fixed from time to time by the Board
or by any person or persons to whom the Board has delegated such authority. No
officer shall be prevented from receiving such salary by reason of the fact that
he or she is also a director of the corporation.
SECTION 5
CONTRACTS, LOANS, CHECKS AND DEPOSITS
5.1 CONTRACTS
The Board may authorize any officer or officers, or agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the corporation. Such authority may be general or confined to
specific instances. No officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount unless so
authorized by the Board or these by-laws.
5.2 LOANS TO THE CORPORATION
No loans for borrowed money shall be contracted on behalf of the corporation
and no evidences of indebtedness for borrowed money shall be issued in its name
unless authorized by a resolution of the Board. Such authority may be general or
confined to specific instances.
5.3 CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for the payment of money, notes or other
evidences of indebtedness issued in the name of the corporation shall be signed
by the person or persons and in such manner, manually or by facsimile signature
as is from time to time determined by the Board.
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5.4 DEPOSITS
All funds of the corporation not otherwise employed shall be deposited from
time to time to the credit of the corporation in such banks, trust companies or
other depositories as the Board may select.
SECTION 6
CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 ISSUANCE OF SHARES
Shares of the capital stock of the corporation which have been authorized
but not issued may be sold or issued from time to time for such consideration as
may be determined by the Board.
6.2 CERTIFICATES FOR SHARES
Certificates representing shares of the corporation shall be signed by the
Chief Executive Officer or the President, or a Vice President, and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary,
any of whose signatures may be a facsimile. The Board may in its discretion
appoint responsible banks, trust companies or other professionals from time to
time to act as transfer agents and registrars of the stock of the corporation;
and, when such appointments shall have been made, no stock certificate shall be
valid until countersigned by one of such transfer agents and registered by one
of such registrars. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if such person was such officer, transfer agent or registrar at the date of
issue. All certificates shall include on their face written notice of any
restrictions that may be imposed on the transferability of such shares and shall
be consecutively numbered or otherwise identified.
6.3 STOCK RECORDS
The stock transfer books shall be kept at the registered office or principal
place of business of the corporation or at the office of the corporation's
transfer agent or registrar. The name and address of each person to whom
certificates for shares are issued, together with the class and number of shares
represented by each such certificate and the date of issue thereof, shall be
entered on the stock transfer books of the corporation. The person in whose name
shares stand on the books of the corporation shall be deemed by the corporation
to be the owner thereof for all purposes.
6.4 TRANSFER OF SHARES
The transfer of shares of the corporation shall be made only on the stock
transfer books of the corporation pursuant to authorization or document of
transfer made by the holder of record thereof or by his or her legal
representative, who shall furnish proper evidence of authority to transfer, or
by his or her attorney-in-fact authorized by power of attorney duly executed and
filed with the Secretary of the corporation. All certificates surrendered to the
corporation for transfer shall be canceled and no new certificate shall be
issued until the former certificates for a like number of shares shall have been
surrendered and canceled.
6.5 LOST OR DESTROYED CERTIFICATES
In the case of a lost, destroyed or mutilated certificate, a new certificate
may be issued therefor upon such terms and indemnity to the corporation as the
Board may prescribe.
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6.6 SHARES OF ANOTHER CORPORATION
Shares owned by the corporation in another corporation, domestic or foreign,
may be voted by such officer, agent or proxy as the Board may determine or, in
the absence of such determination, by the Chief Executive Officer, the President
or any Vice President of the corporation.
SECTION 7
BOOKS AND RECORDS
The corporation shall keep correct and complete books and records of
account, stock transfer books, minutes of the proceedings of its shareholders
and Board and such other records as may be necessary or advisable.
SECTION 8
ACCOUNTING YEAR
The fiscal year of the corporation shall end on January 31 of each year.
SECTION 9
SEAL
The seal of the corporation, if any, shall consist of the name of the
corporation, the state of its incorporation and the year of its incorporation.
SECTION 10
INDEMNIFICATION
10.1 RIGHT TO INDEMNIFICATION
Each person who was or is made a party or is threatened to be made a party
to or is otherwise involved (including, without limitation, as a witness) in any
actual or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a 'proceeding'), by reason of the
fact that he or she is or was a director or officer of the corporation or that,
being or having been such a director or officer of the corporation, he or she is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to an employee benefit
plan (hereinafter an 'indemnitee'), whether the basis of such proceeding is
alleged action in an official capacity as such a director or officer or in any
other capacity while serving as such a director or officer, shall be indemnified
and held harmless by the corporation to the full extent permitted by the General
Corporation Law of the State of Delaware, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the corporation to provide broader indemnification rights than
permitted prior thereto), or by other applicable law as then in effect, against
all expense, liability and loss (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid in settlement) actually and
reasonably incurred or suffered by such indemnitee in connection therewith and
such indemnification shall continue as to an indemnitee who has ceased to be a
director or officer and shall inure to the benefit of the indemnitee's heirs,
executors and administrators; provided, however, that except as provided in
subsection 10.2 hereof with respect to proceedings seeking to enforce rights to
indemnification, the corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized or ratified by the Board.
The right to indemnification conferred in this subsection 10.1 shall be a
contract right and shall include the right to be paid by the corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition (hereinafter an 'advancement of expenses'); provided, however, that
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if the GCL requires, an advancement of expenses incurred by an indemnitee in his
or her capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
corporation of an undertaking (hereinafter an 'undertaking'), by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified for such expenses
under this subsection 10.1 or otherwise.
10.2 RIGHT OF INDEMNITEE TO BRING SUIT
If a claim under subsection 10.1 hereof is not paid in full by the
corporation within 60 days after a written claim has been received by the
corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the indemnitee may at any
time thereafter bring suit against the corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expense of prosecuting or defending such suit. The indemnitee shall be presumed
to be entitled to indemnification under this Section 10 upon submission of a
written claim (and, in an action brought to enforce a claim for an advancement
of expenses, where the required undertaking, if any is required, has been
tendered to the corporation), and thereafter the corporation shall have the
burden of proof to overcome the presumption that the indemnitee is not so
entitled. Neither the failure of the corporation (including its Board,
independent legal counsel or its shareholders) to have made a determination
prior to the commencement of such suit that indemnification of the indemnitee is
proper in the circumstances nor an actual determination by the corporation
(including its Board, independent legal counsel or its shareholders) that the
indemnitee is not entitled to indemnification shall be a defense to the suit or
create a presumption that the indemnitee is not so entitled.
10.3 NONEXCLUSIVITY OF RIGHTS
The rights to indemnification and to the advancement of expenses conferred
in this Section 10 shall not be exclusive of any other right that any person may
have or hereafter acquire under any statute, agreement, vote of shareholders or
disinterested directors, provisions of the Certificate of Incorporation or
Bylaws of the corporation or otherwise. Notwithstanding any amendment to or
repeal of this Section 10, any indemnitee shall be entitled to indemnification
in accordance with the provisions hereof with respect to any acts or omissions
of such indemnitee occurring prior to such amendment or repeal.
10.4 INSURANCE, CONTRACTS AND FUNDING
The corporation may maintain insurance, at its expense, to protect itself
and any director, officer, employee or agent of the corporation or another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the corporation would have the power
to indemnify such person against such expense, liability or loss under the GCL.
The corporation, without further shareholder approval, may enter into contracts
with any director, officer, employee or agent in furtherance of the provisions
of this Section 10 and may create a trust fund, grant a security interest or use
other means (including, without limitation, a letter of credit) to ensure the
payment of such amounts as may be necessary to effect indemnification as
provided in this Section 10.
10.5 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION
The corporation may, by action of the Board, grant rights to indemnification
and advancement of expenses to employees or agents or groups of employees or
agents of the corporation with the same scope and effect as the provisions of
this Section 10 with respect to the indemnification and
E-15
advancement of expenses of directors and officers of the corporation; provided,
however, that an undertaking shall be made by an employee or agent only if
required by the Board.
10.6 PERSONS SERVING OTHER ENTITIES
Any person who is or was a director or officer of the corporation who is or
was serving (a) as a director or officer of another corporation of which a
majority of the shares entitled to vote in the election of its directors is held
by the corporation or (b) in an executive or management capacity in a
partnership, joint venture, trust or other enterprise of which the corporation
or a wholly owned subsidiary of the corporation is a general partner or has a
majority ownership shall be deemed to be so serving at the request of the
corporation and entitled to indemnification and advancement of expenses under
subsection 10.1 hereof.
10.7 PROCEDURES FOR THE SUBMISSION OF CLAIMS
The Board may establish reasonable procedures for the submission of claims
for indemnification pursuant to this Section 10, determination of the
entitlement of any person thereto and review of any such determination. Such
procedures shall be set forth in an appendix to these Bylaws and shall be deemed
for all purposes to be a part hereof.
SECTION 11
AMENDMENTS OR REPEAL
The Board of Directors shall have the power to adopt, amend or repeal the
Bylaws of this corporation; provided, however, the Board of Directors may not
repeal or amend any bylaw that the shareholders have expressly provided may not
be amended or repealed by the Board of Directors. The shareholders shall also
have the power to adopt, amend or repeal the Bylaws of this corporation.
Notwithstanding any amendment to Section 10 hereof or repeal of these
Bylaws, or of any amendment or repeal of any of the procedures that may be
established by the Board pursuant to Section 10 hereof, any indemnitee shall be
entitled to indemnification in accordance with the provisions hereof and thereof
with respect to any acts or omissions of such indemnitee occurring prior to such
amendment or repeal.
E-16
[Sorrento Networks Logo]
Optical networks made simple
Appendix 1
SORRENTO NETWORKS CORPORATION
9990 MESA RIM ROAD, SAN DIEGO, CA 92121
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Mary Lay as Proxy, with the power to
appoint a substitute and hereby authorizes her to represent and to vote, as
designated on the reverse side of this card, all the shares of common stock of
Sorrento Networks Corporation (the "Company") held of record by the undersigned
as of March 7, 2003, at the special meeting of shareholders to be held on April
__, 2003, or any adjournment thereof.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
PLEASE DATE, SIGN AND MAIL YOUR PROXY CARD BACK AS SOON AS POSSIBLE!
Special Meeting of Shareholders
SORRENTO NETWORKS CORPORATION
April __, 2003
Please Detach and Mail in the Envelope Provided
[X] Please mark your votes as in this example.
FOR AGAINST ABSTAIN
1. Proposal to approve the
Restructuring Transaction [ ] [ ] [ ]
2. Proposal to change the
Company's state of [ ] [ ] [ ]
incorporation from New
Jersey to Delaware
3. Proposal to approve
the Sorrento Networks [ ] [ ] [ ]
Corporation 2003
Equity Incentive Plan
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1 AND 2 AND 3. THIS PROXY ALSO CONFERS DISCRETIONARY
AUTHORITY WITH RESPECT TO ANY BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING
OR ANY ADJOURNMENT OR POSTPONEMENT THEREOF AS TO WHICH DISCRETIONARY AUTHORITY
MAY BE GRANTED.
PLEASE MARK, SIGN, AND DATE AND PROMPTLY RETURN THE PROXY CARD.
Signature: ______________________ _________________________ Date: ________, 2003
SIGNATURE IF HELD JOINTLY
NOTE: Please sign exactly as name appears. When shares are held by joint
tenants, both should sign. When signing as an attorney, as an executor, as
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name by an authorized
signer.
2
Appendix 2
SORRENTO NETWORKS CORPORATION
9990 MESA RIM ROAD, SAN DIEGO, CA 92121
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Mary Lay as Proxy, with the power to appoint a
substitute and hereby authorizes her to represent and to vote, as designated on
the reverse side of this card, all the shares of common stock of Sorrento
Networks Corporation (the "Company") held of record by the undersigned as of
March 7, 2003, at the special meeting of shareholders to be held on April __,
2003, or any adjournment thereof.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
3
SPECIAL MEETING OF SHAREHOLDERS OF
SORRENTO NETWORKS CORPORATION
April __, 2003
Co. # _____________ Acct. # ______________________
PROXY VOTING INSTRUCTIONS
TO VOTE BY MAIL
Please date, sign and mail your proxy card in the envelope provided as soon as
possible.
TO VOTE BY TELEPHONE (TOUCH-TONE PHONE ONLY)
Please call toll-free 1-800-PROXIES and follow the instructions. Have your
control number and the proxy card available when you call.
TO VOTE BY INTERNET
Please access the web page at "www.voteproxy.com" and follow the on-screen
instructions. Have your control number available when you access the web page.
-----------------------------
YOUR CONTROL NUMBER IS ______________
-----------------------------
Please Detach and Mail in the Envelope Provided
[X] Please mark your votes as in this example.
FOR AGAINST ABSTAIN
1. Proposal to approve the
Restructuring Transaction [ ] [ ] [ ]
2. Proposal to change the
Company's state of [ ] [ ] [ ]
incorporation from New
Jersey to Delaware
3. Proposal to approve
the Sorrento Networks [ ] [ ] [ ]
Corporation 2003
Equity Incentive Plan
4
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1 AND 2 AND 3. THIS PROXY ALSO CONFERS DISCRETIONARY
AUTHORITY WITH RESPECT TO ANY BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING
OR ANY ADJOURNMENT OR POSTPONEMENT THEREOF AS TO WHICH DISCRETIONARY AUTHORITY
MAY BE GRANTED.
PLEASE MARK, SIGN, AND DATE AND PROMPTLY RETURN THE PROXY CARD.
Signature: ______________________ _________________________ Date: ________, 2003
SIGNATURE IF HELD JOINTLY
NOTE: Please sign exactly as name appears. When shares are held by joint
tenants, both should sign. When signing as an attorney, as an executor, as
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name by an authorized
signer.
5
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as.............................. 'SS'