SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
December 10, 2002
Date of Report
(Date of earliest event reported)
SORRENTO NETWORKS CORPORATION
(Exact name of Registrant as specified in charter)
NEW JERSEY
(State or other jurisdiction of incorporation)
0-15810 22-2367234
(Commission File No.) (IRS Employer Identification Number)
9990 Mesa Rim Road
San Diego, California 92121
(Address of Principal Executive Office)
(858) 558-3960
(Registrant's telephone number, including area code)
ITEM 5. OTHER EVENTS AND REQUIRED FD DISCLOSURE
Restructuring Letter of Intent and Term Sheet
On December 10, 2002, the Company entered into a Letter of Intent (the
"Letter of Intent") with holders (the "Consenting Holders") of 51.2% of the
principal amount of the Company's 9.75% Senior Convertible Debentures (the
"Debentures") and 50.5% of the liquidation preference of the Series A
Convertible Preferred Stock (the "Preferred Stock") of Sorrento Networks, Inc.,
a wholly-owned subsidiary of the Company ("SNI"). The Letter of Intent and
associated term sheet (the "Term Sheet") contemplate an exchange of the
Debentures and the Preferred Stock at a closing ("Closing") into shares (the
"Exchange Shares") of common stock (the "Common Stock") and $12.5 million (the
"Exchange Debentures", and together with the Fee Amount Debentures (defined
below), the "New Debentures") of new 7.5% secured convertible debentures of the
Company (the "Exchange"). Certain holders of the Series A Preferred would also
receive additional New Debentures of up to $0.95 million (the "Fee Amount
Debentures") to pay certain legal fees. The Exchange proposed in the Letter of
Intent and the Term Sheet is contingent upon satisfaction of the terms and
conditions described in the Letter of Intent.
The Letter of Intent and the Term Sheet contemplate the execution of
definitive agreements (including an Exchange Agreement, the "Definitive
Agreements") which would provide for, among other things, the following:
In the Exchange, holders of the Preferred Stock and the Debentures
would receive 57.5% and 42.5%, respectively, of the Exchange Shares and the
Exchange Debentures, with the amounts to be received by each holder to be based
upon such holder's respective ownership percentage of the Preferred Stock and
the Debentures; provided, however, that the Definitive Agreements may provide
for holders to select different allocations.
The Exchange Shares and the shares of Common Stock issuable upon
conversion of the Exchange Debentures (the "Conversion Shares") would represent
87.5% of the Common Stock on a Diluted Basis (the "Aggregate Percentage").
"Diluted Basis" means the total number of shares of Common Stock issued and
outstanding immediately after the Closing, after giving effect to (i) the
Exchange and the issuance of Exchange Shares, (ii) the Conversion Shares and
(iii) the exercise of the Warrants (as defined below), but without giving effect
to (a) shares issuable upon exercise of the Employee Stock Options (as defined
and described below), (b) the shares issuable upon conversion of the Fee Amount
Debentures and (c) the exercise of any existing employee options, all of which
currently have exercise prices above the market price of the Common Stock and
will be listed on a schedule to the Exchange Agreement.
As of the Closing, Holders of the outstanding Common Stock immediately
before the date of the Closing would own 7.5% of the Common Stock on a Diluted
Basis. In addition, holders of the outstanding Common Stock would receive
warrants (the "Warrants") to acquire Common Stock which, in the aggregate,
totals 5% on a Diluted Basis for a cash exercise price
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equal to 110% of the Reference Price (as defined in the Term Sheet). The Company
would establish a record date not more than 10 business days prior to the
Closing to determine the specific holders of its Common Stock who will be
entitled to receive the Warrants. The Warrants would be exercisable at any time
prior to August 2, 2007; provided, however, that the Company may repurchase the
Warrants at any time, upon 30 days prior notice, for a nominal price at any time
after the volume-weighted average market price of the Common Stock for any 10
consecutive trading days equals or exceeds 150% of the exercise price.
The Term Sheet also contemplates that the Company's Board of Directors
will adopt an employee incentive stock option plan under which options (the
"Employee Stock Options") to acquire up to 15% of the Common Stock on a Diluted
Basis (which for these purposes would include the shares issuable upon
conversion of the Fee Amount Debenture) would be available for persons employed
by the Company or any of its subsidiaries on or after December 9, 2002. Up to
half of the Employee Stock Options would be issued at or promptly following the
Closing at the then-current market price (but in any event not less than 90% of
the Reference Price), and the remaining Employee Stock Options would be issuable
from time to time in such amounts and at such prices as approved by the Board of
the Directors after the Closing. Any such Employee Stock Options granted to
persons who currently hold employee options from the Company will be made
subject to the agreement by such person not to exercise any currently existing
options held by such persons.
The Exchange Debentures and the Fee Amount Debentures would mature on
August 2, 2007 (the "Maturity Date") and would be convertible at any time at the
option of the holder at a conversion price (the "Conversion Price") equal to the
Reference Price into shares of Common Stock; provided however, that in no event
will the number of shares issuable upon conversion of the Exchange Debentures on
a Diluted Basis as of the Closing represent less than 10% nor more than 30% of
the Aggregate Percentage (i.e., the Conversion Price is subject to a collar).
Subject to certain limits, interest on the Exchange Debentures and the Fee
Amount New may be paid, at the Company's option, either in cash,
additional New Debentures or Common Stock. The New Debentures would include
covenants restricting the Company's ability to incur senior or subordinated debt
or preferred stock other than $5 million in lease or equipment financing and a
$5 million revolving credit facility (up to $10 million with certain consents),
as well as other standard covenants and protective provisions. At any time prior
to the Maturity Date, the Company may redeem for cash on a pro rata basis some
or all of the New Debentures at par, plus accrued
interest.
Until one year after the Closing and subject to certain exceptions,
exchanging holders of Debentures and Preferred Stock who continue to hold
Exchange Shares and New Debentures will be entitled to certain weighted
average anti-dilution protection for such continued holdings with respect to
certain additional issuances of Common Stock. In addition, if the Company is
required to issue shares of Common Stock upon the exercise of any right, option
or warrant to purchase Common Stock which was issued prior to the Closing and
was not listed on the Option Schedule, then the Company will issue additional
shares of Common Stock to the exchanging holders of the Debentures and the
Preferred Stock, and will adjust the Conversion Price of the New Debentures,
sufficient to offset the dilutive impact of such issuances.
The Consenting Holders of the Debentures and/or the Consenting
Holders of
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the Preferred Stock may each request, on or before the Closing, that the
Company appoint one new director (for a total of two possible new directors).
The new director(s) would continue in office until the next regularly
scheduled annual meeting of the Company's stockholders and shall be nominated
for re-election at such meeting.
Holders of the Debentures and the Preferred Stock participating in the
Exchange will execute exit consents (the "Exit Consents"), effective upon the
Closing, by which the rights arising under the Debentures and the Preferred
Stock, respectively, will be changed, amended or modified with respect to
covenants, rights, obligations or provisions associated with any agreements that
may govern the Debentures and the Preferred Stock.
Upon the Closing and subject to consideration of tax issues, the
Company's subsidiaries, including SNI, would be merged with and into the
Company. In addition, the Company would reincorporate in Delaware or another
state satisfactory to the Company and the Consenting Holders.
As a result of the execution of the Letter of Intent, the Company, SNI
and the Consenting Holders of the Preferred Stock have agreed to stay all the
Delaware Litigation relating to the Preferred Stock.
The consummation of the Exchange and the other matters contemplated by
the Letter of Intent and the Term Sheet is subject to the satisfaction or waiver
of numerous conditions, including but not limited to, the execution of the
Definitive Agreements, satisfactory completion of due diligence by the holders
of the Debentures and the Preferred Stock, and the Closing occurring by March
28, 2003 (as such date may be extended by consent of the holders of the
Debentures and the Preferred Stock, the "Closing Deadline"). In addition, other
than in the case of Alternative 3 (as defined below), such consummation will
also require approval by the Company's stockholders and the effectiveness of a
Registration Statement registering the securities issuable in connection with
the Exchange (or upon conversion thereof). The Term Sheet also includes a
"Timeline of Critical Events" which constitutes additional terms and conditions
of the proposed Exchange and the Closing.
In addition, consummation of the Exchange requires the consent of the
holders of the Debentures and the Preferred Stock under one of the following
three alternatives:
o the written acceptance by the holders of all of the Debentures and the
Preferred Stock;
o the written acceptance and subsequent confirmation by the holders of all of
the Preferred Stock and the holders of at least 90% of the principal amount
of the Debentures, that those holders of the Debentures who have not
consented to the Exchange will be bound by the Debentures as amended by the
Exit Consents and that the Debentures will be paid at maturity only in
Common Stock; or
o the written acceptance by at least two-thirds (2/3) of those holders of
Preferred Stock that actually vote to accept or reject the Exchange, and
the written acceptance by at least 50% of the holders of Debentures that
actually vote to accept or reject the Exchange and two-thirds (2/3) in
dollar amount of the Debentures held by those holders of the Debentures
that actually vote to accept or reject the Exchange, in which case the
Company and SNI shall seek orders by a court of competent jurisdiction
binding all non-consenting holders to the Exchange and compelling them
to accept the exchange consideration in satisfaction of all claims and
interests represented by the Preferred Stock and the Debentures.
("Alternative 3").
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The Company has agreed to pay up to $320,000 in consent fees to holders
of the Debentures who, by January 9, 2003, waive certain events of default and
interest payments and agree to forebear from enforcing any right or remedy until
the earlier of the Closing or the Closing Deadline pursuant to a Consent and
Waiver.
The foregoing description of the Letter of Intent and the Term Sheet is
qualified in its entirety by reference to the Letter of Intent (including, as
Exhibit A thereto, the Term Sheet), a copy of which is attached hereto as
Exhibit 99.1 and incorporated herein in its entirety by reference. The form of
the Consent and Waiver is attached hereto as Exhibit 99.2 and incorporated
herein in its entirety by reference.
If the Exchange and related transactions are consummated, the change in
ownership of the Common Stock may constitute a change in control of the Company
that would be reportable as an Item 1 event on a Current Report on Form 8-K.
Press Release
On December 12, 2002, the Company issued a press release with respect
to, among other things, the Letter of Intent and the Term Sheet, a copy of which
is attached hereto as Exhibit 99.3.
Pro Forma Balance Sheet
Attached to this Form 8-K as Exhibit 99.4 is the Company's Consolidated
Unaudited Balance Sheet as of October 31, 2002 on an actual basis and on a
pro forma basis as if the Exchange had occurred on that date.
This report contains forward-looking statements that are based on
current expectations, estimates, forecasts and projections about the industries
in which we operate, our beliefs and our management's assumptions. Words such as
"expects," "anticipates," "targets," "goals," "projects," "intends," "plans,"
"believes," "seeks," "estimates" and variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecast in
such forward-looking statements. For a list and description of such risks and
uncertainties, see the reports filed by Sorrento Networks Corporation with the
Securities and Exchange Commission.
Item 7. Exhibits.
Exhibit Description
99.1 Letter of Intent dated December 10, 2002 with holders of the
Company's 9.75% Senior Convertible Debentures and the Series A
Convertible Preferred Stock of Sorrento Networks, Inc., including
this Term Sheet attached thereto as Exhibit A
99.2 Form of Consent and Waiver.
99.3 Press Release issued on December 12, 2002.
99.4 Pro forma Consolidated Balance Sheet of the Company and its
Subsidiaries as of October 31, 2002 giving effect to the Exchange
as if it occurred on October 31, 2002 (unaudited).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SORRENTO NETWORKS CORPORATION
DATE: December 16, 2002 By: /s/ Joe R. Armstrong
-----------------------------------------
Joe R. Armstrong, Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
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99.1 Letter of Intent dated December 10, 2002 with holders of the
Company's 9.75% Senior Convertible Debentures and the Series A
Convertible Preferred Stock of Sorrento Networks, Inc., including
the Term Sheet attached thereto as Exhibit A.
99.2 Form of Consent and Waiver.
99.3 Press Release issued on December 12, 2002.
99.4 Pro forma Consolidated Balance Sheet of the Company and its
subsidiaries as of October 31, 2002 giving effect to the
Exchange as if it occurred on October 31, 2002 (unaudited).