Sorrento Restructures, Trims Losses

Optical equipment maker Sorrento Networks Corp. (Nasdaq: FIBR) breathes a sigh of relief today as it has reached an agreement with bond holders and Series A preferred shareholders to restructure the company. The restructuring ends some shareholder lawsuits against Sorrento and allows the company to work on raising money.

The company can't be too lax, however, as its sales have softened and its revenues dropped to about half of what they were a year ago. Also, though the company is reporting an uptick in orders, some $5 million worth of its backlogged orders stem from a two-year old startup with no earnings history in which Sorrento has taken a $5 million equity investment.

Still, Sorrento is cleaning its house at a furious pace, and its restructuring progress has its executives glowing with optimism. "Our objective is to achieve cash flow breakeven by the end of the third quarter of 2003," says CEO Phil Arneson.

For its third quarter of fiscal year 2003, ended October 31, 2002, Sorrento reported revenues of $5.5 million, compared with $10.1 million for the year-ago period. It added two new customers during the quarter, bringing its list of direct customers to more than 25, with more than 1,600 nodes deployed worldwide.

The company reported a net loss of $8.86 a share, or $6.9 million, compared with a net loss of $22.24 a share, or $15.9 million, as reported during the year-ago quarter.

Sorrento says it took orders with bookings exceeding $13 million during the third quarter. A substantial contributor to bookings included $5 million in orders from Unlimited Fiber Optic Communications Inc. (UFO), a San Francisco-based startup that aims to build metro optical networks for enterprise customers.

UFO has raised $22.5 million in funding to date, $5 million of which came from Sorrento, which UFO picked to be the sole supplier of DWDM and CWDM gear for its networks. Jeff Phillips, Sorrento's VP of corporate development, sits on UFO's board.

Thanks to a restructuring agreement it reached with bondholders and Series A shareholders, Sorrento has set things in motion to erase a huge chunk of its $81 million in debt and to allow it to raise working capital in the future. The company announced it would be giving about 87.5 percent of the company's common stock, on a diluted basis, to its Series A shareholders and convertible debenture holders to accomplish the restructuring. Sorrento expects to get common shareholder approval of the proposed restructuring in a proxy that will be issued early in 2003.

The debt left after the restructuring will be a $12.5 million convertible debenture, with a 7.5 percent interest rate that will mature in August 2007. The company will also simplify its corporate structure by merging all of its subsidiaries into Sorrento Networks Corp., the publicly traded entity.

The downside comes for existing common shareholders, who stand to be substantially diluted. After the restructuring, Sorrento's existing shareholders will keep 7.5 percent of Sorrento's common stock and will get warrants to buy about 5 percent of the remaining stock. That additional stock is exercisable at a 10 percent premium over an average closing price before the restructuring is finished.

Sorrento's gross margins during the quarter were 17 percent, down 33 percent from the year-ago quarter. It has $13.7 million in cash and investments, and that included a $5 million prepaid order from one customer, likely UFO.

The company says its revenues per employee have climbed to $40,000 from $29,000 in just nine months. Arneson, however, says much more improvement is needed. "I will not be satisfied until we see this [revenue per employee] ratio well over $100,000."

Sorrento shares closed up $0.09 (0.9%) to $10.06 in trading on Thursday, before the news was announced.

— Phil Harvey, Senior Editor, Light Reading
BobbyMax 12/4/2012 | 9:11:36 PM
re: Sorrento Restructures, Trims Losses With very fast decling business of optical companies, it is very doubtful that Sorrento situation would improve. There is not much demand for DWDMs and CWDMs. Many companies would not buy from start-ups.
MrLight 12/4/2012 | 9:10:49 PM
re: Sorrento Restructures, Trims Losses BobbyMax, I don't fully agree with the three statements you made in your post.

STATEMENT 1: "With very fast decling business of optical companies, it is very doubtful that Sorrento situation would improve."

The optical business that Sorrento is in is not declining. Sorrento's problem are due to its checkered past and its inability to establish a market identity due to a "me-too" product.

STATEMENT 2: "There is not much demand for DWDMs and CWDMs." Incorrect.

Please see an article in the Dec.2.02 NetworldWorld - "Optical subsets up while market slumps"


Where its states " Leading research firms recently released figures and made statements indicating that certain subsets of the worldwide optical-hardware market are experiencing healthy growth while the overall market languishes."


"The optical-hardware market is and will continue to be propped up by the metropolitan optical systems, Infonetics [Research] says, which comprised 64% of optical hardware sales in the third quarter. Within that market, intelligent metropolitan systems - which at $1.6 billion in the third quarter accounted for 69% of metropolitan optical revenue and 72% of all optical-hardware revenue - will experience the most growth, the firm says."

You are alluding to the data for Long Haul where "In the long-haul, revenue will decrease by 50% this year from last and remain relatively flat until about 2007, according to Probe Research."

STATEMENT 3: "Many companies would not buy from start-ups." Yes, this is your classical "CUT-AND-PASTE" canned response in your LR posts. I can't argue with it much except on its poor grammar, but the situation is exacerbated further by Sorrento's checkered past. Mind you Sorrento is a public company, so it really shouldn't be classed as a start-up.

MrLight :-) BobbyMax, like Sorrento has been through this before...
your_mama 12/4/2012 | 9:10:45 PM
re: Sorrento Restructures, Trims Losses Mr. Light (head), go check your knowledge..
Sorrento had DWDM products since 1997..way
before others even knew what the term metro
DWDM was.."me too"..seems like you been reading
too many "me too" articles..ONI, Movaz, Nortel
all came after Sorrento..not to mention famous
failures like Zaffire, Inara, Roshnee, etc...
like 'em or not..these guys were one of the
first and so far have outlasted many a
flashy startup....
MrLight 12/4/2012 | 9:10:26 PM
re: Sorrento Restructures, Trims Losses Now, now your_mama. I didn't say anything about when Sorrento started.

In 1997, Sorrento Networks, then known as Osicom Technologies Inc., started developing a 16-channel metro DWDM product - the GigaMux. Most of the people in the business know this fact of Metro DWDM history.

The earliest published "glorified press announcements" I have is from TELEPHONY Dec.1.1997, page 7.

"The 16-channel system, which can be deployed in simplex, full duplex and simplex/duplex configurations, transparently supports OC-1 through OC-48 traffic, switched gigabit Ethernet, FDDI and other data traffic types says Jim True, vice president of marketing at Osicom"

In the same article it goes on to say "Local network requirements also forced companies like Osicom to design low-cost solutions. GigaMux's entry level pricing starts at $35,000 per channel, or $225,000 for the full 16-channels."

America's Network Feb.1.1998, page 48, provides some additional information "The system can span 80km in its standard configuration. An enhanced system with an optical amplifier is available up to 120 km between nodes configuration."

Now to put it in context, in TELPHONY May.27.1996 page 72, Ciena was advertising the MultiWave 1600 "that can multiplex up to 16 discrete optical carriers over one fiber. The MultiWave is bit-rate transparent from 150 Mb/s to 2.4 Gb/s and operates with existing Sonet and asynchronous fiber optic transmission systems. It operates up to 600km without electrical regeneration [being 2R]."

Why did I have those on file, because Osicom /Sorrento was one of the companies to watch in the Metro DWDM space - it still is.

Now, I could also use Sorrento's own press dates of:

* First Metro DWDM system (April 1997)
[Unclear what that "system" consisted of, but it was not 3R]
* First large scale field trial (Nov.1997)
* First to commercially ship (Jan.1998)
* First access-enabled DWDM through EPC(Jun.1998)
[EPC - Electronic Photonic Concentrator]
* First European field presence (Jan.1998)
* First European field presence (Jan.1999)
* First All-optical Wavelength Switching Router (May.2000) [TeraMatrix]

But these dates are open to debate, so let's leave it at just 1997.

Now, in regards to the "me too" , well what is so bad about that - to have basically the same product feature set as the other main Metro DWDM players : Ciena, Nortel, ADVA, etc (see http://www.lightreading.com/do... ).

So "your_mama" if you have some information on what "non me-too" sellable features Sorrento has over the Metro DWDM market leaders, please state your case.

MrLight ;-) Checked my knowledge, but the only rhetoric found was in the press releases
lightmaster 12/4/2012 | 9:10:23 PM
re: Sorrento Restructures, Trims Losses MrLight,

Note that the gigamux came to Osicom via an aquisition. Osicom once built datacom products, but later turned into somewhat of a holding company that aquired companies to spin out as IPOs. Sorrento was to have been one of those spin outs, but ended up eating it's parent.

While Osicom/Sorrento had DWDM products that were contemporaries in 1997, they were far from having the same feature sets. Osicom sold into cable providers and a few CLECs and competed mainly on price. Their product did not have the management and performance monitoring features, amplification, or channel management that Ciena had, nor did they have a working 16 channel system up and running until Ciena was well beyond 16 channels. These were things that Cienas customers demanded, so they didn't see Osicom as serious competiton.

What they did have was a bare bones, low cost DWDM system that worked, which was and still is enough for some customers. And, I might add, is a lot more than many Optical startup companies with huge valuations ever had.

Unfortunately, the Osicom management team at the time tried to powerpoint this basic but decent product into a Rolls Royce so they could ride the optical IPO wave to riches. They also announced an optical switch that was supposed to kick everyones butt.

To be fair, Sorrento is not the same company that it was in 1997-2000, with almost totally new management. They seem to be trying to build a real business.
Vesting 12/4/2012 | 9:10:20 PM
re: Sorrento Restructures, Trims Losses Osicom then Sorrento.

Maybe they can just change their name again.

Of course maybe now is the time to change the name of the product. Or maybe they just need to change the product. No PM's on the receive end make it impossible to sell to most carriers once they have found this out.

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