SCHEDULE 14A
(Rule 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[_] Confidential, for use of the Commission only (as permitted by Rule 14a-6(e)
(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-12
SORRENTO NETWORKS CORPORATION
_____________________________________________________________________________
(Name of Registrant as Specified In Its Charter)
_____________________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
______________________________________________________________________
2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
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previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount previously paid:
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4) Date Filed:
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[SORRENTO LOGO]
AND ADDRESS
December 3, 2003
Dear Fellow Shareholders:
We cordially invite you to attend the Annual Meeting of the Shareholders of
Sorrento Networks Corporation (the "Company") to be held at 10:00 a.m., Pacific
Time, on Thursday, January 8, 2004, at the San Diego Marriott Del Mar, 11966 El
Camino Real, San Diego, California.
The purposes of this meeting are the election of directors, ratification of
the appointment of the independent accountants and the approval of the issuance
of common shares associated with the LuxN acquisition that exceeded 20% of the
then total outstanding shares of the Company. Following the meeting, we will
also review the status of our business. These matters are more fully described
in the accompanying Notice of Annual Meeting and Proxy Statement, which we
encourage you to read carefully.
A continental breakfast will be available prior to the meeting beginning at
9:00 a.m. Our senior management will be available to talk with shareholders
before the meeting. Following the formal meeting, management will review our
accomplishments during the past year, update shareholders on our plans for the
future, and respond to shareholders' questions.
The Board of Directors recommends that Shareholders vote in favor of each
proposal. We encourage all Shareholders to participate by voting their shares by
Proxy, whether or not you plan to attend the meeting, as soon as possible. You
may vote over the Internet, by telephone, or by mailing a traditional proxy
card. If you do attend the Annual Meeting, you may revoke your proxy at that
time and vote in person, if you wish, even if you have previously returned your
proxy.
If you have questions about the proposals or voting your shares, please
call Mary Lay, V.P. Finance, at the Company at (858) 909-3445.
Sincerely,
Phillip W. Arneson
Chairman and Chief Executive Officer
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NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
----------
To be held on January 8, 2004
Notice is hereby given that the Annual Meeting of Shareholders (the "Annual
Meeting") of Sorrento Networks Corporation will be held at the San Diego
Marriott Del Mar, 11966 El Camino Real, San Diego, California, on January 8,
2003 at 10:00 a.m., for the following purposes:
1. To elect seven directors who will hold office for one-year terms
ending at the next Annual Meeting or until their successors have
been duly elected and qualified.
2. 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.
3. To ratify the appointment of BDO Seidman, LLP as the firm of
independent auditors for the year ended January 31, 2004.
4. To consider and take action upon such other business as may properly
come before the Annual Meeting or any adjournment thereof.
Only shareholders of record at the close of business on November 24, 2003
will be entitled to notice of and to vote at the Annual Meeting or any
adjournment thereof.
It is important that your shares be represented at the Annual Meeting.
Whether or not you plan to attend the Annual Meeting, please vote as soon as
possible. You may vote over the Internet, as well as by telephone or by mailing
a traditional proxy card. Your proxy may be revoked at any time prior to the
vote at the Annual Meeting by following the procedures set forth in the
accompanying Proxy Statement.
By Order of the Board of Directors
PHILLIP W. ARNESON
Chairman and Chief Executive Officer
San Diego, California
December 10, 2003
SORRENTO NETWORKS CORPORATION
9990 Mesa Rim Road
San Diego, California 92121
----------
Proxy Statement
----------
Annual Meeting of Shareholders to be held January 8, 2004
GENERAL INFORMATION
This Proxy Statement is being furnished to shareholders of Sorrento
Networks Corporation, a Delaware corporation, in connection with the
solicitation of proxies by our Board of Directors for use at our Annual Meeting
of Shareholders (the "Annual Meeting") to be held at the San Diego Marriott Del
Mar, 11966 El Camino Real, San Diego, California, on January 8, 2004 at 10:00
a.m., and any adjournments or postponements thereof, pursuant to the Notice of
Meeting. The approximate date on which this Proxy Statement is first being sent
to shareholders is December 6, 2003.
Who Can Vote
Only holders of record of our common stock, par value $0.001 per share, at
the close of business on November 24, 2003, are entitled to vote at the Annual
Meeting. As of November 15, 2003, we had outstanding and entitled to vote
10,477,217 shares of common stock. The 444 shares of common stock in our
treasury on that date will not be voted.
How You Can Vote by Proxy
If you are a registered shareholder (you hold your stock in your own name),
you may vote by one of the following methods:
o Proxy Card, by completing and mailing the enclosed proxy card;
o Telephone Voting, by dialing 1-800-PROXIES and following the enclosed
instructions for telephone voting;
o Via the Internet, by going to the web address http://www.amstock.com
and following the enclosed instructions for Internet voting.
If you are a registered voter, you can simplify your voting and save the
Company expense by voting via the Internet or calling the toll-free number
listed on the proxy card. A control number, located on the proxy card, is
designated to verify a shareholder's identity and allow the shareholder to vote
the shares and confirm that the voting instructions have been recorded properly.
If you vote via the Internet or by telephone, please do not return a signed
proxy card.
1
Please be aware that if you vote over the Internet, you might incur costs
such as telephone and Internet access charges for which you will be responsible.
The Internet and telephone voting facilities for eligible shareholders of record
will close at 11:59 p.m. [Pacific] Time on January 7, 2003.
If you return your signed proxy card or use the telephone or Internet
voting before the Annual Meeting, we will vote your shares as you direct. You
have three choices on each matter to be voted upon. For the election of
directors, you may vote for (1) all of the nominees, (2) none of the nominees,
or (3) all of the nominees except those you designate. See "Proposal 1 -
Election of Directors." For each of the other items, you may vote "FOR",
"AGAINST," or "ABSTAIN" from voting.
If you do not specify on your proxy card or through Internet or telephone
prompts how you want to vote your shares, we will vote them "for" the election
of director nominees and "for" ratification of the independent auditors.
If your shares are held in "street name" (through a broker or other
nominee), you must provide instructions on voting to your nominee holder. If you
wish to vote in person at the meeting, you must obtain from the record holder a
legal proxy issued in your name. You will need to contact your broker or other
nominee to determine whether you will be able to vote electronically via the
Internet or by telephone.
How You May Revoke or Change Your Vote
You can revoke your proxy at any time before it is voted at the Annual
Meeting by:
(1) Sending written notice of revocation to the Corporate Secretary; or
(2) Submitting another proper proxy with a more recent date than that of
the proxy first given by (i) following the Internet voting
instructions, or (ii) following the telephone voting instructions, or
(iii) by signing and returning a proxy card to the Company; or
(3) Attending the Annual Meeting and voting in person.
Another person at the meeting may also represent you if you execute a
proper proxy designating that person.
Any notice of revocation that is delivered at the Annual Meeting should be
hand- delivered to the Inspector of Election at or before the taking of the
vote. A shareholder may be requested to present such documents as shall be
reasonably requested for the purpose of establishing such shareholder's
identity.
Quorum, Voting Requirements and Effect of Abstentions and Non-Votes
At the Annual Meeting, an Inspector of Election will determine the presence
of a quorum and tabulate the results of the voting by the shareholders. The
holders of a majority of the
2
outstanding shares of common stock that are entitled to vote at the Annual
Meeting must be present in person or by proxy in order to have the quorum that
is necessary for the transaction of business at the Annual Meeting. The
Inspectors will treat properly executed proxies marked "abstain" or required to
be treated as "non-votes" as present for purposes of determining whether there
is a quorum at the Annual Meeting. Broker "non-votes" occur when a broker or
nominee holding shares for a beneficial owner returns a proxy but does not have
the authority to vote on a particular proposal.
The seven nominees for director who receive the highest number of
affirmative votes will be elected to serve as directors until the next
annual meeting of our shareholders or until their successors are duly
elected and qualified. All other matters will require the approval of
a majority of the votes cast by the holders of common stock in person
or by proxy at the Annual Meeting.
Costs of Solicitation
We will bear the cost of preparing, printing, and mailing material in
connection with this solicitation of proxies. In addition to mailing material,
certain of our employees may make solicitations personally, by telephone and by
fax. We are required to reimburse brokerage firms, banks, and others for their
reasonable out-of-pocket expenses, including clerical expenses, related to
forwarding proxy material to beneficial owners of stock or otherwise in
connection with this solicitation of proxies.
Annual Report
Our Annual Report on Form 10-K/A for the fiscal year ended January 31,
2003, containing audited financial statements for such year, and the Quarterly
Report on Form 10-Q for the fiscal quarter ended July 31, 2003 are enclosed with
this Proxy Statement. This Proxy Statement and the enclosed Proxy are being sent
to our shareholders on or about December 6, 2003.
IN ORDER THAT YOUR SHARES MAY BE REPRESENTED AT THIS MEETING, YOU ARE REQUESTED
TO PLEASE SIGN, DATE AND MAIL THE PROXY PROMPTLY.
PROPOSAL 1
ELECTION OF DIRECTORS
At the Annual Meeting, seven directors will be elected to serve for
one-year terms expiring on the date of the Annual Meeting the following
year. Each director elected will continue in office until a successor has
been elected or until his resignation or removal in the manner provided by
our By-Laws. The names of the nominees for the Board of Directors are
3
listed below. Shares represented by a properly executed proxy in the
accompanying form will be voted for such nominees. However, discretionary
authority is reserved to vote such shares in the best judgment of the persons
named in the event that any person or persons other than the nominees listed
below are to be voted on at the meeting due to the unavailability of any nominee
so listed.
NOMINEES FOR ONE-YEAR TERMS
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE TO ELECT THE
FOLLOWING NOMINEES TO SERVE ON THE BOARD OF DIRECTORS.
Phillip W. Arneson, 67, has been our Chairman and Chief Executive Officer since
March 2002. He previously served as our President and Chief Operating Officer
from October 2001 until his appointment as Chairman and Chief Executive Officer.
He also has served as one of our directors since October 2000. From 1996 to
2001, Mr. Arneson held the position of Executive Vice President for privately
held Frandsen Corporation, a diversified financial and manufacturing company
where he was responsible for growing the enterprise through acquisitions,
internal growth, and strategic partnerships. Additionally, he served as
President of two of its operating companies. Mr. Arneson has served several
public and private technology companies in executive management, holding
positions as Chief Executive Officer, President and Group Vice President as well
as having extensive experience as a director of such companies. From 1982 to
1986, he served as Executive Vice President of Allied Signal's Electronic Sector
and as Chief Executive Officer of its subsidiary, Amphenol Corp. In 1986, Mr.
Arneson's technology group garnered the prestigious IR-100 award for the
development of an integrated fiber optics phase modulator. Mr. Arneson holds a
B.S. in Electrical Engineering from the University of Minnesota's Institute of
Technology.
Donne F. Fisher, 65, has served as one of our directors since November 2001 and
is chairman of our Audit Committee. Mr. Fisher is currently President of Fisher
Capital Partners, Ltd., a private venture capital and investment company he
founded in 1991. From 1982 to 1996, Mr. Fisher held various executive officer
positions with Tele-Communications, Inc. ("TCI") and its subsidiaries including
Executive Vice President and Treasurer. He was a TCI director from 1980 until
1999 when TCI merged into AT&T Corporation. Since his retirement in 1996, Mr.
Fisher has been a consultant to TCI (now AT&T Broadband). Mr. Fisher also serves
as a director of Liberty Media Corporation, a former subsidiary of AT&T, and
General Communications, Inc., a diversified telecommunications provider.
Robert L. Hibbard, 51, has served as one of our directors since November 2001
and is chairman of our compensation committee. Mr. Hibbard is an attorney and
management consultant in private practice in which he handles a wide variety of
commercial matters including technology licensing and the structuring of merger
and acquisitions transactions. From 1997 to 1999, Mr. Hibbard was Chief
Executive Officer of Kim Technologies International, Inc., a privately held
developer of electromechanical "super" capacitors for wireless applications.
From 1994 to 1997, Mr. Hibbard was Vice President and General Counsel at Allied
Signal Engines, and from 1987 to
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1994, Assistant General Counsel at Allied Signal Aerospace. Mr. Hibbard holds a
B. A. degree from Gustavus Adolphus College and a J. D. degree from Marquette
University Law School.
Gary M. Parsons, 52, has served as one of our directors since October 2000.
Since 1996, Mr. Parsons has held the position of Chairman of the Board for
Motient Corporation, a wireless data firm, and XM Satellite Radio Holdings,
Inc., and in October 2001 was named Chairman and Chief Executive Officer of
Mobile Satellite Ventures, LLP. On January 10, 2002, Motient filed a voluntary
bankruptcy petition in connection with a prearranged restructuring of its debt
and emerged from bankruptcy on May 1, 2002. From 1990 to 1996, Mr. Parsons held
a number of executive positions at MCI Communications, Inc., including Executive
Vice President, Chief Executive Officer of MCImetro, Inc., and President of
MCI's Southern Division. From 1984 to 1990, Mr. Parsons held the
responsibilities of Executive Vice President at Telecom*USA, a fiber-optic and
long distance venture subsequently acquired by MCI. Mr. Parsons holds a B.S. in
Electrical and Computer Engineering from Clemson University and an MBA from the
University of South Carolina.
Larry J. Matthews, 76, has served as one of our directors since August 2002. Mr.
Matthews was a co-founder of Zytec Corporation, a manufacturer of high
performance electronics for the telecommunications and computer industries. Mr.
Matthews served as an officer and director of Zytec, which grew from a start-up
operation to a public company with revenues exceeding $250 million annually
during his tenure. In 1992, Zytec won the National Baldrige Quality Award. A
public offering of Zytec was completed in 1994. In 1997, Zytec merged with
Computer Products Corporation to form Artesyn Technologies (ATSN, NASDAQ). Mr.
Matthews currently serves on Artesyn's board as a director. He also serves on
the Board of Veritec, Inc. (OTCBB, VRTC.OB,), a seller of microprocessor-based
encoding and decoding systems products. From January 1999 to June 2000, Mr.
Matthews served as Veritec's Acting President and Chief Executive Officer. Mr.
Matthews holds a Bachelor of Engineering degree from Iowa State University, and
serves on the boards of several privately held companies.
Don Herzog, 34, is an investment professional who worked most recently for the
firm of Zimmer Lucas Partners in New York City from 2001 to 2003. Prior to that,
he was with the venture capital firm Odyssey Capital from 2000 to 2001. Mr.
Herzog earned his MBA at Carnegie Mellon from 1998 to 2000 and received a
B. S. in electrical engineering from Drexel University in 1990, prior to eight
years as a naval officer.
Tom Schilling, 37, was most recently Chief Financial Officer of Cincinnati Bell
Inc. (fka Broadwing Inc.), serving from 2002-2003. Prior to that, and from 1999,
Mr. Schilling was Senior VP and Chief Financial Officer of Broadwing
Communications, a subsidiary of Cincinnati Bell. Further, Mr. Schilling was
Chief Financial Officer of AutoTrader.com from 1998-1999, and from 1993-1998
held several management positions with MCI Communications, Inc. He holds a B.S.
in accounting from Indiana University.
INFORMATION CONCERNING THE BOARD
5
The Board of Directors met eleven times in fiscal 2003. No director
attended fewer than 75% of the meetings.
The Board of Directors has an Audit Committee, which met five times during
fiscal 2003, and a Compensation Committee, which met three times during fiscal
2003. No committee member attended fewer than 75% of the meetings.
The Compensation Committee is responsible for reviewing the compensation
and benefits of our executive officers, making recommendations to the Board of
Directors concerning compensation and benefits for such executive officers,
reviewing overall company-wide compensation plans and administering our stock
option plans. Mr. Hibbard has been elected to serve as chairman of the
Compensation Committee with Messrs. Fisher, Herzog, Matthews and Parsons
currently serving as members.
The Audit Committee is responsible for providing independent, objective
oversight of our accounting functions and internal controls. The Audit Committee
reviews our financial statements, meets with our independent accountants to
review our internal controls and financial management practices and examines all
agreements or other transactions between us and our directors and officers
(other than those compensation functions assigned to the Compensation Committee)
to determine whether such agreements or transactions are fair to our
shareholders.
Our independent auditors and our internal accounting staff have
unrestricted access to our Audit Committee.
The Audit Committee is composed of independent directors, and acts under a
written charter first adopted and approved by the Board of Directors in June
2000, a copy of which is attached to this Proxy Statement as Exhibit A. Each
member of the Audit Committee is independent as defined by the NASDAQ Stock
Market Listing Standards and by the Sarbanes-Oxley Act of 2002. Mr. Fisher
served as chairman of the Audit Committee with Messrs. Matthews and Parsons as
members of the Audit Committee. In fiscal year 2004, Mr. Fisher has again been
elected to serve as chairman of the Audit Committee with Messrs. Herzog,
Matthews, and Schilling serving as members. The report by the Audit Committee
for the year ended January 31, 2003, as submitted by the members of the Audit
Committee, follows:
Audit Committee Report
The following report of the Audit Committee does not constitute soliciting
material and should not be deemed filed or incorporated by reference into any
other company filing under the Securities Act of 1933 or the Securities Exchange
Act of 1934, except to the extent we specifically incorporate this Report by
reference therein.
The Audit Committee consulted with our independent accountants regarding
the following:
o the plan for, and the independent accountants' report on, each audit
of our financial statements;
o our financial disclosure documents, including all financial statements
and reports filed
6
with the SEC and sent to shareholders;
o reviewing our accounting practices, principles, controls and
methodologies;
o significant developments in accounting and SEC rules;
o the adequacy of our internal controls and the performance of our
accounting personnel.
The Audit Committee is responsible for overseeing and monitoring the
quality of our accounting and auditing practices as well as recommending to the
Board that our financial statements be included in our annual report. Management
is responsible for planning and conducting audits, ensuring that our financial
statements are prepared in accordance with accounting principles generally
accepted in the United States of America, and our system of internal controls.
In this context, the Audit Committee has held discussions with management
and BDO Seidman, LLP, our independent accountants for fiscal 2003. Management
has represented to the Committee that our financial statements were prepared in
accordance with accounting principles generally accepted in the United States of
America, and the Committee has reviewed and discussed the consolidated financial
statements and other such matters deemed relevant and appropriate with
management and the independent accountants. In addition, the Committee has met
with the independent accountants and discussed the scope and results of the
audit for fiscal 2003 and the matters required to be discussed by Statement on
Auditing Standards No. 61, "Communication with Audit Committees".
Further, the Audit Committee has received the written disclosures and the
letter from BDO Seidman, as required by Independence Standards Board No. 1,
"Independence Discussions with Audit Committees", and has discussed with BDO
Seidman, LLP its independence from management. The Committee has also reviewed
the fees received by the independent accountants for services related to fiscal
2003 and determined that no material amounts were paid for non-audit related
services, and such amounts were compatible with the maintenance of BDO Seidman,
LLP's independence in the conduct of its auditing function.
Based on the reviews and discussions described above, the Audit Committee
recommended to the Board, and the Board has approved, that the audited financial
statements be included in our Annual Report on Form 10-K for the year ended
January 31, 2003, as amended, for filing with the Securities and Exchange
Commission. The Committee also has recommended, subject to stockholder
ratification, the selection of BDO Seidman, LLP as our independent accountants
for the fiscal year ending January 31, 2004.
The members of the Audit Committee have also confirmed there have been no
new circumstances or developments since their respective appointments to the
Audit Committee that would impair any member's ability to act independently.
7
The Audit Committee
Donne F. Fisher, Chairman
Gary M. Parsons
Larry J. Matthews
Audit and Non-Audit Fees
The following table presents fees for professional audit services rendered
by BDO Seidman, LLP for the audit of the Company's annual financial statements
and fees billed for other services rendered by BDO Seidman, LLP during Fiscal
2003 and 2002:
FY 2003 FY 2002
-------- --------
Audit fees (a) $215,666 $134,951
Audit-related fees (b) 12,735 57,903
Tax related fees (c) 193,250 4,806
Other fees (d) -- --
-------- --------
Total $421,651 $197,660
(a) Includes fees incurred for quarterly reviews conducted under the
Statement of Auditing Standards No. 71 and 100 and the Company's
audited financial statements including Audit Committee meeting
fees and proxy review fees.
(b) Other audit-related fees consist primarily of audits and reviews of
stand alone financial reports of the Company and it's subsidiaries,
reviews of draft public offering documents of a subsidiary which were
not filed in FY 2002, review of all public filings that incorporate by
reference or accompany the Company's audited financials statements, a
single purpose audit of a subsidiary's revenue from a product line
required for compliance with a purchase agreement and restructuring
pro forma financial information.
(c) Tax related fees include both domestic and international tax
preparation.
(d) none
BDO Seidman did not provide and it did not bill nor was it paid any fees
for, financial information systems design and implementation services in fiscal
2003 and 2002. All non-audit services were reviewed with the Audit Committee,
which concluded that the provision of such services by BDO Seidman, LLP was
compatible with the maintenance of that firm's independence in the conduct of
its auditing function.
Director Compensation
Each director who is not one of our employees or our subsidiaries is paid
an annual retainer of $24,000 per year, payable at a rate of $2,000 per month.
If an outside director is not nominated for re-election or re-elected, the
unpaid remainder of his $24,000 annual retainer shall be paid by the Company in
a lump sum upon his departure.
8
Each director who is not one of our employees receives $1,250 for each
Board of Directors meeting attended. Directors who serve as the chairman of a
Committee receive an additional $750 for each Committee meeting attended and all
other committee members receive $500. All Directors are reimbursed for expenses
incurred in attending Board of Directors and Committee meetings. Directors
receive no additional compensation or options for serving on the Board of
Directors or any Committee.
Directors receive a Non-Statutory Option to purchase 50,000 shares of
common stock annually, provided that the director has not previously been
employed by, or received a prior option grant from us. The shares underlying
these options vest (or our right of repurchase lapses) in equal installments at
the end of each month during the subsequent 12-month period measured from the
grant date. The stock options shall be exercisable for a period of 10 years
after the date of grant. If an outside director is not nominated for re-election
or re-elected subsequent to the date of the annual grant, the unvested options
shall immediately vest.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of October 31, 2003,
regarding the ownership of our common stock by (i) each director and nominee for
director of the Company; (ii) each of the present executive officers named in
the executive officer section following; (iii) each person known to us to
beneficially own 5% or more of our common stock; and (iv) all of our directors
and executive officers as a group. Except as indicated, all persons named as
beneficial owners of our common stock have sole voting and investment power with
respect to the shares indicated as beneficially owned by them. All persons named
have an address at c/o Sorrento Networks Corporation, 9990 Mesa Rim Road, San
Diego, California 92121, unless otherwise indicated.
Common Stock
---------------------------
Number of Percentage of
Name of Beneficial Owner (A) Shares Outstanding (N)
---------------------------- --------- ---------------
Phillip W. Arneson (B) 444,453 4.1%
Donne F. Fisher (C) 105,982 1.0%
Robert L. Hibbard (D) 34,717 *
Gary M. Parsons (E) 32,250 *
Larry J. Matthews (F) 30,917 *
Don Herzog (G) 12,500 *
Tom Schilling (H) 12,500 *
Joe R. Armstrong (I) 257,195 2.4%
All Directors, Nominees and
9
Executive Officers as a Group 930,512 8.7%
(J) Rajendra Singh 873,132 8.3%
7925 Jones Branch Drive
Suite 6400
McLean, VA 22102
(K) Belmarken Holdings, BV 2,059,195 19.7%
Boeing Avenue 53
1119 PE Schiphol Rijk
The Netherlands, PF
(L) Sorrento Holdings, L.L.C. 791,604 7.6%
c/o Hareh Capital Management
621 N.W. 53rd St., Suite 620
Boca Raton, FL 33487
(M) Menlo Ventures 614,947 5.9%
2000 Sand Hill Rd., Bldg. 4, Ste. 100
Menlo Park, CA 94024
----------
* Less than 1%
(A) All information with respect to beneficial ownership of the shares is based
upon filings made by the respective beneficial owners with the Securities
and Exchange Commission or information provided by such beneficial owners
to us.
(B) Includes exercisable options held by Mr. Arneson to acquire 444,203 shares
of common stock, and 250 shares of common stock purchased in June 2002.
(C) Includes exercisable options to acquire 32,167 shares of common stock held
by Mr. Fisher. and 24,605 shares of common stock received in distribution
of stock to our former Series A Preferred Stock holders and interest
payments on the 7.5% Convertible Debenture outstanding. Mr. Fisher is
President of Fisher Capital Partners, which holds 49, 210 shares of our
common stock. Mr. Fisher is a director of Liberty Media Corporation, which
owns an approximate 74% economic interest representing an approximate 94%
voting interest in UnitedGlobalCom, Inc. ("UGC"). Belmarken Holding, B.V.,
an indirect subsidiary of
10
UGC, holds 2,059,195 shares of our common stock. Liberty Media also holds
convertible debt of United Pan-Europe Communications, N.V., a subsidiary of
UGC, which it has agreed to exchange for additional shares in UGC. Mr.
Fisher meets all the current requirements for an independent director.
(D) Includes exercisable options to acquire 34,667 shares of common stock held
by Mr. Hibbard and 50 shares of common stock purchased in July 2002.
(E) Represents options to acquire shares of our common stock, which were
granted to Mr. Parsons consistent with, and upon the same terms, conditions
and vesting schedules as, option grants made to other members of our Board
of Directors.
(F) Represents options to acquire shares of our common stock, which were
granted to Mr. Matthews consistent with, and upon the same terms,
conditions and vesting schedules as, option grants made to other members of
our Board of Directors
(G) Represents options to acquire shares of our common stock, which were
granted to Mr. Herzog consistent with, and upon the same terms, conditions
and vesting schedules as, option grants made to other members of our Board
of Directors
(H) Represents options to acquire shares of our common stock, which were
granted to Mr. Schilling consistent with, and upon the same terms,
conditions and vesting schedules as, option grants made to other members of
our Board of Directors
(I) Includes exercisable options to acquire 257,045 shares of common stock held
by Mr. Armstrong and 150 shares of common stock purchased in June 2002.
(J) Represents holdings reported by Rajendra Singh, Neera Singh, Cherrywood
Holdings, Inc., Telcom Ventures, L.L.C., and Telcom-SNI Investors, L.L.C.
on June 16, 2003 on Form 13-G, "General Statement of Beneficial Ownership."
Includes 647,348 shares of common stock and 225,784 shares underlying
convertible debentures held by the reporting persons.
(K) Represents holdings reported by Belmarken Holdings, BV on June 16, 2003 on
Form 13-D, "General Statement of Beneficial Ownership." Includes 1,566,539
shares of common stock and 492,656 shares underlying convertible debentures
held by the reporting person.
(L) Represents holdings reported by Sorrento Holdings, L.L.C., on June 16, 2003
on Form 13-G, "General Statement of Beneficial Ownership." Includes 614,971
shares of common stock and 176,633 shares underlying convertible debentures
held by the reporting person.
(M) Represents holdings for Menlo Ventures as shown on our Transfer Agent
Shareholders of Record list as of October 31, 2003. Includes 580,203 shares
of common stock and 34,744 shares underlying warrants held by the reported
person.
(N) For each beneficial owner, the "Percentage of Outstanding" equals each
owner's actual holdings of shares plus shares represented by unexercised
options and warrants held, divided by total shares outstanding at October
31, 2003 of 10,477,217 plus the unexercised options and warrants detailed
above of the referenced holder only. In other words, individual percentages
of the listed holders will not add to the group total because the
calculations are made separately for each holder.
11
EXECUTIVE OFFICERS AND DIRECTORS
As of the date of this Proxy Statement, our executive officers and directors
are:
Name Age Position
------------------- --- --------------------------------------
*Phillip W. Arneson 67 Chief Executive Officer, President and
Chairman of the Board
*Donne F. Fisher 65 Director
*Robert L. Hibbard 51 Director
*Gary M. Parsons 54 Director
*Larry J. Matthews 76 Director
*Don Herzog 34 Director
*Tom Schilling 40 Director
Joe R. Armstrong 54 Chief Financial Officer
* See biographies in Proposal 1 - Election of Directors
Joe R. Armstrong has served as our Chief Financial Officer since January 2001.
He brings over 25 years of corporate finance, investor relations, treasury,
legal and management experience to us. As chief financial officer, vice
president, finance and secretary of State Of The Art, a leading provider of
accounting software, from 1983 to 1997 he managed two rounds of venture capital
financing, the company's initial public offering and several significant
acquisitions and mergers. From February 1998 to March 2001, Mr. Armstrong served
as CFO for The Bohlin Company. Previously, he was director of marketing finance
and financial planning for MAI Basic Four Corporation and a certified public
accountant for Vicenti, Lloyd and Stutzman, a regional public accounting firm.
Mr. Armstrong holds both bachelors and masters degrees in business from Utah
State University.
Other Key Management
As of the date of this Proxy Statement, other members of our management
team include:
Name Age Position
-------------------- --- ------------------------------------
Subrata Datta 41 Chief Technology Officer
Ram Krishnan 50 Vice President, Business Development
Mary A. Lay 46 Vice President, Finance
Andrew Nguyen 44 Vice President, Engineering
Manfred Seehagen 55 Vice President, European Operations
Marc W. Thurman 54 Vice President, Operations
Mitchell R. Truelock 35 Vice President, Sales & Marketing
12
Subrata Datta has served as Chief Technology Officer since October 2003 and
previously served as our Vice President of Engineering. Mr. Datta joined
Sorrento upon our acquisition of Distributed Systems International, Inc. in
1996. From 1996 to 1999 he was responsible for all engineering development for
the LAN adapter and hub/switch products. Prior to joining us, Mr. Datta helped
develop the ANSI FDDI and FDDI-II standards and design network components and
system-level products for DSI. Prior to DSI, Mr. Datta had extensive design
experience while working at AT&T Bell Laboratories on the 3B20 Duplex computer
system, based on highly fault tolerant architectures, high-reliability and
stringent up-time requirements. Before working for AT&T Bell Laboratories, Mr.
Datta worked for IBM's Yorktown Research Center where he focused on FDDI
development for their RS6000 workstation systems. Mr. Datta holds a M.S. and
B.S. in Electrical Engineering from the Cooper Union School of Engineering.
Ram Krishnan has served as Vice President of Business Development since our
acquisition of LuxN, Inc, in August 2003. Mr. Krishnan had been with LuxN since
July 2000, serving in a variety of positions including VP, Operations and VP,
Business Development. Prior to that, he spent twenty years at Hewlett-Packard
and Agilent Technologies in Engineering, Marketing and Manufacturing positions,
including a stint as a Business Unit Manager for optoelectronic devices. Mr.
Krishnan graduated from the University of California, Berkeley with a PhD in
Mechanical Engineering.
Mary A. Lay has served as Vice President, Finance since July 2002 and joined us
in March 2002 as Controller. Ms. Lay brings over 20 years of corporate finance,
treasury and management experience to the Company. Ms. Lay's previous experience
includes contract and permanent position as Corporate Controller and Chief
Financial Officer at several companies including On-Point Technology Systems,
Inc., Curtis Coleman Company and Nexergy Tauber. Ms. Lay holds a B.A. in
Financial Accounting from National University, an M.B.A. from the University of
Phoenix and is a certified public accountant.
Andrew Nguyen has served as Vice President of Engineering since October 2003.
Mr. Nguyen served as LuxN's Vice President, Engineering since August 2000,
during which time he was responsible for all product development including the
delivery of high-availability carrier-class optical transport platforms and
network management software products. Prior to joining LuxN, Mr. Nguyen served
as Vice President, Engineering for Allied Telesyn International (ATI), a leading
supplier of fiber transceivers/media-converter products and workgroup/enterprise
IEEE802.3 L2/L3 repeaters/switches/routers. Prior to ATI, Mr. Nguyen worked at
Motorola, Ricoh and Epson Research Center, developing and delivering successful
products to the market. Mr. Nguyen holds a B.S. in Electrical Engineering from
San Jose State University.
Manfred Seehagen has served as our Vice President of European Operations since
September 2002 and joined Sorrento Networks in March 1999 as the Director of
Sales and Marketing for our German subsidiary. He has a computer science and
electronics background as well as several years of sales and marketing
experience with ITT Telecommunications, Standard Electrik Lorenz and Alcatel.
Mr. Seehagen has also been an active member of ZVEI (Zentralverband der
Elektrotechnik und Elektronikindustrie), the German electrical and electronic
manufacturers' association where he was a representative in several
telecommunications working groups.
13
Marc Thurman has served as Vice President, Operations since April 2001. Mr.
Thurman oversees our manufacturing and operations, supply chain management, and
quality assurance functions. He brings to us nearly 25 years of manufacturing
operations, supply chain management and quality assurance experience on leading
edge technologies and products for the computer and telecommunication markets.
Mr. Thurman's previous experience includes service since 1971, in various
functions at Packard Bell NEC, ComCrypt Systems, IDEA Courier, Inc., Sidereal
Corporation, Intel Corporation, RTE Corporation, and Western Electric. In his
most recent position, Mr. Thurman had manufacturing responsibilities including
internal production, contract manufacturing (EMS) and third party manufacturing
(TPM), supporting revenues of $2 billion. Mr. Thurman holds a B.S. in Electrical
Engineering from Oregon State University as well as an M.B.A. degree from
University of Portland.
Mitchell R. Truelock, has served as Vice President, Sales and Marketing since
February 2003 and is responsible for North American and Asia Pacific sales,
marketing, product management and customer support. Mr. Truelock joined us in
January 2003 as Vice President, Strategic Planning after having consulted with
us since August 2002. Prior to joining us, from February 2000 to November 2001,
Mr. Truelock was a Vice President in the communications equipment group at Banc
Boston Robertson Stephens, a technology investment bank. From June 1998 to
February 2000, Mr. Truelock was a Vice President in the technology group at Dain
Rauscher Wessels, a technology investment bank. From September 1995 to June
1998, Mr. Truelock was a corporate attorney at Cooley Godward LLP where he
focused on mergers and acquisitions, private financings and initial public
offerings for technology companies. Mr. Truelock holds a L.L.M. in corporate
securities at Georgetown University Law, a J.D. from Southern Methodist
University, and a BBA in accounting from the University of Texas at Austin.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Two of our customers are subsidiaries of UPC, which is the parent of
Belmarken Holding, B.V., a holder of approximately 21.8% of our shares of common
stock, and indirect subsidiaries of UGC. During fiscal 2003 we made sales of
$312,000, including deferred revenue, to these customers and these customers had
no outstanding receivables at January 31, 2003. During the six months ended July
31, 2003 we had sales of $156,000 to these customers. These customers had
outstanding receivables of $78,000 as of July 31, 2003. As noted above, Mr.
Fisher is a director of Liberty Media Corporation, which is a shareholder of UGC
and debt holder in one of its indirect subsidiaries. Mr. Fisher was not one of
our directors when we made these sales and extended credit to these customers.
However, indirect subsidiaries of UGC continue to be among our customers.
In February 2003, by formal resolution by the Board of Directors, we
entered into a consulting agreement with Mr. Robert Hibbard to provide services
to our Board of Directors and management at a consulting rate of $175 per hour
and a retainer of $20,000 per month for six months. Mr. Hibbard agreed to make
himself available to us for not less than 20 hours per week. This agreement
terminates February 1, 2004 and the cash retainer portion of Mr. Hibbard's
agreement expired September 1, 2003. This agreement supersedes Mr. Hibbard's
August 2002 consulting agreement. Nearly all of Mr. Hibbard's consulting work
for us has involved matters
14
being considered or reviewed by the Board or by committees of the Board. His
work has included, among other matters, structuring and implementing our 2003
Equity Incentive Plan for employees, participating in settlement negotiations
for litigation, assisting in our capital restructuring and improving our
intellectual property policies and procedures. In fiscal year 2003, Mr. Hibbard
was paid $91,836 in consulting fees and for the first three quarters in fiscal
year 2004 has been paid $203,287 in consulting fees.
In April 2002, our former Chairman and CEO, Dr. Xin Cheng, who was
terminated without cause, filed a claim in arbitration seeking, among other
things, payment of $500,000 and acceleration of the vesting of options pursuant
to alleged contractual obligations of SNI. The arbitrator issued a decision
favorable to Dr. Cheng and, having exhausted our legal remedies, we have paid
Dr. Cheng $610,000 in full satisfaction of the arbitration award.
EXECUTIVE COMPENSATION
Executive Compensation
Please refer to our Annual Report on Form 10K/A for the fiscal year ended
January 31, 2003 for a summary of Executive Compensation.
The following tables set forth the annual compensation for our Chief
Executive Officer ("CEO") for the fiscal year ended January 31, 2003, and for
our four most highly compensated executive officers (the "Named Executive
Officers"), other than the CEO, who were serving as executive officers at the
end of our fiscal year and whose salary and bonus exceeded $100,000.
Summary Compensation Table
Annual Compensation
--------------------------------
Other All
Annual Other
Salary Bonus Compensation Compensation
Name and Principal Position Year ($) ($)(A) ($) ($)(B)(C)(D)(E)(F)
-------------------------------------------------------- ---- ------- ------- ------------ ------------------
Phillip W. Arneson, Chairman, Chief Executive Officer... 2003 245,387 205,000 -- 72,066
2002 60,582 25,000 -- 12,547
-- --
Joe R. Armstrong, Chief Financial Officer............... 2003 191,927 165,000 -- 20,962
2002 175,011 -- -- --
Richard L. Jacobson, Sr. VP Legal and Secretary......... 2003 250,000 150,000 -- 19,231
2002 251,802 -- -- --
2001 140,850 -- -- 42,746
Jeff S. Phillips, VP Corporate Development.............. 2003 170,019 68,000 -- 37,918
2002 170,019 10,000 62,339
Darin L. Clause, VP Strategic Sales..................... 2003 160,014 -- 79,393 8,400
2002 160,014 -- 158,399 77,211
2001 145,181 -- 51,101 51,740
(A) In fiscal year 2002, Mr. Arneson received a $25,000 signing bonus per his
employment contract, which took effect October 2001, and Mr. Phillips
received a $10,000 performance bonus.
15
Bonus compensation represents performance and retention bonuses paid in
fiscal year 2003 and 2002. In fiscal year 2003 Mr. Arneson received the
final payment of $5,000 of his $30,000 signing bonus per his employment
contract, which took effect October 2001, a performance bonus of $125,000
and a retention bonus of $75,000. Mr. Armstrong received a performance
bonus of $105,000 and a retention bonus of $60,000. Mr. Jacobson received a
$75,000 performance bonus and a $75,000 retention bonus. Mr. Phillips
received a $51,000 performance bonus and a $17,000 retention bonus.
(B) Other compensation for Mr. Arneson for fiscal year 2003 consists of
temporary living expenses paid by the Company of $48,930 and vacation
accrual buy-out of $23,237. In fiscal year 2002 Mr. Arneson had temporary
living expenses of $12,547.
(C) Other compensation for Mr. Armstrong represents vacation accrual buy-out.
(D) Other compensation for Mr. Jacobson represents vacation accrual buy-out in
fiscal year 2003 and relocation related expenses reimbursed by us in fiscal
year 2001.
(E) Other compensation for Mr. Phillips represents living expenses of $37,918
and $55,800 for fiscal years 2003 and 2002, respectively, and vacation
accrual buy-out of $6,539 in fiscal year 2002.
(F) Other compensation for Mr. Clause represents car allowance of $8,400,
$7,200 and $2,400 for fiscal years 2003, 2002 and 2001, respectively. Mr.
Clause had relocation expenses reimbursed by us of $70,011 and $49,340 for
fiscal years 2002 and 2001, respectively.
Key Employee Retention and Incentive Plan:
In November 2002, our Board of Directors, acting on a recommendation of the
Compensation Committee and in consultation with Towers Perrin, a national
executive compensation accounting firm, approved our "Key Employee Retention and
Incentive Plan." The purpose of this plan is to provide a means whereby we could
achieve the ongoing retention of certain key employees and certain management
personnel. In addition, the Plan also provides for granting incentive based
awards for the achievement of our goals and objectives along with recognition
for the participant's continued contributions to us. In the past we had no such
formal plan.
Long-Term Incentive Plans
We have no long-term incentive plans other than under our various option
and incentive plans.
16
Option Grants -- Year Ended January 31, 2003
There were no option grants exercised for the year ended January 31, 2003
for any of the Named Executive Officers.
The following table sets forth information concerning each exercise of
stock options during the year ended January 31, 2003 by each of the Named
Executive Officers and the January 31, 2003 value of unexercised options.
Aggregated Option Exercises in Fiscal Year 2003 and January 31, 2003
Option Values
Number of
Securities Underlying Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired On Value at Fiscal Year-End ($) at Fiscal Year-End (#) (A)
Exercise Realized --------------------------- ---------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
------------------------------ ----------- -------- ----------- ------------- ----------- -------------
Phillip W. Arneson............ -- -- 16,833 13,750 -- --
Joe R. Armstrong.............. -- -- 8,875 9,125 -- --
Richard L. Jacobson........... -- -- 10,760 5,940 -- --
Jeff S. Phillips.............. -- -- 4,805 2,695 -- --
Darin L. Clause............... -- -- 2,021 2,021 -- --
(A) Options are "in-the-money" if, on January 31, 2003, the market price of our
common stock ($6.33) exceeded the exercise price of such options. The value
of such options is calculated by determining the difference between the
aggregate market price of our common stock covered by such options on
January 31, 2003, and the aggregate exercise price of such options. As of
January 31, 2003 there were no options held by executive officers or
management that were exercisable at $6.33 or less.
Employment Agreements
On March 1, 2002 Mr. Arneson assumed the role of our Chairman, President
and Chief Executive Officer. On April 30, 2002, our Board of Directors approved
an employment agreement with Mr. Arneson regarding the terms of his employment
as Chairman, Chief Executive Officer and President, which superseded his August
2001 contract. The agreement provides for annual compensation of $250,000. The
agreement also calls for the vesting, as of March 1, 2002, of the 6,250 options
granted Mr. Arneson on September 17, 2001, and the granting of 23,750 additional
stock options (adjusted for the 1-for-20 reverse split) at a strike price equal
to the closing price of our common stock on NASDAQ on March 1, 2002, which
shares are to vest at the rate of 1,000 shares per month beginning on April 1,
2002, continuing for 12 months, when 5,000 additional shares vest, and beginning
on May 1, 2003, 1,125 shares will vest each month. The employment is at will;
however, if Mr. Arneson should be terminated without cause or resign in certain
circumstances, he would receive a lump sum severance
17
payment of two years' base salary and vesting of all stock options, and health
and life benefits; he would be required to provide exclusive consulting services
for two years following his termination. The agreement also calls for the
reimbursement of living expenses in San Diego at the rate of $2,750.00 per month
while Mr. Arneson remains employed. In the event of a change of control, merger
or sale of our company, Mr. Arneson is entitled to receive an immediate payment
equal to two year's salary, health and life insurance benefits for two years and
vesting of all his options. In June 2003, our Board of Directors amended the
termination section of Mr. Arneson's contract and authorized increases in annual
compensation to $275,000, and monthly living allowance to $3,250.
In May 2002, we entered into an employment agreement with Mr. Armstrong,
our CFO, which provides for an annual salary of $200,000 per year plus bonus of
$20,000, which was paid in a lump-sum, in June 2002, and 10,500 options
(adjusted for the 1-for-20 reverse split) to acquire our common stock vesting
over two years. The contract is for no specified term and Mr. Armstrong is an
at-will employee such that we or Mr. Armstrong may terminate employment at any
time, with or without cause or notice, and with or without reason, subject to
the rights and obligations as provided in the contract. However, should Mr.
Armstrong be terminated without cause he will receive a lump-sum severance
payment of one year's salary, health and life benefits for one year and vesting
of all his options. In the event of a change of control, merger or sale of our
company, Mr. Armstrong is entitled to receive an immediate payment equal to one
year's salary, health and life insurance benefits for one year and vesting of
all his options. In June 2003, our Board of Directors authorized an increase in
Mr. Armstrong's annual compensation to $225,000.
In July 2002, we entered into an employment agreement with Mr. Jacobson,
which provides for an annual salary of $250,000 per year and 9,000 options
(adjusted for the 1-for-20 reverse split) to acquire our common stock vesting
over two years. This contract replaced and superseded his July 2000 employment
agreement. The contract was for no specified term and Mr. Jacobson is an at-will
employee, such that either we or Mr. Jacobson could terminate employment at any
time, with, or without cause or notice, and with or without reason, subject to
the rights and obligations as provided in the contract. As of July 1, 2003, Mr.
Jacobson is no longer in our employ.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires our directors
and executive officers and person who own more than 10% of a registered class of
our equity securities to file reports of beneficial ownership and changes in
beneficial ownership with the Securities and Exchange Commission. The rules
promulgated by the Commission under Section 16(a) of the Exchange Act require
those persons to furnish us with copies of all reports filed with the Commission
pursuant to Section 16(a).
During the nine months ended October 31, 2003, the following directors
received stock option grants that were not reported by the required filing date:
Don Herzog, Director and Tom Schilling, Director. These directors have now filed
the required forms as required under Section 16(a) of the Exchange Act.
18
Compensation Committee Report
The following report shall not be deemed incorporated by reference by any
general statement incorporating by reference this proxy statement into any
filing under the Securities Act of 1933 or under the Securities Exchange Act of
1934, except to the extent we specifically incorporate this information by
reference, and shall not otherwise be deemed filed under such Acts.
The Compensation Committee in fiscal year 2003 consisted of Donne F.
Fisher, Robert L. Hibbard and Phillip W. Arneson. In June 2003, Mr. Arneson
resigned from the Compensation Committee and Larry Mathews joined the Committee.
The Compensation Committee reviews, recommends and approves changes to our
compensation and benefits policies and programs, makes recommendations to the
Board for options granted under our plans and is responsible for reviewing and
approving the compensation for our executive officers and certain of our senior
management. A majority of the Committee is neither our current employees nor our
former employees nor are they eligible to participate in any of our executive
compensation programs. Mr. Arneson did not participate in meetings of the
Committee concerning his compensation package.
We have developed and are developing compensation programs designed to
reflect our performance and to be competitive in the marketplace. In designing
compensation programs, we attempt to reflect both value created for shareholders
while supporting our strategic goals. The goals of our short-term and long-term
compensation programs are to:
o Attract, retain and motivate a high caliber executive leadership team
and employee group;
o Competitive base salaries in keeping with a philosophy of career
continuity;
o Align executive compensation with shareholder interests;
o Support our short-term and long-term strategic goal and objectives;
o Promote our value and reward individuals for outstanding contributions
to our success.
The nature of our business requires a technologically innovative personnel
team to make a long-term commitment to our growth. Accordingly, we grant
incentive awards primarily in the form of stock options with view towards
long-term corporate performance. These awards may not fluctuate as much as
year-to-year financial results. Under our programs, a substantial portion of
senior executives' potential compensation depends on increases in shareholder
value.
We pay for performance on the basis of an individual's level of
responsibility. For this purpose, performance means both individual and
corporate performance. Individual performance includes the ability to put our
business plans into effect and to react to unanticipated events. We base
compensation decisions for all employees, including the executive officers on
this criteria.
Our executive compensation is based upon three components, base salary,
short-term
19
incentive awards and long-term incentives, which are intended to meet our
compensation program goals.
Base Salary
In keeping with the long-term and highly technical nature of our business,
we take a long-term approach to management development. This career-oriented
philosophy requires a competitive base salary. We base our salary structure on
competitive positioning (comparing our salary structure with salaries paid by
comparable companies), our own business performance, and general economic
factors, and increases in the individual's responsibilities, whether through
promotions or otherwise. Specific weights are not given to these factors, but
competitive positioning is the most important factor. Within the comparable
salary ranges, we determine individual senior management salaries based on
individual performance, level of responsibility, and experience.
Short-Term Incentive Awards
Our short-term incentive awards are discretionary. When deemed appropriate,
they are designed to reflect the officer's contribution to the overall success
of the organization and also consider the long-range impact of near-term
decisions and contributions. Any award an executive receives depends on his/her
individual performance and level of responsibility. Both objective and
subjective measures are considered. These include, but are not limited to:
sales, profit margins, operating expense, net income, working capital,
individual initiative, business judgment, technical expertise and operational
excellence.
Long-Term Incentive Awards
Long-term incentive awards are intended to develop and retain strong
management through share ownership and incentive awards that recognize future
performance. Stock options, stock appreciation rights, stock awards and cash
awards may be granted to directors, executive officers and all our employees.
The Committee believes that a significant portion of senior management's
compensation should depend on value created for the shareholders. Option grants
SARS, and stock and cash awards are an excellent way to accomplish this because
they tie management's interests directly to the shareholders' interests.
The number of awards granted to senior management is based on individual
performance and level of responsibility. For this purpose, the Committee
measures performance the same way as described above for short-term awards.
Awards must be sufficient in size to provide a strong incentive for executives
to work for long-term business interests and become significant owners of our
Company.
Stock Option Tender Offer
To address the needs of our employees, to retain talented employees, and to
keep our
20
employees motivated, the Compensation Committee approved a tender offer for
certain employee stock options. Participation in the tender offer was a
voluntary program that allowed eligible employees to tender for cancellation
some or all of their eligible stock options that had an exercise price greater
than or equal to $7.50 per share (before giving effect to our 1-for-20 reverse
stock split in October 2002) for our FIBR shares and all options granted by our
subsidiary Sorrento Networks, Inc., regardless of exercise price, for the
opportunity to receive an option for a smaller number of shares at a current
market price in six months and one day following the expiration date of the
tender offer. Eligible employees were required to declare their election to
participate in the program before May 17, 2002, at which time the options they
elected to tender were cancelled. Because the new option grants were made six
months and one day following the day the tendered options were cancelled, we did
not have to change to variable method of accounting for stock options to
employees.
Employees that participated in the program received favorable vesting terms
that allowed the new option grant(s) to credit for the six months from time of
cancellation of their old options to the new option grant date, with the
remaining unvested portion of the new option grant(s) vesting in accordance with
their prior vesting schedule.
Our then current and former directors and executive officers, and key
management were not eligible to participate in the stock option tender offer.
We believe the actions we have taken over the past fiscal year have aligned
with our objectives and were appropriate to attract, retain and motivate the
talent we need to execute our restructuring plan and restore value to our
shareowners.
Compensation Committee
Donne F. Fisher
Robert L. Hibbard
Phillip W. Arneson
21
PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total returns for an
investment in our common stock, the NASDAQ Telecommunications Index and the S&P
500 Index. These indices are included for comparative purposes only and do not
necessarily reflect management's opinion that such indices are an appropriate
measure of the relative performance of the stock involved, and are not intended
to forecast or be indicative of possible future performance of our common stock.
INDEX VALUES
Sorrento Networks Corp S&P 500 Index NASDAQ Telecom Index
---------------------- ------------- --------------------
1/31/99 16.12 1279.64 578.59
1/31/00 49.56 1394.46 978.44
1/31/01 27.00 1366.01 555.82
1/31/02 3.58 1130.20 206.17
1/31/03 6.33 855.70 115.24
This graph shall not be deemed incorporated by reference by any general
statement incorporating by reference this proxy statement into any filing under
the Securities Act of 1933 or under the Securities Exchange Act of 1934, except
to the extent that we specifically incorporate this graph by reference, and
shall not otherwise be deemed filed under such Acts.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" THE ELECTION OF ALL SEVEN NOMINEES AS OUR DIRECTORS.
PROPOSAL 2
22
APPROVAL OF COMMON SHARE ISSUANCE FOR THE RELEASE OF $1,027,000 IN
CASH PROCEEDS FROM LUXN ACQUISTION
This proposal will determine if 505,153 shares of common stock should be
issued the participating LuxN shareholders that would result in cash proceeds of
$1,027,000 to the Company for the use of general working capital purposes. If
not approved, the $1,027,000 currently held by the Company as restricted cash
would be returned to those shareholders.
On August 8, 2003, Sorrento Networks Corporation successfully completed the
acquisition of LuxN, Inc. LuxN's product line supplies optical access equipment
to the network edge using coarse and dense wavelength division multiplexing
(CWDM and DWDM) technology. LuxN's OSMINE-certified products enable delivery of
high-bandwidth data, storage, video, and voice services for service providers,
cable MSOs, and enterprises. Sorrento acquired LuxN for a combination of stock,
warrants, and cash previously held by LuxN. LuxN's stockholders were given the
option to exchange their shares of LuxN stock for either their pro-rata portion
of LuxN's net cash or shares of Sorrento's common stock. LuxN stockholders,
regardless of their election to receive either net cash proceeds or Sorrento's
common stock, received their pro-rata portion of warrants to purchase 400,000
shares of Sorrento's common stock at an exercise price of $3.05 per share. The
warrants are being held in escrow for a period of six months to satisfy any
successful indemnification claims.
At closing, Sorrento issued 1,374,194 shares of its common stock and
warrants to purchase 400,000 shares, which together represented 19.9% of
Sorrento's then outstanding shares. This issuance resulted in $2,794,194 being
received by Sorrento for general working capital purposes. There remains
$1,027,145 in LuxN's net cash that can be exchanged for 505,153 shares of common
stock, but the issuance of those additional shares is subject to stockholder
approval because the aggregate of the shares of Sorrento's common stock that
were issued at the closing of the acquisition, the shares into which the
warrants are exercisable, and the additional 505,153 shares exceeded 20% of
Sorrento's outstanding shares of common stock on the date of the acquisition.
The LuxN acquisition has brought Sorrento both valuable customers and
products. In order to complete a successful integration between the two
companies, cash resources are required to support legal, engineering and sales
and marketing activities. Sorrento is in critical need of cash to support its
ongoing operations and to take advantage of the revenue and growth opportunities
associated with the acquisition. Without the approval of these additional cash
proceeds from the LuxN acquisition, Sorrento will be required to forego
important and significant plans for marketing, product development and ongoing
operations.
Without approval the additional cash held by the Company as restricted cash
will be returned to the LuxN shareholders.
The Company's Board of Directors supports the approval of Proposal 2 and
recommends a vote in favor of the proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" APPROVAL OF COMMON SHARE ISSUANCE FOR LUXN ACQUISTION.
23
PROPOSAL 3
RATIFICATION OF THE
SELECTION OF INDEPENDENT AUDITORS
The selection of independent auditors to examine our financial statements
for the fiscal year ending January 31, 2004, which will be sent or made
available to shareholders and filed with the Securities and Exchange Commission,
is to be submitted to the meeting for ratification. BDO Seidman, LLP has been
selected by the Audit Committee of the Board of Directors to examine such
financial statements. Although ratification by the shareholders is not required
by law, the Board of Directors believes that shareholders should be given this
opportunity to express their views on the subject. While not binding on the
Audit Committee or the Board of Directors, the failure of the shareholders to
ratify the appointment of BDO Seidman, LLP as our independent auditors would be
considered by the Audit Committee and the Board of Directors in determining
whether to continue the engagement of BDO Seidman, LLP.
A member of BDO Seidman, LLP will be present at the Annual Meeting and will
be available to respond to appropriate questions and will have the opportunity
to make a statement.
Audit Fees
BDO Seidman, LLP billed us $168,441 and $134,951, in the aggregate, for
professional services for the audit of our annual financial statements for
fiscal 2003 and 2002 respectively, and for the review of our interim financial
statements, which are included in our Quarterly Reports on Form 10-Q for fiscal
2003.
BDO Seideman, LLP billed us $9,265 and $5,623 for other audit-related fees
for fiscal year 2003 and 2002 respectively, for the review of our proxy
statements and audit committee meeting attendance.
Tax Fees
BDO Seidman, LLP billed us $193,250 and $4,806 for fiscal 2003 and 2002
respectively, for domestic and international tax preparation work.
Financial Information Systems Design and Implementation Fees
BDO Seidman did not provide and did not bill nor was it paid any fees for,
financial information systems design and implementation services in fiscal 2003
and 2002 as described in Paragraph (c)(4)(ii) of Rule 2-01 of Regulation S-X.
All Other Fees
BDO Seidman, LLP has billed us $50,695 and $52,280, in the aggregate, for
professional services rendered for all services other than those services
captioned "Audit Fees", "Tax Fees" and "Financial Information Systems Design and
Implementation Fees" in fiscal 2003 and 2002
24
respectively. These services included consulting and other services.
All non-audit services were reviewed with the Audit Committee, which
concluded that the provision of such services by BDO Seidman, LLP was compatible
with the maintenance of that firm's independence in the conduct of its auditing
function.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
RATIFICATION OF BDO SEIDMAN, LLP AS OUR INDEPENDENT AUDITORS.
OTHER BUSINESS
It is not anticipated that any other matters will be brought before the
Annual Meeting for action. If any such other matters shall properly come before
the Annual Meeting, however, it is intended that the persons authorized under
the proxies may, in the absence of instructions to the contrary, vote or act
thereon in accordance with their best judgment.
SHAREHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, our shareholders may present
proper proposals for inclusion in our proxy statement and for consideration at
the next annual meeting by submitting their proposals to us in a timely manner.
Any of our shareholders who wish to present a proposal for the inclusion in the
proxy statement for action at our next Annual Meeting of Shareholders must
comply with our By-Laws and the rules and regulations of the Commission then in
effect. To be considered for inclusion in next year's proxy statement, such a
proposal must be mailed to us at our principal executive offices at 9990 Mesa
Rim Road, San Diego, California 92121, Attention: Corporate Secretary, and must
be received by us on or before March 31, 2004.
IMPORTANT
TO ASSURE YOUR REPRESENTATION AND A QUORUM FOR THE TRANSACTION OF BUSINESS
AT THE ANNUAL MEETING, WE URGE YOU TO PLEASE COMPLETE, SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD PROMPTLY.
25
EXHIBIT A
CHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
OF SORRENTO NETWORKS CORPORATION
I. AUDIT COMMITTEE PURPOSE
The Audit Committee is appointed by the Board of Directors to assist the Board
in fulfilling its oversight responsibilities. The Audit Committee's primary
duties and responsibilities are to:
Monitor the integrity of the Company's financial reporting process and systems
of internal controls regarding finance, accounting, and legal compliance.
Monitor the independence and performance of the Company's independent auditors.
Provide an avenue of communication among the independent auditors, management,
and the Board of Directors.
The Audit Committee has the authority to conduct any investigation appropriate
to fulfilling its responsibilities, and it has direct access to the independent
auditors as well as anyone in the organization. The Audit Committee has the
ability to retain, at the Company's expense, special legal, accounting, or other
consultants or experts it deems necessary in the performance of its duties.
II. AUDIT COMMITTEE COMPOSITION AND MEETINGS
Audit Committee members shall meet the requirements of the NASDAQ Stock Market
and the Sarbanes-Oxley Act of 2002. The Audit Committee shall be composed of
three or more directors as determined by the Board, each of whom shall be
independent non-employee directors, free from any relationship that would
interfere with the exercise of his or her independent judgment. Each member of
the Committee shall have a basic understanding of finance and accounting and be
able to read and understand fundamental financial statements, and at least one
member of the Committee shall have accounting or related financial management
expertise.
Audit Committee members shall be appointed by the Board. If an audit committee
Chair is not designated or present, the members of the Committee may designate a
Chair by majority vote of the Committee membership.
The Committee shall meet at least four times annually, or more frequently as
circumstances dictate. The Audit Committee Chair shall prepare and/or approve an
agenda in advance of each meeting. The Committee should meet privately in
executive session at least annually with management, the independent auditors,
and as a committee to discuss any matters that the Committee or each of these
groups believe should be discussed. In addition, the Committee, or at
26
least its Chair, should communicate with management and the independent auditors
quarterly to review the Company's financial statements and significant findings
based upon the auditor's limited review procedures.
III. AUDIT COMMITTEE RESPONSIBILITIES AND DUTIES
REVIEW PROCEDURES
1. Review and reassess the adequacy of this Charter at least annually. Submit
the charter to the Board of Directors for approval and have the document
published at least every three years in accordance with SEC regulations.
2. Review the Company's annual audited financial statements prior to filing or
distribution. Review should include discussion with management and independent
auditors of significant issues regarding accounting principles, practices, and
judgments.
3. In consultation with the management and the independent auditors, consider
the integrity of the Company's financial reporting processes and controls.
Discuss significant financial risk exposures and the steps management has taken
to monitor, control, and report such exposures. Review significant findings
prepared by the independent auditors together with management's responses.
4. Review with financial management and the independent auditors the Company's
quarterly financial results prior to the release of earnings and/or the
Company's quarterly financial statements prior to filing or distribution.
Discuss any significant changes to the Company's accounting principles and any
items required to be communicated by the independent auditors in accordance with
SAS 61.
The Chair of the Committee may represent the entire Audit Committee for purposes
of this review.
INDEPENDENT AUDITORS
1. The independent auditors are ultimately accountable to the Audit Committee
and the Board of Directors. The Audit Committee, subject to any action that may
be taken by the full Board, shall have the ultimate authority and responsibility
to select, evaluate and, where appropriate, replace the independent auditors.
The Committee shall assist the Board in its oversight of the qualifications,
independence and performance of the independent auditors.
2. Approve the fees and other significant compensation to be paid to the
independent auditors.
3. On an annual basis, the Committee shall review and discuss with the
independent auditors all significant relationships they have with the Company
that could impair the auditor's independence.
4. Review the independent auditors audit plan -- discuss scope, staffing,
locations, reliance upon
27
management, and general audit approach.
5. Prior to releasing the year-end earnings, discuss the results of the audit
with the independent auditors. Discuss certain matters required to be
communicated to audit committees in accordance with AICPA SAS 61.
6. Consider the independent auditors' judgments about the quality and
appropriateness of the Company's accounting principles as applied in its
financial reporting.
7. The Committee shall:
(i) Receive from the independent auditors annually, a formal written
statement delineating the relationships between the auditors and the
Company consistent with Independence Standards Board Standard
Number 1;
(ii) Discuss with the independent auditors the scope of any such disclosed
relationships and their impact or potential impact on the independent
auditors' independence and objectivity; and
(iii) Recommend that the Board take appropriate action in response to the
independent auditor's report to satisfy itself of the auditors'
independence.
8. The Committee shall review and approve the original proposed scope of the
annual independent audit of the Company's financial statements and the
associated engagement fees, as well as any significant variations in the actual
scope of the independent audit and the associated engagement fees.
LEGAL COMPLIANCE
1. On at least an annual basis, review with the Company's counsel, any legal
matters that could have a significant impact on the organization's financial
statements, the Company's compliance with applicable laws and regulations, and
inquiries received from regulators or governmental agencies.
OTHER AUDIT COMMITTEE RESPONSIBILITIES
1. Annually prepare a report to shareholders as required by the Securities and
Exchange Commission. The report shall be included in the Company's annual proxy
statement.
2. Perform any other activities consistent with this Charter, the Company's
by-laws, and governing law, as the Committee or the Board deems necessary or
appropriate.
3. Maintain minutes of meetings and periodically report to the Board of
Directors on significant results of the foregoing activities.
OTHER OPTIONAL CHARTER DISCLOSURES
28
1. Establish, review, and update periodically a Code of Ethical Conduct and
ensure that management has established a system to enforce this Code.
2. Periodically perform self-assessment of audit committee performance.
3. Review financial and accounting personnel succession planning within the
Company.
4. Annually review policies and procedures as well as audit results associated
with directors' and officers' expense accounts and perquisites. Annually review
a summary of directors and officers related party transactions and potential
conflicts of interest.
29
Appendix 1
SORRENTO NETWORKS CORPORATION ANNUAL MEETING TO BE HELD ON 01/08/04 SORRENTO NETWORKS CORPORATION
FOR HOLDERS AS OF 11/24/03 * ISSUER CONFIRMATION COPY - INFO ONLY * 01/08/04
5 1-0001 THIS FORM IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY.
PLEASE DO NOT USE IT FOR VOTING PURPOSES.
83586Q2019 1
FOR ALL NOMINEES
WITHHOLD ALL NOMINEES
WITHHOLD AUTHORITY TO VOTE FOR
DIRECTORS RECOMMEND: A VOTE FOR ELECTION OF THE FOLLOWING NOMINEES 0010100 ANY INDIVIDUAL NOMINEE. WRITE
NUMBER(S) OF NOMINEE(S) BELOW
1 - 01-PHILLIP W. ARNESON, 02-DONNE F. FISHER,
03-ROBERT L. HIBBARD, 04-LARRY J. MATTHEWS,05-DON ------------------------------------
HERZOG,06-TOM SCHILLING
FOR AGAINST ABSTAIN
2 *- PROPOSAL TO APPROVE THE ISSUANCE OF COMMON ------>>> FOR ------>>> 2 X
SHARES ASSOCIATED WITH THE LUXN ACQUISITION THAT 0030501 DO NOT USE 2
EXCEEDED 20% OF THE THEN TOTAL OUTSTANDING
SHARES OF THE COMPANY. DO NOT USE
3 - PROPOSAL TO RATIFY THE SELECTION OF BDO ------>>> FOR ------>>> 3 FOR AGAINST ABSTAIN 83586Q209
SEIDMAN, LLP AS THE COMPANY'S INDEPENDENT 0010200
AUDITORS FOR FISCAL YEAR 2004. DO NOT USE PLACE "X" HERE IF
YOU PLAN TO ATTEND
*NOTE* IN THEIR DISCRETION, THE PROXIES ARE DO NOT USE AND VOTE YOUR
AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY SHARES AT THE
PROPERLY COME BEFORE THE MEETING OR ANY MEETING
ADJOURNMENT OR POSTPONEMENT THEREOF AS TO WHICH FOR AGAINST ABSTAIN
DISCRETIONARY AUTHORITY MAY BE GRANTED.
DO NOT USE [ADP LOGO]
---------------------
HOUSEHOLDING ELECTION DO NOT USE
---------------------
DO NOT USE
(H) Mark "FOR" to enroll this account to receive ------>>> 51 MERCEDES WAY
certain future shareholder communications in FOR AGAINST ABSTAIN EDGEWOOD NY 11717
a single package per household. Mark
"AGAINST" if you do not want to participate. DO NOT USE
To change your election in the future, call
1-800-542-1061. See accompanying page for DO NOT USE
more information about this election.
DO NOT USE
FOR AGAINST ABSTAIN IMPORTANT NOTICE
REGARDING DELIVERY
DO NOT USE OF SECURITY HOLDER
DOCUMENTS (HH)
DO NOT USE SORRENTO NETWORKS
CORPORATION
9990 MESA RIM ROAD
SAN DIEGO, CA 92121
ATTN: MARY LAY
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