AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 27, 2003
REGISTRATION NO. 333-103930
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
SORRENTO NETWORKS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------
NEW JERSEY 3672 22-2367234
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
9990 MESA RIM ROAD
AN DIEGO, CALIFORNIA 92121
(858) 558-3960
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL OFFICES)
-------------------
PHILLIP W. ARNESON
CHIEF EXECUTIVE OFFICER
SORRENTO NETWORKS CORPORATION
9990 MESA RIM ROAD
SAN DIEGO, CALIFORNIA 92121
(858)-558-3960
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
-------------------
Copies of all communications to:
W. RAYMOND FELTON, ESQ.
GREENBAUM, ROWE, SMITH, RAVIN, DAVIS & HIMMEL LLP
METRO CORPORATE CAMPUS I
POST OFFICE BOX 5600
WOODBRIDGE, NEW JERSEY 07095
(732) 549-5600
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-------------------
CALCULATION OF REGISTRATION FEE
PROPOSED
MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES PRICE OFFERING REGISTRATION
TO BE REGISTERED AMOUNT TO BE REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
---------------- -------------------------- ------------ --------- -----
Common Stock, par value $6.00 per share..... 15,000,000 $6.88 $103,200,000.00 $8,348.88
(1) Includes an indeterminate number of shares of common stock issuable to
prevent dilution resulting from stock splits, stock dividends or similar
transactions pursuant to Rule 416 under the Securities Act of 1933, as
amended.
(2) Estimated pursuant to Rule 457 based upon the closing price of the common
stock on March 17, 2003 as reported on the Nasdaq National Market solely for
the purpose of computing the registration fee.
(3) Previously paid.
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
________________________________________________________________________________
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 27, 2003
PROSPECTUS
SORRENTO NETWORKS CORPORATION
15,000,000 SHARES
COMMON STOCK
This prospectus relates to an aggregate of 15,000,000 shares of our common
stock. These shares are being registered pursuant to registration rights
obligations we have to the holders of our 9.75% Senior Convertible Debentures
Due August 2, 2004 and to the holders of shares of Series A Preferred Stock
issued by our subsidiary, Sorrento Networks, Inc., or SNI. Our 9.75% debentures
and the Series A Preferred Stock will be exchanged for shares of our common
stock and new 7.5% Senior Convertible Debentures Due August 4, 2007, at a
closing currently anticipated to be held on or about May 30, 2003.
Approximately 10,440,000 of the shares being registered hereunder will be
issued or issuable in exchange for the currently outstanding 9.75% debentures
and Series A Preferred Stock and upon conversion of the new 7.5% debentures. The
remaining 4,560,000 shares are potentially issuable as payment of interest or a
commitment fee on the new 7.5% debentures and to prevent dilution in the event
we issue common stock at a price less than the conversion price of the new 7.5%
debentures.
We will not own any of the shares, so we will receive no proceeds when they
are sold.
Our common stock is quoted on the Nasdaq National Market under the symbol
'FIBR.' On May 22, 2003, the closing price for our common stock was $5.51.
INVESTING IN COMMON STOCK INVOLVES RISK. BEFORE YOU INVEST, YOU SHOULD
CONSIDER CAREFULLY THE 'RISK FACTORS' ON PAGE 11.
Neither the SEC nor any state securities commission has approved or
disapproved these securities or passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
THE DATE OF THIS PROSPECTUS IS MAY 27, 2003.
TABLE OF CONTENTS
PAGE
----
THE COMPANY................................................. 3
THE RESTRUCTURING........................................... 3
OUR BUSINESS................................................ 4
RISK FACTORS................................................ 11
THE OFFERING................................................ 21
USE OF PROCEEDS............................................. 21
SELLING SHAREHOLDERS........................................ 21
SUMMARY OF REGISTRATION RIGHTS AGREEMENT.................... 23
PLAN OF DISTRIBUTION........................................ 23
DESCRIPTION OF OUR COMMON STOCK............................. 25
WHERE YOU CAN FIND MORE INFORMATION......................... 25
FORWARD LOOKING INFORMATION................................. 26
LEGAL MATTERS............................................... 27
EXPERTS..................................................... 27
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES................................ 27
2
THE COMPANY
We are a leading supplier of intelligent optical networking solutions for
metropolitan and regional applications worldwide. Our solutions enable
communication carriers and service providers to offer broadband networking
services over optical fibers for metropolitan and regional applications. Our
technologies permit telecommunications service providers to increase fiber
capacity and fiber bandwidth utilization, reduce network costs and complexity
over scalable and efficient networking platforms. Our optical networking systems
support a wide variety of protocols, mixed speeds of traffic and accommodate
changing traffic patterns directly over optical networks.
Our product solutions include optical access, optical transport, and network
management solutions optimized for metro and regional markets, and combine to
create powerful, cost-effective, and easy-to-manage optical networks. Our dense
wavelength division multiplexing, or DWDM, and course wavelength division
multiplexing, or CWDM, platforms can be used in both metropolitan and regional
network applications. DWDM technology allows many optical signals to be
transmitted simultaneously on the same optical fiber by using different
wavelengths of light to distinguish the signals. This technology increases
optical network capacity and flexibility.
Our comprehensive suite of optical networking interfaces and optical access
multiplexers allow us to also address broadband applications in the optical
access market including data center fail-over recovery, storage area networking
and internet connectivity applications. Our introduction of a CWDM product is a
lower cost, entry level solution that can be used for enterprise and carrier
customer access that complements our DWDM product line. Multiplexing is a
process that combines a number of lower speed data transmissions into one
high-speed data transmission.
We also have two powerful network management solutions for our DWDM product
line. Addressing all key management aspects -- fault, configuration,
performance, and security -- these systems conform to North American and
international standards and are simple to learn and use. We have a robust,
carrier-class management system that offers broad functionality, including
equipment/facilities management, fault management, performance monitoring,
security control, alarm filtering, and remote download. We also have an
enterprise network management solution that provides an intuitive graphical
interface and covers operations, administration, maintenance, and provisioning
functionality for our DWDM networks.
We currently have an installed base with over 20 communications service
providers and system integrators worldwide, including AT&T Broadband, now
Comcast Corporation, Deutsche Telekom, Cox Communications, United Pan-Europe
Communications, El Paso Global Networks and Edison Carrier Solutions.
Our shares of common stock are traded on the Nasdaq National Market under
the symbol 'FIBR.'
Our principal executive offices are located at 9990 Mesa Rim Road, San
Diego, California 92121. Our telephone number is (858) 558-3960. Our website is
sorrentonet.com. We do not intend the information found on our website to be a
part of this prospectus.
THE RESTRUCTURING
On March 6, 2003, we, SNI, and the holders of our outstanding 9.75%
debentures and Series A Preferred Stock executed an Exchange Agreement, pursuant
to which we have agreed to exchange the outstanding 9.75% debentures and Series
A for shares of our common stock and new 7.5% debentures in an aggregate
principal amount of $13.1 million. The closing of the restructuring transaction
will occur as soon as is practicable after the effective date of the
registration statement of which this prospectus forms a part, subject to the
satisfaction or waiver of the conditions set forth in the Exchange Agreement. We
currently expect the closing to be on or about May 30, 2003.
An aggregate of approximately 10,440,000 shares of our common stock will be
issued at the closing of the restructuring transaction or will be issuable upon
conversion of the New Debentures. The new 7.5% debentures that will be issued in
the restructuring transaction will be convertible into between approximately
1,134,000 and approximately 3,201,000 shares (representing
3
approximately 8.08% and 22.9% respectively of our shares outstanding on a
diluted basis), depending on the conversion price, which we will not know until
shortly before the closing of the restructuring transaction. The conversion
price of the new 7.5% debentures will depend upon the closing price of our stock
prior to the closing of the restructuring transaction. Because we will not know
the conversion price until shortly before closing the restructuring transaction,
we cannot now determine the precise number of shares of our common stock that
will be issued to the holders of the outstanding 9.75% debentures and Series A
at the closing of the restructuring transaction and the precise number of shares
of our common stock that will be issuable upon conversion of the new 7.5%
debentures.
'Diluted basis' means the total number of shares of our common stock issued
and outstanding 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 the new 7.5% debentures, (iii) shares of our common
stock issuable upon exercise of the new warrants to be issued to our existing
shareholders; and (iv) shares of our common stock issuable under our 2003 Equity
Incentive Plan. 'Diluted basis' does not give effect to (i) shares of our common
stock issuable upon conversion of our Series D Preferred Stock, and (ii) shares
of our common stock issuable upon exercise of existing options or warrants.
In addition to issuing shares of our common stock and new 7.5% debentures,
we will issue warrants to our shareholders of record as of a date to be
determined, but which will be no more than ten (10) business days prior to the
closing of the restructuring. The warrants will be non-transferable warrants to
purchase approximately 4.2% of our common stock on a diluted basis, and will be
exercisable beginning one year after the closing at a 10% premium over an
average closing price of our stock prior to the closing of the restructuring.
Exercise of the warrants will be subject to the effectiveness of a separate
registration statement with respect to the common shares to be issued upon
exercise of the warrants.
Prior to the closing of the restructuring transaction, we will merge with
and into a new Delaware corporation, formed for the purpose of reincorporating
in Delaware. No later than the first anniversary of the closing date of the
restructuring transaction, we will merge with our subsidiaries, SNI, Meret
Communications, Inc., and Sorrento Valley Real Estate Holdings, LLC. We will be
the surviving corporation of that merger.
As a result of the consummation of the transactions contemplated by the
Exchange Agreement, all pending legal actions between us and SNI, and the
holders of the Series A relating to the Series A will be dismissed.
OUR BUSINESS
UNDERSTANDING OUR MARKET
RAPID GROWTH IN BANDWIDTH DEMAND
Fueled by the growth of the Internet, the volume of data traffic transmitted
across telecommunications networks now exceeds voice traffic. The growth of data
traffic is attributable to increased Internet usage, increased access speeds and
greater use of bandwidth intensive applications. Bandwidth means the capacity to
move information down a communications channel. Bandwidth is defined by the
highest data rates that can be transmitted by that channel and is commonly
measured in bits per second. According to Ryan, Hankin & Kent, Internet traffic
is projected to increase at a rate exceeding 40% per year for the next five
years.
MIGRATION OF NETWORK INFRASTRUCTURE
Traditional copper-based and SONET/SDH based telecommunications
infrastructures were originally designed for voice traffic. These
infrastructures do not scale effectively to provide the bandwidth needed to
support the growth in high-speed data traffic. In addition, these
infrastructures need network-wide upgrades in order to accommodate growing
traffic thus resulting in long delays for provisioning new services.
4
DWDM and CWDM technologies are more flexible, more efficient and more
scalable networking alternatives for meeting the growing demand for bandwidth
and new broadband services. Broadband means technologies or networks that have
the ability to transmit high data rates. DWDM means dense wavelength division
multiplexing, which is a sophisticated opto-electronics technology that uses
multiple wavelengths of light very efficiently to greatly increase the number of
video, data or voice channels of information that can be sent on a single
optical fiber. SONET means a transmission protocol for high-speed transmission
over fiber optic cable, which was introduced by Bell Communications in 1984 and
quickly accepted by American National Standards Institute. SDH means Synchronous
Digital Hierarchy, which is transmission protocol for high-speed transmission
over fiber optic cable published in 1988 by the Consultative Committee for
International Telegraph and Telephony. It is a transmission protocol used
outside the United States that is similar to SONET.
DWDM networks for long-haul applications were the first to be deployed, and
optical solutions specifically designed to address the challenges faced by
metropolitan markets have significantly lagged in deployment. Accordingly, metro
networks are considered to be traffic bottlenecks in the fast and efficient
transmission of data.
ENHANCED COMPETITION IN THE SERVICE PROVIDER MARKET
Worldwide deregulation in the telecommunications industry has led to an
increase in the number of service providers seeking to address the growing
demand for bandwidth. In the U.S. and internationally, traditional service
providers such as incumbent local exchange carriers (ILECs), inter-exchange
carriers (IXCs) and post, telephone and telegraph companies (PTTs) are seeing
new entrants in the broadband networking market seeking to capitalize on the
growing demand for bandwidth. A number of competitors to these incumbents are
building new data-centric networks to address the present bandwidth bottlenecks
in the metropolitan markets, including utilities and cable television companies
which are upgrading their current networks and are leveraging existing
investments in fiber optic infrastructure to deliver high-speed data services in
both the local and regional markets. This enhanced competition in the carrier
and service provider markets is driving increased capital expenditures on
network infrastructure that is focused on delivering scalable high-speed data
services in a cost efficient manner.
NETWORK TOPOGRAPHY
The following describes each of the network segments within the optical
network hierarchy:
LONG-HAUL NETWORKS are high capacity networks that connect service
providers and carry voice and data across large geographic regions,
typically spanning distances up to 4,000 kilometers. Long-haul networks
are relatively simple networks, built around SONET/SDH technology and are
primarily designed only to satisfy service provider long haul network
capacity requirements.
METROPOLITAN CORE (METRO-CORE) NETWORKS connect the central offices of
service providers in a metropolitan area and facilitate the transport and
switching of traffic within extended metropolitan areas and between the
network edge and long-haul networks. Metropolitan core networks are
typically implemented in ring configurations and reach ring circumferences
up to 300 kilometers. In order to efficiently use the optical network,
sub-rate multiplexing devices aggregate traffic into wavelengths carrying
higher speed aggregate bit rates across telecommunications networks.
Regional networks typically transport voice and data traffic between cities
across distances of 200 to 600 kilometers or more.
ACCESS NETWORKS connect enterprises or traffic aggregation nodes, in
multiple locations throughout metropolitan areas, to service providers'
central offices or connect different end-user locations to each other. In
order to efficiently use the optical network, optical access devices
aggregate traffic from end users into wavelengths or wavelength bands for
transport across telecommunications networks. Because access networks must
support the varying demands of end users, these networks tend to be very
complex.
5
METROPOLITAN AREA OPTICAL NETWORK OPPORTUNITY
Although optical technologies are being deployed in long-haul networks to
relieve capacity constraints, these solutions are not specifically designed to
address the issues inherent in metropolitan and regional optical networks. Data
is normally mapped into the voice multiplexing hierarchy for transport over the
long-haul network. Metropolitan optical networks are characterized by varying
traffic patterns and protocols as well as varied topologies and end-user
requirements, making them more complex and difficult to manage than long haul
networks. As a result, service providers have only recently begun to exploit the
benefits of optical technologies in metropolitan optical networks.
The optical networking market has seen a substantial downturn in 2002 from
2001 levels. The metro WDM market, which was expected to increase, has also
experienced a slowdown in as capital spending has declined throughout the
telecommunications industry. While we believe that the metro WDM world-wide
market will grow significantly in the years to come, such growth is not likely
to occur until capital spending resumes in the markets we serve, and we are
unable to assess at present when this might take place. According to industry
analysts, including Ryan, Hankin and Kent and others, the metro WDM market in
2001 was about $1.2 billion worldwide and is expected to grow to $3.6 billion by
2005.
REGIONAL OPTICAL NETWORK OPPORTUNITY
In addition to the metropolitan market, recent engineering enhancements have
permitted the use of DWDM networking platforms for regional optical networking
applications. This development opens up the opportunity to address a portion of
the substantial long haul market. In some regions, e.g., Europe, regional
solutions apply to the majority of the networks installed. Industry researchers
recently started looking at reclassifying the regional market opportunity,
although statistical data for this market are not available.
SPECIFIC CHALLENGES FACING METROPOLITAN OPTICAL NETWORKS
Service providers face numerous specific challenges in addressing
metropolitan and regional optical networks:
Scalability Limitations. Originally constructed for voice traffic, the
current network infrastructure based on SONET/SDH technology does not
allow for the network efficiencies necessary to address the shift to a
predominantly data-driven network. Due to its inherent lack of scalability,
the current network infrastructure may require service providers to
undertake the expensive and tedious process of replacing network equipment
or adding new layers of similar equipment in response to changes or
increases in bandwidth demand. Alternative approaches to WDM are being
developed by other vendors to address the scalability of the SONET/SDH
networks. These nonstandard solutions are called next generation SONET/SDH
and can minimize the wasted bandwidth of legacy SONET/SDH. While these
solutions allow carriers to combine voice and data on the same network,
such solutions do not, however, expand the amount of bandwidth available
and are, therefore, unable to accommodate the need for large amounts of
bandwidth.
Need to Support Multiple Protocols. Metropolitan optical networks are
characterized by a wide variety of protocols. The inability to support
multiple protocols and services from a single platform further increases
the cost and complexity of the metropolitan networks. Alternative approaches
to WDM are being developed by other vendors to address the requirement for
support of multiple services. These nonstandard solutions are called
multi-service provisioning platforms. These solutions generally carry out
protocol conversions and are much more complex than WDM solutions.
Market Downturn. Virtually all telecom related market segments have suffered
a decline in demand in the current economic downturn. What was once viewed
as only a long-haul decline in market demand has now affected the regional
and metropolitan networks as both enterprise and carrier business have cut
back capital spending. Although we expect that
6
demand in the regional and metropolitan markets will be strong in future
periods, there are no assurances that capital spending will resume within
this sector in the near term.
Several Stages of Conversion. Present solutions require several
conversions to transport data through a metropolitan network. In the
access networks, aggregation of traffic often requires protocol
conversions into a common protocol before optical transmission. In the
central office, data is often demultiplexed and converted into electrical
signals for regeneration, switching or further aggregation into higher
capacity links and then reconverted into optical signals for transmission
in the metro-core network.
Inefficient Bandwidth Utilization. Within metropolitan optical networks,
service providers must cater to end-users with varying access speeds.
Current optical access solutions do not make efficient use of scarce
wavelength resources. Service providers must assign a full wavelength
to each signal, whether or not the end-user requires the full bandwidth
potential of each wavelength.
Difficulty of Network Management. Multiple protocols and services,
coupled with the lack of standards that exist in metropolitan optical
networks, make network management functions, such as performance
monitoring and configuration, exceedingly difficult. Lack of a robust
network management platform further adds to the cost and complexity of
metropolitan optical networks.
Need for New, Enhanced Service Offerings to Generate New Revenue
Opportunities. Service providers are searching for next-generation
solutions that will enable them to generate additional sources of revenue
from offering new or enhanced services to their customers. Current
solutions typically require the service provider to deploy equipment
that is specifically designed for a particular service and transmission
rate. Next-generation solutions must be able to offer enhanced features,
wavelength provisioning and bandwidth-on-demand, that end-users will
increasingly request from service providers.
OUR SOLUTION
Our solutions feature products designed to specifically address the
shortcomings of legacy SONET/SDH networks and to facilitate offering new
services throughout metropolitan and regional optical networks. We enable our
customers to meet the rapidly growing demand for bandwidth by offering
end-to-end metropolitan and regional optical networking solutions for the
aggregation, transport and management of traffic. Our current products,
including our GigaMux'r' DWDM transport system, our EPC'TM' sub-rate
multiplexing modules, our JumpStart'TM' CWDM transport system, as well as the
network management product line that includes GigaView, TeraManager'TM' and
TeraConfigurator'TM', are specifically designed to meet the unique requirements
of the metropolitan and regional markets.
Our optical networking solutions offer numerous benefits including:
Cost Effective Entry-Level Access Solution. Our Jumpstart CWDM platform
allows low cost multiplexing of up to four wavelengths carrying a mix of
protocols and signals for access applications. CWDM means coarse wavelength
division multiplexing, which is a sophisticated opto-electronics technology
that uses multiple wavelengths of light to increase the number of video,
data or voice channels of information that can be sent on a single optical
fiber.
Scalable Architecture. We have created an optical networking solution that
simultaneously transmits voice, data, and video over optimized fiber
channels. The modular architecture of our solution enables service providers
to incrementally expand capacity as their bandwidth needs increase. This
simple, scaleable, and functional solution solves short and long-term
service provider problems, which enhances their ability to reduce costs and
offer value-added services. For example, a service provider can begin
deployment with a single channel and later expand up to 64 channels,
providing up to 640 gigabits per second, or Gbps, of transmission capacity
without interrupting existing traffic. A fiber channel is a serial data
transfer architecture standard conceived for new mass storage devices
and other
7
peripheral devices that require very high bandwidth connections. Bit
rates for fiber channels are either 1.06 Gbps or 2.1 Gbps.
Protocol and Signal Transparency. Our suite of solutions transports a
mix of protocols and signals, including SONET/SDH, Asynchronous Transfer
Mode (ATM) over SONET, Internet Protocol (IP) over SONET, Gigabit
Ethernet, Fibre Channel and Enterprise System Connectivity in their
native formats over numerous wavelengths in the same fiber. This
transparency provides operational simplicity in that the service provider
can offer networking connectivity without having to worry about protocol
conversions. This is particularly important in metropolitan areas where
multiple protocols are utilized and data transmission rates change
often. The transparency of our solution eliminates the unnecessary
conversions from optical to electrical and back to optical, as well as
eliminates several layers of equipment that would otherwise be required
in the transport and switching of traffic, thus reducing network
complexity and signal latency.
Protocol Aggregation. Our EPC'TM' optical access multiplexer aggregates
traffic, of varied rates utilizing a wavelength per direction of
transmission, from businesses and network points of presence for transport
throughout optical networks. This aggregation allows better utilization
of wavelengths and lowers capital expenditures of telecom service
providers by reducing investments in excess network capacity.
Manageability. The design of our end-to-end optical networking solution
will allow service providers to perform network management from a single
platform with our TeraManager'TM' product. This intelligent optical
network element management software platform provides fault,
configuration, performance, and security management utilizing an
easy-to-use graphical user interface that allows point and click network
provisioning and monitoring.
Regional Optical Transport. Our solution permits service providers to
expand beyond the confines of metropolitan networks using the same
platform for metropolitan and regional applications. Regional networks
can now be built using the lower cost solutions developed for the
metropolitan environment.
OUR STRATEGY
Our objective is to become a leading supplier of intelligent optical
networking solutions for metro and regional applications worldwide. The key
elements of our strategy are to:
ENHANCE AND COMPLETE OUR METROPOLITAN/REGIONAL OPTICAL
NETWORKING SOLUTIONS
We intend to continue to enhance our existing family of metropolitan and
regional optical networking products and to introduce new products that
increase the functionality of our end-to-end optical solution. We introduced
TeraManager'TM' and TeraConfigurator'TM' in our management solution
portfolio in fiscal 2002. We also introduced JumpStart'TM', our CWDM
solution, in fiscal year 2002. The combination of our GigaMux'r' optical
transport products, with the EPC'TM' sub-rate multiplexer, the JumpStart'TM'
CWDM, and TeraManager'TM', our carrier class network management product,
creates an intelligent all-optical transport solution.
LEVERAGE OUR ENGINEERING LEADERSHIP
We intend to leverage our engineering expertise in the areas of optical,
mechanical, electrical and network management design to continue to provide
leading end-to-end metropolitan and regional optical networking systems and
to expand our market share. We believe we were the first company to
commercially ship a metropolitan optical networking product using DWDM
technology. As of January 31, 2003, we had a skilled team of 29 engineers
that continually focus on developing products for the metropolitan and
regional optical transport market. We believe that our technological
leadership has been the key to our success and will enable us to rapidly
develop new product offerings and end-to-end optical solutions for the
metropolitan and regional markets.
8
ALLOW OUR CUSTOMERS TO LEVERAGE THEIR FIBER ASSETS BY OFFERING
REVENUE-GENERATING SERVICES
The majority of our existing customers and targeted customers have a
large amount of fiber assets in the metropolitan and regional network
infrastructure. We intend to continue to develop and provide solutions that
will enable our customers to leverage their existing fiber infrastructure to
deliver revenue-generating services, while reducing their overall network
costs. In addition, we believe our existing customer base provides us with
an advantage when competing for new customers. We intend to continue to work
closely with our customers and invest in sales and marketing resources to
maintain our high level of customer service and remain responsive to our
customers' changing needs.
AGGRESSIVELY PURSUE EXPENSE REDUCTION INITIATIVES
We plan to aggressively pursue cost reduction initiatives to bring our
expenses in line with current and future anticipated revenues. Such
reductions may affect the size of our workforce, and may require decreasing
our operating expenses and capital spending. During the past two fiscal
years we have concentrated on implementing initiatives that have lowered our
operating costs and anticipate the need for continued cost reductions if
sales volume does not increase in the near future.
MAINTAIN OUR SALES, SERVICE AND SUPPORT ORGANIZATIONS WORLDWIDE
We intend to continue to market our products worldwide. We currently
have sales, service and support teams in North America, Europe and Asia. We
believe that sales, service and support efforts on a customer-by-customer
basis are most effective due to the technical evaluation and significant
investments that are made by our customers.
PRODUCTS
Our family of optical networking systems is designed to provide our
customers with end-to-end solutions for the metropolitan and regional optical
networking markets. Our transport, access, switching and network management
systems include the following products, some of which are still in development.
GigaMux'r' -- DWDM Optical Transport
Our GigaMux'r' optical transport product utilizes DWDM technology to expand
the capacity of new and existing fibers and enable traffic to travel throughout
metropolitan optical networks without optical to electrical to optical
conversions at each intermediate node. Our GigaMux'r' features wavelength
translation, wavelength multiplexing, optical amplification, optical add-drop
multiplexing, protection switching and performance monitoring. The scalable and
modular architecture of our GigaMux'r' product enables service providers to
easily and cost-effectively expand their existing networks as bandwidth
requirements increase. GigaMux'r' can simultaneously transport multiple
protocols bi-directionally over one or more fibers, which reduces the cost and
complexity of the network.
Our GigaMux'r' product is Network Equipment Building Standards, or NEBS,
level III certified. As of January 31, 2003, we have shipped our GigaMux'r'
product to over 20 direct carrier customers or resellers worldwide. Our
GigaMux'r' product includes the following key features:
Scalability: the system can grow from 1 to 64 protected channels
(640 Gbps/fiber) without a major upgrade or service interruption.
Protocol transparency: the system can aggregate and transport SONET/SDH
(OC-3/STM-1 through OC-192/STM-64 carrying voice, IP or ATM traffic),
ESCON, Fibre Channel, Fast Ethernet, Gigabit Ethernet and video.
Modular protection: the system's modular protection system allows
redundancy to be implemented at any point in the network.
Add/drop channels: the system is equipped with add/drop modules that
allow specific channels to be added or dropped while all other channels
pass through. Our filter subsystem can add or drop from single channels
to larger wavelength bands.
9
Reach: Up to 600 kilometers with optical amplifiers and up to 1000 km with
the addition of dispersion compensation.
EPC'TM' -- Sub-Rate Access Multiplexer
Electric Photonic Concentrator, or EPC'TM', is our sub-rate access
multiplexer product that aggregates a wide variety of traffic from businesses
and network points of presence for high-speed transport throughout optical
networks. The traffic is aggregated and effectively shares a wavelength per
direction of transmission and can be ported directly into the DWDM stage of our
GigaMux'r'. EPC'TM' is designed to lower the cost and increase the efficiency of
bandwidth delivery within optical networks.
Our EPC'TM' products include the following key features:
Support for asynchronous or synchronous (SONET/SDH) time division
multiplexing of data Provisionable bit rates and protocol and overhead
transparency
JumpStart'TM' -- CWDM Transport
JumpStart is our entry level solution for multiplexing up to 4
bi-directional data channels using coarse wavelength division multiplexing
technology on a single fiber. The product is very compact and can be stacked to
provide additional capacity -- 4 channels per fiber.
TeraManager'TM' -- Element Management System
TeraManager'TM' is our TL1-based intelligent element management software
platform that provides fault, configuration, performance and security management
for all the Sorrento networks products and for networks built with such
products. Service providers can operate our network management platform through
an easy-to-use graphical user interface, which gives users a complete network
view and enables point and click provisioning and monitoring.
Our TeraManager'TM' product includes the following features:
Fault, configuration, security and performance management
Carrier class performance
Interface with higher layer operation support systems
MERET OPTICAL COMMUNICATIONS
Our optical networking subsidiary, Meret Communications, Inc., doing
business as Meret Optical Communications, also markets our new CWDM product, as
well as feature-rich video transport and switching, radio frequency, or RF,
transmission, and RF synthesis products.
10
RISK FACTORS
WE HAVE SUBSTANTIAL DEBT, AND WE MAY NOT GENERATE SUFFICIENT CASH FLOW TO MEET
OUR DEBT SERVICE OBLIGATIONS.
Upon closing the restructuring transaction, our total debt will consist
primarily of approximately $13.1 million principal amount of new 7.5% debentures
with a maturity date in August 2007, and mortgage debt of approximately
$3,630,000. The amount of our debt could have important consequences, including:
impairing our ability to obtain additional financing for working capital,
capital expenditures, acquisitions or general corporate purposes;
requiring us to dedicate a substantial portion of our operating cash flow
to paying principal and interest on indebtedness, thereby reducing the
funds available for operations;
limiting our ability to grow and make capital expenditures due to the
financial covenants contained in our debt arrangements;
impairing our ability to adjust rapidly to changing market conditions,
invest in new or developing technologies, or take advantage of
significant business opportunities that may arise;
placing us at a competitive disadvantage compared to our competitors that
have less debt; and
making us more vulnerable if the current general economic downturn
continues or if our business experiences difficulties.
If we cannot generate sufficient additional revenue, we may not be able to
meet our debt service obligations, repay our debt when due, or comply with other
covenants in the new 7.5% debentures. If we breach the new 7.5% debentures, the
holders could require repayment of all amounts owed, and we would not have
sufficient cash reserves to repay such amounts.
WE MAY BE UNABLE TO RAISE THE FUNDS NECESSARY TO REPAY OR REFINANCE OUR
INDEBTEDNESS.
We will be obligated to make principal and interest payments on the New
Debentures each year until 2007, when the new 7.5% debentures mature. Although
under certain circumstances we may pay interest in shares of our common stock or
in additional new 7.5% 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.
We are registering for resale hereunder 15,000,000 shares of our common
stock that will be issued and issuable in connection with the restructuring
transaction. The new 7.5% debentures that will be issued in the restructuring
transaction will be convertible into between approximately 1,134,000 and
approximately 3,201,000 shares (representing approximately 8.08% and 22.9%
respectively of our shares outstanding on a diluted basis), depending on the
conversion price. We
11
will not know the conversion price of the new 7.5% debentures until shortly
before the closing of the restructuring transaction, and therefore cannot now
determine the precise number of shares of our common stock that will be issued
to the holders of the outstanding 9.75% debentures and Series A or the precise
number of shares of our common stock that will be issuable upon conversion of
the new 7.5% debentures upon consummation of the restructuring transaction.
Assuming that the new 7.5% debentures are convertible into approximately 16% of
our outstanding common stock on a diluted basis, we estimate that we will issue
approximately 8,260,000 shares at the closing of the restructuring transaction,
which may be sold into the public market immediately. Under that same
assumption, and subject to certain restrictions, we estimate that the new 7.5%
debentures we will issue will also be immediately convertible into approximately
2,240,000 shares of common stock, and those shares of common stock are also
being registered for resale hereunder. Sales of a substantial number of shares
of our common stock 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 the restructuring 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. We cannot assure you that we
will achieve revenue growth, cost savings or other business economies.
WE MAY NOT BE ABLE TO OBTAIN THE ADDITIONAL FINANCING WE ANTICIPATE WE WILL NEED
IN THE NEAR FUTURE TO CONTINUE OUR BUSINESS.
We will need additional funds to support operations in the near 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. We cannot
be sure 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 may 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 continue to reduce our expenses
in the near future to bring 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.
THE EXCHANGING HOLDERS WILL HOLD A SUBSTANTIAL PORTION OF OUR STOCK AND WILL
HAVE SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING SHAREHOLDER CONSENT.
Assuming the new 7.5% debentures are convertible into approximately 16% of
our common stock outstanding on a diluted basis, the exchanging holders will own
approximately 90% of our outstanding common stock immediately following
consummation of the restructuring. If all of the new 7.5% debentures were
converted into shares of our common stock, the exchanging holders would own
approximately 74.4% of our common stock on a diluted basis, and existing
shareholders would own approximately 10.5% of our common stock on a diluted
basis. Accordingly, the exchanging holders will have significant influence over
matters requiring our shareholder approval following the combination. The
exchanging holders, 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.
12
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR FUTURE LOSSES.
We have incurred operating losses during the years ended January 31, 2003,
2002 and 2001 of $31.3 million, $37.2 million and $50.4 million, respectively,
and as of January 31, 2003, we had an accumulated deficit of $183.8 million. We
expect to continue to incur losses in the future. If we do not become
profitable, the value of our stock will decrease. We have large expenses in the
areas of sales and marketing, research and development, manufacturing, and
general and administrative expenses that are not covered by our current sales
volume and resulting gross margin. Currently, the majority of revenues are from
shipments of our optical networking product lines. In order for us to become
profitable, we will need to generate and sustain higher revenue, improve our
gross margins on products while maintaining reasonable expense levels.
In addition, we have incurred, and continue to incur, extraordinary and
extremely high legal expenses in connection with our capital restructuring and
defense of legal claims against us brought by prior officers, directors or other
personnel claims. These expenses have depleted our existing working capital. If
we continue to incur such expenses, our existing working capital may be depleted
sufficiently that our business may be seriously harmed. We cannot assure you
that we will be able to reduce such costs in the immediate future.
OUR HISTORY OF LOSSES AND FUTURE LOSSES COULD HAVE AN IMPACT ON OUR ABILITY TO
FINANCE OUR BUSINESS AND RISK OUR ABILITY TO CONTINUE OPERATING.
We have incurred significant losses and may incur significant losses in the
future. Such losses could cause our equity balance to fall below necessary
levels so that we are in violation of minimum listing requirements for our
publicly traded stock on the Nasdaq National Market, which could cause
significant decline in shareholder value and stock price.
IF NASDAQ DELISTS OUR COMMON STOCK FROM THE NASDAQ NATIONAL MARKET, THE MARKET
LIQUIDITY FOR OUR COMMON STOCK COULD BE SEVERELY AND ADVERSELY EFFECTED.
On March 6, 2003 we presented before the Nasdaq Panel our reasons for the
request for an extension of time to complete our restructuring plans. On
April 4, 2003, the Panel issued a decision extending until May 16, 2003, our
time to demonstrate compliance with the minimum shareholder equity standard.
As our current plan is to close the capital restructuring, subject to
shareholder approval, on or about May 30, 2003, we asked the Panel for a short
extension on the May 16 deadline. The Panel has amended the terms of its
April 4, 2003 decision and has given us until May 30, 2003 to comply with
Nasdaq's listing requirement of shareholders' equity of at least $10 million.
In addition we must demonstrate compliance with all other requirements for
continued listing on the Nasdaq national market. If our stock is delisted
from Nasdaq, the ability of holders of our common stock to sell our stock
could be adversely affected, our ability to secure future funding might be
severely impacted, and there could be a material adverse effect on our
financial condition.
IF OUR COMMON STOCK IS DELISTED FROM THE NASDAQ MARKET SYSTEM, IT MAY BE SUBJECT
TO THE 'PENNY STOCK' REGULATIONS, WHICH MAY AFFECT THE ABILITY OF OUR
SHAREHOLDERS TO SELL THEIR SHARES.
Regulations of the SEC define 'penny stock' to be any non-Nasdaq equity
security that has a market price as therein defined of less than $5.00 per share
or which has an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction with respect to any penny
stock, of a disclosure schedule prepared by the SEC relating to the penny stock
market. The SEC also requires disclosure of our commissions payable to both the
broker/dealer and its registered representative and information regarding
current quotations of the securities. Finally, the SEC requires that monthly
statements be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stocks.
13
YOUR PERCENTAGE OF OWNERSHIP AND VOTING POWER, AND THE PRICE OF OUR COMMON STOCK
MAY DECREASE BECAUSE WE MAY ISSUE A SUBSTANTIAL NUMBER OF SHARES OF COMMON
STOCK, OR SECURITIES CONVERTIBLE OR EXERCISABLE INTO OUR COMMON STOCK.
On the effective date of the registration statement of which this prospectus
forms a part, we will have the authority to issue up to one hundred fifty
million shares of our common stock and two million shares of our preferred stock
without shareholder approval. We will also have issued warrants to our
shareholders of record as of a date to be determined, but which will be no more
than ten (10) business days prior to the closing, which will be exercisable into
approximately 600,000 shares of our common stock.
We may also issue additional warrants and options to purchase shares of our
common stock. These future issuances could be at values substantially below the
price paid for our common stock by current shareholders. We may conduct
additional future offerings of our common stock, preferred stock, or other
securities with rights to convert the securities into shares of our common
stock, which may result in a decrease in the value or market price of our common
stock. Further, the issuance of preferred stock could have the effect of
delaying, deferring or preventing a change of ownership without further vote or
action by the shareholders and may adversely affect the voting and other rights
of holders of common stock.
OUR INDUSTRY IS HIGHLY COMPETITIVE, AND WE MAY NOT HAVE THE RESOURCES REQUIRED
TO COMPETE SUCCESSFULLY.
The market for optical networking equipment is extremely competitive. We
expect competition to intensify in the future. Our primary sources of
competition include vendors of optical networking and infrastructure equipment
such as CIENA Corporation, Cisco Systems, Lucent Technologies, Nortel Networks,
Sycamore Networks, and ADVA AG Optical Networking as well as private companies
that have been or will be focusing on our target markets. The competitors for
Meret's legacy products include Pesa, Artel, RGB Spectrum, Utah Scientific, and
many other companies. We may also face competition from a number of other
companies that have announced plans for new products to address the same network
problems that our products address. Many of our current and potential
competitors have significantly greater sales and marketing, technical,
manufacturing, financial and other resources than we do. Our competitors also
may have more extensive customer relationships than us, including relationships
with our current and potential customers. If we are unable to compete
successfully against our current and future competitors, we could experience
pricing pressures, reduced gross margins and order cancellations, any one of
which could seriously harm our business.
OUR BUSINESS MAY BE SERIOUSLY HARMED IF THE MARKET FOR OPTICAL NETWORKING
PRODUCTS IN METROPOLITAN AND REGIONAL AREAS DOES NOT DEVELOP AS WE EXPECT.
Our current and future product offerings are focused on the needs of
providers that service regional and metropolitan areas. The market for optical
networking products in regional and metropolitan areas is not yet mature, and we
cannot be certain that a feasible market for our products will develop or be
sustainable. In addition, the market has suffered a cutback in capital spending
from both enterprise and carrier customers as a result of poor economic
conditions. If this market does not develop, or develops more slowly than we
expect or continues to be impacted by the reduction in capital spending, our
business may be seriously harmed. Furthermore, the optical networking industry
is subject to rapid technological change, and newer technology or products
developed by others could render our products less competitive or obsolete. In
developing our products, we have made, and will continue to make, assumptions
about the optical networking standards that our customers and competitors may
adopt. If the standards adopted are different from those which we have chosen to
support, market acceptance of our product would be significantly reduced and our
business will be seriously harmed.
OUR FUTURE GROWTH DEPENDS ON OUR ABILITY TO ATTRACT NEW CUSTOMERS, AND ON OUR
CUSTOMERS' ABILITY TO SELL ADDITIONAL SERVICES TO THEIR OWN CUSTOMERS.
Most of our potential customers evaluate optical networking products for
deployment in large telecommunications systems that they are installing. There
is only a relatively limited number of
14
potential customers for our products. If we are not selected by a potential
customer, our revenues and ability to grow our business may be seriously harmed.
Similarly, our growth depends on our customers' success in selling
communications services based on our products and complementary products from
others. Our success will depend on our ability to effectively anticipate and
adapt to customer requirements and offer products and services that meet
customer demands. Any failure of our current or prospective customers to
purchase products from us for any reason, including a downturn in their
business, would seriously harm our ability to grow our business.
IF WE FAIL TO ESTABLISH AND SUCCESSFULLY MAINTAIN STRATEGIC ALLIANCES, LONG-TERM
CONTRACTS AND RELATIONSHIPS WITH DISTRIBUTORS AND SYSTEM INTEGRATORS, OUR
ABILITY TO GROW AND BE PROFITABLE MAY BE SERIOUSLY HARMED.
Strategic alliances and long-term contracts are an important part of our
effort to expand our sales opportunities and technological capabilities. To
date, we have entered into strategic alliances with AT&T Broadband, now Comcast
Corporation, United Pan-Europe Communications, INRANGE, and Looking Glass. In
addition we have a long-term contract with Cox Communications. We cannot be
certain that our existing alliances and long-term contracts will not be
cancelled or that we will be able to enter additional strategic alliances on
terms that are favorable to us. With the exception of two agreements we recently
entered into with TCI Network Solutions, Inc., d/b/a AT&T Broadband Network
Solutions, and UFO Communications, Inc., our agreements to date with our
strategic allies are non-exclusive, and we anticipate that future agreements
will also be on a non-exclusive basis. These agreements are generally short
term, have no minimum financial commitments on either side and can be cancelled
without significant financial consequence. In addition, we cannot be certain
that our existing and any future strategic alliances will be successful. As we
expand internationally, we will increasingly depend upon distributors and system
integrators. Our ability to grow and be profitable may be seriously harmed if we
fail to establish and maintain strategic alliances, long-term contracts and
relationships with distributors and system integrators. Our five-year agreement
with AT&T Broadband Network Solutions provides that we will be AT&T Broadband
Network Solutions' exclusive supplier, subject to certain exceptions, of dense
and course wavelength division multiplexing equipment. We also recently
contracted with UFO to be its exclusive supplier of equipment, subject to
certain exceptions, for networks owned, leased or operated by UFO.
WE RELY ON A SMALL NUMBER OF CUSTOMERS FOR MOST OF OUR REVENUES AND ANY LOSS,
CANCELLATION, REDUCTION OR DELAY IN SALES TO, OR COLLECTIONS FROM, ANY SINGLE
CUSTOMER COULD SERIOUSLY HARM OUR BUSINESS.
Our customer base is highly concentrated. Historically, orders from a
relatively limited number of customers accounted for most of our net sales. For
the fiscal year ended January 31, 2003, five customers accounted for 84% of net
sales, during the year ended January 31, 2002, five customers accounted for 62%
of net sales and in fiscal year 2001 five customers accounted for 44% of our net
sales. We expect that, for the foreseeable future, sales to a limited number of
customers will continue to account for a high percentage of our net sales. We
currently do not have any long-term purchase commitments with any of our
customers, and we are subject to the varying purchase cycles of our customers.
Our concentrated customer base significantly increases the credit risks
associated with slow payments or non-payments by our customers. The loss or
delay of orders or slow or non-payment from, any of our largest customers could
adversely impact our business.
OUR BACKLOG AT ANY POINT MAY NOT BE A GOOD INDICATOR OF EXPECTED REVENUES.
Our backlog at the beginning of each quarter typically is not sufficient to
achieve expected sales for the quarter. To achieve our sales objective, we are
dependent upon obtaining orders during each quarter for shipment during that
quarter. Furthermore, our agreements with our customers typically provide that
they may change delivery schedules and cancel orders within specified times
which are typically 30 days or more prior to the scheduled shipment date,
without significant penalty. Our customers have in the past built, and may in
the future build, significant inventory in order to facilitate more rapid
deployment of anticipated major projects or for other
15
reasons. Decisions by such customers to reduce their inventory levels have led
and could lead to reductions in purchases from us. These reductions, in turn,
have and could cause fluctuations in our operating results and have had and
could have caused an adverse effect on our business, financial condition and
results of operations in periods in which the inventory is reduced.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND MAY FAIL TO MEET
OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, CAUSING OUR
STOCK PRICE TO DECLINE.
Our revenues and operating results will vary significantly from quarter to
quarter and year to year due to a number of factors, many of which are outside
of our control and any of which may cause our stock price to fluctuate. Some of
the factors that may affect us include changes in market demand for our optical
networking products, the cost and availability of components used in our
products, the timing and amount of customer orders, the length and
unpredictability of the sales and deployment cycles of our products, the timing
of new product introductions and enhancements by our competitors and ourselves,
changes in our pricing or the pricing of our competitors, our ability to attain
and maintain production volumes and quality levels of our products, and general
economic conditions as well as those specific to the telecommunications and
related industries.
IF WE ARE UNABLE TO COMPLY WITH REGULATIONS AFFECTING OUR CUSTOMERS' INDUSTRIES,
OUR REVENUES MAY BE SERIOUSLY HARMED.
Our customers are involved in industries that are subject to extensive
regulation by domestic and foreign governments. If we fail to conform our
products to these regulatory requirements, we could lose sales and our business
could be seriously harmed. Additionally, any failure of our products to comply
with relevant regulations could delay their introduction and require costly and
time-consuming engineering changes.
THE TIME THAT OUR CUSTOMERS AND POTENTIAL CUSTOMERS REQUIRE FOR TESTING AND
QUALIFICATION BEFORE PURCHASING OUR PRODUCTS CAN BE LONG AND VARIABLE, AND MAY
REQUIRE US TO INVEST SIGNIFICANT RESOURCES WITHOUT ANY ASSURANCES OF SALES,
WHICH MAY CAUSE OUR RESULTS OF OPERATIONS TO BE UNPREDICTABLE.
Before purchasing our products, potential customers typically undertake a
lengthy evaluation, testing and product qualification process. In addition,
potential customers often require time-consuming field trials of our products.
Our sales effort requires the effective demonstration of the benefits of our
products to, and significant training of, potential customers. In addition, even
after deciding to purchase our products, our customers may take several years to
deploy our products. The timing of deployment depends on many factors, including
the sophistication of a customer and the complexity and size of a customer's
networks. Our sales cycle, which is the period from the time a sales lead is
generated until the recognition of revenue, can often be longer than one year.
The length and variability of our sales cycle is influenced by a variety of
factors beyond our control, including our customers' buildout and deployment
schedules, our customers' access to product purchase financing, our customers'
needs for functional demonstration and field trials, and the manufacturing lead
time for our products. Because our sales cycles are long and variable and may
require us to invest significant resources without any assurances of sales, our
results of operations may be unpredictable.
THE GIGAMUX'r', EPC'TM', TERAMANAGER'TM' AND JUMPSTART'TM' ARE OUR ONLY
CURRENTLY AVAILABLE SIGNIFICANT PRODUCTS, AND IF THEY ARE NOT COMMERCIALLY
SUCCESSFUL, OUR REVENUE WILL NOT GROW AND WE MAY NOT ACHIEVE PROFITABILITY.
If our customers and potential customers do not adopt, purchase and
successfully deploy our GigaMux'r', EPC'TM', TeraManager and JumpStart products
in large numbers, our revenue may not grow and our business, financial condition
and results of operations will be seriously harmed. Because the market for our
products is relatively new, future demand for our products is uncertain and will
depend on the speed of adoption of optical networking, in general, and optical
equipment in metro and regional networks, in particular.
16
IF WE ARE NOT ABLE TO DEVELOP AND COMMERCIALIZE NEW OR ENHANCED PRODUCTS, OUR
OPERATING RESULTS AND COMPETITIVE POSITION WILL BE SERIOUSLY HARMED.
Our growth depends on our ability to successfully fund and develop new and
enhanced products. The development of new or enhanced products is a costly,
complex and uncertain process that requires us to anticipate accurately future
technological and market trends. Our next generation of transport and network
management products, as well as our TeraMatrix'TM' line of wavelength switching
products, is currently under development. We cannot be sure whether these or
other new products will be successfully developed and introduced to the market
on a timely basis, or at all. We will need to complete each of the following
steps to successfully commercialize these and any other new products, complete
product development, qualify and establish component suppliers, validate
manufacturing methods, conduct extensive quality assurance and reliability
testing, complete software validation, and demonstrate systems interoperability.
Each of these steps presents serious risks of failure, rework or delay, any
one of which could adversely affect the rate at which we are able to introduce
and market our products. If we do not develop these products in a timely manner,
our competitive position and financial condition could be adversely affected.
In addition, as we introduce new or enhanced products, we must also manage
the transition from older products to newer products. If we fail to do so, we
may disrupt customer ordering patterns or may not be able to ensure that
adequate supplies of new products can be delivered to meet anticipated customer
demand. Any failure to effectively manage this transition may cause us to lose
current and prospective customers.
IF OUR PRODUCTS DO NOT INTEROPERATE WITH OUR CUSTOMERS' NETWORKS, INSTALLATIONS
WILL BE DELAYED OR CANCELLED OR OUR PRODUCTS COULD BE RETURNED.
Many of our customers require that we design products to interoperate with
their existing networks, each of which may have different specifications and
utilize a variety of protocols. Our customers' networks contain multiple
generations of products that have been added over time as these networks have
grown and evolved. Our products must interoperate with all of the products
within these networks as well as future products in order to meet our customers'
requirements. If we are required to modify our product design to be compatible
with our customers' systems to achieve a sale, it may result in a longer sales
cycle, increased research and development expense and reduced margins on our
products. If our products do not interoperate with those of our customers'
networks, installations could be delayed, orders for our products could be
cancelled or our products could be returned, any of which could seriously harm
our business.
OUR PRODUCTS MAY HAVE ERRORS OR DEFECTS THAT WE FIND ONLY AFTER DEPLOYMENT,
WHICH COULD SERIOUSLY HARM OUR RELATIONSHIP WITH OUR CUSTOMERS AND OUR
REPUTATION.
Our customers may discover errors or defects in our products, and our
products may not operate as expected. If we are unable to fix errors or other
problems that may be identified on a timely basis, we could experience losses of
or delays in revenues and loss of market share, loss of customers, failure to
attract new customers or achieve market acceptance, diversion of engineering
resources, increased service and warranty costs, and legal actions by our
customers. Any failure of our current or planned products to operate as expected
could delay or prevent their adoption and seriously harm our relationship with
our customers and our reputation.
WE DEPEND UPON CONTRACT MANUFACTURERS AND ANY DISRUPTION IN THESE RELATIONSHIPS
MAY CAUSE US TO FAIL TO MEET THE DEMANDS OF OUR CUSTOMERS AND DAMAGE OUR
CUSTOMER RELATIONSHIPS.
We use contract manufacturers to manufacture and assemble some of our
products in accordance with our specifications. We currently have three
U.S.-based contract manufacturers. We do not have long-term contracts with any
of them, and none of them is obligated to perform services for us for any
specific period or at any specified price, except as may be provided in a
particular purchase order. We may not be able to effectively manage our
relationships with these
17
manufacturers and they may not meet our future requirements for timely delivery
or provide us with the quality of products that we and our customers require.
Each of our contract manufacturers also builds products for other companies.
We cannot be certain that they will always have sufficient quantities of
inventory available to fill our orders, or that they will allocate their
internal resources to fill these orders on a timely basis. Qualifying a new
contract manufacturer and commencing volume production is expensive and time
consuming and could result in a significant interruption in the supply of our
products. If we are required to change contract manufacturers, we may suffer
delays that could lead to the loss of revenue and damage our customer
relationships.
WE RELY ON A LIMITED NUMBER OF SUPPLIERS AND SINGLE SUPPLIERS FOR SOME OF OUR
COMPONENTS, AND OUR SALES AND OPERATING RESULTS MAY BE SERIOUSLY HARMED IF OUR
SUPPLY OF ANY OF THESE COMPONENTS IS DISRUPTED.
We and our contract manufacturers currently purchase several key components
of our products from single and limited sources. We purchase each of these
components on a purchase order basis and have no long-term contracts for these
components. In the event of a disruption in supply or if we receive an
unexpectedly high level of purchase orders, we may not be able to develop an
alternate source in a timely manner or at favorable prices. Any of these events
could hurt our ability to deliver our products to our customers and negatively
affect our operating margins. In addition, our reliance on our suppliers exposes
us to potential supplier production difficulties or quality variations. Any such
disruption in supply would seriously affect our present and future sales.
WE EXPECT THE AVERAGE SELLING PRICES OF OUR PRODUCTS TO DECLINE, WHICH MAY
REDUCE GROSS MARGINS AND REVENUE.
Our industry has experienced significant erosion of average product selling
prices. We anticipate that the average selling prices of our products will
decline in response to competitive pressures, increased sales discounts, and new
product introductions by our competitors or other factors. Such reduced sales
prices require us to reduce our costs in order to maintain or improve our
existing gross margins. If we are unable to achieve sufficient cost reductions
and increases in sales volumes, the decline in average selling prices will
reduce our gross margins and revenue.
IF WE ARE UNABLE TO HIRE OR RETAIN HIGHLY SKILLED PERSONNEL, WE MAY NOT BE ABLE
TO OPERATE OUR BUSINESS SUCCESSFULLY.
Our future success depends upon the continued services of our key
management, sales and marketing, and engineering personnel, many of whom have
significant industry experience and relationships. Many of our personnel could
be difficult to replace. We do not have 'key person' life insurance policies
covering any of our personnel. The loss of the services of any of our key
personnel could delay the development and introduction of, and negatively impact
our ability to sell, our products. Competition for highly skilled personnel is
intense in our industry, and we may not be able to attract and retain qualified
personnel, which could seriously harm our business.
IF WE BECOME SUBJECT TO UNFAIR HIRING CLAIMS, WE COULD INCUR SUBSTANTIAL COSTS
IN DEFENDING OURSELVES.
Companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring practices.
We cannot assure you that we will not receive claims of this kind in the future
as we seek to hire qualified personnel or that those claims will not result in
material litigation. We could incur substantial costs in defending ourselves or
our employees against such claims, regardless of their merits. In addition,
defending ourselves from such claims could divert the attention of our
management away from our operations.
18
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH COULD LIMIT OUR
ABILITY TO COMPETE.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We also enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to, and distribution of,
our software, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. Monitoring
unauthorized use of our products is difficult, and we cannot be certain that the
steps we have taken will prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. If competitors gain access to our
technology, our ability to compete could be harmed.
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD SERIOUSLY HARM OUR BUSINESS AND REQUIRE US TO INCUR SIGNIFICANT
COSTS.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We may be a party to
litigation in the future to protect our intellectual property or as a result of
an allegation that we infringe upon others' intellectual property rights. Any
parties asserting that our products infringe upon their proprietary rights would
force us to defend ourselves and possibly our customers or manufacturers against
the alleged infringement. These claims and any resulting lawsuits, if
successful, could subject us to significant liability for damages and
invalidation of our proprietary rights. Additionally, any claims and lawsuits,
regardless of their merits, would likely be time-consuming and expensive to
resolve and would divert management time and attention.
Any claims of infringement on the intellectual property rights of others
could also force us to do one or more of the following: stop selling,
incorporating or using our products that use the challenged intellectual
property, obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which may not be available to us
on reasonable terms, or at all, or redesign those products that use such
technology. If we are forced to take any of the foregoing actions, our business
may be seriously harmed. However, we intend to vigorously protect our
intellectual property against all material challenges.
IF NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY ARE NOT AVAILABLE TO US OR ARE
VERY EXPENSIVE, OUR PRODUCTS COULD BECOME OBSOLETE.
We have been licensing, and may be required to, license technology from
third parties to develop new products or product enhancements. We cannot assure
you that third-party licenses will be available to us on commercially reasonable
terms, if at all. If we are required to obtain any third-party licenses to
develop new products and product enhancements, we could be required to obtain
substitute technology, which could result in lower performance or greater cost,
either of which could seriously harm the competitiveness of our products.
Our international operations are subject to a number of risks, including
changes in foreign government regulations and telecommunications standards,
import and export license requirements, tariffs, taxes and other trade barriers,
fluctuations in currency exchange rates, difficulty in collecting accounts
receivable, the burden of complying with a wide variety of foreign laws,
treaties and technical standards, difficulty in staffing and managing foreign
operations, and political and economic instability.
The majority of our sales and expenses have been denominated in U.S.
dollars. However, in the future a larger portion of our sales and expenses may
be denominated in non-U.S. currencies. As a result, currency fluctuations
between the U.S. dollar and the currencies in which we do business could cause
foreign currency translation gains or losses that we would recognize in the
period incurred. We cannot predict the effect of exchange rate fluctuations on
our future operating results because of the number of currencies involved, the
variability of currency exposure and the potential volatility of currency
exchange rates. We do not currently engage in foreign exchange hedging
transactions to manage our foreign currency exposure.
19
IF WE DO NOT EFFECTIVELY MANAGE OUR GROWTH, WE MAY NOT BE ABLE TO SUCCESSFULLY
EXPAND OUR BUSINESS.
Our business has experienced wide fluctuations in sales volume from quarter
to quarter, which places a significant strain on our management systems and
resources. Our ability to successfully offer our products and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We will need to continue to improve our financial,
managerial and manufacturing processes and reporting systems, and will need to
continue to expand, train and manage our workforce worldwide. If we fail to
effectively manage our growth and address the above requirements, our ability to
pursue business opportunities and expand our business could be harmed.
OUR STOCK PRICE MAY BE VOLATILE WHICH MAY AFFECT YOUR ABILITY TO SELL SHARES AT
OR ABOVE THE OFFERING PRICE OR RESULT IN SECURITIES LITIGATION AGAINST US.
The stock market in general, the Nasdaq Stock Market and the stock of
optical networking companies in particular, have experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to a
company's operating performance. We expect the price of our common stock to
fluctuate. The offering price may not be indicative of the prices that will
prevail in the public market after the offering. The trading price of our common
stock could fluctuate in response to factors including those described elsewhere
in this prospectus and:
General market and economic conditions;
Announcements of technological innovations or new products;
Publicity regarding actual or potential results with respect
to technologies or products under development; and
Other events or factors, many of which are beyond our control
These broad market and industry factors may cause our stock price to
decline, regardless of our actual operating performance. In the past, following
periods of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against that company.
Securities class-action litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources, which would harm
our profitability.
20
THE OFFERING
Shares of Common Stock Offered............... 15,000,000 shares of common stock.
Use of Proceeds.............................. We do not own any of the shares being
registered hereunder and so we will not
receive any cash proceeds from the sale of
the shares.
Nasdaq Symbol................................ FIBR
USE OF PROCEEDS
We do not own any of the shares offered hereunder and we will not receive
any cash proceeds from their sale. In consideration for our issuing the shares
of common stock and new 7.5% debentures, our outstanding 9.75% Debentures and
SNI's Series A will be retired and cancelled and will not be reissued. We will
bear the expenses of the restructuring.
SELLING SHAREHOLDERS
We are registering a total of 15,000,000 shares of our common stock,
pursuant to the requirements of the Exchange Agreement and Registration Rights
Agreement we entered into (or into which we will enter) with the holders of our
outstanding 9.75% debentures and SNI's Series A. We are registering for resale
the shares of common stock that will be issued at the closing of the
restructuring transaction, the shares of our common stock that are issuable upon
conversion of the new 7.5% debentures that we will issue as part of the
restructuring transaction, the shares of our common stock that are potentially
issuable as payment of interest or a commitment fee on the new 7.5% debentures,
and shares of our common stock that may be issuable so to prevent dilution in
the event and subject to certain exceptions we issue common stock or securities
convertible or exercisable into our common stock at a price less than the
conversion price of the new 7.5% debentures. Other than the shares covered by
this prospectus, none of the selling shareholders listed below holds more than
one percent (1%) of our common stock and none has ever held any position or
office with us.
21
The following table sets forth information for the shares being registered
hereunder, as of May 22, 2003, and assuming the exchange had closed on that
date, with respect to the shares to be held by the selling shareholders upon
consummation of the exchange. The number of shares of common stock to be offered
for resale by this prospectus by the selling shareholders was determined by the
terms of our agreement with such selling shareholders. All numbers give effect
to the 1-for-20 reverse stock split that became effective October 28, 2002.
PERCENTAGE OF
OUTSTANDING
SHARES OF COMMON COMMON STOCK NUMBER OF NUMBER OF SHARES
STOCK OWNED OWNED PRIOR SHARES TO BE OF COMMON
PRIOR STOCK TO TO OFFERING OFFERED FOR OWNED AFTER
NAME OF SELLING SHAREHOLDER OFFERING (1)(2) (1)(2) SALE(3) OFFERING
--------------------------------- ---------------- ------------- ------------- ----------------
Deutsche Bank AG, London
Branch......................... 1,023,234 7.3% 1,023,234 0
Gryphon Master Fund, L.P......... 409,293 2.9% 409,293 0
ZLP Master Fund, Ltd............. 68,216 .5% 68,216 0
ZLP Master Technology Fund,
Ltd............................ 613,940 4.4% 613,940 0
Societe Generale................. 545,725 3.9% 545,725 0
Jeffrey Thorp IRA, Bear Stearns
Custodian...................... 409,293 2.9% 409,293 0
Crescent International, Ltd...... 163,717 1.2% 163,717 0
Riverview Group, LLC............. 272,862 2.0% 272,862 0
Elliott Associates L.P........... 136,431 1.0% 136,431 0
Langley Partners, L.P............ 409,293 2.9% 409,293 0
Steelhead Investments Ltd........ 341,078 2.4% 341,078 0
Belmarken Holding BV............. 2,049,612 14.3% 2,049,612 0
Telcom -- SNI Investors,
L.L.C.......................... 1,826,382 13.0% 1,826,382 0
Sorrento Holdings, L.L.C......... 791,666 5.6% 791,666 0
General Signal Holdings Company.. 365,384 2.6% 365,384 0
Andersen, Weinroth Capital
Corp........................... 261,500 1.8% 261,500 0
Andersen Weinroth & Co., L.P..... 182,692 1.3% 182,692 0
ASM Investments, L.L.C........... 158,333 1.1% 158,333 0
Fisher Capital Partners.......... 121,795 .9% 121,795 0
Six Rivers Group, Ltd............ 121,795 .9% 121,795 0
Summit Capital Management........ 60,898 .4% 60,898 0
Virgo Cap, Inc................... 60,898 .4% 60,898 0
Renn Zaphiropoulos............... 30,449 .2% 30,449 0
Michael S. Kagnoff............... 12,180 .08% 12,180 0
---------- ----- ---------- --
Total............................ 10,436,666 73.98% 10,436,666 0
---------- ----- ---------- --
---------- ----- ---------- --
---------
(1) Except as otherwise indicated, the number of shares
beneficially owned is determined under rules promulgated by
the SEC, and the information is not necessarily indicative
of beneficial ownership for any other purpose. Each selling
shareholder has sole voting power and investment power with
respect to all shares listed as owned by that selling
shareholder.
(2) In addition to the shares set forth in these columns, we are
registering an additional 4,563,334 shares, which are
potentially issuable as payment of interest or a commitment
fee on the new 7.5% debentures and to prevent dilution in
the event we issue common stock at a price less than the
conversion price of the new 7.5% debentures. As such, these
shares will not be issued on the closing date of the
restructuring transaction.
(3) We do not know when or in what amounts the selling
shareholders will offer shares for sale, if at all. The
selling shareholders may sell any or all of the shares
included in and offered by this prospectus. Because the
selling shareholders may offer all or some of the shares
pursuant to this offering, we cannot estimate the number of
the shares that will be held by the selling shareholders
after completion of the offering. However, for purposes of
this table, we have assumed that, after completion of the
offering, none of the shares included in and covered by this
prospectus will be held by the selling shareholders.
22
SUMMARY OF REGISTRATION RIGHTS AGREEMENT
We believe that the following summary describes the material terms of the
Registration Rights Agreement. We recommend that you carefully read this
agreement in its entirety for a complete description of its terms and
conditions.
REGISTRATION RIGHTS AGREEMENT
As part of the restructuring transaction with the holders of our outstanding
9.75% debentures and Series A Preferred Stock, we will enter into a registration
rights agreement pursuant to which we will agree to file the registration
statement of which this prospectus forms a part with the SEC, which when
declared effective by the SEC, will permit the resale from time to time by the
holders of the shares of our common stock being registered and offered
hereunder.
We will use our reasonable best efforts to keep the registration statement
of which this prospectus forms a part 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 shares
of our common stock that we are required to keep registered for resale.
We may take any action required by any law or regulation that results in the
holders of the shares of our common stock being registered and offered hereunder
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 of which this prospectus forms a
part 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 of which this prospectus forms a
part, 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 selling
shareholders hereunder. This means that, with certain exceptions, at any time
during the period that the registration statement of which this prospectus forms
a part is effective, if we propose to register any shares of our common stock,
we will provide the selling shareholders hereunder with the opportunity to
register all or part of the securities that are registrable pursuant to the
restructuring transaction in that registration statement.
We will seek to have the securities registrable pursuant to the
restructuring transaction 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 of which this
prospectus forms a part is effective, the selling shareholders hereunder may
sell their securities in an underwritten offering, provided that at least
$7.5 million of securities registrable pursuant to the restructuring transaction
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 selling shareholders and, under some circumstances, certain expenses we
incur in connection with a request by the selling shareholders for an
underwritten offering that is withdrawn by them.
PLAN OF DISTRIBUTION
We have been advised that there are currently no underwriting arrangements
with respect to the shares being registered hereunder or of the shares
potentially issuable upon conversion of, or as interest or commitment fees on
the new 7.5% debentures. The selling shareholders may sell all or a portion of
the shares beneficially owned by them and offered hereby from time to time
directly by the selling shareholders, or through one or more underwriters,
broker-dealers or agents
23
who may receive compensation in the form of discounts, concessions or
commissions from the selling shareholders or the purchasers of the shares. If
the shares are sold through underwriters or broker-dealers, the selling
shareholder will be responsible for underwriting discounts or commissions or
agent's commissions. The shares may be sold in one or more transactions at fixed
prices, at prevailing market prices at the time of the sale, at varying prices
determined at the time of sale, or at negotiated prices. These sales may be
effected in transactions, which may involve crosses (crosses are transactions in
which the same broker acts as an agent on both sides of the trade) or block
transactions:
1. on any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of sale,
2. in the over-the-counter market,
3. in transactions otherwise than on these exchanges or services or in the
over-the-counter market,
4. through the writing of options, whether such options are listed on an
options exchange or otherwise, or
5. through the settlement of short sales.
In connection with sales of the common stock or otherwise, the selling
shareholders may enter into hedging transactions with broker-dealers, which may
in turn engage in short sales of the common stock in the course of hedging in
positions they assume. The selling shareholders may also sell shares of common
stock short and deliver shares of common stock covered by this prospectus to
close out short positions, provided that the short sale is made after the
registration statement is declared effective and a copy of this prospectus is
delivered in connection with the short sale. The selling shareholder may also
loan or pledge shares of common stock to broker-dealers that in turn may sell
such shares. If the selling shareholders effect such transactions by selling
shares of common stock to or through underwriters, broker-dealers or agents,
such underwriters, broker-dealers or agents may receive commissions in the form
of discounts, concessions or commissions from the selling shareholders or
commissions from purchasers of the shares of common stock for whom they may act
as agent or to whom they may sell as principal (which discounts, concessions or
commissions as to particular underwriters, broker-dealers or agents may be in
excess of those customary in the types of transactions involved).
The selling shareholders may pledge or grant a security interest in some or
all of the shares of common stock owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell the shares of common stock from time to time pursuant to the
prospectus.
The selling shareholders also may transfer, pledge or donate the shares of
common stock in other circumstances in which case the transferees, donees,
pledgees or other successors in interest will be the selling beneficial owners
for purposes of the prospectus. Upon our being notified by a named selling
shareholder that a donee or a pledgee intends to sell more than 500 shares, we
will file a supplement to this prospectus.
The selling shareholders and any broker-dealer participating in the
distribution of the shares of common stock may be deemed to be 'underwriters'
within the meaning of the Securities Act, and any commissions paid, or any
discounts or concessions allowed to any such broker-dealer may be deemed to be
underwriting commissions or discounts under the Securities Act. At anytime a
particular offer of the securities is made, a revised prospectus or prospectus
supplement, if required, will be distributed, which will disclose:
The name of the selling shareholders and any participating underwriters,
broker-dealers or agents;
The aggregate amount and type of securities being offered;
The price at which the securities were sold and other material terms of the
offering;
24
Any discounts, commissions, concessions or other items constituting
compensation from the selling shareholders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers; and
That the participating broker-dealers did not conduct any investigation to
verify the information in this prospectus or incorporated in this prospectus by
reference.
We cannot assure you that any selling shareholder will sell any or all of
the shares or registered pursuant to the registration statement of which this
prospectus forms a part. Selling shareholders may also sell shares under Rule
144 under the Securities Act, if available, rather than under this prospectus.
Once sold under the registration statement, of which this prospectus forms a
part, the shares of common stock will be freely tradable in the hands of persons
other than our affiliates.
We are required to pay all fees and expenses incident to the registration of
the shares, including fees and disbursements for counsel to the selling
shareholders. Pursuant to the registration rights agreement filed as an exhibit
to the registration statement of which this prospectus forms a part, we will
indemnify the selling shareholders against certain losses, claims, damages and
liabilities, including certain liabilities under the Securities Act.
DESCRIPTION OF OUR COMMON STOCK
Currently, we are authorized to issue 7.5 million shares of common stock,
par value $6.00 per share, and 2 million shares of preferred stock, $0.01 par
value per share. As of May 22, 2003, there are 868,050 shares of common stock
issued and outstanding. Before the closing of the restructuring transaction, we
will reincorporate as a Delaware corporation and will be authorized to issue 150
million shares of common stock, par value $0.001 per share, and 2 million shares
of preferred stock, $0.01 par value per share.
Each share of our common stock has, and after our reincorporation in
Delaware will have, one vote on all matters presented to the shareholders.
Because our common stock does not and will not have cumulative voting rights,
the holders of more than 50% of the shares may, if they choose to do so, elect
all of the directors, and, in that event, the holders of the remaining shares
will not be able to elect any of our directors. The holders of our common stock
are, and after our reincorporation in Delaware will be, entitled to receive
dividends when, as and if declared by our board of directors out of funds
legally available therefor. In the event of our liquidation, dissolution or
winding up, holders of our common stock are, and after our reincorporation in
Delaware will be, 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, and after
our reincorporation in Delaware will have, no conversion, preemptive or other
subscription rights, and there are and will be no redemption provisions
applicable to the common stock. All of the outstanding shares of common stock
are, and the shares of common stock offered hereby when issued against payment
of the consideration set forth in this prospectus, will be, fully paid and
nonassessable.
The registrar and transfer agent for our common stock is American Stock
Transfer & Trust Co., 6201 15th Avenue, 3rd Floor, Brooklyn, New York 11219.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of the registration statement on Form S-3 which we
filed with the SEC under the Securities Act using a 'shelf' registration
process. As permitted by SEC rules, this prospectus does not contain all the
information included in the registration statement and the accompanying exhibits
filed with the SEC. You may refer to the registration statement and its exhibits
for more information.
We are subject to and comply with the informational reporting requirements
of the Securities Exchange Act of 1934. You may read and copy any document we
file with the SEC at the SEC's public reference room at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549 or at its
25
regional offices at: 233 Broadway, New York, New York 10279 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain further
information about the operation of the SEC's public reference room by calling
the SEC at 1-800-SEC-0330. Our filings are also available to the public over the
Internet at the SEC's website at http://www.sec.gov.
The SEC allows us to 'incorporate by reference' into this prospectus the
information we file with the SEC. This means that we may disclose important
information to you by referring you to those documents. The information we
incorporate by reference is considered to be part of this prospectus. If we
subsequently file superseding or updating information with the SEC in a document
that is incorporated by reference into this prospectus, the updated information
will also become a part of this prospectus and will supersede the earlier
information.
We are incorporating by reference into this prospectus the following
documents that we previously filed with the SEC:
Our Annual Report on Form 10-K/A for the fiscal year ended
January 31, 2003.
Our Current Reports on Form 8-K dated March 12 and May 12, 2003.
The description of our common stock contained in our registration
statement on Form S-8, filed with the SEC on March 19, 2002, including
any amendment or report filed for the purpose of updating that
description.
We are also incorporating by reference into this prospectus all documents
that we subsequently file with the SEC under Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date of this prospectus and prior to the
termination of this offering. Any statements made in this prospectus or in a
document incorporated or deemed to be incorporated by reference in this
prospectus will be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained in this prospectus or in any
other subsequently filed document that is also incorporated or deemed to be
incorporated by reference in this prospectus modifies or supersedes the
statement. Any statement so modified or superseded will not be deemed, except as
so modified or superseded, to constitute a part of this prospectus.
You may obtain copies of any of our filings which are incorporated by
reference, at no cost, by contacting us at the following address or telephone
number:
Sorrento Networks Corporation
9990 Mesa Rim Road
San Diego, California 92121
Attention: Joe R. Armstrong
Chief Financial Officer
(858) 558-3960
In order to ensure timely delivery of the documents, your request should be
made no later than five (5) business days prior to the date on which you make
your final investment decision.
FORWARD LOOKING INFORMATION
All statements included or incorporated by reference in this prospectus,
other than statements of historical facts, that address activities, events or
developments that we intend, expect, project, believe or anticipate will or may
occur in the future are forward looking statements. Such statements are
typically characterized by terminology such as 'believe,' 'anticipate,'
'should,' 'intend,' 'plan,' 'will,' 'expect,' 'estimate,' 'project,'
'positioned,' 'strategy,' and similar expressions. These statements are based on
assumptions and assessments made by our management in light of its experience
and its perception of historical trends, current conditions, expected future
developments and other factors our management believes to be appropriate. These
forward looking statements are subject to a number of risks and uncertainties,
including those risks described in
26
this prospectus under 'Risk Factors,' as well as other factors that our
management has not yet identified. Any such forward looking statements are not
guarantees of future performance and actual results, developments and business
decisions may differ from those contemplated by such forward looking statements.
We disclaim any duty to update any forward looking statements.
LEGAL MATTERS
The legality of the shares offered by this prospectus has been passed upon
by Greenbaum, Rowe, Smith, Ravin, Davis & Himmel LLP, Woodbridge, New Jersey.
EXPERTS
The financial statements incorporated by reference in this prospectus have
been audited by BDO Seidman, LLP, independent certified public accountants, to
the extent and for the periods set forth in their reports incorporated by
reference, and are incorporated herein in reliance upon such report given upon
the authority of said firm as experts in auditing and accounting.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in that Act and is
therefore unenforceable.
27
15,000,000 SHARES
SORRENTO NETWORKS CORPORATION
COMMON STOCK
--------------------
PROSPECTUS
--------------------
We have not authorized any dealer, sales person or other person to give any
information or represent anything contained in this prospectus. You must not
rely on any unauthorized information.
This prospectus is not an offer to sell, or a solicitation of an offer to
buy, securities in any jurisdiction where it is unlawful.
The information contained in this prospectus is current as of May 27, 2003
MAY 27, 2003
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The registrant estimates expenses in connection with the offering described
in this Registration Statement will be as follows:
ITEM AMOUNT
---- ------
Securities and Exchange Commission Registration Fee $ 8,348.88
Printing and Engraving Expenses $10,000.00
Accountants' Fees and Expenses $ 8,000.00
Legal Fees and Expenses $25,000.00
Nasdaq Listing Fees $22,500.00
Miscellaneous $ 1,151.12
Total $75,000.00
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's current Certificate of Incorporation permits
indemnification to the fullest extent permitted by New Jersey law, and after
reincorporation in Delaware, the Certificate of Incorporation of the new
Delaware corporation will permit indemnification to the fullest extent permitted
by Delaware law. The bylaws of the Registrant require, and after reincorporation
in Delaware will require, the Registrant to indemnify any person who was or is a
party or is threatened to be made a party to any proceeding, by reason of the
fact that such person was or is a director or officer of the Registrant or that,
being or having been such a director or officer of the Registrant, such person
is or was serving at the request of the Registrant as a director, officer,
employee or agent of another business entity, against expenses, judgments,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in, or not opposed
to, the best interests of the Registrant and, with respect to any criminal third
party proceeding (including any action or investigation which could or does lead
to a criminal third party proceeding) had no reasonable cause to believe such
conduct was unlawful. The Registrant may also indemnify any person who was or is
an authorized representative of the Registrant and who was or is a party or is
threatened to be made a party to any proceeding by reason of the fact that such
person was or is an authorized representative of the Registrant, against
expenses actually and reasonably incurred by such person in connection with the
defense or settlement of such proceeding if such person acted in good faith and
in a manner reasonably believed to be in, or not opposed to, the best interests
of the Registrant, except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged to
be liable to the Registrant unless and only to the extent that the court in
which such corporate proceeding was pending shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such authorized representative is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Such
indemnification is mandatory under the Registrant's by-laws as to expenses
actually and reasonably incurred to the extent that an authorized representative
of the Registrant has been successful on the merits or otherwise in defense of
any third party or corporate proceeding or in defense of any claim, issue or
matter therein. The determination of whether an individual is entitled to
indemnification may be made by a majority of disinterested directors,
independent legal counsel in a written legal opinion or the shareholders.
New Jersey law permits indemnification in connection with a proceeding
brought by or in the right of the Registrant to procure a judgment in its favor.
The Delaware General Corporation Law also authorizes a corporation to indemnify
directors, officers, employees or agents of the corporation if such party acted
in good faith and in a manner he or she reasonably believed to be
II-1
in or not opposed to the best interest of the corporation and, with respect to
any criminal action or proceeding, had no reason to believe his or her conduct
was unlawful, as determined in accordance with the Delaware General Corporation
Law. Delaware law further provides that indemnification shall be provided if the
party in question is successful on the merits otherwise. In addition, the
Delaware General Corporation Law does not permit indemnification in an action or
suit by or in the right of the corporation, where such person has been adjudged
liable to the corporation, unless, and only to the extent that, a court
determines that such person fairly and reasonably is entitled to indemnity for
costs the court deems proper in light of liability adjudication. Indemnity is
mandatory to the extent a claim, issue or matter has been successfully defended.
The Registrant currently maintains a directors and officers liability
insurance policy.
ITEM 16. EXHIBITS.
Exhibit
Number Description of Document
------ -----------------------
3.1 -- Restated Certificate of Incorporation dated June 14, 1988
(A).
3.2 -- Amended and Restated By-Laws of the Registrant (B).
3.6 -- Series D Preferred Stock Certificate of Designation (D).
3.9 -- Certificate of Amendment to the Certificate of
Incorporation dated January 16, 1998 (F).
3.10 -- Amendment to the By-Laws dated January 30, 1998 (F).
3.11 -- Corrected Certificate of Incorporation of Sorrento
Networks, Inc. (P).
3.12 -- Series F Preferred Stock Certificate of Designation (P).
3.13 -- Certificate of Amendment to the Certificate of
Incorporation dated October 25, 2002 (R).
3.14* -- Certificate of Correction to the Certificate of Amendment
to the Certificate of Incorporation dated November 6,
2002.
3.15 -- Form of Certificate of Incorporation of new Delaware
corporation(S).
3.16 -- Form of By-Laws of new Delaware corporation(s).
4.1 -- 1988 Stock Option Plan (G).
4.2 -- Amended and Restated 1997 Incentive and Non-Qualified
Stock Option Plan (F).
4.3 -- 1997 Directors Stock Option Plan (H).
4.4 -- 2000 Stock Incentive Plan (O).
4.5 -- 2000 Employee Stock Purchase Plan (I).
4.6 -- 2000 Stock Option/Stock Issuance Plan of Sorrento
Networks, Inc. (O).
4.7 -- Form of Senior Convertible 9.75% Debenture due August 2,
2004 (P).
4.8 -- Form of Warrant dated August 2, 2001 (P).
4.9 -- Form of 7.5% Convertible Debenture Due August 2, 2007
(S).
4.10 -- Form of Warrant (S).
4.11 -- Sorrento Networks Corporation 2003 Equity Incentive Plan
(S).
5.* -- Opinion of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel LLP.
10.1 -- Line of Credit Agreement with Coast Business Credit dated
May 28, 1995 and Modification dated January 31, 1996 (J).
10.5 -- Agreement dated June 12, 2000 with Par Chadha (N).
10.7 -- Agreement dated May 22, 2000 with Rohit Phansalkar (N).
10.8 -- Agreement dated May 22, 2000 with Christopher E. Sue (N).
10.9 -- Agreement dated August 22, 2000 with Leonard N. Hecht
(O).
10.10 -- Agreement dated May 22, 2000 with John A. Mason (O).
10.11 -- Agreement dated July 12, 2000 with Richard L. Jacobson
(O).
10.12 -- Securities Purchase Agreement dated as of August 1, 2001
(P).
10.13 -- Escrow Agreement dated as of August 1, 2001 (P).
10.14 -- Registration Rights Agreement dated as of August 2, 2001
(P).
10.18 -- Agreement dated March 1, 2002, with Phillip W. Arneson
(Q).
10.19 -- Exchange Agreement dated March 6, 2003 (S).
10.20 -- Form of Registration Rights Agreement with Exchanging
Holders (S).
II-2
Exhibit
Number Description of Document
------ -----------------------
21. -- Subsidiaries of the Registrant (T).
23.1 -- Consent of BDO Seidman LLP -- filed herewith.
23.2* -- Consent of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel
LLP (included in opinion filed as Exhibit 5).
24* -- Power of Attorney.
* Previously filed.
--------------
The foregoing are incorporated by reference from the Registrant's filings
indicated:
(A) Form 10-QSB for quarter ended July 31, 1986
(B) Form 10-K for the year ended January 31, 1988
(C) Form 10-K for year ended January 31, 1993
(D) Form S-3 dated February 25, 1997
(E) Form 10-KSB for year ended January 31, 1997
(F) Proxy Statement dated December 1, 1999
(G) Proxy Statement dated May 13, 1998
(H) Proxy Statement dated November 21, 1997
(I) Proxy Statement dated December 11, 2000
(J) Form 10-KSB for year ended January 31, 1996
(K) Form 8-K dated February 2, 1996
(L) Form 8-K dated September 12, 1996
(M) Form 8-K dated September 23, 1996
(N) Form 10-Q for the quarter ended October 31, 2000
(O) Form 10-K for the year ended January 31, 2001
(P) Form 8-K dated August 2, 2001.
(Q) Form 10-K for the year ended January 31, 2002
(R) Form 8-K dated October 25, 2002.
(S) Proxy Statement filed with the SEC on April 16, 2003.
(T) Form 10-K for the year ended January 31, 2003
NOTE: Certain previously filed exhibits are no longer being incorporated by
reference (and therefore not numerically listed) as the underlying documents
have either expired or are no longer material or relevant.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent
no more than 20 percent change in the maximum aggregate
offering price set forth in 'Calculation of Registration Fee'
table in the effective registration statement; and
II-3
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes to supplement the prospectus,
after the expiration of the subscription period, to set forth the results of the
subscription offer, the transactions by the underwriters during the subscription
period, the amount of unsubscribed securities to be purchased by underwriters,
and the terms of any subsequent reoffering thereof. If any public offering by
the underwriters is to be made on terms differing from those set forth on the
cover page of the prospectus, a post-effective amendment will be filed to set
forth the terms of such offering.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable ground to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California, on the 27th day of
May, 2003.
SORRENTO NETWORKS CORPORATION
By: /s/ PHILLIP W. ARNESON
.................................
PHILLIP W. ARNESON
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PHILLIP W. ARNESON Chief Executive Officer, Chairman, May 27, 2003
......................................... Director
PHILLIP W. ARNESON
/s/ JOE R. ARMSTRONG* Principal Accounting Officer, Chief May 27, 2003
......................................... Financial Officer
JOE R. ARMSTRONG
Director
.........................................
DONNE FISHER
/s/ ROBERT HIBBARD Director May 27, 2003
.........................................
ROBERT HIBBARD
Director
.........................................
GARY M. PARSONS
/s/ LARRY J. MATTHEWS* Director May 27, 2003
.........................................
LARRY J. MATTHEWS
*By: /s/ PHILLIP W. ARNESON
......................................
PHILLIP W. ARNESON
As attorney in fact
II-5
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as ................ 'TM'
The registered trademark symbol shall be expressed as ..... 'r'