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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  
 
SECURITIES EXCHANGE ACT OF 1934
 
  
 
For the quarterly period ended July 31, 2002
 
OR
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  
 
SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 0-15810
 
 
SORRENTO NETWORKS CORPORATION
(Exact name of Registrant as specified in charter)
 
New Jersey
  
22-2367234
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification Number)
 
9990 Mesa Rim Road
San Diego, California
  
92121
(Address of principal executive offices)
  
(Zip Code)
 
Registrant’s telephone number, including area code: (858) 558-3960
 
 
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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Common Stock, $.30 par value per share, Outstanding: 15,349,748 shares at August 31, 2002.
 
This Form 10-Q, future filings of the registrant, and oral statements made with the approval of an authorized executive officer of the Registrant may contain forward looking statements. In connection therewith, please see the cautionary statements and risk factors contained in Item 2. “Fluctuations in Revenue and Operating Results” and “Forward Looking Statements—Cautionary Statement”, which identify important factors which could cause actual results to differ materially from those in any such forward-looking statements.
 

SORRENTO NETWORKS CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(In Thousands)
 
    
July 31,
2002
     
January 31,
2002
  
    
(Unaudited)
         
ASSETS
                  
CURRENT ASSETS
                  
Cash and equivalents
   
$
14,483
 
   
$
14,243
 
Accounts receivable, net
   
 
6,628
 
   
 
8,081
 
Inventory, net
   
 
13,648
 
   
 
18,810
 
Prepaid expenses and other current assets
   
 
550
 
   
 
1,252
 
Investment in marketable securities
   
 
6,336
 
   
 
28,120
 
    
  
TOTAL CURRENT ASSETS
   
 
41,645
 
   
 
70,506
 
    
  
PROPERTY AND EQUIPMENT, NET
   
 
17,698
 
   
 
17,411
 
    
  
OTHER ASSETS
                  
Purchased technology, net
   
 
466
 
   
 
652
 
Other assets
   
 
1,228
 
   
 
1,671
 
Investment in former subsidiary
   
 
—  
 
   
 
99
 
    
  
TOTAL OTHER ASSETS
   
 
1,694
 
   
 
2,422
 
    
  
TOTAL ASSETS
   
$
61,037
 
   
$
90,339
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
CURRENT LIABILITIES
                  
Short-term debt
   
$
159
 
   
$
1,043
 
Current maturities of long-term debt
   
 
360
 
   
 
362
 
Accounts payable
   
 
3,921
 
   
 
5,575
 
Accrued liabilities and other current liabilities
   
 
11,100
 
   
 
8,887
 
Due on redemption of preferred security of subsidiary
   
 
48,800
 
   
 
48,800
 
    
  
TOTAL CURRENT LIABILITIES
   
 
64,340
 
   
 
64,667
 
    
  
Long-term debt and capital lease obligations
   
 
3,749
 
   
 
3,867
 
Debentures payable, net of unamortized costs and discounts
   
 
4,558
 
   
 
3,489
 
Dividends payable
   
 
99
 
   
 
99
 
    
  
TOTAL LIABILITIES
   
 
72,746
 
   
 
72,122
 
    
  
COMMITMENTS AND CONTINGENCIES
                  
STOCKHOLDERS’ (DEFICIT) EQUITY
                  
Preferred stock, $.01 par value; liquidation preference $1,353
   
 
1
 
   
 
1
 
Common stock, $.30 par value; 150,000 shares authorized; 15,359 shares issued 15,350 shares outstanding at July 31, 2002; 14,209 shares issued and 14,200 shares outstanding at January 31, 2002
   
 
4,607
 
   
 
4,263
 
Additional paid-in capital
   
 
152,745
 
   
 
151,443
 
Deferred stock compensation
   
 
(131
)
   
 
(255
)
Accumulated deficit
   
 
(173,156
)
   
 
(161,326
)
Accumulated unrealized gain on marketable securities
   
 
4,294
 
   
 
24,160
 
Treasury stock, at cost; 9 shares at July 31, 2002 and January 31, 2002, respectively
   
 
(69
)
   
 
(69
)
    
  
TOTAL STOCKHOLDERS’ (DEFICIT) EQUITY
   
 
(11,709
)
   
 
18,217
 
    
  
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
   
$
61,037
 
   
$
90,339
 
    
  
See accompanying notes to consolidated financial statements.

2

 
SORRENTO NETWORKS CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands, except per share amounts)
 
    
Three Months Ended
July 31,
     
Six Months Ended
July 31,
  
    
2002
     
2001
     
2002
     
2001
  
NET SALES
   
$
5,199
 
   
$
7,998
 
   
$
11,202
 
   
$
22,495
 
COST OF SALES
   
 
7,499
 
   
 
6,702
 
   
 
12,014
 
   
 
16,270
 
    
  
  
  
GROSS PROFIT (LOSS)
   
 
(2,300
)
   
 
1,296
 
   
 
(812
)
   
 
6,225
 
    
  
  
  
OPERATING EXPENSES
                                    
Selling and marketing
   
 
3,645
 
   
 
3,836
 
   
 
7,077
 
   
 
8,149
 
Engineering, research and development
   
 
2,339
 
   
 
3,425
 
   
 
4,873
 
   
 
6,726
 
General and administrative
   
 
5,911
 
   
 
3,293
 
   
 
7,774
 
   
 
6,043
 
Deferred stock compensation
   
 
109
 
   
 
205
 
   
 
215
 
   
 
406
 
Other operating expenses
   
 
93
 
   
 
93
 
   
 
190
 
   
 
186
 
    
  
  
  
TOTAL OPERATING EXPENSES
   
 
12,097
 
   
 
10,852
 
   
 
20,129
 
   
 
21,510
 
    
  
  
  
LOSS FROM OPERATIONS
   
 
(14,397
)
   
 
(9,556
)
   
 
(20,941
)
   
 
(15,285
)
    
  
  
  
OTHER INCOME (EXPENSES)
                                    
Investment income
   
 
93
 
   
 
43
 
   
 
187
 
   
 
143
 
Interest expense
   
 
(1,541
)
   
 
(144
)
   
 
(2,851
)
   
 
(334
)
Other income (expenses)
   
 
39
 
   
 
(168
)
   
 
119
 
   
 
(117
)
Gain (loss) on sale of marketable securities
   
 
—  
 
   
 
(1,136
)
   
 
11,656
 
   
 
(1,136
)
    
  
  
  
TOTAL OTHER INCOME (EXPENSES)
   
 
(1,409
)
   
 
(1,405
)
   
 
9,111
 
   
 
(1,444
)
    
  
  
  
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX
   
 
(15,806
)
   
 
(10,961
)
   
 
(11,830
)
   
 
(16,729
)
PROVISION FOR INCOME TAXES
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
    
  
  
  
NET LOSS
   
$
(15,806
)
   
$
(10,961
)
   
$
(11,830
)
   
$
(16,729
)
    
  
  
  
NET LOSS PER SHARE:
                                    
PREFERRED STOCK DIVIDENDS
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
180
 
NET LOSS APPLICABLE TO COMMON SHARES
   
$
(15,806
)
   
$
(10,961
)
   
$
(11,830
)
   
$
(16,909
)
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
   
 
14,809
 
   
 
14,184
 
   
 
14,571
 
   
 
13,740
 
    
  
  
  
BASIC NET LOSS PER COMMON SHARE
   
$
(1.07
)
   
$
(0.77
)
   
$
(0.81
)
   
$
(1.23
)
    
  
  
  
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
   
 
19,275
 
   
 
14,184
 
   
 
19,037
 
   
 
13,740
 
    
  
  
  
DILUTED NET LOSS PER COMMON SHARE
   
$
(2.26
)
   
$
(0.77
)
   
$
(2.03
)
   
$
(1.23
)
    
  
  
  
COMPREHENSIVE INCOME AND ITS COMPONENTS CONSIST OF THE FOLLOWING:
                                    
Net loss
   
$
(15,806
)
   
$
(10,961
)
   
$
(11,830
)
   
$
(16,729
)
Unrealized losses from marketable securities:
                                    
Unrealized holding losses arising during the period
   
 
(6,812
)
   
 
(2,798
)
   
 
(8,210
)
   
 
(24,434
)
Reclassification adjustment for gains (losses) included in net loss
   
 
—