SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
August 8, 2003
Date of Report
(Date of earliest event reported)
SORRENTO NETWORKS CORPORATION
(Exact name of Registrant as specified in charter)
DELAWARE
(State or other jurisdiction of incorporation)
0-15810 04-3757586
(Commission File No.) (IRS Employer Identification Number)
9990 Mesa Rim Road
San Diego, California 92121
(Address of Principal Executive Office)
(858) 558-3960
(Registrant's telephone number, including area code)
-------------------------------------------------------------------------------
The purpose of this amendment to the Company's Form 8-K filed with the SEC on
August 22, 2002 is to provide additional information required under Item 7.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On August 8, 2003, we completed our acquisition of LuxN, Inc., pursuant
to an Agreement and Plan of Merger, dated as of June 25, 2003, between Sorrento
and LuxN, a copy of which is attached as Exhibit 2.1 hereto. On August 11, 2003,
we issued a press release announcing the completion of the acquisition, a copy
of which is attached hereto as Exhibit 99.1. At the effective time of the
merger, our wholly-owned subsidiary, Lambda Acquisition Corp., was merged with
and into LuxN, with LuxN being the surviving corporation in the merger.
Pursuant to the Agreement and Plan of Merger, each share of LuxN
common stock outstanding at the effective time of the merger was cancelled.
As consideration for the transaction, holders of LuxN's Series A-1 Preferred
Stock with an aggregate pro-rata portion of $14.8 million of LuxN's net cash
held elected to receive cash at closing, and holders of LuxN's Series A-1
Preferred Stock with an aggregate pro-rata portion of $3.8 million of LuxN's
net cash held elected to receive our common stock at closing. We issued
1,374,194 shares of our common stock to the holders of LuxN's Series A-1
Preferred Stock at the closing, and will issue an additional 505,153 shares
upon receipt of our shareholders' approval. In addition, we issued warrants
to purchase 400,000 of our shares of common stock at an exercise price of
$3.05 per share to the holders of LuxN's Series A-1 Preferred Stock. The
warrants will be held in escrow for a period of six months to satisfy any
successful indemnification claims. We did not assume or exchange any
outstanding options or warrants to purchase shares of LuxN stock.
Pursuant to the terms of the Agreement and Plan of Merger, we will file
a Registration Statement on Form S-3 to enable the resale by the selling
shareholders of the shares of our common stock that were issued as consideration
for the merger.
The consideration paid to holders of LuxN's shareholders was determined
through arms-length negotiations between our board of directors and officers and
those of LuxN.
The foregoing description of the Agreement and Plan of Merger is
qualified in its entirety by reference to the Agreement, a copy of which was
previously filed with the SEC, and incorporated herein by reference.
This report contains forward-looking statements that are based on
current expectations, estimates, forecasts and projections about the industries
in which we operate, our beliefs and our management's assumptions. Words such as
"expects," "anticipates," "targets," "goals," "projects," "intends," "plans,"
"believes," "seeks," "estimates" and variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecast in
such forward-looking statements. For a list and description of such risks and
uncertainties, see the reports filed by Sorrento Networks Corporation with the
Securities and Exchange Commission.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired.
Historical financial statement for LuxN, Inc. consisting of the
financial statements and notes provided on pages F-1 through F-27 of this
amended Report.
1
FINANCIAL STATEMENTS FOR YEARS ENDED JUNE 30, 2003, 2002 AND 2001.
Independent Auditor's Report
Balance Sheets as of June 30, 2003 and 2002
Statements of Operations for the years ended June 30, 2003, 2002
and 2001
Statements of Stockholders' Equity for the years ended June 30,
2003, 2002 and 2001
Statements of Cash Flows for the years ended June 30, 2003, 2002
and 2001
Summary of Business and Significant Accounting Policies
Notes to Financial Statements
(b) Unaudited Pro Forma Financial Information.
Unaudited pro forma financial information relating to the Company and
giving effect to the acquisition is provided on pages F-22 through F-27 of this
amended Report.
SORRENTO NETWORKS CORPORATION PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Pro Forma Consolidated Financial Statements (Unaudited)
(c) Exhibits Description
-------- -----------
2.1 Agreement and Plan of Merger by and between Sorrento
Networks Corporation and LuxN, Inc., dated as of June 25,
2003. Previously filed.
99.1 Press Release dated August 11, 2003. Previously filed.
2
INDEX TO FINANCIAL STATEMENTS
INDEX TO HISTORICAL FINANCIAL STATEMENTS OF LUXN, INC.
PAGE
----
FINANCIAL STATEMENTS FOR YEARS ENDED JUNE 30, 2003, 2002 and 2001
Independent Auditor's Report F-1
Balance Sheets as of June 30, 2003 and 2002 F-2
Statements of Operations for the years ended June 30, 2003, 2002 and 2001 F-4
Statements of Stockholders' Equity for the Years ended June 30, 2003,
2002 and 2001 F-5
Statements of Cash Flows for the years ended June 30,
2003, 2002 and 2001 F-6
Summary of Business and Significant Accounting Policies F-7
Notes to Financial Statements F-7
PRO FORMA CONSOLIDATED FINANCIAL STATEMENT UNAUDITED
Pro Forma Consolidated Balance Sheets as of July 31, 2003 F-24
Pro Forma Consolidated Statements of Operations for the year ended
January 31, 2003 F-25
Pro Forma Consolidated Statements of Operations for the six months
ended July 31, 2003 F-26
Notes to Unaudited Pro Forma Consolidated Financial Statements F-27
3
INDEPENDENT AUDITOR'S REPORT
The Board of Director and Stockholders
LuxN, Inc.:
We have audited the accompanying balance sheets of LuxN, Inc. as of June 30,
2003 and 2002, and the related statements of operations, stockholders' equity
and cash flows for the years then ended. These statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. The financial statements of
LuxN, Inc. for the year ended June 30, 2001 were audited by other auditors,
whose report dated September 5, 2001, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LuxN, Inc. as of June 30, 2003
and 2002, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. As discussed in Note 1 to the
financial statements, the Company has incurred significant losses since its
inception and is dependent on obtaining additional financing in order to fund
its operations. These matters raise substantial doubt about the ability of the
Company to continue as a going concern. Management's plan in regard to these
matters is also described in Note 1. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in Note 1 to the financial statements on August 8, 2003, LuxN, Inc.
was acquired by Sorrento Networks Corporation, pursuant to an Agreement and Plan
of Merger, dated as of June 25, 2003.
/s/ BDO SEIDMAN, LLP
San Jose, California
October 10, 2003
F-1
LUXn, Inc.
BALANCE SHEET
June 30,
-------------------------------
2003 2002
-------------------------------
ASSETS (Note 8)
CURRENT ASSETS:
Cash and cash equivalents $ 3,163,600 $ 1,508,700
Short-term investments (Note 2) 18,446,500 2,305,900
Accounts receivable, net of allowance for doubtful accounts of
$432,300 and $189,000 at June 30, 2003 and 2002 405,200 369,400
Inventories (Note 3) 2,489,900 6,254,700
Deposits 231,200 1,086,900
Prepaid expenses and other current assets 29,000 244,700
----------- --------------
TOTAL CURRENT ASSETS 24,765,400 11,770,300
Property, plant and equipment, net (Note 4) 167,100 1,195,300
Other non-current assets (Notes 2 and 6) 717,500 724,900
----------- --------------
TOTAL ASSETS $25,650,000 $ 13,690,500
=========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 433,400 $ 2,402,700
Accrued expenses (Note 5) 530,300 1,572,000
Deferred revenue 213,500 510,300
Current portion of capital lease obligations (Note 6) 175,100 200,200
Current portion of equipment loans (Note 7) 629,500 2,050,400
Line of credit (Notes 2 and 8) 1,940,400 1,940,400
----------- --------------
TOTAL CURRENT LIABILITIES 3,922,200 8,676,000
Capital lease obligations, net of current portion (Note 6) 177,700 352,800
Equipment loans, net of current portion (Note 7) - 629,500
----------- --------------
TOTAL LIABILITIES 4,099,900 9,658,300
----------- --------------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 12)
STOCKHOLDERS' EQUITY (Note 11)
Series A convertible preferred stock, $0.0001 par value:
Designated shares - 0 in 2003 and 1,660,000 in 2002
Issued and outstanding shares- 0 in 2003 and 1,660,000 in 2002
Aggregate liquidation preference of $0 in 2003 and $830,000 in 2002 - 100
Series B convertible preferred stock, $0.0001 par value:
Designated shares - 0 in 2003 and 8,602,150 in 2002
Issued and outstanding shares- 0 in 2003 and 8,602,150 in 2002
Aggregate liquidation preference of $0 in 2003 and $8,000,000 in 2002 - 900
Series C convertible preferred stock, $0.0001 par value:
Designated shares - 0 in 2003 and 5,750,000 in 2002
F-2
Issued and outstanding shares- 0 in 2003 and 5,750,000 in 2002
Aggregate liquidation preference of $0 in 2003 and $23,000,000 in 2002 - 600
Series D convertible preferred stock, $0.0001 par value:
Designated shares - 0 in 2003 and 4,830,035 in 2002
Issued and outstanding shares- 0 in 2003 and 4,830,035 in 2002
Aggregate liquidation preference of $0 in 2003 and $69,069,500 in 2002 - 500
Series E convertible preferred stock, $0.0001 par value:
Designated shares -0 in 2003 and 7,023,007 in 2002
Issued and outstanding shares- 0 in 2003 and 3,153,845 in 2002
Aggregate liquidation preference of $0 in 2003 and $45,099,984 in 2002 - 300
Series A-1 convertible preferred stock, $0.0001 par value:
Designated shares - 1,600,000,000 in 2003 and 0 in 2002 147,200 -
Issued and outstanding shares- 1,471,645,004 in 2003 and 0 in 2002
Aggregate liquidation preference of $138,153,500 in 2003 and $0 in 2002
Common stock $0.0001 par value
Authorized shares - 2,200,000,000 in 2003 and 50,000,000 in 2002
Issued and outstanding shares - 33,394,076 in 2003, 9,409,230 in 2002 3,300 900
Additional paid-in capital 181,023,700 147,128,300
Note receivable from stockholders (4,500) (183,900)
Unrealized gain (loss) on short-term investments 32,400 (500)
Accumulated deficit (159,652,000) (142,915,000)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 21,550,100 4,032,200
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,650,000 $ 13,690,500
============= =============
See accompanying notes to financial statements.
F-3
LuxN, Inc.
STATEMENTS OF OPERATIONS
Year ended June 30,
2003 2002 2001
------------------ ------------------ -----------------
Revenues $ 2,974,600 $ 7,613,400 $ 8,090,100
Cost of sales 5,334,500 7,595,300 15,767,700
------------ ------------ -----------
Gross Profit (Loss) (2,359,900) 18,100 (7,677,600)
Operating Expenses:
Research and development 8,927,000 21,816,900 33,092,800
Sales and marketing 3,377,600 11,059,200 19,269,800
General and administrative 1,743,900 3,129,200 5,043,400
Restructuring cost and charges related
to property and equipment 10,736,200
------------ ------------ -----------
Total Operating Expenses 14,048,500 46,741,500 57,406,000
------------ ------------ -----------
Operating Loss (16,408,400) (46,723,400) (65,083,600)
Interest Income (Expense), net (328,600) (124,100) 2,304,700
------------ ------------ ------------
Net Loss $(16,737,000) $(46,847,500) $(62,778,900)
============ ============ ============
See accompanying notes to financial statements.
F-4
LuxN, Inc.
Statements of Stockholders' Equity
Convertible
Preferred Stock Common Stock
-----------------------------------------------
Shares Amount Shares Amount
-----------------------------------------------
Balance, June 30, 2000 20,138,176 $2,000 9,755,050 $1,000
Issuance of Series D preferred stock in
July 2000 at $14.30 per share 704,009 100 - -
Issuance of Series E preferred stock in
December 2000 at $14.30 per share,
net of issuance costs of $2,616,100 3,153,845 300 - -
Issuance of common stock to
non employees - - 20,000 -
Exercise of stock options in exchange
for services - - 11,000 -
Exercise of stock options for cash and
notes receivable - - 1,466,464 100
Issuance of notes receivable secured
by common stock - - - -
Repurchase of common stock - - (1,015,300) (100)
Receipt of payments on notes
receivable from stockholders - - - -
Stock options issued to consultants
and other nonemployees - - - -
Components of comprehensive loss - - - -
Unrealized gain on short-term Investments - - - -
Net loss - - - -
Comprehensive loss
--------------------------------------------
Balance, June 30, 2001 23,996,030 2,400 10,237,214 1,000
Exercise of stock options - - 36,476 -
Repurchases of unvested common
stock - - (864,460) (100)
Receipt of payments on notes
receivable from stockholders - - - -
Valuation of options and awards to
consultants and non-employees - - - -
Components of comprehensive loss - - - -
Unrealized loss on short-term
investments - - - -
Net loss - - - -
Comprehensive loss
--------------------------------------------
Balance, June 30, 2002 23,996,030 2,400 9,409,230 900
Conversion of preferred stock
Series A,B,C,D and E (23,996,030) (2,400) 23,996,030 2,400
Issuance of Series A-1 preferred stock
in September 2002 at $0.023469 per share,
net of issuance costs of $456,300 1,471,645,004 147,200 - -
Repurchases of common stock related to
option exercises - - (11,184) -
Receipt of payments on notes receivable
related to option exercises - - - -
Interest on notes receivable related to
option exercises - - - -
Write-Off of notes from stockholders - - - -
Valuation options and awards to
consultants and non-employees - - - -
Valuation for the vesting acceleration of
options - - - -
Components of comprehensive loss - - - -
Unrealized gain on short-term
investments - - - -
Net loss - - - -
Comprehensive loss
--------------------------------------------
Balance, June 30, 2003 1,471,645,004 $147,200 33,394,076 $3,300
============================================
Notes Accumulated
Additional Receivable Other Total
Paid-in From Comprehensive Accumulated Stockholders'
Capital Stockholders Income Deficit Equity
---------------------------------------------------------------------------------
Balance, June 30, 2000 $92,916,600 $ - $ - $(33,288,600) $59,631,000
Issuance of Series D preferred stock in
July 2000 at $14.30 per share 10,067,200 - - - 10,067,300
Issuance of Series E preferred stock in
December 2000 at $14.30 per share,
net of issuance costs of $2,616,100 42,483,600 - - - 42,483,900
Issuance of common stock to
non employees 80,000 - - - 80,000
Exercise of stock options in exchange
for services 22,000 - - - 22,000
Exercise of stock options for cash and
notes receivable 1,963,600 (226,000) - - 1,737,700
Issuance of notes receivable secured
by common stock - (32,000) - - (32,000)
Repurchase of common stock (423,300) - - - (423,400)
Receipt of payments on notes
receivable from stockholders - 36,600 - - 36,600
Stock options issued to consultants
and other nonemployees 350,100 - - - 350,100
Components of comprehensive loss - - - - -
Unrealized gain on short-term Investments - - 96,200 - 96,200
Net loss - - - (62,778,900) (62,778,900)
-----------
Comprehensive loss (62,682,700)
-------------------------------------------------------------------------------------
Balance, June 30, 2001 147,459,800 (221,400) 96,200 (96,067,500) 51,270,500
Exercise of stock options 35,200 - - - 35,200
Repurchases of unvested common
stock (418,600) - - - (418,700)
Receipt of payments on notes
receivable from stockholders - 37,500 - - 37,500
Valuation of options and awards to
consultants and non-employees 51,900 - - - 51,900
Components of comprehensive loss - - - - -
Unrealized loss on short-term
investments - - (96,700) - (96,700)
Net loss - - - (46,847,500) (46,847,500)
------------
Comprehensive loss (46,944,200)
-------------------------------------------------------------------------------------
Balance, June 30, 2002 147,128,300 (183,900) (500) (142,915,000) 4,032,200
Conversion of preferred stock
Series A,B,C,D and E - - - - -
Issuance of Series A-1 preferred stock
in September 2002 at $0.02 per share,
net of issuance costs of $456,300 33,934,900 - - - 34,082,100
Repurchases of common stock related to
option exercises (8,900) - - - (8,900)
Receipt of payments on notes receivable
related to option exercises - 5,600 - - 5,600
Interest on notes receivable related to
option exercises - (4,900) - - (4,900)
Write-Off of notes from stockholders - 178,700 - - 178,700
Valuation options and awards to
consultants and non-employees (30,600) - - - (30,600)
Valuation for the vesting acceleration of
options - - - - -
Components of comprehensive loss - - - - -
Unrealized gain on short-term
investments - - 32,900 - 32,900
Net loss - - - (16,737,000) (16,737,000)
------------
Comprehensive loss (16,704,100)
-------------------------------------------------------------------------------------
Balance, June 30, 2003 $181,023,700 $ (4,500) $ 32,400 $ (159,652,000) $ 21,550,100
====================================================================================
See accompanying notes to financial statements.
F-5
LuxN, Inc
STATEMENTS OF CASH FLOWS
Year ended June 30,
2003 2002 2001
--------------------------------------------------
Cash Flows From Operating Activities
Net loss $ (16,737,000) $ (46,847,500) $ (62,778,900)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,028,200 7,247,700 5,681,000
Stock-based compensation (benefit) expense (30,600) 51,900 372,100
Charges related to property and equipment - 7,108,200 -
Provision for doubtful accounts 243,300 (78,700) 267,700
Provision for excess and obsolete inventories 2,752,400 1,913,100 10,556,300
Interest income on note receivable from
stockholders (4,900) (10,100) -
Write-off of notes receivable from stockholders 178,700 - -
Changes in assets and liabilities:
Accounts receivable (279,100) 2,350,500 (2,909,000)
Inventories 1,012,400 1,206,000 (15,798,400)
Deposits, prepaid and other current assets 1,071,400 (377,100) (405,600)
Other non-current assets 7,400 891,900 (1,434,000)
Accounts payable (1,969,300) (583,800) (1,492,500)
Accrued expenses (1,041,700) (1,623,600) 2,104,800
Deferred Revenue (296,800) (940,800) 1,218,700
-----------------------------------------------
Net Cash Used in Operating Activities (14,065,600) (29,692,300) (64,617,800)
Cash flows from investing activities
Purchases of property and equipment - (1,639,200) (9,377,100)
Proceeds from sale of property and equipment - 63,600 -
Issuance of notes receivable secured by common stock - - (32,000)
Purchases of short-term investments (19,840,100) (4,439,300) (55,554,600)
Proceeds from sale of short-term investments 3,732,400 26,418,400 82,725,900
-----------------------------------------------
Net Cash Provided By (Used in) Investing Activities (16,107,700) 20,403,500 17,762,200
Cash Flows From Financing Activities
Issuance of common stock to non-employees - - 80,000
Proceeds from issuance of preferred stock, net 34,082,100 - 52,551,300
Proceeds from exercise of common stock options and
warrants - 35,200 1,737,700
Repurchase of common stock (8,900) (418,700) (423,400)
Receipt of payments on stockholder notes receivable 5,600 47,600 36,600
Repayment under equipment loans and capital lease
obligations (2,250,600) (1,558,300) (1,160,300)
Borrowings under equipment loans - - 2,012,200
Borrowings under line of credit 1,940,400 1,940,400 -
Repayment under line of credit (1,940,400) - -
-----------------------------------------------
Net Cash Provided By Financing Activities 31,828,200 46,200 54,834,100
Net Increase (Decrease) in Cash and Cash Equivalents 1,654,900 (9,242,600) 7,978,500
Cash and Cash Equivalents, beginning 1,508,700 10,751,300 2,772,800
-----------------------------------------------
Cash and Cash Equivalents, ending $ 3,163,600 $ 1,508,700 $ 10,751,300
===============================================
Supplemental Disclosures of Cash Flow information:
Cash paid for interest $ 544,900 $ 579,400 $ 413,120
Non-cash Investing and Financing Activities
Issuance of common stock in exchange for notes
receivable from stockholders $ - $ - $ 226,000
Equipment purchased under capital leases $ - $ - $ 782,200
Inventory capitalized into property and equipment $ - $ 1,321,700 $ -
See accompanying notes to financial statements.
F-6
LuxN, Inc
NOTES TO AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED June 30, 2003, 2002 and 2001
1. Organization and Significant Accounting Policies
Description of Business
LuxN, Inc. (the "Company") was incorporated in California on June 18,
1998, and reincorporated in Delaware on April 20, 2000. The Company develops,
manufactures, and markets optical transport and switching solutions for
metropolitan service providers and enterprise customers.
From inception to June 30, 2000, the Company's principle efforts have
been focused on, raising capital, developing and designing its products and
applications, performing market studies, establishing marketing channels and the
Company's image, and recruiting key personnel. The Company was in the
development stage through June 30, 2000. During 2001, the Company began its
planned principal operations and recorded its first revenues. Although the
Company is no longer considered a development-stage company, the Company is
still subject to risks, including, but not limited to, dependence on key
individuals, competition from substitute products and larger companies, the
successful development and marketing of its products and the ability to obtain
adequate financing to support its long-term development.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities in the normal course of business. The Company has incurred
significant losses since its inception and is dependent on obtaining additional
financing in order to fund its operations. These matters raise substantial doubt
about the ability of the Company to continue as a going concern. Beginning in
April 2002, the bankruptcy and near-insolvency of several of the Company's
customers, due to the continued slow down in the telecommunication market,
caused management to begin to take corrective action to significantly decrease
cash burn and determine the best course of action to maintain and enhance the
value of the Company. In this regards, management implemented, in October 2002,
an acquisition strategy pursuant to which it has been seeking to identify an
appropriate entity with which to merge. During fiscal 2003, the Company raised
$34.5 million from the issuance of Series A-1 convertible preferred stock.
Management expects to incur additional losses through fiscal 2004, and it
recognizes the need to utilize some or all of its available financing resources
as of June 30, 2003 to fund its cash requirements in fiscal 2004. The financial
statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern.
Current Developments
On August 8, 2003, LuxN, Inc was acquired by Sorrento Networks
Corporation ("Sorrento"), pursuant to an Agreement and Plan of Merger ("the
Agreement"), dated as of June 25, 2003.
At the effective time of the merger, Lambada Acquisition Corp, a
wholly-owned subsidiary of Sorrento, was merged with and into LuxN, Inc., with
LuxN, Inc. being the surviving corporation in the merger.
Pursuant to the Agreement, each share of the Company's common stock
outstanding at the effective time of the merger was cancelled. As consideration
for the transaction, holders of the Company's Series A-1 convertible preferred
stock with an aggregate pro rata portion of $14.75 million of the Company's net
cash held elected to receive cash at closing, and holders of the Company's
Series A-1 convertible preferred stock with an aggregate pro rata portion of 3.8
million of the Company's net cash held elected to receive common stock of
Sorrento at closing. Sorrento issued 1,374,194 shares of its common stock to the
holders of the Company's Series A-1 convertible preferred stock at the closing,
and will issue an additional 505,153 shares upon receipt of its shareholders'
approval. In addition, Sorrento issued warrants to purchase 400,000 of its
shares of common stock at an exercise price of $3.05 per share to the holders of
the Company's Series A-1 convertible preferred
F-7
stock. The warrants will be held in escrow for a period of 6 months to satisfy
any successful indemnification claims. Sorrento did not assume or exchange any
outstanding options or warrants to purchase shares of the Company's stock.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from those
estimates.
Concentrations of Credit Risks
Financial instruments that potentially subject the Company to
concentrations of risk are cash and cash equivalents, short-term investments and
accounts receivable. The Company reduces risk on financial instruments by
maintaining its cash and cash equivalents with two major U.S. financial
institutions and by limiting its short-term investments to certificates of
deposit and U.S. government agency securities.
Exposure to credit risk on accounts receivable is controlled through
credit approvals, credit limits, and continuous monitoring procedures. As of
June 30, 2003 and 2002, two customers accounted for 76% and 61%, respectively of
net accounts receivable. In each year ended June 30, 2003 and 2002, two
customers individually represented greater than 10% of net revenue,
respectively. For the year ended June 30, 2001, no customer individually
represented greater than 10% of net revenue.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less from the date of purchase to be cash
equivalents. Cash equivalents are carried at cost, which approximates fair
value. The Company's cash and cash equivalents are composed of cash deposited in
bank checking and money market accounts.
Short-term Investments
Short-term investments consist of debt securities, and of certificates of
deposit with a bank, with maturity dates not extending beyond two years from the
balance sheet date, and are stated at amounts that approximate fair market
value. The Company accounts for the short-term investments in accordance with
Statement of Financial Accounting Standards (SFAS) No.115, Accounting for
Certain Investments in Debt and Equity Securities. Management determines the
appropriate classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. The Company
classifies its short-term investments as available-for-sale. Available-for-sale
investments are recorded at fair value with unrealized gains and losses reported
in the statement of stockholders' equity. The amortized cost of debt securities
is adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income. Interest income is recognized
when earned.
Fair Value of Financial Instruments
The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and certain amounts included in accrued expenses,
approximate fair value because of their short maturities.
F-8
Revenue Recognition
The Company recognizes product revenue at the time of shipment provided
that persuasive evidence of a final agreement exists, there are no uncertainties
regarding customer acceptance, the fee is fixed and determinable and
collectability is reasonably assured. If uncertainties regarding customer
acceptance exist, revenue is deferred and recognized when the uncertainties are
resolved. Revenue from service contracts is deferred and recognized ratably over
the period of the related agreements.
The Company sells its products principally in the United States. For
the years ended June 30, 2003, 2002, and 2001, sales outside the United States
were 13%, 11% and 18%, respectively, of total revenue.
Inventories
Inventories are stated at the lower of cost or market. Cost includes
materials, labor and overhead on a first-in, first-out basis.
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation. Property and equipment are depreciated using the straight-line
method based on estimated useful lives, generally three years. Leasehold
improvements and assets recorded under capital lease arrangements are amortized
using the straight-line method over the lesser of the estimated useful lives of
the assets or the remaining lease terms.
Valuation of Long-Lived Assets
The Company reviews long-lived assets to be held and used for
impairment whenever events or circumstances indicate that the carrying amount of
such assets may not be recoverable. Such events or changes in circumstances
include, but are not limited to, a significant industry downturn, a significant
decline in the market value of the Company, or significant reductions in
projected future cash flows of the operating segment.
Determination of recoverability is based on the sum of the undiscounted
cash flows expected to result from the use of the assets and their eventual
disposition. If the carrying value is not recoverable, an impairment loss is
measured as the amount by which the carrying amount of the assets exceeds the
fair value. Long-lived assets classified as held for sale are measured at the
lower of carrying amount or fair value less cost to sell.
Other Non-current Assets
Other non-current assets are primarily composed of deposits on leased
properties, and certificates of deposit (See Note 2 and 6).
Warranty Reserves
The Company provides a limited warranty of 12 months for its products.
Estimated expenses for warranty obligations are recorded at the time revenue is
recognized.
Research and Development
Research and development costs are composed of salaries, travel,
materials, supplies and contract services and are expensed as incurred.
Stock-Based Compensation
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No.25, Accounting for Stock Issued to
Employees ("APB Opinion No. 25"), as interpreted by Financial Accounting
Standards Board ("FASB") Interpretation No.44 ("FIN 44"), Accounting for Certain
Transactions Involving Stock Compensation, and has adopted the "disclosure only"
alternative described in Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123").
F-9
Stock-Based Compensation (continued)
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS 123 and Emerging Issues Task Force Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services ("EITF 96-18").
The Company has adopted the disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"). In accordance with the
provisions of SFAS 123, the Company applies APB Opinion No. 25, and related
interpretations in accounting for its stock option plan under which no
compensation expense has been recognized in the accompanying statement of
operations. Had compensation expense for the Plan been determined consistent
with SFAS 123, the Company's net loss would have been increase by the pro forma
amounts indicated below:
Year Ended June 30,
2003 2002 2001
-----------------------------------------------------
Net Loss, as reported $(16,737,000) $(46,847,500) $(62,778,900)
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects - 14,000 -
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related effects (399,800) (881,500) (614,900)
----------------------------------------------------
Net loss, pro forma $(17,136,800) $(47,715,000) $(63,393,800)
====================================================
The weighted average fair values of options granted in fiscal years 2003, 2002
and 2001 were $0.0002, $0.18 and $0.70, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants:
Years Ended June 30,
2003 2002 2001
-----------------------------------------------------
Expected dividend yield 0% 0% 0%
Risk-free interest rate 3.19% 3.94% - 4.68% 4.88% - 6.15%
Expected life 3 years 5 years 5 years
Volatility 0% 0% 0%
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under
SFAS 109, deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates that will be in effect
when the differences are expected to reverse.
F-10
Comprehensive Income (Loss)
The Company's accumulated other comprehensive income consists of the
accumulated net gains or losses on available-for-sale investments. For the year
ended June 30, 2003, comprehensive loss was $32,900 less than the net loss
because of unrealized gains on available-for-sale short-term investments.
Comprehensive loss exceeded the net loss by $96,700 for the year ended June 30,
2002, because realized gains on the sale of available-for-sale securities that
are included in the determination of the net loss must be deducted from other
comprehensive loss to the extent any unrealized gains had been included in the
determination of other comprehensive loss for a prior period. For the year ended
June 30, 2001, comprehensive loss was $96,200 less than the net loss because of
unrealized gains on available-for-sale short-term investments.
Advertising Expense
The cost of advertising is expensed as incurred. Advertising costs were
$5,300, $190,800, and $1,047,300 in fiscal years 2003, 2002, and 2001,
respectively.
Shipping and Handling Costs
The Company records costs related to shipping and handling in cost of
sales for all periods presented.
Reincorporation
In April 2000, the Company's Board of Directors approved the
reincorporation of the Company in Delaware. Upon reincorporation, the Company
issued new shares with a par value of $0.0001 per share to all convertible
preferred and common stockholders. All convertible preferred and common share
amounts in the accompanying financial statements have been adjusted
retroactively to give effect to this change.
Recent Accounting Pronouncements
In August 2001, the FASB issued Statement of Financial Accounting
Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
("SFAS 144"). SFAS 144 supersedes SFAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and certain
provisions of APB Opinion No. 30, Reporting the results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. SFAS 144 retains the
fundamental provisions of SFAS 121 related to (i) the recognition and
measurement of the impairment of long-lived assets to be held and used, and (ii)
the measurement of long-lived assets to be disposed by sale. It provides more
guidance on estimating cash flows when performing recoverability tests, requires
long-lived assets to be disposed of other than by sale to be classified as held
and used until disposal, and establishes more restrictive criteria to classify
long-lived assets as held for sale. In addition, SFAS 144 supersedes the
accounting and reporting provisions for APB Opinion No. 30 for the disposal of a
segment of a business. However, it retains the basic provisions of APB Opinion
No. 30 to report discontinued operations separately from continuing operations
and extends the reporting of a discontinued operation to a component of an
entity. The Company's adoption of SFAS 144 during its 2003 fiscal year did not
have a material impact on the Company's financial position or results of
operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, Liability Recognition for certain
Employee Termination Benefits and Other Costs to Exit and Activity (including
Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred rather than when the exit or disposal plan is approved. In
addition, SFAS 146 establishes that fair value is the objective for initial
measurement of the liability. SFAS 146 is effective for exit or disposal
activities initiated after June 30, 2003, but early adoption is permitted. The
Company is currently evaluating the adoption date and the impact the adoption
will have on its financial position and results of operations.
F-11
Recent Accounting Pronouncements (continued)
In December 2002, the FASB issues SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure ("SFAS 148"), effective for
fiscal year ending after December 15, 2002. SFAS 148 amends SFAS 123, to provide
alternative methods of transition to the voluntary fair value method of
accounting for stock-based employee compensation. SFAS 148 also amends the
disclosure provisions of SFAS 123 to require that disclosure of the pro forma
effect of using the fair value method of accounting for stock-based employee
compensation be displayed in tabular format within a Company's summary of
significant accounting policies. The disclosure provisions of SFAS 148 are
effective for fiscal years ending after December 5, 2002 and have been
incorporated into these financial statements and accompanying footnotes.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS
150"). This statement affects the classification, measurement and disclosure
requirements of the following three types of freestanding financial instruments:
1) manditorily redeemable shares, which the issuing company is obligated to buy
back with cash or other assets; 2) instruments that do or may require the issuer
to buy back some of its shares in exchange for cash or other assets, which
includes put options and forward purchase contracts; and 3) obligation that can
be settled with shares, the monetary value of which is fixed, tied solely or
predominantly to a variable such as a market index, or varies inversely with the
value of the issuers' shares. In general, SFAS 150 is effective for all
financial statements entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS 150 is not expected to have an impact on the
Company's financial position or disclosures.
2. Short-Term Investments
As of June 2003 and 2002, the Company had approximately $18 million and
$2 million, respectively, in short-term investments.
The Company's short-term investments are classified as
available-for-sales, as the Company intends to sell them as needed for
operations. As of June 30, 2003 and 2002, the carrying value of the short-term
investments held approximates fair value.
As of June 30, 2003, approximately $17 million was placed in U.S.
government obligations, maturing between July 2003 and February 2005, with no
more than $3 million concentrated to any individual debt security. The interest
on these debt securities ranged from 4.5% to 7.125%.
In addition, as of June 30, 2003 and 2002, the Company had placed
approximately $2 million and $3 million, respectively, in certificates of
deposit with a bank. As of June 30, 2003 and 2002, $0.7 million are included in
other non-current assets as these certificates of deposit were placed as
security for capital lease obligations. As of June 30, 2002, the remaining
balances of the certificates of deposits secured the Company's line of credit.
3. Inventories
A summary of inventories as of June 30, 2003 and 2002, follows:
2003 2002
-------------------------------
Raw material $2,096,900 $5,292,400
Work in process 117,300 799,600
Finished goods 275,700 162,700
-------------------------------
$2,489,900 $6,254,700
===============================
F-12
During 2003 and 2002, the Company recorded write-downs of excess and
obsolete inventories of approximately $2.7 million and $1.9 million,
respectively. These additional charges to cost of sales were primarily due to
the significant decrease in forecasted sales.
4. Property and Equipment
As a result of the Company's assessment of the market conditions and
the related effect on its business plan, the Company concluded in fiscal 2002
that indicators of impairment of its long-lived assets were present.
Accordingly, as of June 30, 2002, the Company performed an impairment test of
the carrying of value of its long-lived assets, consisting primarily of property
and equipment in accordance with SFAS 121 Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Based on an
undiscounted cash flow analysis, the cash flows expected to be generated by the
Company's long-lived assets during their estimated remaining useful lives were
not sufficient to recover the net book value of the assets. The Company
estimated, using a valuation report prepared by an independent appraiser, the
estimated fair value of its engineering manufacturing and test equipment. The
Company also estimated the fair value of its office furniture and fixtures,
software and leasehold improvements by obtaining quotations from third-party
sources for comparable assets. Consequently, the Company recorded an impairment
charge of $5.6 million to write the carrying value of its long-lived assets held
for use down to their fair values of approximately $1.2 million as of June 30,
2002.
In addition to the above, the Company recognized a loss of
approximately $1.5 million on the disposal of long-lived assets during its 2002
fiscal year.
A summary of property and equipment as of June 30, 2003 and 2002, follows:
2003 2002
-----------------------------------
Computers and equipment $ 1,046,300 $1,046,300
Office furniture and fixtures 47,100 47,100
Software 6,300 6,300
Leasehold improvements 95,600 95,600
-----------------------------------
1,195,300 1,195,300
-----------------------------------
Less: Accumulated Depreciation
and Amortization (1,028,200) -
-----------------------------------
$ 167,100 $1,195,300
===================================
Included in net property and equipment at June 30, 2003 and 2002, were $0 and
$200 thousand, respectively, of inventory used for customer evaluation purposes.
F-13
5. Accrued Expenses
A summary of accrued expenses as of June 30, 2003 and 2002, follows:
2003 2002
----------------------------
Accrued warranty $144,100 $185,500
Accrued payroll and related benefits 103,900 810,000
Accrued professional fees 75,000 38,000
Accrued sales, use and property tax liabilities 23,200 47,000
Other accrued liabilities 184,100 491,500
----------------------------
$530,300 $1,572,000
============================
6. Capital Lease Obligations
The Company has equipment under capital lease that require payments of
principal and interest as follows:
Fiscal Year Capital Leases
----------- --------------
2004 $ 216,600
2005 102,300
2006 76,700
2007
---------
Total minimum payments 395,600
Less: Amount representing interest (42,800)
---------
Present Value of minimum payments 352,800
Less: Current portion (175,100)
---------
Long-term portion $ 177,700
=========
As of June 30, 2003 and 2002, capital lease obligations are secured by
$717,500 and $707,500, respectively, in certificates of deposit included in
other non-current assets.
In August 2003, the Company paid, $328,400 in full settlement of its
remaining obligations under capitalized leases.
7. Equipment Loans
In May 1999, the Company entered into an agreement with Angel Ventures
LP for a $2.0 million equipment financing facility subject to a 5% facility fee
over the term of the agreement (See Note 13). The facility was secured by the
assets purchased using the borrowings. The interest rate ranged from 6.73% to
6.97%. In connection with the issuance of the debt, the company issued to Angel
Ventures LP a fully vested and immediately exercisable warrant for 60,000 shares
of common stock at an exercise price per share of $0.93. The
F-14
warrant was exercised in September 1999. In December 2002, the Company repaid
its equipment loans with Angel Ventures LP amounting to $410,400 plus accrued
interest of $76,200.
In September 1999, the Company entered into an agreement with a lender
for a $3.0 million equipment financing facility subject to a 5% facility fee
over the term of the agreement. The facility was secured by the assets purchased
using the borrowings. The interest rate was 13.94%. In connection with the
issuance of the debt, the Company issued to this lender a fully vested and
immediately exercisable warrant for 50,000 shares of common stock at an exercise
price per share of $0.10 (see Note 11). During the year ended June 30, 2003, the
Company repaid the outstanding balance on this loan of approximately $1 million
plus interest of $73,600.
In February 2001, The Company entered into an agreement with another
lender for a $3.0 million equipment financing facility. As of June 30, 2003, the
Company has outstanding borrowings of approximately $629,500 under this
agreement. The facility is secured by the assets purchased using the borrowings.
Borrowings are to be repaid in 36 monthly payments of principal and interest
from the date borrowed. The interest rate is 14.23%. In connection with the
issuance of the debt, the Company issued to this lender fully vested and
immediately exercisable warrants for an aggregate of 10,000 shares of common
stock at an exercise price per share of $4.00 (see Note 11).
Principal payments under the equipment loans are as follows for the
years ended June 30:
Years ended June 30, Equipment Loans
----------------------------------------------------
2004 $629,500
Thereafter -
--------
Total principal payments $629,500
========
In August 2003, the Company paid, $601,700 in full settlement of
remaining equipment loans.
8. Lines of Credit
In March 2002, the Company entered into a revolving credit agreement
with a bank for borrowings up to $2.0 million. The credit agreement was secured
by $2.3 million of the Company's assets in the form of certificates of deposit.
As of June 30, 2002, the Company had drawn $1,940,400 against the line of
credit. In December 2002, the Company entered into a new revolving credit
agreement with another bank for borrowings up to $5.0 million and repaid its
existing line of credit. This credit agreement is secured by all of the
Company's assets. Any outstanding borrowing bears interest based on the prime
rate plus 0.5% (4.5% at June 30, 2003). As of June 30, 2003, the Company has
drawn $1,940,400 against the line of credit. This agreement expires in November
2003.
As of June 30, 2003, the Company was in compliance with the financial
covenants under the credit agreement.
In August 2003, the Company paid off the outstanding balance on its
line of credit.
9. Income Taxes
Temporary differences and carry-forward which gave rise to significant
portion of deferred tax assets and liabilities as of June 30, 2003 and 2002 are
as follows:
F-15
2003 2002
----------------------------------
Net operating loss carry-forwards $ 45,381,300 $ 38,129,100
Depreciation and amortization 9,692,800 11,566,400
Inventory reserve 6,110,200 5,051,500
Credit carry-forwards 4,152,600 3,521,900
Reserves not currently deductible 694,700 780,300
Cumulative book to tax differences - -
------------ ------------
Net deferred tax asset 66,031,600 59,049,200
Valuation allowance (66,031,600) (59,049,200)
------------ ------------
Report deferred tax asset $ - $ -
============ ============
Realization of the deferred tax assets is dependent upon future taxable
income, if any, the amount and timing of which are uncertain. Based on the
available objective evidence, management believes it is more likely than not
that the net deferred tax asset will not be fully realizable. Accordingly, the
Company has provided a full valuation allowance against its net deferred tax
asset of June 30, 2003 and 2002.
As of June 30, 2003, the Company had approximately $118 million of
federal and $90 million of state net operating loss carry-forwards available
to reduce future taxable income which will begin to expire in 2018 for federal
and 2010 for state tax purposes, respectively. Under the Tax Reform Act of 1986,
the amounts of benefits from net operating loss carry-forwards may be impaired
or limited if the Company incurs a cumulative ownership change of more than 50%
as defined, over a three year period.
10. Commitments and Contingencies
The Company leases its facilities under non-cancelable operating lease
agreements. During the year ended June 30, 2003, certain of these agreements
expired and were not extended by the Company. The remaining operating lease
agreements expire on December 31, 2003. Rent expense under the agreements was
approximately $1.3 million, $6.9 million and $4.1 million for the years ended
June 30, 2003, 2002 and 2001, respectively. Minimum future lease payments under
the agreements are approximately $209,600 for fiscal year 2004.
The Company is involved in various legal proceedings arising in the
ordinary course of its business. Although occasional adverse decisions or
settlements may occur, management believes that the final disposition of such
matters will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
F-16
11. Stockholders' Equity
Increase in Authorized Shares
On September 16, 2002, the Company filed an amendment to its Amended and
Restated Certificate of Incorporation with the Secretary of State of Delaware
that increased the number of shares of authorized common stock from 50 million
to 2.2 billion and the number of shares of authorized preferred stock from
27,865,192 to 1.6 billion. A principal purpose for authorizing the additional
shares was for issuance pursuant to arrangements to finance the Company's
continuing operations.
Convertible Preferred Stock
As of June 30, 2002, the Company had 23,996,030 shares of convertible
preferred stock issued and outstanding in the following Series: 1,660,000 shares
of Series A convertible preferred stock, 8,602,150 shares of Series B
convertible preferred stock, 5,750,000 shares of Series C convertible preferred
stock, 4,830,035 shares of Series D convertible preferred stock and 3,153,845
shares of Series E convertible preferred stock.
On September 16, 2002, the Company completed a Series A-1 convertible
preferred stock financing. The Company issued 1,471,645,004 shares at $0.023469
per share (the "Original Issue Price") for total gross proceeds of $34.5
million. In connection with the issuance of the Series A-1 convertible preferred
stock, all outstanding shares of Series A, B, C, D and E convertible preferred
stock and related warrants were converted to 23,996,030 shares of common stock.
The significant rights, restrictions and preferences of convertible
preferred stock are as follows:
o Each share of Series A-1 convertible preferred stock is
convertible at the right and option of the stockholder, into one
share of common stock. The conversion ratio is subject to
adjustment in the event of stock splits and stock dividends. In
addition, the conversion ratio is subject to adjustment in the
event of a dilutive issuance, or the issuance of additional
securities at a price less than the Original Issue Price.
o Each stockholder of Series A-1 convertible preferred stock is
entitled to the number of votes equal to the number of shares of
common stock into which the preferred stock can be converted.
o Each stockholder of Series A-1 convertible preferred stock is
entitled to receive annual dividends at the rates of 8% of the
Original Issue Price per share when and if declared by the Board
of Directors, prior to payment of dividends on common stock.
Dividends are non-cumulative, and no dividends have been declared
to date.
o In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, each stockholder of
Series A-1 convertible preferred stock shall be entitled to
receive, prior and in preference to any distribution of any
assets or surplus funds to the holders of common stock, an amount
equal to four times the Original Issue Price, approximately $0.09
per share, plus declared but unpaid dividends (if any). If the
full amount is not available for distribution, amounts shall be
paid out to proportion to the aggregate preferential amounts
owed.
o Each share of Series A-1 convertible preferred stock is
convertible into one share of common stock in the event of an
underwritten public offering of the Company's common stock with
aggregate proceeds to the Company in excess of $40,000,000 and a
public offering price of at least the Original Issue Price per
share.
F-17
Common Stock
As of June 30, 2003, the Company has reserved the following shares of
authorized but unissued common stock:
Conversion of outstanding Series A-1 preferred stock 1,471,645,004
1999 Equity Incentive Plan 804,600
2001 Equity Incentive Plan 4,976,424
2002 Equity Incentive Plan 377,988,370
Exercise of stand-alone options 4,000
Exercise of warrants 74,000
-------------
1,855,492,398
=============
Stock Warrants
In May 1999, the Company issued a fully vested and immediately
exercisable warrant to Angel Ventures LP (a related party) to purchase 60,000
shares of common stock for $0.93 per share in connection with an equipment loan.
The warrant was exercised in September 1999. In accordance with EITF 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services, the Company
estimated the fair value of the warrants using the Black-Scholes model with the
following assumptions: risk-free interest rate of 5.87%, a contractual life of 7
years, expected volatility of 80% and no expected dividends. The Company found
the value of the warrant to be $2,400 and has ratably recorded it as interest
expense over the term of the loan. During the years ended June 30, 2003 and
2002, $0 and $400, respectively, was recorded as interest expense.
In September 1999, the Company issued a fully vested and immediately
exercisable warrant to purchase 50,000 shares of common stock for $0.10 per
share in connection with an equipment loan. The warrant expires in September
2006. In accordance with EITF 96-18, the Company estimated the fair value of the
warrant using the Black-Scholes model with the following assumptions: risk-free
interest rate of 6.19%, a contractual life of 7 years, expected volatility of
80% and no expected dividends. The Company found the value of the warrant to be
$3,800 and has ratably recorded it as interest expense over the term of the
loan. During the years ended June 30, 2003 and 2002, $900 and $1,100,
respectively, was recorded as interest expense.
In January 2001, the Company issued a fully vested and immediately
exercisable warrant to purchase 14,000 shares of Series E preferred stock for
$14.30 per share in connection with a revolving credit facility. In conjunction
with the Series A-1 convertible preferred stock financing in September 2002, the
warrant was converted to purchase shares of common stock. The warrant expires in
January 2006. In accordance with EITF 96-18, the Company estimated the fair
value of the warrant using the Black-Scholes model with the following
assumptions: risk-free interest rate of 4.97%, a contractual life of 5 years,
expected volatility of 80% and no expected dividends. The Company found the
value of the warrant to be $134,900 and has ratably recorded it as interest
expense over the term of the loan. During the years ended June 30, 2003 and
2002, $0 and $78,700, respectively, was recorded as interest expense.
In February 2001, the Company issued a fully vested and immediately
exercisable warrant to purchase 10,000 shares of common stock for $4.00 per
share in connection with the equipment loan. The warrant expires in February
2008. In accordance with EITF 96-18, the Company estimated the fair value of the
warrant using the Black-Scholes model with the following assumptions: risk-free
interest rate of 5.16%, a contractual life of 7 years,
F-18
expected volatility of 80% and no expected dividends. The Company found
the value of the warrant to be $30,400 and has ratably recorded it as
interest expense over the term of the loan. During the years ended June 30,
2003 and 2002, $10,100 and $10,100, respectively, was recorded as interest
expense. As of June 30, 2003, the remaining unamortized portion amount to
$6,800.
Equity Incentive Plans
Under the Company's 1998 Equity Incentive Plan (the "1998 Plan") and
1999 Equity Incentive Plan (the "1999 Plan"), adopted in June 1998 and January
1999, respectively, the Board of Directors may grant to employees and
consultants options to purchase the Company's common stock at terms and prices
determined by the Board. Options granted under the 1998 and 1999 plans are
exercisable at such times and under such conditions as determined by the Board
of Directors, but the term of the option and the right of exercise may not
exceed 10 years from the date of the grant. The 1998 Plan was discontinued in
January 1999, and the remaining shares reserved and available for grant were
retired under the 1998 Plan and were utilized under the 1999 Plan. In December
2000, the 1999 Plan was terminated with respect to future grants of stock
options. The 1999 Plan will continue to govern outstanding and unexercised
options previously granted under the 1999 Plan. Upon termination of the 1999
Plan, the 1,137,539 then-remaining shares available for grant were deemed not
available for future grant until authorized under an active stock plan. As of
June 30, 2003, the Company had 804,600 options outstanding under the 1999 plan.
In December 2000, the Company adopted the 2001 Stock Plan (the "2001
Plan"), under which 2,000,000 shares are reserved for issuance. In September
2001, the Company reserved an additional 3,000,000 shares for issuance under
the 2001 Plan. The Board of Directors may grant to employees and consultants
options to purchase the Company's common stock at terms and prices determined
by the Board. Options granted under the 2001 Plan are exercisable at such
times and under such conditions as determined by the Board of Directors,
but term of the option and the right of exercise may not exceed 10 years from
the date of grant. Generally, the stock options are exercisable upon vesting
at 24% on the first anniversary date and ratably at 2% per month until vested
in full. As of June 30, 2003, the Company had 1,821,080 options outstanding
under the 2001 Plan, and 3,155,344 shares available for grant.
In September 2002, the Company adopted the 2002 Stock Plan (the "2002
Plan"), under which 377,988,370 shares are reserved for issuance. The Board of
Directors may grant to employees and consultants options to purchase the
Company's common stock at terms and prices determined by the Board. Options
granted under the 2002 Plan are exercisable at such times and under such
conditions as determined by the Board of Directors, but term of the option and
the right of exercise may not exceed 10 years from the date of grant. Generally,
the stock options should become exercisable at a rate of no less than 20% per
year over 5 years from the date the option are granted. As of June 30, 2003, the
Company had 314,875,885 options outstanding under the 2002 Plan, and 63,112,485
shares available for grant.
F-19
A summary of the status of the Company's stock option plans as of June
30, 2003, 2002 and 2001 and changes during the years then ended is presented
in the following table:
Shares Available for Options Weighted-Average
Grant Outstanding Exercise Price
-------------------------------------------------------------
Balance, June 30, 2000 2,367,925 2,723,813 $1.080
Authorized 2,000,000 - $ -
Granted (4,466,035) 4,466,035 $3.010
Exercised - (1,477,464) $1.340
Canceled - returned to plan 905,164 (905,164) $0.940
Canceled - not returned to plan - (380,160) $1.280
Repurchased 442,800 - $0.450
Termination of 1999 Plan (1,137,539) - $ -
-------------------------------------------------------------
Balance, June 30, 2001 112,315 4,427,060 $2.550
Authorized 3,000,000 - $ -
Granted (3,422,190) 3,422,190 $1.000
Exercised - (36,476) $0.962
Canceled - returned to plan 1,899,691 (1,899,691) $1.877
Canceled - not returned to plan - (1,222,875) $2.491
----------------------------------------------------
Balance, June 30, 2002 1,589,816 4,690,208 $1.718
Authorized 377,988,370 - $ -
Granted (324,249,803) 324,249,803 $0.002
Exercised - - $ -
Canceled - returned to plan 10,939,446 (10,939,446) $0.208
Canceled - not returned to plan - (499,000) $2.527
----------------------------------------------------
Balance, June 30, 2003 66,267,829 317,501,565 $0.016
====================================================
The following table summarized information about stock options
outstanding and exercisable at June 30, 2003:
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
--------------------------------------------------------------------------------------
$0.002 314,875,885 2.43 $0.002 52,847,398 $0.002
$0.100 10,000 5.89 $0.100 10,000 $0.100
$0.400 86,600 6.33 $0.400 86,600 $0.400
$0.500 75,500 6.65 $0.500 75,500 $0.500
$1.000 1,714,420 8.17 $1.000 1,184,729 $1.000
$2.000 105,000 7.05 $2.000 105,000 $2.000
$4.000 634,160 7.41 $4.000 539,690 $4.000
---------------------------------------------------------------------------------
317,501,565 $0.016 54,848,917 $0.068
=================================================================================
Acceleration of Vesting
During fiscal year 2002, the Company accelerated the vesting of options
to purchase 112,216 shares of common stock upon termination of employees. The
Company has recognized compensation expense of approximately $14,000, which was
measured based on the intrinsic value at the date of modification in excess of
the original intrinsic value.
F-20
Common Stock Options to Non-employees
During fiscal year 2002, the Company allowed various consultants and
advisors to continue to vest monthly in their shares after the termination of
their respective relationships with the Company. The additional vested options
were issued under the 1999 and 2001 plans to purchase 34,983 shares of common
stock at exercise prices ranging from $0.10 to $4.00 per share. The Company also
issued fully vested and immediately exercisable nonqualified stock options to
purchase 5,000 shares at a price of $1.00 to a consultant. The fair value of the
awards was calculated using the Black-Scholes valuation method, utilizing a
volatility factor of 0.8, dividend yield of 0%, risk-free interest rates of 3.7%
to 6.0%, and the contractual life of 10 years. Total compensation (benefit)
expense recognized in fiscal years 2003 and 2002 were $(16,800) and $31,600,
respectively.
During fiscal year 2001, the Company issued nonqualified stock options
under the 1999 and 2001 plans to purchase 85,250 shares of common stock at
exercise prices ranging from $1.00 to $4.00 per share to various advisors and
consultants; 45,250 shares were immediately vested and exercisable and 40,000
shares were exercisable upon vesting, which is generally over two years. The
Company also issued a stand-alone nonqualified stock option to purchase 4,000
shares of common stock at $4.00 per share, which vested immediately. The fair
value of the awards was calculated using the Black-Scholes valuation method,
utilizing a volatility factor of 0.8, dividend yield of 0%, risk-free interest
rates of 3.7% to 5.4%, and the contractual life of 10 years. During the years
ended June 30, 2003, 2002 and 2001, the Company recognized compensation
(benefit) expense of $(13,800), $16,800 and $1,100, respectively.
12. 401(k) Plan
Effective February 1999, the Company established a 401(k) retirement
plan for full-time employees and to which it may make discretionary
contributions. No employer matching contributions were made during fiscal years
2003 and 2002.
13. Related-Party Transactions
The Company had an equipment loan with Angel Ventures LP, the general
partner of which is the CEO of the Company. Final payments of principal and of
accrued interest were made during fiscal year 2003 (See Note 7).
14. Restructuring and Charges Related to Property and Equipment
In October 2001, senior management approved a restructuring plan to
exit certain facilities. Lease commitments were subsequently paid out over the
respective lease terms through December 2002. During fiscal 2002, the Company
paid $3.4 million for lease commitments.
Details of the restructuring charge are as follows:
Lease Commitments
--------------------
Restructuring charge $ 3,628,000
Payments during fiscal 2002 (3,446,600)
-----------
Balance as of June 30, 2002 181,400
Restructuring charge --
Payments during fiscal 2003 (181,400)
-----------
Balance as of June 30, 2003 $ -
===========
F-21
(b) Unaudited Pro forma Financial Information
On August 8, 2003 we completed our acquisition of LuxN, Inc., pursuant
to an Agreement and Plan of Merger, dated as of June 25, 2003, between Sorrento
and LuxN, a copy of which is attached as Exhibit 2.1 hereto. On August 11, 2003,
we issued a press release announcing the completion of the acquisition, a copy
of which is attached hereto as Exhibit 99.1. At the effective time of the
merger, our wholly-owned subsidiary, Lambda Acquisition Corp., was merged with
and into LuxN, with LuxN being the surviving corporation in the merger.
Pursuant to the Agreement and Plan of Merger, each share of LuxN common
stock outstanding at the effective time of the merger was cancelled. As
consideration for the transaction, holders of LuxN's Series A-1 Preferred Stock
with an aggregate pro-rata portion of $14.8 million of LuxN's net cash held
elected to receive cash at closing, and holders of LuxN's Series A-1 Preferred
Stock with an aggregate pro-rata portion of $3.8 million of LuxN's net cash held
elected to receive our common stock at closing. We issued 1,374,194 shares of
our common stock to the holders of LuxN's Series A-1 Preferred Stock at the
closing, and will issue an additional 505,153 shares upon receipt of our
shareholders' approval. In addition, we issued warrants to purchase 400,000 of
our shares of common stock at an exercise price of $3.05 per share to the
holders of LuxN's Series A-1 Preferred Stock. The warrants will be held in
escrow for a period of six months to satisfy any successful indemnification
claims. We did not assume or exchange any outstanding options or warrants to
purchase shares of LuxN stock.
Pursuant to the terms of the Agreement and Plan of Merger, we have
filed a Registration Statement on Form S-3 to enable the resale by the selling
shareholders of the shares of our common stock that were issued as consideration
for the merger. The registration statement went effective October 7, 2003.
The consideration paid to holders of LuxN's shareholders was determined
through arms-length negotiations between our board of directors and officers and
those of LuxN.
The foregoing description of the Agreement and Plan of Merger is
qualified in its entirety by reference to the Agreement, a copy of which was
previously filed with the SEC.
The following unaudited pro forma summary presents the consolidated
results of operations as if the merger with LuxN, Inc. had occurred on February
1, 2002. The Consolidated Pro Forma Balance Sheet as of July 31, 2003 includes
the balance sheet of Sorrento Networks at that date and the balance sheet of
LuxN, Inc. as of June 30, 2003. For the six month period ending July 31, 2003,
the information contained in the Consolidated Pro Forma Statements of Operations
include six months of information for Sorrento Networks and five months of
information for LuxN, Inc. This difference in accounting periods is due to the
fiscal year end of LuxN, Inc. of June 30th, and the quarter end of Sorrento
Networks of July 31st. The adjustments shown on the Consolidated Balance Sheets
as of July 31, 2003, are preliminary and are subject to change as the Company
finalizes the accounting for the acquisition. There were no adjustments to the
Statements of Operations for the twelve months ended January 31, 2003 or the six
months ended July 31, 2003.
F-22
These pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of what would have occurred had the merger
been made on February 1, 2002, nor are they indicative of future results. As
a result, the unaudited pro forma net results and pro forma per share amounts
do not purport to represent what Sorrento Networks Corporation results of
operations would have been if the merger with LuxN, Inc. had occurred on
February 1, 2002, and is not intended to project Sorrento Networks Corporation's
results of operations for any future period.
For purchase accounting purposes, the purchase consideration for the
acquisition of LuxN amounted to approximately $18 million consisting of cash
paid and common stock issued. The cash paid was approximately 14.8 million and
was paid to LuxN's Series A-1 Preferred Stockholders who elected to receive
cash in lieu of common stock. The common stock was issued to LuxN shareholders
who elected to exchange their shares of LuxN stock for Sorrento Networks common
stock. The issuance was 1,374,194 shares at a per share price of $2.35 for an
approximate value of $3.2 million. These shares were issued August 8, 2003.
The pro forma presentation excludes the value of the 400,000 warrants
issued in connection with the purchase that are held in escrow until the
expiration of an indemnification period as per the Agreement and Plan of Merger.
When and if the warrants are released from escrow, the value of the warrants
will be recorded as additional purchase price consideration. The $878,280 value
of the 400,000 warrants issued to LuxN shareholders who elected to exchange
their shares of LuxN stock for Sorrento Networks common stock was determined
using the Black Scholes option pricing model based on the following inputs:
Option price of $3.05, estimated life of 5 years, volatility of 168% and no
dividends.
The pro forma presentation excludes the value of the future issuance
of 505,153 shares of Sorrento Networks common stock to the LuxN shareholders who
elected to exchange their shares of LuxN stock for our common stock. The shares
will be issued upon shareholder approval and in return $1.0 million of LuxN cash
held in escrow will be released. The approximate value of these shares is $1.1
million as of the acquisition date based upon a per share price of $2.35 and
will be added to the purchase price when shareholder approval has been granted
and the shares are issued.
The pro forma financial information presented does not reflect for
any value preliminary purchase accounting adjustments assigned to intangible
assets such as trademarks and patents. The Company is in the process of
determining the value of any acquired intangible assets. The Company expects
to complete the valuation of acquired intangible assets in the near future
and will make any necessary adjustments to the purchase price as needed.
The company has recorded contingent consideration of approximately
$1.9 million in connection with the warrants held in escrow and the common
stock issuance awaiting shareholder approval.
F-23
SORRENTO NETWORKS CORPORATION [SORRENTO NETWORKS LOGO]
AND SUBSIDIARIES
CONSOLIDATED PROFORMA BALANCE SHEETS (UNAUDITED)
(In Thousands, except per share amounts)
=============================================================================================================================
July 31, 2003
--------------------------------------------------------
SNC LuxN Adjustments Consolidated
-----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and equivalents $ 5,075 $ 21,610 $ (18,657)(a)(b) $ 8,028
Accounts receivable, net 3,230 405 - 3,635
Inventory, net 12,717 2,490 - 15,207
Prepaid expenses and other current assets 436 260 - 696
Investment in marketable securities 85 - 85
------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 21,543 24,765 (18,657) 27,651
------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 13,849 167 0 14,016
------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Purchased technology, net 225 - 225
Investment in non-marketable securitites 5,025 - 5,025
Other assets 874 718 (718)(c) 874
------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 6,124 718 (718) 6,124
------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 41,516 $ 25,650 $(19,375) $ 47,791
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long term debt 176 2,745 (2,745)(d) 176
Accounts payable 2,849 433 - 3,282
Deferred revenue 349 214 - 563
Accrued liabilities and other current liabilities 8,341 530 1,871 (j) 10,742
------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 11,715 3,922 (874) 14,763
------------------------------------------------------------------------------------------------------------------------------
Long-term debt and capital lease obligations 3,563 178 (178)(d) 3,563
Debentures payable, net of unamortized costs and discounts 13,100 - 13,100
------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 28,378 4,100 (1,052) 31,426
------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; liquidation preference $1,353 1 147 (147)(e) 1
Common stock, $.001 par value; 150,000,000 shares authorized;
8,042,849 shares issued 8,042,405 shares outstanding at
July 31, 2003; 2,260,688 shares issued and 2,260,244
shares outstanding at January 31, 2003; 2,274,194 shares
potentially issueable to LuxN stockholders 9 3 (3)(f)(g) 9
Additional paid-in capital 194,269 181,020 (177,793)(e)(f)(g) 197,496
Accumulated deficit (181,243) (159,652) 159,652 (h) (181,243)
Accumulated other compreshensive income 171 32 (32)(i) 171
Treasury stock, at cost; 444 shares at July 31, 2003 and
January 31, 2003, respectively (69) - (69)
------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 13,138 21,550 (18,323) 16,365
------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,516 $ 25,650 $ (19,375) $ 47,791
==============================================================================================================================
F-24
SORRENTO NETWORKS CORPORATION [SORRENTO NETWORKS LOGO]
AND SUBSIDIARIES
CONSOLIDATED PROFORMA STATEMENTS OF OPERATIONS (UNAUDITED)
(In Thousands, except per share amounts)
================================================================================================================
Twelve Months Ended January 31, 2003
---------------------------------------------------
SNC LuxN Adjustment Consolidated
----------------------------------------------------------------------------------------------------------------
NET SALES $ 25,137 $ 3,958 $ 29,095
COST OF SALES 21,817 2,812 24,629
----------------------------------------------------------------------------------------------------------------
GROSS PROFIT 3,320 1,146 - 4,466
----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling and marketing 12,021 5,702 17,723
Engineering, research and development 8,990 14,832 23,822
General and administrative 13,638 7,579 21,217
----------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 34,649 28,113 - 62,762
----------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (31,329) (26,967) - (58,296)
----------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSES)
Investment income 275 275
Interest expense (9,619) (358) (9,977)
Other income (Expenses) 214 214
Gain on sale of marketable securities 14,249 14,249
----------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSES) 5,119 (358) - 4,761
----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX (26,210) (27,325) (53,535)
PROVISION FOR INCOME TAXES - - -
----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (26,210) $ (27,325) - $ (53,535)
================================================================================================================
EARNINGS (LOSS) PER SHARE:
BASIC WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,161,601 2,161,601 2,161,601
----------------------------------------------------------------------------------------------------------------
BASIC NET INCOME (LOSS) PER COMMON SHARE $ (12.13) $ (12.64) - $ (24.77)
================================================================================================================
DILUTIVE EARNINGS (LOSS) PER SHARE:
BASIC WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,384,902 2,384,902 2,384,902
----------------------------------------------------------------------------------------------------------------
BASIC NET INCOME (LOSS) PER COMMON SHARE $ (12.13) $ (12.64) - $ (24.77)
================================================================================================================
F-25
SORRENTO NETWORKS CORPORATION [SORRENTO NETWORKS LOGO]
AND SUBSIDIARIES
CONSOLIDATED PROFORMA STATEMENTS OF OPERATIONS (UNAUDITED)
(In Thousands, except per share amounts)
====================================================================================================================
Six Months Ended July 31, 2003
--------------------------------------------------
SNC LuxN Adjustments Consolidated
--------------------------------------------------------------------------------------------------------------------
NET SALES $ 12,337 $ 1,462 $ 13,799
COST OF SALES 9,020 4,006 13,026
--------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 3,317 (2,544) - 773
--------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling and marketing 4,066 957 5,023
Engineering, research and development 3,194 1,418 4,612
General and administrative 3,768 752 4,520
--------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 11,028 3,127 - 14,155
--------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (7,711) (5,671) - (13,382)
--------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSES)
Investment income 8 8
Interest expense (3,804) (201) (4,005)
Other income (Expenses) 13,773 13,773
Gain on sale of marketable securities 4,026 4,026
--------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSES) 14,003 (201) - 13,802
--------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX 6,292 (5,872) - 420
PROVISION FOR INCOME TAXES - - - -
--------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 6,292 $ (5,872) - $ 420
====================================================================================================================
EARNINGS (LOSS) PER SHARE:
BASIC WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 3,418,696 3,418,696 3,418,696
--------------------------------------------------------------------------------------------------------------------
BASIC NET INCOME (LOSS) PER COMMON SHARE $ 1.84 $ (1.72) - $ 0.12
====================================================================================================================
DILUTIVE EARNINGS (LOSS) PER SHARE:
DILUTIVE WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 5,554,037 5,554,037 5,554,037
--------------------------------------------------------------------------------------------------------------------
DILUTIVE NET INCOME (LOSS) PER COMMON SHARE $ 1.16 $ (1.06) - $ 0.10
====================================================================================================================
F-26
Notes to Unaudited Pro Forma Consolidated Financial Statements:
(a) To record $14.8 million cash consideration to LuxN's Series A-1 Preferred
shareholders who elected to receive cash at closing and restricted cash of
$1.0 million.
(b) To reduce the June 30, 2003 cash balance by $2.9 million which represents
the amount of cash used for debt reduction per the agreement and plan of
merger.
(c) To record reduction of other assets by the amount of a collaterized
certificate of deposit in the amount of $718 thousand used to extinguish
debt obligations per the agreement and plan of merger.
(d) To record elimination of debt relating to equipment leases and a bank line
of credit in the amount of $2.9 million in accordance with the agreement
and plan of merger.
(e) To eliminate LuxN Series-A Preferred Stock in accordance with purchase
accounting rules.
(f) To eliminate LuxN Common Stock in accordance with purchase accounting
rules.
(g) To record the value of the new shares of common stock issued to the LuxN
shareholders who elected to exchange their shares of LuxN stock for
Sorrento Networks common stock. The issuance is approximately 1,374,194
shares at a per share price of $2.35 for an approximate value of $3.2
million. These shares were issued August 8, 2003.
(h) To eliminate $32 thousand of Other Comprehensive Income from the LuxN
Balance Sheet in accordance with purchase accounting rules.
(i) To eliminate LuxN's accumulated deficit from the Balance Sheet at time of
acquisition in accordance with purchase accounting rules.
(j) To record the estimated value of contingent consideration.
F-27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this amended report to be signed on its
behalf by the undersigned hereunto duly authorized.
SORRENTO NETWORKS CORPORATION
DATE: October 21, 2003 By: /s/ Joe R. Armstrong
---------------------
Joe R. Armstrong,
Chief Financial Officer