Tropic Networks is proposing to acquire two Canadian energy firms in a deal that would give the optical networking vendor enough cash to last nine more months, the company announced today.

Tropic will use all its common and preferred stock to acquire and merge with oil developer Chamaelo Exploration and natural gas developer Tournament Energy, giving Tropic's current shareholders less than 1% of the resulting entity.

Meanwhile, Tropic will preserve its optical networking business by transferring the business and all of its current assets (currently valued at about $36 million) to a newly created ad hoc organization, which will be, renamed Tropic Networks and continue selling optical networking equipment. In addition to their stake in the oil exploration firm, the company's existing shareholders would receive shares of the reborn Tropic "equivalent" to their current holdings, Tropic said.

After the deal, the reborn Tropic Networks would retain no relationship to Chamaelo or Tournament. Tropic would walk away with about $9.4 million in cash (in Canadian dollars, or about $8.1 million U.S.), which the company says will allow it to fund its operations through September 2006. In the meantime, the company will look to obtain additional financing to extend its lifespan beyond that date.

The company, which currently employs 97 people full time and another 29 on a contract basis, insists there will be no change to its executive leadership or headcount following the transaction.

"From a customer, partner, employee, shareholder supplier perspective, there is absolutely no change whatsoever to the optical business going forward," Chief Financial Officer Gord Wyse said in an interview today. "The only addition will be that we will have raised $9.4 million Canadian of non-diluted money. The company will be in a stronger financial position than it was before this transaction."

A five-year-old start-up in the reconfigurable optical add/drop multiplexer (ROADM) market, Tropic had raised a total of $153 million in funding and accumulated a deficit of $114 million, according to regulatory filings. In its most recent fiscal year, which ended June 30, the company incurred a net loss of more than $32 million with about $8 million in revenue. According to Wyse, the company has seen "significant revenue growth" in the second half of this year.

"We're starting to see a lot of traction in places like Asia and Europe," Wyse said. "In 2005, we focused on the North American market."

In the summer of 2004, RBC Capital Markets suggested Tropic had won a metro ROADM contract from SBC Communications by partnering with Alcatel. But several months later, other analysts suggested the contract--which RBC had estimated could be worth $300 million or $400 million--was still open, and rumors circulated that Tropic's product hadn't performed as promised. During the fiscal year that ended in June 2005, Tropic had only sold about $2.6 million worth of gear to Alcatel, according to regulatory filings. Wyse would not comment on the SBC deal.

Alcatel is also an equity investor in Tropic, having led a $33-million series-D funding round in July 2004. It's unknown how much of Tropic Alcatel currently owns.

In 2005, as ROADM vendors including Fujitsu Network Communications and Nortel Networks introduced wavelength-selective switching--a newer, more flexible type of ROADM--Tropic insisted WSS technology was not yet mature enough for commercial use. Wyse said the company currently has a WSS card in trials.

To raise the additional cash it will give to the reborn Tropic, the entity created by the merger of Chamaelo and Tournament, which will take the name Chamaelo Exploration, will issue a private placement of subscription receipts worth up to $87.5 million (Canadian) and, if needed, obtain additional bridge financing. Chamaelo Exploration will serve the oil and gas exploration and development business. Its assets include an untapped land base of about 116,800 acres, and its net earnings for the nine months ended Sept. 30, 2005 would total nearly $2.6 million.

The post-merger Chamaelo Exploration would be "financially stable yet able to provide exposure to the potential of rapid productions and cash-flow growth," the companies said in regulatory filings. It would boast "a high-quality asset base and diverse opportunities for growth, which range from low-risk infill drilling to high-impact exploration."

Tropic shareholders will vote on the proposed merger on December 22, and Chamaelo and Tournament shareholders will vote December 28.