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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File number: 0-15810
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SORRENTO NETWORKS CORPORATION
(Exact name of Registrant as specified in charter)
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Delaware 04-3757589
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
9990 Mesa Rim Road
San Diego, California 92121
(Address of principal executive offices) (Zip Code)
(858) 558-3960
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 NASDAQ
Title of each class Name of exchange on which registered
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in a definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [_] No [X]
The Registrant's revenues for its most recent fiscal year were $25,462,000
The aggregate market value of voting stock based upon the bid and asks price
held by non-affiliates of the Registrant on July 31, 2003 was $23,429,101.
Number of shares outstanding of the Registrant's only class of common stock as
of March 31, 2004 (the latest practicable date): 16,672,682.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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PART I
Item 1. Business
Introduction
This Annual Report on Form 10-K may contain forward-looking statements that
involve risks and uncertainties. Such statements include, but are not limited
to, statements containing the words "believes, "anticipates," "expects,"
"estimates" and words of similar import. Our actual results could differ
materially from any forward-looking statements, which reflect, management's
opinions only as of the date of this report, as a result of such risks and
uncertainties. We undertake no obligation to revise or publicly release the
results of any revisions to these forward-looking statements. Readers should
carefully review the risk factors set forth below in "Factors That May Affect
Future Results" and in other documents the company files from time to time with
the Securities and Exchange Commission, including its quarterly reports on Form
10-Q.
We are a leading supplier of intelligent optical networking solutions for
access, metropolitan and regional applications worldwide. Our solutions enable
communication carriers and service providers to offer broadband networking
services over their existing optical fiber infrastructure. Our technologies
permit telecommunications service providers to increase fiber capacity and fiber
bandwidth utilization, reduce network costs and complexity over scalable and
efficient networking platforms. Our optical networking systems support a wide
variety of protocols, mixed speeds of traffic and accommodate changing traffic
patterns directly over optical networks.
Our product solutions include optical access, optical transport, and
network management solutions optimized for access, metro and regional markets,
and combine to create powerful, cost-effective, and easy-to-manage optical
networks. Our dense wavelength division multiplexing, or DWDM, and coarse
wavelength division multiplexing, or CWDM, platforms can be used in enterprise,
access, metropolitan and regional network applications. WDM 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 video on demand, storage area networking,
data center fail-over recovery, and internet connectivity applications. Our CWDM
products provide a low cost, entry-level solution that can be used for
enterprise and carrier access applications and that complement our DWDM product
line. Multiplexing is a process that combines a number of lower speed data
streams into one high-speed data stream.
We also have two powerful network management solutions for our CWDM and
DWDM product line. Addressing all key management aspects - fault, configuration,
performance, and security - these systems conform to North American and
international standards and are simple to learn and use. We have a robust,
carrier-class management system that offers broad functionality, including
equipment/facilities management, fault management, performance monitoring,
security control, alarm filtering, and remote download. We also have an
enterprise network management solution that provides an intuitive graphical
interface and covers operations, administration, maintenance, and provisioning
functionality for our DWDM networks.
We currently have an installed base with over 20 communications service
providers and system integrators worldwide, including AT&T Broadband, now
Comcast Corporation, Deutsche Telekom, Cox Communications, Time Warner Telecom,
United Pan-Europe Communications, El Paso Global Networks and Edison Carrier
Solutions.
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.
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Migration of Network Infrastructure
Traditional copper-based and SONET/SDH based telecommunications
infrastructures were originally designed for voice traffic. These
infrastructures do not scale effectively to provide the bandwidth needed to
support the growth in high-speed data traffic. In addition, these
infrastructures need network-wide upgrades in order to accommodate growing
traffic thus resulting in long delays for provisioning new services.
DWDM and CWDM technologies are more flexible, more efficient and more
scalable networking alternatives for meeting the growing demand for bandwidth
and new broadband services. Broadband means technologies or networks that have
the ability to transmit high data rates. DWDM is a sophisticated
opto-electronics technology that uses multiple wavelengths of light very
efficiently to greatly increase the number of video, data or voice channels of
information that can be sent on a single optical fiber. Synchronous Optical
Network, SONET, is a telecom transmission protocol for high-speed transmission
over fiber optic cable, which was introduced by Bell Communications in 1984 and
quickly accepted by American National Standards Institute. SDH stands for
Synchronous Digital Hierarchy, which is transmission protocol for high-speed
transmission over fiber optic cable published in 1988 by the Consultative
Committee for International Telegraph and Telephony. It is a transmission
protocol used outside the United States, mostly in Europe, that is similar to
SONET.
DWDM networks were first deployed in long-haul applications. However,
optical solutions specifically designed to address the challenges faced by
access and metropolitan markets have significantly lagged in deployment.
Accordingly, access and 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:
o 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.
o 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.
o 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
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telecommunications networks. Because access networks must support
the varying demands of end users, these networks tend to be very
complex.
Metropolitan Area Optical Network Opportunity
Although optical technologies are being deployed in long-haul networks to
relieve capacity constraints, these solutions are not specifically designed to
address the issues inherent in metropolitan and regional optical networks. Data
is normally mapped into the voice multiplexing hierarchy for transport over the
long-haul network. Metropolitan optical networks are characterized by varying
traffic patterns and protocols as well as varied topologies and end-user
requirements, making them more complex and difficult to manage than long haul
networks. As a result, service providers have only recently begun to exploit the
benefits of optical technologies in metropolitan optical networks.
The optical networking market has seen a substantial downturn. The metro
WDM market, which was expected to increase, has also experienced a slowdown as
capital spending has declined throughout the telecommunications industry.
Although we believe that the metro WDM world-wide market will grow significantly
in the years to come, such growth is not likely to occur until capital spending
resumes in the markets we serve, and we are unable to assess at present when
this might take place.
Regional Optical Network Opportunity
In addition to the metropolitan market, recent engineering enhancements
have permitted the use of DWDM networking platforms for regional optical
networking applications. This development opens up the opportunity to address a
portion of the substantial long haul market. In some regions, e.g., Europe,
regional solutions apply to the majority of the networks installed. Industry
researchers recently started looking at reclassifying the regional market
opportunity, although statistical data for this market are not available.
Specific Challenges Facing Metropolitan and Regional Optical Networks
Service providers face numerous specific challenges in addressing
metropolitan and regional optical networks:
Scalability Limitations. Originally constructed for voice
traffic, the current network infrastructure based on SONET/SDH
technology does not allow for the network efficiencies necessary
to address the shift to a predominantly data-driven network. Due
to its inherent lack of scalability, the current network
infrastructure may require service providers to undertake the
expensive and tedious process of replacing network equipment or
adding new layers of similar equipment in response to changes or
increases in bandwidth demand. Alternative approaches to WDM are
being developed by other vendors to address the scalability of
the SONET/SDH networks. These nonstandard solutions are called
next generation SONET/SDH and can minimize the wasted bandwidth
of legacy SONET/SDH. While these solutions allow carriers to
combine voice and data on the same network, such solutions do
not, however, expand the amount of bandwidth available and are,
therefore, unable to accommodate the need for large amounts of
bandwidth.
Need to Support Multiple Protocols. Metropolitan optical networks
are characterized by a wide variety of protocols. The inability
to support multiple protocols and services from a single platform
further increases the cost and complexity of the metropolitan
networks. Alternative approaches to WDM are being developed by
other vendors to address the requirement for support of multiple
services. These nonstandard solutions are called multi-service
provisioning platforms (MSPP). These solutions generally carry
out protocol conversions and are much more complex than WDM
solutions.
Market Downturn. Virtually all telecom related market segments
have suffered a decline in demand in the current economic
downturn. What was once viewed as only a long-haul decline in
market demand has now affected the regional and metropolitan
networks as both enterprise and carrier business have cut back
capital spending. Although we expect that demand in the regional
and metropolitan markets will be strong in future periods, there
are no assurances that capital spending will resume within this
sector in the near term.
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Several Stages of Conversion. Present solutions require several
conversions to transport data through a metropolitan network. In
the access networks, aggregation of traffic often requires
protocol conversions into a common protocol before optical
transmission. In the central office, data is often demultiplexed
and converted into electrical signals for regeneration, switching
or further aggregation into higher capacity links and then
reconverted into optical signals for transmission in the
metro-core network.
Inefficient Bandwidth Utilization. Within metropolitan optical
networks, service providers must cater to end-users with varying
access speeds. Current optical access solutions do not make
efficient use of scarce wavelength resources. Service providers
must assign a full wavelength to each signal, whether or not the
end-user requires the full bandwidth potential of each
wavelength.
Difficulty of Network Management. Multiple protocols and
services, coupled with the lack of standards that exist in
metropolitan optical networks, make network management functions,
such as performance monitoring and configuration, exceedingly
difficult. Lack of a robust network management platform further
adds to the cost and complexity of metropolitan optical networks.
Need for New, Enhanced Service Offerings to Generate New Revenue
Opportunities. Service providers are searching for
next-generation solutions that will enable them to generate
additional sources of revenue from offering new or enhanced
services to their customers. Current solutions typically require
the service provider to deploy equipment that is specifically
designed for a particular service and transmission rate.
Next-generation solutions must be able to offer enhanced
features, wavelength provisioning and bandwidth-on-demand, that
end-users will increasingly request from service providers.
Our Solution
Our solutions feature products designed to specifically address the
shortcomings of legacy SONET/SDH networks and to facilitate offering new
services throughout metropolitan and regional optical networks. We enable our
customers to meet the rapidly growing demand for bandwidth by offering
end-to-end access, metropolitan and regional optical networking solutions for
the aggregation, transport and management of traffic. Our current products,
including our GigaMux'r' 6400 DWDM transport system, our EPC'TM' sub-rate
multiplexing modules, our GigaMux'r' 3200 and 1600 DWDM and CWDM transport
systems, as well as the network management product line that includes
GigaView'TM', TeraManager'TM' and TeraConfigurator'TM', are specifically
designed to meet the unique requirements of access metropolitan and regional
markets.
Our optical networking solutions offer numerous benefits including:
Cost Effective Entry-Level Access Solution. Our GigaMux'r' 3200
and 1600 DWDM and CWDM platforms allow low cost multiplexing of
up to sixteen wavelengths carrying a mix of protocols and signals
for access applications. The 3200 and 1600 products enable
customers to seamlessly and costs effectively mix CWDM and DWDM
on the same platform and on the same fiber. These products also
provide patented.
Cost effective and feature rich in wavelength management
capabilities. The 3200 and 1600 products also reduce customer
operating costs by enabling the same modules to be used across
every platform, thereby reducing sparing costs.
Scalable Architecture. We have created an optical networking
solution that simultaneously transmits voice, data, and video
over optimized fiber channels. The modular architecture of our
solution enables service providers to incrementally expand
capacity as their bandwidth needs increase. This simple,
scaleable, and functional solution solves short and long-term
service provider problems, which enhances their ability to reduce
costs and offer value-added services. For example, a service
provider can begin deployment with a single channel and later
expand up to 64 channels, providing up to 640 gigabits per
second, or Gbps, of transmission capacity without interrupting
existing traffic. A fiber channel is a serial data transfer
architecture standard conceived for new mass storage devices and
other peripheral devices that require very high bandwidth
connections. Bit rates for fiber channels are either 1.06 Gbps or
2.1 Gbps.
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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 our optical networking solutions
We intend to continue to enhance our existing family of optical
networking products and to introduce new products that increase the
functionality of our end-to-end optical solution. We introduced
TeraManager'TM' and TeraConfigurator'TM' in our management solution
portfolio in fiscal 2002. We introduced a new 10-port Gigabit Ethernet
multiplexer in December 2003 for video on demand and large commercial
applications. The combination of our GigaMux'r' optical transport
products, with the EPC'TM' sub-rate multiplexers, and TeraManager'TM',
our carrier class network management product, creates an intelligent
all-optical transport solution.
Leverage our engineering expertise
We intend to leverage our engineering expertise in the areas of
optical, mechanical, electrical and network management design to
continue to provide leading end-to-end metropolitan and regional
optical networking systems and to expand our market share. We believe
we were the first company to commercially ship a metropolitan optical
networking product using DWDM technology. As of January 31, 2004, we
had a skilled team of 49 engineers that continually focus on
developing products for the metropolitan and regional optical
transport market. We believe that our technological expertise has been
the key to our success and will enable us to rapidly develop new
product offerings and end-to-end optical solutions for the
metropolitan and regional markets.
Allow our customers to leverage their fiber assets by offering
revenue-generating services
The majority of our existing customers and targeted customers
have a large amount of fiber assets in the metropolitan and regional
network infrastructure. We intend to continue to develop and provide
solutions that will enable our customers to leverage their existing
fiber infrastructure to deliver
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revenue-generating services, while reducing their overall network
costs. In addition, we believe our existing customer base provides us
with an advantage when competing for new customers. We intend to
continue to work closely with our customers and invest in sales and
marketing resources to maintain our high level of customer service and
remain responsive to our customers' changing needs.
Aggressively pursue expense reduction initiatives
We continue to aggressively pursue cost reduction initiatives to
bring our expenses in line with current and future anticipated
revenues. Such reductions may affect the size of our workforce, and
may require decreasing our operating expenses and capital spending.
During the past two fiscal years we have concentrated on implementing
initiatives that have lowered our operating costs and anticipate the
need for continued cost reductions if sales volume does not increase
in the near future.
Maintain our sales, service and support organizations worldwide
We intend to continue to market our products worldwide. We
currently have sales, service and support teams in North America,
Europe and Asia. We believe that sales, service and support efforts on
a customer-by-customer basis are most effective due to the technical
evaluation and significant investments that are made by our customers.
Expand our product and customer base through careful acquisitions
We intend to expand our addressable market by adding
"best-of-breed" optical access products to our metro/regional
portfolio and enhance our edge-to-core network offerings. The recent
acquisition of LuxN, Inc., is a prime example of such expansion. LuxN
supplies optical access equipment for the network edge using CWDM and
DWDM technology. LuxN's Operations Systems Modification of Intelligent
Network Elements (OSMINE) certified products enable delivery of
high-bandwidth data, storage, video, and voice services for service
providers, cable Multiple Service Operators or MSOs, and enterprises.
Our union with LuxN broadens our 30-plus blue-chip customer base by
adding over 20 new customers including Time Warner Telecom, Hawaii
I-Net, Yipes Enterprise Services, and numerous universities.
Products
Our family of optical networking systems is designed to provide our
customers with end-to-end solutions for the metropolitan and regional optical
networking markets. Our transport, access, switching and network management
systems include the following products, some of which are still in development.
GigaMux'r' 6400 -- DWDM Optical Transport
Our GigaMux'r' 6400 optical transport product utilizes DWDM technology to
expand the capacity of new and existing fibers and enable traffic to travel
throughout metropolitan optical networks without optical to electrical to
optical conversions at each intermediate node. Our GigaMux'r' 6400 features
wavelength translation, wavelength multiplexing, optical amplification, optical
add-drop multiplexing, protection switching and performance monitoring. The
scalable and modular architecture of our GigaMux'r' 6400 product enables service
providers to easily and cost-effectively expand their existing networks as
bandwidth requirements increase. The GigaMux'r' 6400 can simultaneously
transport multiple protocols bi-directionally over one or more fibers, which
reduces the cost and complexity of the network. As part of our focus on
video-on-demand transport, we recently introduced a 10-port Gigabit Ethernet
multiplexer for GigaMux'r' 6400 metro/regional DWDM system targeted at the cable
multi-system operator community.
Our GigaMux'r' 6400 product is Network Equipment Building Standards; or
NEBS, level III certified. As of January 31, 2004, 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.
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Protocol transparency: the system can aggregate and transport
SONET/SDH (OC-3/STM-1 through OC-192/STM-64 carrying voice, IP or
ATM traffic), ESCON, Fibre Channel, Fast Ethernet, Gigabit
Ethernet and video.
Modular protection: the system's modular protection system allows
redundancy to be implemented at any point in the network.
Add/drop channels: the system is equipped with add/drop modules
that allow specific channels to be added or dropped while all
other channels pass through. Our filter subsystem can add or drop
from single channels to larger wavelength bands.
Reach: Up to 600 kilometers with optical amplifiers and up to
1,000 km with the addition of dispersion compensation.
EPC'TM' - Sub-Rate Access Multiplexers
Electric Photonic Concentrator, or EPC'TM', is our sub-rate access
multiplexer product that aggregates a wide variety of traffic from businesses
and network points of presence for high-speed transport throughout optical
networks. The traffic is aggregated for transmission on a single wavelength over
the GigaMux'r' 6400. EPC'TM' is designed to lower the cost and increase the
efficiency of bandwidth delivery within optical networks.
Our EPC'TM' products aggregate the following protocols:
Ten one Gigabit Ethernet channels onto one 10 Gigabit wavelength
16 OC-3 channels or 4 OC-12 channels, or a combination thereof,
over a single OC-48 wavelength
Two one Gigabit Ethernet channels, or four fractional Gigabit
Ethernet channels, over a single OC-48 wavelength
Eight ESCON channels over a single OC-48 wavelength
GigaMux'r' 3200 and 1600 - DWDM and CWDM Optical Transport
Our GigaMux'r' 3200 and 1600 platforms feature the flexibility and value
needed for optical access and metro applications. The GM 3200 and 1600 can scale
up to 16 protected wavelengths of DWDM or 8 protected wavelengths of CWDM,
respectively, optimizing the cost of ownership for differing application needs.
The system features wavelength translation, wavelength multiplexing, optical
amplification, optical add-drop multiplexing, protection switching, and
comprehensive management and performance monitoring.
The GM 3200 and 1600 modules are supported in 4 different chassis options
(GM 3234, GM 3217, GM 1608, and GMX 128), ranging from 1 to 64 wavelengths in
capacity. All modules are common across multiple chassis allowing ease and
simplicity of sparing and flexible provisioning. Whether the CWDM/DWDM equipment
is positioned at the Central Office or customer premise, Sorrento utilizes an
industry leading form factor to keep rack space to a minimum. The operational
flexibility is extended to multi-rate software provisioning, varying methods of
protection, with DC and AC power support across all chassis. The GM 3200 and
1600 design is focused on providing simple intelligent optical access solutions
at a low cost of ownership to the carrier providing a quick ROI with ease of
implementing new revenue services.
Our GigaMux'r' 3200 and 1600 products are Network Equipment Building
Standards; or NEBS, level III certified. As of January 31, 2004, we have shipped
our GigaMux'r' 3200-1600 products to over 20 customers worldwide. Our GM 3200 -
1600 product includes the following key features:
Affordable pay-as-you-grow architecture featuring a low entry
price, modular design, and the ability to add more services
without interrupting the existing traffic.
Multi-rate, multi-protocol on the same hardware, supporting GbE,
1G & 2G Fibre Channel, ESCON, FICON, OC-3 thru OC-192, digital
video, 10 GbE LAN/WAN PHY and more.
Support for all access and metro topologies (including
point-to-point, linear add/drop, ring, and mesh) over single or
dual fibers with distances over 250 km.
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Four different chassis options starting at 2RU in height (3.5")
and scaling from 1 to 64 wavelengths in capacity.
Cost effective In-Wavelength Management, eliminating the need for
a separate Optical Supervisory Channel.
Support for both CWDM and DWDM in the same chassis and on the
same fiber, utilizing the same form factor for all modules -
maximizing service flexibility and greatly reducing sparing and
inventory costs.
TeraManager'TM' -- Element Management System
TeraManager'TM' is our 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:
o Fault, configuration, security and performance management
o Carrier class performance
o 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.
Customers
Our target customer base includes wholesale and retail broadband service
providers, such as inter-exchange carriers, local and foreign telephone
companies, the telecom affiliates of utility companies (utilicoms), cable
television service providers, system integrators and distributors.
Our customers generally fit the following customer profiles:
o Wholesale Network Providers--these customers provide wavelength
and broadband services to communication service providers and
include telecommunication carriers, cable companies and
utilicoms.
o Managed Services Providers--these customers provide wavelength
and broadband services to enterprises and include
telecommunication carriers, cable companies, utilicoms and
Internet Service Providers.
o System Integrators--companies that specialize in providing
turnkey networking solutions for enterprise networks and
applications such as data-center connectivity and storage area
networks.
o Large Enterprises--large enterprise customers are generally large
organizations with complex networking needs, usually spanning
multiple locations and difficult types of network requirements.
Enterprise customers include industrial corporations, government
agencies, and utilities.
o Small and Medium Businesses--these customers have a need for
networks as well as connection to the Internet and/or to their
business partners. However, they generally have limited
resources. Therefore, we provide product through systems
integrators or Value Added Resellers.
Our customer base is highly concentrated. In fiscal year 2004, five
customers accounted for 48% of net sales. In fiscal year 2003, five customers
accounted for 84% of net sales, during fiscal year ended January 31, 2002 five
customers accounted for 62% of sales. We expect this customer concentration to
continue for the foreseeable future.
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For fiscal 2004, we shipped our optical networking products to a total of 23
customers worldwide. Three customers, AT&T Broadband, now Comcast Corporation,
Cox Communications and Looking Glass Networks each represented more than 10% of
our net sales for fiscal 2004 and AT&T Broadband, now Comcast Corporation, Cox
Communications and Deutsche Telekom each represented more than 10% of our net
sales for fiscal 2003
Key Relationships
Three customers, AT&T Broadband, Cox Communications and Deutsche Telekom
each represented more than 10% of our net sales for fiscal 2002.
We have entered into long-term agreements with some of our customers,
including:
AT&T Broadband Network Solutions (Now Comcast Business Communications)
In February 2000, we entered into a strategic alliance agreement with AT&T
Broadband Network Solutions (now Comcast Business Communications), or AT&T
Broadband. Under the terms of this agreement, AT&T Broadband and we agreed to
negotiate in good faith concerning the implementation of a number of joint sales
and marketing initiatives. AT&T Broadband also agreed to help introduce our
technology to individuals at other AT&T divisions and to provide feedback
concerning our products' performance. The initial term of this agreement expired
in February 2002 and was automatically renewed for an additional one-year term
in February 2002, February 2003 and February 2004. Similar automatic renewals
will occur in each succeeding February. Either AT&T Broadband or we may
terminate the agreement for any reason upon ninety days notice. In addition, we
concurrently entered into an equipment purchase agreement. The equipment
purchase agreement expired in February 2002 and was automatically renewed for an
additional one-year term in February 2002, February 2003 and February 2004.
Similar automatic renewals will occur in each succeeding February. Either AT&T
Broadband or we may terminate the agreement for any reason upon ninety days
notice. We started shipping our products to AT&T Broadband in the second quarter
of fiscal year 2001.
In November 2002, we entered into a separate exclusive supplier agreement
with AT&T Broadband. Under this agreement, we became AT&T Broadband's exclusive
supplier, subject to certain exceptions, of dense and course wavelength division
multiplexing equipment that AT&T Broadband uses to provide UFO Communications,
Inc., a private service provider, with certain services on certain AT&T
Broadband networks. The initial term of this agreement is five years and
continues after the initial term until either party gives 90 days written notice
terminating the agreement.
Looking Glass Networks
In August 2001, we entered into an equipment purchase agreement with
Looking Glass Networks, or LGN. Under the terms of this agreement, LGN agreed to
purchase metro DWDM optical networking equipment from Sorrento as the primary
supplier. LGN also agreed to receive early adopter access to new and emerging
Sorrento technologies, and to serve as a beta tester for new and emerging
equipment and to provide feedback concerning our products' performance. The
initial term of this agreement expires in August 2004 and will be automatically
renewed for additional one-year terms. Either LGN or Sorrento may terminate the
agreement at the end of the initial or any renewal term upon ninety days notice.
We started shipping our products to LGN in the third quarter of fiscal year
2002.
Time Warner Telecom
In April 2001, we entered into an equipment purchase agreement with Time
Warner Telecom, or TWT. Under the terms of this agreement, TWT agreed to
purchase CWDM and DWDM optical networking equipment from Sorrento. The initial
term of this agreement expired in April 2003 and was automatically renewed for
an additional one-year term in April 2004. Similar automatic renewals will occur
in each succeeding April. TWT may terminate the agreement for any reason upon
thirty days notice.
Sales and Marketing
Our sales effort is currently focused on North America, Europe and Asia. As
of January 31, 2004, our sales and marketing organization included 36 employees,
including account managers, sales engineers, support personnel, product managers
and marketing personnel. In North America and Europe, we sell our products
through our direct
10
sales force as well as through system integrators. Our international direct
sales force is located in the United Kingdom, France and Germany. In Asia, we
sell our products though system integrators.
In support of our worldwide selling efforts, our marketing team targets
potential customers through in-depth market analysis. Our marketing objectives
include building market awareness and acceptance of our products as well as
expanding our customer base. Our customer acquisition strategy has focused on
targeting customers who are aggressively building network infrastructure and are
looking to leverage existing fiber assets to generate additional revenue from
broadband services. This focus has led to strategic supply agreements with
several MSOs, utilities, and CLECs. We also plan to target incumbent carriers as
they expand the development of their metropolitan and regional fiber networks.
Marketing personnel coordinate our participation in trade shows, seminars and
industry events and conduct media relation's activities with trade and general
business publications. We participate in many industry organizations responsible
for developing standards that are used in optical networks.
Customer Service and Support
Our customer service and support team provides a critical component of our
customer satisfaction initiative. This team provides support to our customers
allowing them to successfully design and implement their optical networks. All
services can be customized to meet the needs our customers. Our staff is
experienced, and has the equipment necessary to support both installation and
problem resolution. A variety of installation service packages support the
implementation from start up to upgrades and maintenance. Specialists are
available 7 days a week, 24 hours a day. We offer a Technical Assistance Center
including field services support. Multiple technical support service agreements
allow our customers to define the level of support they require. Our customer
service and support team provides installation, maintenance and training
programs addressing the product, installation and maintenance processes and can
be delivered at the customer location or at our training facility.
We currently provide service and support to our international customers on
a direct basis and are establishing service and support agreements throughout
the world. To date revenues from service and support agreements have not been
material. We intend to continue to develop our internal team to meet the needs
of our customers and will utilize strategic partners to allow us to provide
greater value when appropriate.
We provide a total service solution. Our hardware products are warranted
against defects for a period of 12 to 36 months dependent on purchase
agreements, including technical support and parts repair/replacement. We also
offer support contracts for a fee to our customer base, thereby allowing our
customers to select a service plan tailored to their own particular needs.
Engineering, Research and Development
We have assembled a team of highly skilled engineers with extensive
experience in the fields of optical, mechanical, electrical and network
management design. We believe that our success in introducing DWDM optical
technology for use in the metropolitan and regional markets was a result of our
strength in research and development. As of January 31, 2004, 49 employees were
engaged in engineering, research and development efforts. Our research and
development efforts are focused on new product development as well as enhancing
performance and reliability of our existing products. We believe that our
research and development efforts are key in maintaining technical
competitiveness, delivering innovative products, and addressing the needs of the
regional and metropolitan market.
Our engineering, research and development expenses were $8.0 million, $9.0
million and $13.7 million for the years ended January 31, 2004, 2003 and 2002,
respectively. The decrease in our engineering, research and development expenses
was primarily due to headcount and expense reduction programs initiated by the
Company as a result of decreased capital spending levels from our major telecom
customers during these periods.
Manufacturing and Quality
We outsource the manufacturing of our products. We design our products and
perform system integration, quality control, final testing and configuration at
our San Diego, California and Sunnyvale locations. Our Sunnyvale facility is ISO
9001:2000 certified and we have begun the process of upgrading our San Diego
facility from ISO 9002:1994 to ISO 9001:2000. By meeting such standards, we
assure our customers that we meet internationally recognized standards for
quality, customer care and sound management practices. We believe that
outsourcing our
11
manufacturing allows us to conserve working capital, flexibly respond to changes
in market demand and quickly deliver products to our customers.
We currently purchase products from our contract manufacturers and other
suppliers on a purchase order basis. We generally do not enter long-term
contracts with our contract manufacturers or suppliers, and they are not
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 purchase a
limited number of key components used in the manufacturing of our products from
a limited number of suppliers and some of our components are purchased
exclusively from a single supplier on a purchase order basis. Management
believes that other suppliers could be identified to provide similar components
on comparable terms. A change of suppliers, however, could cause a delay in
manufacturing and a possible loss of sales, which would affect operating results
adversely.
Patent, Trademarks and Licenses
We currently hold approximately 39 patents and have several patent
applications pending. Although we attempt to protect our intellectual property
rights through patents, trademarks, and copyrights, maintaining certain
technology as trade secrets and other measures, we cannot assure that any
patent, trademark, copyright or other intellectual property rights owned by us
will not be invalidated, circumvented or challenged, that such intellectual
property rights will provide competitive advantages to us or that any of our
pending or future patent applications will be issued with the scope of the
claims sought by us, if at all. We cannot assure that others will not develop
technologies that are similar or superior to our technology, duplicate our
technology or design around the patents that we own. In addition, effective
patent, copyright and trade secret protection may be unavailable or limited in
certain foreign countries in which we do business or intend to do business in
the future. We also have licensed and may in the future license technologies
from other companies on a non-exclusive basis. For example, one of our CWDM
products incorporates technology purchased from Entrada Networks, Inc., our
former affiliate, that we then enhanced to complete a commercially feasible
product.
We believe that the future success of our business will depend on our
ability to translate the technological expertise and innovation of our personnel
into new and enhanced products. We cannot assure that the steps taken by us will
prevent misappropriation of our technology. In the future, we may take legal
action to enforce our patents and other intellectual property rights, to protect
our trade secrets, to determine the validity and scope of the proprietary rights
of others, or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of resources and
could harm our business and operating results.
As is common in our industry, we have from time to time received
notification from other companies of intellectual property rights held by those
companies upon which our products may infringe. Any claim or litigation, with or
without merit, could be costly, time consuming and could result in a diversion
of management's attention, which could harm our business. If we were found to be
infringing on the intellectual property rights of any third party, we could be
subject to liabilities for such infringement, which could be material, and could
be required to seek licenses from other companies or to refrain from using,
manufacturing or selling certain products or using certain processes. Although
holders of patents and other intellectual property rights often offer licenses
to their patent or other intellectual property rights, no assurance can be given
that licenses would be offered, that the terms of any offered license would be
acceptable to us or that failure to obtain a license would not cause our
operating results to suffer.
Working Capital Practices
We have historically maintained high levels of inventories to meet output
requirements of our customers and to ensure an uninterrupted flow of inputs from
suppliers. We have however, initiated active and aggressive programs to reduce
our inventories and conserve working capital resources on an ongoing basis. It
is not our standard policy to grant customers the right to return merchandise
that performs according to specifications. Typical payment terms require payment
within thirty to sixty days from the date of shipment.
We perform ongoing credit evaluations of each customer's financial
condition and extend unsecured credit related to the sales of various products.
From time to time we receive financial instruments such as letters of credit for
payments for international customers. At January 31, 2004, accounts receivable
due from Cox Communications, KLA Tencor, CNT and Time Warner Telecom accounted
for 16%, 12%, 12% and 11% respectively, of net
12
receivables. At January 31, 2003, accounts receivable due from AT&T Broadband,
Cox Communications, DeltaNet and Inoc accounted for 31%, 16%, 19% and 30%
respectively, of net receivables.
Our Backlog
At January 31, 2004, we had backlog that totaled $2.1 million compared to
$5.0 million at January 31, 2003. Our backlog consists of orders confirmed with
a purchase order for products to be shipped within twelve months to customers
with approved credit status. We do not believe that backlog, as of any
particular date, should be used as an indication of sales for any future period
for two reasons. First, orders are increasingly being booked and shipped in a
short period of time and therefore may never be calculated in the backlog amount
at the end of any particular quarter. Second, customers have and can change
delivery schedules or cancel orders without a significant penalty.
Competition
The market for optical networking equipment is extremely competitive and
subject to rapid technological change. We expect competition to continue to be
significant in the future. Our primary competitors in the DWDM market include
vendors of optical networking and infrastructure equipment such as ADVA AG
Optical Networking, CIENA Corporation, Cisco Systems, Lucent Technologies,
Fujitsu and Nortel Networks, as well as private companies that have been or will
be focusing on our target markets. Our primary competitors for our CWDM products
include ADVA AG Optical Networking and CIENA Corporation, as well as private
companies that have been or will be focusing on our target markets. Many of our
competitors have significantly greater financial resources and are able to
devote these greater resources to the development, promotion, sales and support
of their products. In addition, many of our competitors have more extensive
customer relationships than we do, including relationships with our potential
customers. We believe each of our competitors has optical networking products in
various stages of development.
We believe the principal competitive factors in the optical networking
market are:
o product performance, features, functionality and reliability;
o price/performance characteristics;
o timeliness of new product introductions;
o relationships with existing customers;
o service, support and financing; and
o financial stability and strength of company.
We believe our products compete favorably with our competition within our
marketplace.
The competitors for Meret's legacy products include Pesa, Artel, RGB
Spectrum, Utah Scientific, and many other companies.
Increased competition may result in further price reductions, reduced gross
margins and loss of market share, any of which could materially and adversely
affect our business, operating results and financial condition. There can be no
assurance that we will be able to compete successfully against current and
future competitors, or that competitive factors will not have a material adverse
effect on our business, operating results and financial condition.
Environmental Compliance
We are required to file environmental compliance reports with the Federal
Food and Drug Administration regarding the emissions levels of our laser-based
products, which are used in fiber optics communications. All of our products
comply with required safety level standards.
Employees
As of January 31, 2004, we had 132 employees, of which 49 were in
engineering, research and development, 36 in sales and marketing, and the
remainder in manufacturing and in general and administrative functions. Of the
49 employees in engineering, research and development 20 have master's degrees
and 14 have doctorate degrees.
13
We also employ a number of part-time and temporary personnel from time to time
in various departments. Our future success will depend in part on our ability to
attract, retain and motivate highly qualified technical and management
personnel, for whom competition is intense. None of our employees are covered by
a collective bargaining agreement and we believe that our relations with our
employees are good.
Forward-Looking Statements--Cautionary Statement
All statements other than statements of historical fact contained in this
Form 10-K, in our future filings with the Securities and Exchange Commission, in
our press releases and in our oral statements made with the approval of an
authorized executive officer are forward-looking statements. Words such as
"propose," "anticipate," "believe," "estimate," "expect," "intend," "may,"
"should", "could," "will" and similar expressions are intended to identify such
forward-looking statements. These forward-looking statements are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Although we believe that our expectations reflected in these
forward-looking statements are based on reasonable assumptions, such statements
involve risk and uncertainties and no assurance can be given that actual results
will be consistent with these forward-looking statements. Important factors that
could cause actual results to differ materially from those forward-looking
statements include without limitation: our ability successfully to finance our
current and future needs for working capital; our ability to keep our common
stock listed on the NASDAQ Stock Market; our ability to successfully develop,
sell and market our optical networking and other products; our expectations
concerning factors affecting the markets for our products, such as demand for
increased bandwidth; the scope and duration of the economic slowdown currently
being experienced by many of our existing and prospective customers; our ability
to compete successfully with companies who are much larger than we are and who
have much greater financial resources at their disposal; our ability, or
failure, to complete strategic alliances and strategic opportunities such as
sales or spin-offs of subsidiaries or business units on terms favorable to us
for reasons either within or outside our control; changed market conditions, new
business opportunities or other factors that might affect our decisions as to
the best interest of our shareholders; and other risks detailed from time to
time in our reports filed with the Securities and Exchange Commission.
We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. These risks and uncertainties are described in the
following section. We specifically decline any obligation to publicly release
the result of any revisions, which may be made to any forward-looking statements
to reflect anticipated or unanticipated events or circumstances occurring after
the date of such statements, or to update the reasons why actual results could
differ from those projected in the forward-looking statements.
Factors That May Affect Future Results
In connection with the safe harbor contained in the Private Securities
Reform Act of 1995 we are hereby identifying important factors that could cause
actual results to differ materially from those contained in any forward-looking
statements made by us or on our behalf. Any such statement is qualified by
reference to the following cautionary statements:
The telecom industry has experienced a significant downturn in the past
several years and continues to remain unpredictable as to future capital
spending level for carriers with whom we depend upon our revenues. Current world
turmoil, economic uncertainty and an equity market that is difficult to raise
new capital, could cause our future revenues to decrease. A significant downturn
in our revenues would have a negative impact upon our existing working capital
and have a negative impact on our stock price. In addition, we would be faced
with the need to raise additional working capital of which there is no certainty
that such working capital would be available.
We have substantial debt, and we may not generate sufficient cash flow to meet
our debt service obligations if revenues significantly decreased.
Our total debt consists primarily of approximately $12.4 million principal
amount of 7.5% debentures with a maturity date in August 2007, and mortgage debt
of approximately $3.6 million. The amount of our debt could have important
consequences, including:
o impairing our ability to obtain additional financing for working
capital, capital expenditures, acquisitions or general corporate
purposes;
14
o 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;
o 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;
o placing us at a competitive disadvantage compared to our
competitors that have less debt; and
o making us more vulnerable if the current general economic
downturn continues or if our business experiences difficulties.
If we cannot generate sufficient revenues, we may not be able to meet our
debt service obligations, repay our debt when due, or comply with other
covenants in the 7.5% debentures. If we breach our obligations under the 7.5%
debentures, the holders could require repayment of all amounts owed, and we may
not have sufficient cash reserves to repay such amounts.
We may be unable to raise the funds necessary to repay or refinance our
indebtedness.
We are obligated to make interest payments on the 7.5% debentures on a
quarterly basis each year until 2007, when the 7.5% debentures mature. We have
the option to pay interest in shares of our common stock and in additional 7.5%
debentures to a certain limitation rather than cash. Upon maturity in August
2007 we may need additional capital to fund the repayment of the 7.5%
debentures. Our ability to arrange financing and the cost of financing if
necessary, to repay these debentures will depend upon many factors, including:
o our ability to deliver a good business model whereby we generate
profitable results;
o general economic and capital markets conditions generally, and in
particular the non-investment grade debt market;
o credit availability from banks or other lenders;
o investor confidence in the telecommunications industry generally
and our company specifically; and
o provisions of tax and securities law that are conducive to
raising capital.
If we need additional funds and are unable to raise them, our inability to
raise them will have an adverse effect on our operations. If we decide to raise
additional funds by incurring debt, we may become subject to additional or more
restrictive financial covenants and ratios.
A significant number of shares of our common stock issued in connection
with the restructuring transaction we undertook in June 2003, and in connection
with the December 2003 and January 2004 private placements, may be sold into the
market. This could cause the market price of our common stock to drop
significantly, even if our business is doing well.
Pursuant to the restructuring transaction we undertook in June 2003 with
the former holders of our subsidiary's Series A Preferred Stock and our then
outstanding 9.75% Senior Convertible Debentures, we registered for resale
15,000,000 shares of our common stock that were issued and are issuable or
potentially issuable in connection with the restructuring transaction. As part
of the restructuring transaction, we issued an aggregate principal amount of
$13.1 million of 7.5% convertible debentures, which are convertible into
approximately 2,416,975 shares at a conversion price of $5.42.
Additionally, in the December 2003 and January 2004 private placements, we
sold 5,061,613 shares of our common stock and issued warrants to purchase
2,530,806 shares of common stock to investors, and warrants to purchase 506,161
shares of common stock to the placement agent in the private placement.
15
Sales of a substantial number of shares of our common stock within any
narrow period of time could reduce the market price of our common stock.
Additionally, unless we achieve revenue growth and/or cost savings and other
business economies sufficient to improve our operating performance, which we
cannot assure, there could be a negative impact on our future stock price. We
have a history of losses and expect to incur future losses.
We have incurred operating losses during the years ended January 31, 2004,
2003 and 2002 of $17.6 million, $31.3 million and $37.2 million, respectively,
and as of January 31, 2004, we had an accumulated deficit of $193.8 million. We
expect that we could continue to incur losses in the future. If we do not become
profitable, the value of our stock will decrease. We have large expenses in the
areas of sales and marketing, research and development, manufacturing, and
general and administrative expenses that are not covered by our current sales
volume and resulting gross margin. Currently, the majority of revenues are from
shipments of our optical networking product lines. In order for us to become
profitable, we will need to generate and sustain higher revenue, improve our
gross margins on products while maintaining reasonable expense levels.
Our history of losses and expectation of future losses could have an impact on
our ability to finance our business and risk our ability to continue operating.
We have incurred significant losses and may incur significant losses in the
future. Such losses could cause our equity balance to fall below necessary
levels so that we are in violation of minimum listing requirements for our
publicly traded stock on the NASDAQ National Market, which could cause
significant decline in stockholder value and stock price.
Your percentage of ownership and voting power, and the price of our common stock
may decrease because we may issue a substantial number of shares of common
stock, or securities convertible or exercisable into our common stock.
We have the authority to issue up to one hundred fifty million shares of
our common stock and two million shares of our preferred stock without
stockholder approval. We have also previously issued warrants to certain of our
stockholders which will be exercisable to purchase approximately3.5 million
shares of our common stock.
In fiscal 2004, we issued 1,879,340 shares of our common stock in
connection with our acquisition of LuxN, Inc., a Delaware corporation, which we
acquired by the merger of our wholly-owned subsidiary with and into LuxN. In
addition, we issued warrants to purchase approximately 400,000 of our shares of
common stock in connection with the merger.
We may also issue additional warrants and options to purchase shares of our
common stock. These future issuances could be at values substantially below the
price paid for our common stock by current stockholders. We may conduct
additional future offerings of our common stock, preferred stock, or other
securities with rights to convert the securities into shares of our common
stock, which may result in a decrease in the value or market price of our common
stock. Further, the issuance of preferred stock could have the effect of
delaying, deferring or preventing a change of ownership without further vote or
action by the stockholders and may adversely affect the voting and other rights
of holders of common stock.
16
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 ADVA AG Optical Networking, CIENA Corporation, Cisco Systems, Lucent
Technologies and Nortel Networks, 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
are limited number of potential customers for our products. If a potential
customer does not select us, our revenues and ability to grow our business may
seriously harmed. Similarly, much of our growth depends on our customers'
success in selling communications services based on our products and
complementary products from others. Our success will depend on our ability to
effectively anticipate and adapt to customer requirements and offer products and
services that meet customer demands. Any failure of our current or prospective
customers to purchase products 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, and United Pan-Europe Communications. In addition we have long-term
contracts with Cox Communications, Looking Glass Networks and Time Warner
Telecom. 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
17
we fail to establish and maintain strategic alliances, long-term contracts and
relationships with distributors and system integrators.
We rely on a small number of customers for most of our revenues and any loss,
cancellation, reduction or delay in sales to, or collections from, any single
customer could seriously harm our business.
Our customer base is highly concentrated. Historically, orders from a
relatively limited number of customers accounted for most of our net sales. For
the fiscal year ending January 31, 2004, five customers accounted for 43% of net
sales, during the fiscal year ended January 31, 2003, five customers accounted
for 58% of net sales and in fiscal year 2002 five customers accounted for 70% 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 reasons. Decisions by such
customers to reduce their inventory levels have led and could lead to reductions
in purchases from us. These reductions, in turn, have and could cause
fluctuations in our operating results and have had and could have caused an
adverse effect on our business, financial condition and results of operations in
periods in which the inventory is reduced.
Our operating results are likely to fluctuate significantly and may fail to meet
or exceed the expectations of securities analysts or investors, causing our
stock price to decline.
Our revenues and operating results may vary significantly from quarter to
quarter and year to year due to a number of factors, many of which are outside
of our control and any of which may cause our stock price to fluctuate. Some of
the factors that may affect us include changes in market demand for our optical
networking products, the cost and availability of components used in our
products, the timing and amount of customer orders, the length and
unpredictability of the sales and deployment cycles of our products, the timing
of new product introductions and enhancements by our competitors and ourselves,
changes in our pricing or the pricing of our competitors, our ability to attain
and maintain production volumes and quality levels of our products, and general
economic conditions as well as those specific to the telecommunications and
related industries.
If we are unable to comply with regulations affecting our customers' industries,
our revenues may be seriously harmed.
Our customers are involved in industries that are subject to extensive
regulation by domestic and foreign governments. If we fail to conform our
products to these regulatory requirements, we could lose sales and our business
could be seriously harmed. Additionally, any failure of our products to comply
with relevant regulations could delay their introduction and require costly and
time-consuming engineering changes.
The time that our customers and potential customers require for testing and
qualification before purchasing our products can be long and variable, and may
require us to invest significant resources without any assurances of sales,
which may cause our results of operations to be unpredictable.
Before purchasing our products, potential customers typically undertake a
lengthy evaluation, testing and product qualification process. In addition,
potential customers often require time consuming field trials of our products.
Our sales effort requires the effective demonstration of the benefits of our
products to, and significant training of, potential customers. In addition, even
after deciding to purchase our products, our customers may take several years to
deploy our products. The timing of deployment depends on many factors, including
the sophistication of a customer and the complexity and size of a customer's
networks. Our sales cycle, which is the period from the time a sales lead is
generated until the recognition of revenue, can often be longer than one year.
18
The length and variability of our sales cycle is influenced by a variety of
factors beyond our control, including our customers' build out and deployment
schedules, our customers' access to product purchase financing, our customers'
needs for functional demonstration and field trials, and the manufacturing lead
time for our products. Because our sales cycles are long and variable and may
require us to invest significant resources without any assurances of sales, our
results of operations may be unpredictable.
The GigaMux'r' 6400 and 3200 products, EPC'TM', and TeraManager'TM' are our only
currently available significant products, and if they are not commercially
successful, our revenue will not grow and we may not achieve profitability.
If our customers and potential customers do not adopt, purchase and
successfully deploy our GigaMux'r', EPC'TM', and TeraManager'TM' products in
large numbers, our revenue may not grow and our business, financial condition
and results of operations will be seriously harmed. Because the market for our
products is relatively new, future demand for our products is uncertain and will
depend on the speed of adoption of optical networking, in general, and optical
equipment in metro and regional networks, in particular.
If we are not able to develop and commercialize new or enhanced products, our
operating results and competitive position will be seriously harmed.
Our growth depends on our ability to successfully fund and develop new and
enhanced products. The development of new or enhanced products is a costly,
complex and uncertain process that requires us to anticipate accurately future
technological and market trends. Our next generation of transport and network
management products is currently under development. We cannot be sure whether
these or other new products will be successfully developed and introduced to the
market on a timely basis, or at all. We will need to complete each of the
following steps to successfully commercialize these and any other new products,
complete product development, qualify and establish component suppliers,
validate manufacturing methods, conduct extensive quality assurance and
reliability testing, complete software validation, and demonstrate systems
interoperability.
Each of these steps presents serious risks of failure, rework or delay, any
one of which could adversely affect the rate at which we are able to introduce
and market our products. If we do not develop these products in a timely manner,
our competitive position and financial condition could be adversely affected.
In addition, as we introduce new or enhanced products, we must also manage
the transition from older products to newer products. If we fail to do so, we
may disrupt customer ordering patterns or may not be able to ensure that
adequate supplies of new products can be delivered to meet anticipated customer
demand. Any failure to effectively manage this transition may cause us to lose
current and prospective customers.
If our products do not interoperate with our customers' networks, installations
will be delayed or cancelled or our products could be returned.
Many of our customers require that we design products to interoperate with
their existing networks, each of which may have different specifications and
utilize a variety of protocols. Our customers' networks contain multiple
generations of products that have been added over time as these networks have
grown and evolved. Our products must intemperate with all of the products within
these networks as well as future products in order to meet our customers'
requirements. If we are required to modify our product design to be compatible
with our customers' systems to achieve a sale, it may result in a longer sales
cycle, increased research and development expense and reduced margins on our
products. If our products do not interoperate with those of our customers'
networks, installations could be delayed, orders for our products could be
cancelled or our products could be returned, any of which could seriously harm
our business.
Our products may have errors or defects that we find only after deployment,
which could seriously harm our relationship with our customers and our
reputation.
Our customers may discover errors or defects in our products, and our
products may not operate as expected. If we are unable to fix errors or other
problems that may be identified on a timely basis, we could experience losses of
or delays in revenues and loss of market share, loss of customers, failure to
attract new customers or achieve market acceptance, diversion of engineering
resources, increased service and warranty costs, and legal actions by our
customers. Any failure of our current or planned products to operate as expected
could delay or prevent their adoption and seriously harm our relationship with
our customers and our reputation.
19
We depend upon contract manufacturers and any disruption in these relationships
may cause us to fail to meet the demands of our customers and damage our
customer relationships.
We use contract manufacturers to manufacture and assemble some of our
products in accordance with our specifications. We currently have three
U.S.-based contract manufacturers. We do not have long-term contracts with any
of them, and none of them is obligated to perform services for us for any
specific period or at any specified price, except as may be provided in a
particular purchase order. We may not be able to effectively manage our
relationships with these manufacturers and they may not meet our future
requirements for timely delivery or provide us with the quality of products that
our customers and we 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.
Our contract manufacturers and we 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 erosion of average product selling prices. We
anticipate that the average selling prices of our products will decline in
response to competitive pressures, increased sales discounts, and new product
introductions by our competitors or other factors. Such reduced sales prices
require us to reduce our costs in order to maintain or improve our existing
gross margins. If we are unable to achieve sufficient cost reductions and
increases in sales volumes, the decline in average selling prices will reduce
our gross margins and revenue.
If we are unable to hire or retain highly skilled personnel, we may not be able
to operate our business successfully.
Our future success depends upon the continued services of our key
management, sales and marketing, and engineering personnel, many of whom have
significant industry experience and relationships. Many of our personnel could
be difficult to replace. We do not have "key person" life insurance policies
covering any of our personnel. The loss of the services of any of our key
personnel could delay the development and introduction of, and have a negative
impact on our ability to sell, our products. Competition for highly skilled
personnel is intense in our industry, and we may not be able to attract and
retain qualified personnel, which could seriously harm our business.
If we become subject to unfair hiring claims, we could incur substantial costs
in defending ourselves.
Companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring practices.
We cannot assure you that we will not receive claims of this kind in the future
as we seek to hire qualified personnel or that those claims will not result in
material litigation. We could incur substantial costs in defending ourselves or
our employees against such claims, regardless of their merits. In addition,
defending ourselves from such claims could divert the attention of our
management away from our operations.
We may be unable to protect our intellectual property, which could limit our
ability to compete.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We also enter into confidentiality or license agreements with our
20
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 could subject us to risks due to currency
fluctuations and changes in foreign government regulations, which could harm our
business.
Our international operations are subject to a number of risks, including
changes in foreign government regulations and telecommunications standards,
import and export license requirements, tariffs, taxes and other trade barriers,
fluctuations in currency exchange rates, difficulty in collecting accounts
receivable, the burden of complying with a wide variety of foreign laws,
treaties and technical standards, difficulty in staffing and managing foreign
operations, and political and economic instability.
The majority of our sales and expenses have been denominated in U.S.
dollars. However, in the future a larger portion of our sales and expenses may
be denominated in non-U.S. currencies. As a result, currency fluctuations
between the U.S. dollar and the currencies in which we do business could cause
foreign currency translation gains or losses that we would recognize in the
period incurred. We cannot predict the effect of exchange rate fluctuations on
our future operating results because of the number of currencies involved, the
variability of currency exposure and the potential volatility of currency
exchange rates. We do not currently engage in foreign exchange hedging
transactions to manage our foreign currency exposure.
If we do not effectively address our financial, managerial and manufacturing
processes, we may not be able to successfully expand our business.
Our business has experienced wide fluctuations in sales volume from quarter
to quarter, which places a significant strain on our management systems and
resources. Our ability to successfully offer our products and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We will need to continue to improve our financial,
managerial and manufacturing processes and reporting systems,
21
and will need to continue to expand, train and manage our workforce worldwide.
Many of our competitors have set-up manufacturing facilities and operations
offshore into significantly less expensive labor and product markets. Our
ability to produce our products at similar favorable production costs could harm
our ability to compete in the markets we serve. If we fail to effectively
address the above requirements, our ability to pursue business opportunities and
expand our business could be harmed.
Our stock price may be volatile which may affect your ability to sell shares at
or above the offering price or result in securities litigation against us.
The stock market in general, the NASDAQ Stock Market and the stock of
optical networking companies in particular, have experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to a
company's operating performance. We expect the price of our common stock to
fluctuate. The offering price may not be indicative of the prices that will
prevail in the public market after the offering. The trading price of our common
stock could fluctuate in response to factors including those described elsewhere
in this annual report and:
o General market and economic conditions;
o Announcements of technological innovations or new products;
o Publicity regarding actual or potential results with respect to
technologies or products under development; and
o 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.
Definitions
As used in this Annual Report on Form 10-K, the following terms have the
meanings indicated:
"ATM" means Asynchronous Transfer Mode, which is a type of networking technology
based on transferring data in cells or packets of a fixed size. The small,
constant cell size allows ATM equipment to transmit video, audio, and data over
the same network, and assure that no single type of data overtakes the line.
Current implementations of ATM support data transfer rates of 25 Mbps to 2.48
Gbps.
"Backbone" means a main segment of a network carrying large amounts of traffic.
Individual metro and interoffice rings are attached to the backbone.
"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 (bps). For example,
Ethernet has a 10 Mbps bandwidth and OC-192 has 10 gigabits per second
bandwidth.
"Bridge" means a device that connects two or more networks of the same access
method (Ethernet to Ethernet or Token Ring to Token Ring) by making simple
forward/don't forward decisions on each data packet received from any of the
networks to which it is connected.
"Broadband" means technologies or networks that have the ability to transmit
high data rates.
"CLEC" means a Competitive Local Exchange Carrier.
"Concentrator" means the connection point, more sophisticated than a hub,
incorporating different types of cable connections, back-up power supply,
data-gathering capability for management purposes and possibly even bridge and
router features as well.
22
"CWDM" means Coarse Wavelength Division Multiplexing, which is a sophisticated
opto-electronics technology that uses multiple wavelengths of light spaced at
least 400 Ghz apart to increase the number of video, data or voice channels of
information that can be sent on a single optical fiber in a transmission system.
"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 in a transmission system.
"ESCON"--Enterprise System Connectivity--means a protocol for 200 Mbps signal
transmission speed over fiber optic cable.
"Ethernet" means a 10 Mbps speed network that runs over thick coaxial cable
(10BASE5), thin coaxial cable (10BASE2), twisted-pair (10BASE-T), and
fiber-optic cable. It is the most widely used LAN technology and the most
popular form of Ethernet is 10BASE-T. Ethernet is a network specification that
was developed at Xerox Corp's Palo Alto Research Center, and made into a network
standard by Digital, Intel, and Xerox.
"Fast Ethernet" means a 100 Mbps speed network that runs over thick coaxial,
twisted-pair, and fiber-optic cable. Fast Ethernet is 10 times faster than
Ethernet.
"FDDI" means a Fiber Distributed Data Interface and is a fiber optic network
that supports transmission speeds up to 100 Mbps.
"Fibre Channel" means a serial data transfer architecture standard conceived for
new mass storage devices and other peripheral devices that require very high
bandwidth connections. Bit rates for Fibre channel are either 1.06 Gbps or 2.1
Gbps.
"Gigabit Ethernet" means a 1000 Mbps speed network that runs fiber-optic cable
for wide area network connections.
"HDTV" means high definition television, which is a new type of television that
provides much better resolution than current television. HDTV is slowly being
implemented into the broadcast networks.
"Hub" means a central connection device to which many network tributaries are
connected.
"ILEC" means Incumbent Local Exchange Carrier and is a telephone company that
provides local services and does not offer long distance services. All the
regional operating companies after the break-up of AT&T became ILECs.
"ISDN" means an Integrated Services Digital Network and is an all-digital
communications network that provides a wide range of services on a switched
basis. Voice, data and video can be simultaneously transmitted on one line from
a source.
"ISO" means International Standards Organization. Founded in 1946, ISO is an
international organization composed of national standards bodies from over 75
countries. ISO has defined a number of important computer standards; the most
significant of which is perhaps is OSI (Open Systems Interconnection), a
standardized architecture for designing networks.
"ISP" means an Internet Service Provider.
"ITU" means International Telecommunications Union, which is an
intergovernmental organization through which private and public organizations
develop telecommunications. The ITU was founded in 1865 and became a United
Nations agency in 1947 and it is responsible for adopting international tax
treaties, regulations and standards governing telecommunications.
"IXC" means an inter-exchange carrier, a long distance telephone company or a
carrier that specializes in connecting central offices of local service
providers. This carrier typically does not offer services to end users. AT&T,
MCI and Sprint are IXCs. A carrier that provides the backbone of competitive
local exchange carriers can also be considered as an IXC. Therefore, an IXC can
provide service in both metropolitan and in long haul networks.
"LAN" means a Local Area Network and is a high-speed communications system
designed to link computers for the purpose of sharing files, programs and
various devices such as printers and high-speed modems within a small
23
geographic area such as a workgroup, department or single floor of a multi-story
building. LANs may include dedicated computers or file servers that provide a
centralized source of shared files and programs.
"MSO" means a Multiple Service Operator, which is typically a cable TV operator
that offers multiple services such as video, voice and data.
"Multiplexing" means a process that combines a number of lower speed data
transmissions into one high-speed data transmission by splitting that total
available bandwidth into narrower bands (frequency division) or by allotting a
common channel to several different transmitting devices one at a time in
sequence (time division). The opposite function of separating the data channels
into their original format is called demultiplexing.
"OC-1, OC-3, OC-12, OC-48, OC-192" means the SONET bit rates of 51.85Mbps, 155
Mbps, 622 Mbps, 2.5 Gbps and 10Gbps transmission speeds for signals over fiber
optic cables. The number in the end of the term corresponds to the equivalent
multiple of OC-1 capacity (e.g., OC-192 means equivalent to 192 times OC-1)
"OEMs" means original equipment manufacturers.
"Opto-Electro-Optical" means Optical-Electrical-Optical which describes the
conversion of optical signals to electric and back to optical. Typically,
devices performing this function in the electrical domain and the signals need
to be converted back to optical for transmission over optical fibers.
"Packet" means the "envelope" in which the network software places a message
being sent from one station to another station in a network. One of the key
features of a packet is that it contains the destination address in addition to
the data.
"POTS" means "plain old telephone service" which refers to the standard
telephone service over copper lines that most homes use. In contrast, telephone
services based on high-speed, digital communications lines, such as ISDN and
FDDI, are not POTS. The main distinction between POTS and non-POTS services is
speed and bandwidth. POTS is generally restricted to about 52Kbps.
"Protocol" means a standard developed by international standards bodies,
individual equipment vendors, and ad hoc groups of interested parties to define
how to implement a group of services in one or more layers of the OSI model. The
Open Systems Interconnect ("OSI") reference model was developed by the ISO to
define all the services a LAN should provide. Ethernet and Token Ring, for
example, are both protocols that define different ways to provide the services
called for in the Physical and Data Link Layers of the OSI model.
"PTT" means Postal, Telephone and Telegraph, and refers to a generic telephone
company outside the United States. Typically, a PTT is state owned and can
operate both local and long distance services.
"RBOC" means a Regional Bell Operating Company.
"Router" means a network translator that reads network-addressing information
within packets to provide greater selectivity in directing traffic over multiple
network segments. It is a more complex inter-networking device.
"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 a hierarchy
similar to SONET but in this case the lowest bit rate channel is STM-1 (155
Mbps).
"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.
"Switch" means a device that allows the network operator to vary and select
connections between network nodes at very high speeds.
"T-1" means a dedicated phone connection supporting data rates of 1.544 Mbps. A
T-1 line actually consists of 24 individual channels, each of which supports
64Kbps and can be configured to carry voice or data traffic. T-1 lines are
sometimes referred to as DS-1 lines.
"TCP/IP" means Transmission Control Protocol/Internet Protocol, which is a suite
of protocols used for communications between two or more devices.
24
"TDM" means time division multiplexing which is a multiplexing process that
combines a number of lower speed data transmissions into one high-speed data
transmission by allotting a common channel to several different transmitting
devices one at a time in sequence.
"Token Ring" means a 4 Mbps or 16 Mbps speed network that uses different
technology than Ethernet to co-ordinate the transmission of data among nodes.
"WAN" means a Wide Area Network and is a communications network that connects
geographically dispersed users. Typically, a WAN consists of two or more LANs.
The largest WAN in existence is the Internet.
Item 2. Properties.
We are headquartered in our San Diego, California facility that we own
consisting of approximately 36,000 square feet used for offices, research and
development and manufacturing. We also own a 47,000 square foot facility in San
Diego, California adjacent to our headquarters that is used for offices,
manufacturing and customer support.
For the fiscal year 2004 we occupied an additional 40,668 square feet used
for office, research and development and manufacturing activities under lease as
detailed below:
Location Square Footage Facility Type Expiration Date
- -------- -------------- -------------------- ----------------
Sunnyvale, California 35,288 Office/Manufacturing December 31, 2004
Stuttgart, Germany 5,380 Office December 31, 2005
We believe our facilities are suitable and adequate to meet our current
needs. See Note E to the Consolidated Financial Statements contained in Part II
herein for terms and amounts of mortgages on the facility we own.
Item 3. Legal Proceedings
On June 4, 2003, we consummated the exchange transaction and cancelled all
outstanding Series A Convertible Preferred Stock and 9.75% Senior Convertible
Debentures. The Exchange Agreement provides that the litigation instituted by
the former holders of Series A stock be dismissed with prejudice against the
Company, its subsidiaries, its current officers and directors, and other
defendants who execute an appropriate release, and without prejudice against all
other defendants. This dismissal will require court approval, which is in the
process of being obtained by counsel for all parties.
In addition, claims in arbitration were filed by two of our former
financial officers and employees who worked in our former Santa Monica office,
which has since been closed, alleging that their resignations in May 2002 were
for "good reason" as defined in their employment agreements, all of which were
to expire on May 22, 2002. One of the claims was settled in May 2003 for $45
thousand, approximately the value of legal fees incurred by the plaintiff. The
other claim was resolved in August 2003 by an arbitrator who ruled in our favor.
As part of the arbitration ruling, both parties were responsible for their own
legal fees.
A former officer of our SNI subsidiary brought suit alleging breach of a
consulting agreement we entered into with him in March 2002, following his
resignation "for good reason" as defined in his employment agreement. He was
seeking acceleration of consulting fees due to him under his consulting
agreement in the amount of $229 thousand. This suit was settled in January 2004
for approximately $150 thousand in full settlement and a mutual release of
claims from both parties.
From time to time, we are involved in various other legal proceedings and
claims incidental to the conduct of our business. Although it is impossible to
predict the outcome of any outstanding legal proceedings, we believe that such
legal proceedings and claims, individually and in the aggregate, are not likely
to have a material effect on our financial position, results of operations, or
cash flows.
Item 4: Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of Sorrento Networks Corporation (the
"Meeting") was held on January 8, 2004.
25
Elections of Directors
The shareholders elected each of the seven nominees for directors as listed
in the Sorrento Networks Corporation's proxy statement dated December 3, 2003.
The directors will hold office for one-year terms ending at the next Annual
Meeting or until their successors have been duly elected and qualified.
The proxies received by Sorrento Networks Corporation for the Meeting were
voted as follows:
VOTES
DIRECTOR VOTES FOR AGAINST
- -------------------- --------- -------
1 Phillip W. Arneson 7,647,206 519,518
2 Donne F. Fisher 7,785,513 381,211
3 Robert L. Hibbard 7,647,206 519,518
4 Gary M. Parsons 7,785,513 381,211
5 Larry J. Matthews 7,785,513 381,211
6 Don Herzog 7,785,513 381,211
7 Tom Schilling 8,030,228 136,496
Additional Shares to LuxN Shareholders
To approve the issuance of common shares associated with the LuxN
acquisition that exceeds 20% of the current outstanding shares of the Company as
of the acquisition date. Upon approval, the cash held under restriction would be
released to the Company for general working capital purposes
VOTES VOTES
PROPOSAL VOTES FOR AGAINST ABSTAIN UNVOTED
- ------------------------- --------- ------- ------- ---------
Additional Shares to LuxN
Shareholders 2,224,914 144,537 22,358 5,774,915
Appointment of Auditors
The shareholders ratified the appointment of BDO Seidman, LLP as Sorrento
Networks Corporation's independent auditors. The proxies received by Sorrento
Networks Corporation for the Meeting were voted as follows:
VOTES VOTES
PROPOSAL VOTES FOR AGAINST ABSTAIN UNVOTED
- ----------------------- --------- ------- ------- ---------
3 BDO Seidman, Auditors 8,120,038 29,276 17,410 --
26
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters.
Our common stock has been traded on the NASDAQ Small Cap Market under the
symbol FIBR since 1994. On December 16, 1998, we commenced trading on the NASDAQ
National Market System under the same symbol.
The following table sets forth the high and low sale prices per share of
our common stock as reported on the NASDAQ National Market for the periods
indicated. Quotations represent inter-dealer prices; they do not include retail
markups, markdowns, or commissions; and, they may not represent actual
transactions.
Fiscal
2002-2003 High Low
- ---------- ------ ------
Quarter from February 1, 2002 to April 30, 2002........ $73.20 $40.00
Quarter from May 1, 2002 to July 31, 2002.............. $53.00 $13.20
Quarter from August 1, 2002 to October 31, 2002........ $14.80 $ 2.40
Quarter from November 1, 2002 to January 31, 2003...... $15.07 $ 4.15
Fiscal
2003-2004
- ----------
Quarter from February 1, 2003 to April 30, 2003........ $ 8.30 $ 4.96
Quarter from May 1, 2003 to July 31, 2003.............. $ 5.98 $ 2.27
Quarter from August 1, 2003 to October 31, 2003........ $ 3.81 $ 2.25
Quarter from November 1, 2003 to January 31, 2004...... $ 5.35 $ 2.38
On March 31, 2004, the average of the high and low bid quotation for our
common stock was $3.13 per share. There is no assurance that a market in our
common stock will continue.
Approximate Number of Holders of Common Stock
As of March 31, 2004, there were approximately 756 holders of record,
including brokerage firms and nominees, of our common stock. We believe that the
number of beneficial owners of our common stock substantially exceeds this
number.
Dividends
We have never paid any cash dividends on our common stock. The present
policy of the Board of Directors is to retain all available funds to finance the
planned level of operations. In light of the anticipated cash needs of our
business, it is not anticipated that any cash dividends will be paid to the
holders of our common or preferred stock in the foreseeable future.
Sale of Unregistered Securities
During fiscal year 2004, we issued the following securities that were not
registered under the Securities Act of 1933:
June 04, 2003 Exchange Agreement 8,029,578 shares of common stock
June 04, 2003 Legal Settlement 54,314 shares of common stock
August 08, 2003 LuxN, Inc. Acquisition 1,879,340 shares of common stock
December 31, 2003 Private Placement 2,140,101 shares of common stock
January 26, 2004 Private Placement 2,921,512 shares of common stock
The registration statements for the above listed common stock issuances have
been filed with the Securities and Exchange Commission and have become
effective.
27
Securities Authorized For Issuance Under Equity Compensation Plans
The following table provides information as of January 31, 2004 regarding
compensation plans (including individual compensation arrangements) under which
equity securities of Sorrento are authorized for issuance.
Number of Securities To Number of Securities
Be Issued Upon Remaining Available for
Exercise Weighted-Average Exercise Future Issuance Under Equity