<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED APRIL 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM_____________________TO____________________
ORTEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 0-22598 95-3494360
(STATE OR OTHER JURISDICTION (COMMISSION FILE NO.) (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2015 WEST CHESTNUT STREET, ALHAMBRA, CALIFORNIA 91803-1542
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 281-3636
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 30, 1996 was $168 million based on the closing sales
price of such stock on such date.
[_] Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The number of shares outstanding of the registrant's common stock, as of
June 30, 1996 was 11,426,560.
----------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Proxy Statement for its 1996 Annual Meeting of
Stockholders to be held on September 27, 1996 are incorporated by this reference
into Part III as set forth herein.
================================================================================
TOTAL PAGES 44
EXHIBIT INDEX ON PAGE 41
<PAGE>
PART I
ITEM 1. BUSINESS
Ortel Corporation ("Ortel" or the "Company") pioneered the development of
"linear fiberoptic" technology that enables the transmission of a wide variety
of digital, digitally compressed or analog information via radio frequency
("RF") signals on fiberoptic cable. By utilizing this technology, users do not
need to convert RF signals into a digital format or transform them to individual
channels at low frequencies. The Company's linear fiberoptic technology has
contributed to the development of a network architecture called "hybrid
fiber/coax," combining the best features of fiberoptics and coaxial cable.
Today, linear fiberoptics enables CATV system operators to transform their
traditional one-way, video-only systems to interactive, two-way, video, voice
and data delivery systems and provides telephone companies with the means to
cost-effectively transform their traditional telephone networks to deliver
interactive video and data services. Revenues from the sale of products for
these broadband applications accounted for approximately 72% of the Company's
total revenues in fiscal year 1996.
Other applications that use this technology are satellite earth stations,
cellular and personal communications (PCS) networks and certain government
communication projects all of which capitalize on the inherent ability of this
technology to enable longer transmission distances, improved signal quality,
higher bandwidth, immunity to interfering signals and operating cost savings as
compared to most other solutions. As a result of the acquisition of Avitec AB in
Sweden, the Company has also positioned itself as a leading supplier of
repeaters which enhance the coverage of wireless base stations for cellular, PCS
and other wireless services. Revenues from the sale of products for these
applications accounted for approximately 28% of the Company's total revenues in
fiscal 1996.
HISTORY
The Company was incorporated in April 1980 under the laws of California and
was reincorporated in October 1994 under the laws of Delaware concurrent with
the Company's initial public offering. For the first several years, the Company
focused on the application of its semiconductor laser technology primarily for
high-speed government applications. In 1987, the Company was the first to
demonstrate that amplitude modulated CATV signals could be cost-effectively
transmitted over fiber. This demonstration led to an effort to commercialize the
technology for CATV applications culminating with initial volume shipment of
products for this purpose in fiscal 1990. In May 1993, Ortel introduced the
industry's first "digital ready" laser for interactive services, which carries
multi-channel video and digitally modulated RF signals at frequencies up to 750
MHz.
Concurrent with the development of its linear fiberoptic technology for
CATV applications, the Company also developed a transmitter-receiver link which
could be sold to OEMs and used for the transmission of RF signals between a
cellular base station and a fiber-fed repeater or fiberoptic microcell. This
provided cellular operators the means to extend the coverage of a base station
or enhance the capacity of a given calling area. The acquisition of Avitec AB of
Sweden in March 1996 was a logical extension to the products already being sold
for these applications and gave the Company the means to build a complete line
of repeater products or fiberoptic microcells for both OEMs and end-users.
The Company's principal executive offices are located at 2015 West Chestnut
Street, Alhambra, California 91803-1542. Its telephone number is (818) 281-3636.
GENERAL
Industry Background
Many communications systems use RF signals to transmit voice, data and
video. An important feature of RF signals is that they can "carry" both analog
and digitized electronic information. RF signals transmitted through free space
have been used in radio and television broadcasting, satellite communications,
cellular telephone and other "wireless" communications systems. Such systems
also have used coaxial cables or specially designed hollow metal pipes
("waveguides") to distribute RF signals between ground based facilities. CATV,
which grew out of traditional
2
<PAGE>
television broadcasting, also has used coaxial cable to carry RF signals both
between antennas and "headends" and from "headends" to the home.
When RF signals are transmitted through coaxial cables or waveguides,
signal strength and quality deteriorates as transmission distance increases. To
compensate for these effects, system designers have had to either (i) use other
compensating RF equipment, such as amplifiers and equalizers, or (ii) limit the
distance between various pieces of RF equipment. Amplifiers and equalizers
introduce cost, reliability and performance limitations to the overall system
design. Limiting the transmission distance has placed restrictions on the range
and flexibility of the overall system design. In addition, coaxial cable and
waveguides have often been heavy, inflexible and difficult to install.
Broadband RF Communications. CATV networks have relied on a "tree and
branch" coaxial cable network, with multiple cascaded amplifiers to overcome the
signal deterioration, to distribute television signals to subscribers. This
"tree and branch" architecture evolved as the only cost-effective cable network
for CATV systems. The range of CATV networks has been limited because only a
certain number of amplifiers can be cascaded without degrading the signal
unacceptably. To reach more distant subscribers, new transmission control
facilities ("headends") had to be built, or "super-trunk" lines had to be
installed, to convey a high quality signal deep into the network. As the number
of CATV channels multiplied, requiring increased system bandwidth and additional
amplifiers, CATV operators were faced with expensive re-builds of their systems
to provide increased channel capacity.
At the same time, the growth of video and data communications and
developments in digital compression have driven the communications industry to
seek effective ways to integrate interactive video and data services with
traditional communication networks. This emphasis on interactive multimedia
services has placed increased demands on communications networks to deliver
broadband RF two-way communications services, which in turn has required
significantly higher bandwidth than has been used in the past. Historical
efforts by telephone companies to achieve this integration focused on non-RF
digital technology, but no network designs incorporating such technology have
been widely adopted. CATV networks offered a potential solution to providing
higher bandwidth services, but they have been incapable of providing two-way
services because of the limitations of traditional CATV tree and branch
networks. Accordingly, there has been a growing need for products that would
convey a high quality signal deep into CATV networks, provide higher bandwidth
and deliver broadband two-way communications services on traditional CATV
networks.
Wireless Communications. Dramatic changes have also taken place in mobile
communications, primarily cellular telephones, paging systems and two-way radio.
Cellular telephone systems have used RF signals to transmit telephone
conversations, using traditional analog or new digital formats, between mobile
users via fixed "base stations." Each base station has generally served a single
"cell," a geographical area inside of which mobile users can communicate with
the same antenna. The availability and popularity of cellular phones has created
increased demands on cell capacity in order to serve wireless users in congested
locations such as freeway interchanges, office buildings, airports and shopping
malls. As the number of telephone calls has grown, more cells and antennas have
had to be added to the network, requiring new base stations and new equipment.
In addition, the growth of wireless PBX systems has required more complete
cellular coverage inside buildings.
Cellular and PCS telephone systems operators must generate and distribute
RF signals throughout their network. Generally, it has not been cost-effective
to transmit cellular radio signals over coaxial cable from an existing base
station to remote antennas. In addition, in some locations shadow areas can
occur if the signal from the antenna is blocked by buildings, hills or other
obstacles resulting in incomplete coverage. Because PCS operators are faced with
additional coverage problems associated with the loss of signal strength at PCS
frequencies (2 GHz) compared to cellular frequencies, management believes
repeaters will play an important role in providing a cost-effective solution for
deploying these networks. For in-building distribution of RF signals, amplifiers
may be required to overcome the signal loss through coaxial cables. Accordingly,
there has been a growing need for products that can cost-effectively provide a
direct transmission path for RF signals between existing base stations and
remote antennas, between base stations and shadow areas and for RF signal
distribution inside buildings.
Satellite Communications. Using RF signals, satellite communication
networks link earth stations through a communications satellite. Satellite earth
stations have traditionally relied upon coaxial cable and waveguides to
3
<PAGE>
distribute RF satellite signals between antennas and nearby control rooms. The
distance between the antenna and control room has been limited by the
deterioration of signal strength using coaxial cables and waveguides.
Waveguides, and to a lesser extent coaxial cable, have been designed for
specific frequency bands, which have restricted their use when the earth station
is upgraded to new frequency bands. Users of satellite services have had to
access remote satellite antennas through costly leased communication lines or
microwave links because earth stations are often located in remote areas.
Accordingly, there has been a growing need for products that would cost-
effectively transmit RF satellite signals over longer distances.
The Dilemma. Fiber optics offered a potential solution to the limitations
associated with the transmission of RF signals over coaxial cable and
waveguides. Fiberoptic cables transmit optical signals (i.e., information
represented as light energy) through ultra-pure strands of glass. Compared to
coaxial and waveguide cables, fiberoptic cables provide significant performance
advantages, including (i) longer transmission distance, (ii) greater signal
capacity (e.g., higher bandwidth), (iii) reduced cable size and weight and (iv)
invulnerability to interference from external electronic signals.
Optical signals are often generated by semiconductor lasers. Historically,
these signals were generated by switching the laser "on" or "off," creating
binary pulses of light. As a result, fiberoptics technology was used in digital
systems, which respond to whether the signal is "on" or "off." These binary,
"on/off" signals are called pulse code modulated ("PCM") signals and are the
basis of PCM digital communications technology. In the last decade, fiberoptic
technology has been widely commercialized for these non-RF digital signals, and
has made a significant impact on transmission distance, signal quality and cost
in the fields of data communications and digital telephone networks.
In spite of these advances, there had been no widespread adoption of fiber
optics in broadband RF, cellular and wireless and satellite communication
systems. The fiberoptic technology designed for "on/off" operation could not
reproduce all of the RF signals used in these communications systems. To be used
with RF signals, lasers had to reproduce the exact wave form of the original
signal at every instant in time ("linear" operation) and at sufficiently high
frequencies and light output power. These and other technical limitations
presented a dilemma to proponents of fiberoptic transmission in broadband RF,
cellular and wireless and satellite communication systems.
The Ortel Solution
Ortel pioneered the development of linear fiberoptic technology, which
enables the cost-effective transmission of RF signals on fiberoptic cable. The
compelling benefits of fiber optics in RF systems include longer transmission
distance, improved signal quality, higher bandwidth and immunity to interfering
signals.
Unlike traditional "on/off" digital lasers, Ortel's proprietary linear
lasers proportionally modulate the intensity of the light signal with the RF
signal. These variations in light signal are detected at the other end of the
fiberoptic cable by Ortel's proprietary photodiodes and converted into RF
signals. By proportionally modulating the intensity of the light signal, the
Company's linear fiberoptic technology enables the transmission of RF signals
over fiberoptic cables, carrying a wide variety of digital, digitally compressed
and analog information.
Broadband RF Communications. In mid-1987, the Company was the first to
demonstrate that amplitude modulated CATV signals could be cost-effectively
transmitted over fiber. The Company's linear fiberoptic technology for CATV
systems has contributed to the development of a new network architecture,
combining the best features of fiber optics and coaxial cable. This new
architecture, called "hybrid fiber/coax," enables the use of "star-bus" networks
rather than traditional "tree and branch" coaxial networks. Hybrid fiber/coax is
expected to contribute significantly to the development of broadband
communications services, including interactive multimedia. The benefits of the
Company's broadband products include:
. Interactive services. Unlike traditional tree and branch coaxial
networks, star-bus networks using hybrid fiber/coax can support two-way
services, such as video on demand, home shopping, interactive games and
telecommuting.
4
<PAGE>
. Higher performance. CATV networks using hybrid fiber/coax eliminate the
need for lengthy cascades of amplifiers by bringing the headend signal
to within a few thousand feet of the home. This results in improved
signal quality, higher bandwidth and allows cable television operators
to increase the number of channels offered.
. Use of existing infrastructure. Ortel's linear fiberoptic technology
allows the CATV industry to use the "last mile" of the existing coaxial
cable infrastructure connecting the network to individual homes, thereby
reducing the investment required to upgrade the network.
. Scalability. The use of the Company's products in hybrid fiber/coax
networks allows network operators to expand channel capacity by
segmenting these networks such that fewer homes are served by any one
laser. In addition, because "digital switching" occurs at one end of the
network rather than in the "field," these networks may more easily be
upgraded in a cost-effective manner in the future.
. Transparency to subscribers. The Company's products enable subscribers
to continue using their existing television sets and set-top converters,
because the CATV signals are transmitted in standard technical formats.
. Reduced maintenance. Network reliability is increased and operating
costs are reduced as a result of a simplified network layout and fewer
cascaded amplifiers requiring field service.
Wireless Communications. Ortel's linear fiberoptic products expand the
capacity and increase the flexibility of cellular and PCS networks by providing
a direct transmission path for RF signals between existing base stations and
remote antennas and for RF signal distribution inside buildings. The benefits of
the Company's products include:
. Reduced real estate costs. The Company's products allow the
consolidation of signal generating equipment at the base station rather
than at a remote antenna site. This usually eliminates the need to
purchase or lease real estate at the remote site.
. More efficient network operation. Optimal operation of cellular
telephone networks requires careful planning of RF frequencies and
channel assignment over a wide geographical region. Consolidating
equipment at the base station to generate RF channel frequencies allows
operators to dynamically allocate channel frequencies to remote
antennas.
. Cost-effective buildout of new networks. Repeater products and
fiberoptic microcells can reduce the infrastructure cost to deploy new
PCS networks which must overcome the loss of signal strength at higher
frequencies.
. Reduced installation and maintenance costs. The use of fiberoptic cable
for RF signal distribution inside buildings eliminates the need to use
amplifiers, which simplifies the design and installation procedures and
reduces maintenance costs.
Satellite Communications. The Company's products enable interconnection of
antennas, control rooms and remote users through fiberoptic cable, permitting
the replacement of coaxial cable and waveguides in earth stations and multiple
leased lines between remote users and earth stations. The benefits of the
Company's products include:
. Reduced installation costs. The Company's linear fiberoptic products
often reduce real estate and installation costs by eliminating the need
for additional land and buildings at new antennas and lengthy runs of
coaxial cable or waveguides.
. Reduced operating costs. Ortel's products permit centralization of
operating and monitoring equipment in a single control room serving
multiple antennas, resulting in lower equipment and personnel operating
costs.
5
<PAGE>
. Reduced access costs. Ortel's products transmit up to twelve satellite
channels over a single fiberoptic cable, eliminating the need for
multiple leased lines and reducing access costs for remote users.
Products
Ortel's product line consists of packaged lasers and photodiodes coupled to
optical fiber ("modules"), transmitters and receivers incorporating modules and
other circuits ("sub-systems"), and transmitters and receivers in modular rack-
mount chassis designs ("links"). The Company offers this range of products to
meet the specific requirements of various OEM manufacturers and system
integrators that serve the communications market. For example, because of the
unique circuit design challenges of RF circuits, many of Ortel's customers rely
on Ortel to integrate the laser package and the RF circuit into a transmitter
sub-system with a higher level of integration than a simple packaged laser.
Ortel has developed a variety of such sub-systems, standard and custom, for
various end-user applications. Ortel's vertically integrated manufacturing
operations permit the Company to optimize the physical and electrical interface
with its customers' circuit, product and system designs.
Broadband RF Communications. Ortel is a leading supplier of fiberoptic
transmitter sub-systems and receiver modules for use in broadband RF
communications systems. Ortel's products meet the various frequency requirements
of CATV and telephone networks in the United States and abroad. Sales of
transmitter products and receiver products for use in broadband RF (including
CATV and telephone) networks accounted for approximately 72%, 78% and 67% of the
Company's revenues in fiscal years 1996, 1995 and 1994, respectively.
A substantial majority of the Company's customers for its broadband
products purchase custom products. The following table lists certain of the
Company's current standard products for the broadband RF communications market.
The table shows the date a particular product line was first introduced as well
as the date of introduction of the most recent version of that product.
<TABLE>
<CAPTION>
BROADBAND RF COMMUNICATIONS
- - ------------------------------------------------------------------------------------------------------------------
FIRST LATEST
RF NUMBER OF VERSION VERSION
DESCRIPTION FREQUENCY CHANNELS WHERE USED INTRODUCED INTRODUCED
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DFB Laser 40-750 500 CATV headend or August May
Transmitter MHz (analog+digital) telephone central 1990 1996
office
DFB Laser 40-860 60 CATV headend July July
Transmitter MHz (analog) 1992 1993
(International)
OEM Sytem 40-860 500 CATV headend or September September
Transmitter MHz (analog + digital) telephone central 1995 1995
office
DFB Return 5-200 MHz Set by modulation CATV optical June June
Path Laser format node 1996 1996
Photodiode 40-600 Set by CATV optical January July
Receiver MHz transmitter receiver or 1989 1994
telephone ONU
Photodiode 40-860 Set by CATV optical August July
Receiver MHz transmitter receiver 1989 1994
(International)
</TABLE>
In addition to the products described above, the Company has announced
several products which will become available during calendar 1996. A number of
these new products are based on a technology known as external modulation and
are designed to interconnect CATV headends. These products include a 1550nm
transmitter and receiver and an erbium-doped fiber amplifer (EDFA). The Company
has also announced a new return path laser to be available during 1996 for
transmitting return path signals from the home to the CATV headend.
6
<PAGE>
Wireless Communications. Ortel has developed a line of complementary
products designed to be integrated by cellular and wireless system manufacturers
into equipment cabinets and specialized outdoor RF repeaters. Ortel introduced a
transmitter for single-fiber links to microcells and a high dynamic range
transmitter for microcells with heavy traffic loading. Ortel also designs and
manufactures fiberoptic terminal equipment operating at Personal Communications
Networks ("PCN") and Personal Communications Services ("PCS") frequencies.
A new fiberoptic antenna system was introduced during fiscal 1995. This new
system uses small, smoke-detector size devices which are connected to a central
distribution hub that connects to the outside cellular system, but allows calls
to be placed through a Company's PBX telephone switch. This product is currently
in the process of qualification by several equipment manufacturers and cellular
operators.
A majority of the Company's customers for its wireless product purchase
custom products. The following table lists certain of the Company's current
standard products for the wireless communications markets. The table shows the
date a particular product line was first introduced as well as the date of
introduction of the most recent version of that product.In addition to the
products shown, the Company has announced the following products will be
available in 1996: Low and high power repeaters with RF frequency of 1850-1990
MHz with 16 and 8 channels, respectively, and fiber optic microcells with RF
frequency of 1850-1990 MHz and channels all for remote off-air feed from base
stations. In addition to the products shown, the Company has announced the
following products will be available in 1996: high power repeaters at 1850-1990
MHz which will provide an area of coverage comparable to a base station and
fiber optic microcells at 1850-1990 MHz for remote off-air feed from base
stations.
<TABLE>
<CAPTION>
WIRELESS COMMUNICATIONS
- - -----------------------------------------------------------------------------------------------------------
FIRST LATEST
NUMBER OF VERSION VERSION
DESCRIPTION RF FREQUENCY CHANNELS WHERE USED INTRODUCED INTRODUCED
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DFB Laser 800-1,000 MHz 96 Cellular base station August April
Transmitter for analog, digital 1992 1994
Photodiode and dual-mode
Receiver microcell antenna
- - -----------------------------------------------------------------------------------------------------------
DFB Laser 800-1,000 MHz 96 Cellular base station April April
Transmitter for analog, digital 1994 1994
for WDM Links and dual-mode
microcell antennas
for single fiber
solutions
- - -----------------------------------------------------------------------------------------------------------
High Dynamic Range 824-849 MHz 165 Analog, digital and April April
DFB Transmitter dual mode microcells 1994 1994
with heavy traffic
loading
- - -----------------------------------------------------------------------------------------------------------
DFB Laser 1.7-2.2 GHz 96 Personal April April
Transmitter and communications 1994 1994
Photodiode Receiver networks
- - -----------------------------------------------------------------------------------------------------------
DFB Laser 1.7-2.2 GHz 96 PCN links for single April April
Transmitter for fiber solutions 1994 1994
Links
- - -----------------------------------------------------------------------------------------------------------
Fiberoptic Antenna 800-960 MHz 48 In-building cellular February February
System and wireless PBX 1995 1995
- - -----------------------------------------------------------------------------------------------------------
Fiberoptic Antenna 1850-1990 MHz 48 In-building cellular September September
System and wireless PBX 1995 1995
- - -----------------------------------------------------------------------------------------------------------
Low Power Repeater 1.7-2.2 GHz 8-16 Remote off-air feed October November
from base sation 1994 1995
- - -----------------------------------------------------------------------------------------------------------
Repeaters 75-960 MHz Various Remote off-air feed 1986 1995
from main RF source
- - -----------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Satellite Communications. Ortel has developed complete rack mounted
transmission equipment for standard earth station designs. Ortel's products are
used with both receive-only antennas and transmit-and-receive antennas by the
originators of television programming and by major international
telecommunications organizations. In October 1993, Ortel announced its System
8000 product line, which enables operators of major satellite communication
earth stations in the Intelsat and Inmarsat networks to transmit all inter-
facility signals for standard satellite frequency bands between the control room
and antennas over fiberoptic cable.
The following table lists certain of the Company's current products for the
satellite communications market. The table shows the date a particular product
line was first introduced as well as the date of introduction of the most recent
version of that product.
<TABLE>
<CAPTION>
SATELLITE COMMUNICATIONS
- - -------------------------------------------------------------------------------------------------------------
FIRST LATEST
NUMBER OF VERSION VERSION
DESCRIPTION RF FREQUENCY CHANNELS WHERE USED INTRODUCED INTRODUCED
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiberoptic 70 MHz 1 transponder Satellite November September
Transmission Link 140 MHz earth station 1993 1994
VSAT hub
- - -------------------------------------------------------------------------------------------------------------
Fiberoptic 950-2,050 MHz 12 transponders Teleport November May
Transmission Link TV broadcast 1990 1996
CATV headend
- - -------------------------------------------------------------------------------------------------------------
Fiberoptic 3.6-4.2 GHz 12 transponders Satellite November March
Transmission Link 5.8-6.5 GHz earth station 1993 1995
10.95-12.75 GHz TV broadcast
14.0-14.5 GHz
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
TECHNOLOGY
Ortel's leadership in delivering linear fiberoptic products for RF signal
transmission is based upon its expertise in a number of key technologies. These
include:
Advanced laser and photodiode semiconductor technology. Each of the
Company's high performance product lines is built with proprietary laser and
photodiode semiconductor devices that are designed and fabricated by Ortel using
epitaxial wafer fabrication processes. In an epitaxial wafer fabrication
process, one semiconductor material is grown in crystal layers over the surface
of another. The design and testing of these chips has been optimized to produce
devices with high output power and linear operation for RF signal transmission.
Ortel's devices are based on Indium Phosphide and Gallium Arsenide based
compound semiconductor technology. The majority of the Company's laser-based
products use Distributed Feedback ("DFB") lasers and "PIN" photodiodes.
"Distributed Feedback" is a technique used to create semiconductor lasers with a
single optical output wavelength. To produce DFB lasers and PIN photodiodes,
Ortel has established wafer fabrication capabilities for epitaxial layer growth
and the formation of individual laser and photodiode devices within these
epitaxial layers.
Opto-electronic device design. Ortel has developed linear laser designs by
optimizing key design parameters including laser chip efficiency, modulation
bandwidth and the interaction between light and the distributed feedback laser
structure. With Ortel's proprietary linear lasers, the intensity of the light
signal is modulated proportionally by variations in electrical current to create
an exact optical counterpart of the RF signal. The resulting modulated optical
signal is transmitted to the receiving end of the fiberoptic cable and detected
with an Ortel proprietary photodetector that converts the modulated optical
signal to an electrical current. Because of the exact proportionality between
the light intensity from the laser and the value of the RF signal, the Company's
technology creates an effective fiberoptic transmission path for RF signals.
8
<PAGE>
Microelectronic packaging. Packaging is a critical aspect of linear
fiberoptic product performance. Every laser and photodiode package is
hermetically sealed and provides for the electrical connection from an RF
circuit to the device and the efficient transfer of light between the device and
an optical fiber. Ortel has designed a patented miniature "optical bench"
consisting of a laser chip, various optical components to capture and focus the
light and an arrangement to hold the optical fiber rigidly fixed in place within
a tolerance of less than one-millionth of a meter (one micron). This optical
bench is integrated inside the package with an RF electrical interface and is
used in several of the Company's laser products.
RF Electronics
RF predistortion. Predistortion is a technique in which the performance of
linear devices can be considerably improved by pre-conditioning signals in such
a way as to negate predictable deviations from ideal performance. Management
believes that Ortel was the first company to make commercially available
broadband RF predistortion circuits for semiconductor lasers. Ortel's patented
predistorter design, which provides critical performance advantages in Ortel's
laser-based products for CATV applications, uses two independent circuits to
cancel distortion and relies on fundamental carrier suppression, a technique in
which distortion signals are isolated so that they can be amplified, filtered
and controlled to exactly counteract the residual distortion in the DFB laser.
Ortel's vertically integrated manufacturing operations allow for close interplay
between the laser device characteristics and the optimal design of the
predistortion circuit.
Repeaters. In acquiring Avitec AB of Sweden, the Company has added
important new technical capabilities with respect to using RF electronic
techniques to extend the reach of a wireless base station. Unlike the early
repeaters used in cellular networks, Avitec's products are channel selective,
controlling the portion of the signal to be amplified in order to improve signal
strength. In addition, operating management software has been developed by
Avitec to provide the wireless operator with the means of monitoring the use and
performance of the repeater. The acquisition also brings the capability of
providing turnkey project management with respect to providing wireless signals
inside tunnels, subways, and other similar public venues.
RESEARCH AND PRODUCT DEVELOPMENT
The market for linear fiber optics is subject to rapid technological change
and new product introductions. Management believes that the Company's strength
in the marketplace will depend in part on its ability to continue to design and
manufacture high performance products and enhancements that maintain
technological competitiveness for its customers.
Ortel's research and product development strategy emphasizes continuing
evaluation of emerging trends and technical challenges in communications
technologies and standards in order to identify new markets and product
opportunities. The Company believes that its success is due in part to its
ability to maintain sophisticated technology research programs while
simultaneously focusing on practical applications and its customers' strategic
needs. To achieve this, engineers work closely with key customers and network
designers to understand the relationships between system design and Ortel's
product performance.
In order to facilitate the timely introduction of new and enhanced products,
the Company has increased the size of its research and product development
department from 68 employees at the end of fiscal 1995 to 99 employees at the
end of fiscal 1996. The Company also engages outside consultants to assist in
its product development efforts. The Company's management believes that
substantial investment in research and product development is important for the
Company to maintain its leadership position in the industry and, therefore,
intends to increase its spending for research and development in subsequent
fiscal years primarily by adding experienced engineers in the area of fiberoptic
technology, RF circuits, mechanical design and digital interface design. In
fiscal years 1996, 1995 and 1994, research and development expenses were
approximately $8.9 million, $6.3 million, and $4.4 million, respectively.
From time to time, the Company enters into select contract research and
development programs. The Company's strategy is to choose those research and
development programs that supplement established research and development
efforts within the Company. The Company typically retains rights to the
technology developed under such contracts. Revenues from such contracts, which
were $1,753,000, $1,055,000, and $679,000 in fiscal years 1996, 1995 and 1994,
respectively, are netted against research and development expenses.
MARKETING AND SALES
Ortel markets and sells its products worldwide to OEM manufacturers and system
integrators that serve the broadband, wireless and satellite communications
sectors. In the United States, the Company maintains its own sales force, which
currently includes nine sales engineers at the Company headquarters, one in
Atlanta, Georgia, one in Princeton, New Jersey, one in Philadelphia,
Pennsylvania. Internationally, Ortel has 18 distributors in
9
<PAGE>
Europe, Latin America, South Africa, Asia and the Pacific Rim. The Company's
distributor agreements generally have an initial one-year term and renewable 90
day terms thereafter. International distributors are responsible for selling and
promoting certain of Ortel's products exclusively within their respective
territories. Ortel also supplies sales and applications support, product
literature and training to its distributors. Also, the Company sells its
products through three majority-owned subsidiaries, Avitec AB in Sweden, Ortel
SARL in France and Ortel Vertriebs GmbH in Germany.
The typical sales cycle for Ortel's products requires a substantial investment
of time and effort. Initial leads are investigated to determine if the
customer's needs can be met. Engineering and applications support is usually
required during this stage. Often, a lengthy product evaluation phase follows,
which may lead to the necessity to modification of the physical or electrical
specifications of the product. Ortel's policy is to perform such modifications
for large OEM customers. Finally, negotiations regarding volume, delivery and
price take place. Since customer adoption of the Ortel product architecture is
often a major decision for the customer, Ortel's senior management are actively
involved in the sales process.
Approximately 72%, 78% and 69% of the Company's revenues in fiscal years 1996,
1995 and 1994, respectively, came from worldwide sales of its broadband products
for use primarily by CATV operators. Demand for the Company's broadband
products depends to a large extent upon capital spending by CATV operators for
constructing, rebuilding, maintaining or upgrading their systems. Capital
spending by CATV operators and therefore, the Company's sales and profitability,
are dependent on a variety of factors, including access by CATV operators to
financing, demand for their cable services, availability of alternative video
delivery technologies (such as Direct Broadcast Satellite), government
regulation of cable operators and general economic conditions.
Sales to customers outside of the United States represented 32%, 25%, and 30%
of the Company's revenues in fiscal years 1996, 1995 and 1994, respectively.
CUSTOMERS
Ortel's largest customer is the GI Communication Division of GIC. In fiscal
year 1996, Ortel shipped $19.8 million of broadband products to GIC. Until March
1994, Ortel sold CATV transmission products for use in the United States and
Canada exclusively to GIC. This relationship was based in part on a development
agreement pursuant to which GIC provided certain financial and systems support
for the development of Ortel's original DFB laser product for cable television
systems. While the Company has enjoyed a long-term relationship with this
customer, there can be no assurance that GIC will not secure a second source or
continue buying products from the Company. Approximately 34%, 48%, and 44% of
the Company's revenues in fiscal years 1996, 1995 and 1994, respectively, were
derived from sales to GIC of products for use by CATV operators. Since March
1994, Ortel has shipped broadband DFB laser-based CATV products to other OEMs
in the United States. Sales of broadband products to customers other than GIC
represented 37%, 30% and 24% of total revenues in fiscal years 1996, 1995, and
1994, respectively.
Approximately 20%, 19% and 17% of the Company's revenues in fiscal years 1996,
1995 and 1994, respectively, were derived from sales of products to the
Company's next four largest customers.
Ortel has also signed OEM agreements with several other customers for the
supply of its linear fiberoptic products. In return for entering into these
agreements, Ortel offers OEMs volume price discounts, based on both committed
delivery schedules as well as targeted delivery volumes over 12 month periods.
The Company's standard OEM agreement also includes a 12 month warranty on
Ortel's products. None of these contracts individually is currently material to
the Company's results of operations, and the Company currently is not
significantly dependent upon any such individual OEM agreement.
10
<PAGE>
MANUFACTURING AND SUPPLIERS
Ortel's manufacturing operations are currently located at the Company's
headquarters in Alhambra, California. The Company's manufacturing is vertically
integrated and consists of wafer fabrication, chip processing, device packaging,
hybrid microelectronic packaging, printed circuit board testing and final
assembly and test.
Many of the key processes used in Ortel's products are proprietary.
Consequently, many of the key components of Ortel's products are designed and
produced internally. The Company's internal wafer fabrication facility is the
sole source with respect to producing semiconductor lasers for use in its
transmitter products. The loss or reduction in output of this source would
severely impact the Company's financial performance.
Outside contractors are used to supply standard components and to assemble
printed circuit boards. The Company sources certain components from single
vendors or from international vendors. In such cases, the Company's policy is to
maintain a safety stock to help minimize any disruption if the Company needs or
determines to shift to an alternative vendor. Currently, the only components
that the Company purchases from sole suppliers for which alternative sources are
not available are an optical component manufactured by Corning Incorporated,
used in the Company's transmitters, and a MMIC amplifier manufactured by Texas
Instruments, used in certain of the Company's satellite communications products.
The Company assembles all of its products. Relevant assembly processes include
die attach, wirebond, substrate attachment and fiber coupling. Ortel also
conducts tests throughout its manufacturing process using commercially available
and in-house built testing systems that incorporate proprietary procedures.
Ortel performs final product tests on 100% of its products prior to shipment to
customers. Based on customer requirements, the Company also conducts
environmental testing before shipping certain of its products.
COMPETITION
The growth of broadband RF networks for CATV and telephone systems has created
a highly competitive marketplace for linear fiberoptic products. The Company
faces current or potential competition from four primary sources: (i) direct
competitors, (ii) potential entrants, (iii) suppliers of external modulation
products (although this technology does not typically compete with the Company's
products) and (iv) suppliers of alternative network technology.
Currently, the Company's direct competitors include both domestic and foreign
companies such as Mitsubishi, Fujitsu, NEC, Lucent Technologies (formerly AT&T
Microelectronics) and Philips (The Netherlands). As the market for linear
fiberoptic products grows, new competitors are likely to emerge.
Other companies such as Harmonic Lightwaves, Synchronous and Uniphase have
developed products that use external modulation, which is an alternative to the
Company's linear modulation technology. With external modulation, a steady
optical signal is transmitted from a laser through a device that modulates the
amount of light transmitted in response to the application of a broadband RF
signal. This technology is typically used to transmit signals over longer
distances for interconnecting CATV headends. In response to this opportunity,
the Company has recently announced a 1550 externally modulated transmitter and
receiver and an erbium-doped fiber amplifier (EDFA) to be available during the
latter portion of calendar 1996.
There are also several alternative network technologies. For example, in
broadband RF communications, the Company's products compete with PCM digital
fiberoptic technology, which is the basis of "digital fiber to the curb" offered
by companies such as Broadband Technologies, Inc. In telephony networks, a
technology known as ADSL has been developed in which digitally compressed
television signals are transmitted through existing telephone lines from the
central office to the home or business. Satellite delivery of television signals
to the home through the DirecTV system launched by Hughes Communications does
not require a broadband RF coaxial network on the ground. Wireless television,
called MMDS or LMDS, can also be deployed without coaxial or fiberoptic
distribution networks and has been deployed in several large cities. Many
industry observers claim that MMDS systems can be made interactive with suitable
high frequency transmission devices installed in the home. Finally, in cellular
and wireless systems, existing telephone circuits and coaxial cable remain an
alternative to linear fiberoptic signal distribution in systems and sub-systems.
Widespread adoption of any of these technologies would reduce the demand for the
Company's products.
11
<PAGE>
The principal competitive factors in the Company's markets are product
performance, volume shipment capability, customer support, flexibility and
price. While management believes that the Company competes favorably with
respect to each of these factors, there can be no assurance the Company will be
able to compete successfully in the future. Many of Ortel's current or potential
competitors have significantly greater financial, technical, manufacturing,
marketing, sales and other resources than Ortel. In addition, many of these
entities have greater name recognition and extensive experience in the
communications industry. The Company expects that direct and indirect
competition will increase in the future. Additional competition could adversely
affect the Company's results of operations through price reductions, loss of
market share and delays in the timing of customer orders.
INTELLECTUAL PROPERTY
Because of the rapidly evolving nature of the telecommunications industry, the
Company believes that its technological advantage derives primarily from its
ability to develop a continuous stream of new innovations along with its
accumulated base of intellectual property. The Company has a policy of reviewing
its innovations for patentability. In some cases, the Company decides to
maintain its intellectual property as a trade secret rather than to seek patent
protection.
The Company currently holds seventeen United States patents and has a number
of patent applications on file at the United States Patent and Trademark Office.
The Company also has ten foreign patents and a number of foreign patent
applications pending in Europe and other countries. There can be no assurance
that any patent owned by the Company will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future patent
applications will be issued with the scope of the claims sought by the Company,
if at all. Furthermore, there can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology, duplicate
the Company's technology or design around the patents owned by the Company. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries. The Company generally enters into
confidentiality or license agreements with its employees and consultants, and
vendors and customers as needed, and generally limits access to and distribution
of its proprietary information. Nevertheless, there can be no assurance that the
steps taken by the Company will prevent misappropriation of its technology. In
addition, litigation may be necessary in the future to enforce the Company's
patents and other intellectual property rights, to protect the Company's trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition or results of operations. For a description of litigation relating to
the Company's patents, see "Legal Proceedings."
The Company holds a number of registered trademarks with the U.S. Patent and
Trademark Office: Ortel, Ortel Corporation (when appearing with the Company's
logo) and the phrase Making Light Work for You. The title of the Company's
newsletter, Light Reading, is also a registered trademark. In addition, the
Company has applied for trademarks on two phrases which describe applications of
its products: Radio on Fiber refers to the transmission of radio signals using
linear fiberoptic technology and Microwaves on Fiber describes a product's
capability to transmit signals over optical fiber whose frequencies lie in the
microwave range. The Company also has a registered foreign trademark for Ortel
when it appears with the logo in Germany, France, Japan and South Korea, and has
applied for registration in a number of other countries.
REGULATION
The U.S. Congress passed the 1996 Telecommunications Act on February 8, 1996.
This act allows the Regional Bell Operating Companies (RBOCs) entry into the
cable and the cable companies into the local phone business while long distance
phone companies will be able to compete in local phone and video markets.
Management believes that this legislation will promote competition and, hence,
accelerate the upgrading of networks by both cable and telephone operators.
However, it is expected to take several months for the Federal Communications
Commission (FCC) to write the rules under which this legislation is to be
implemented.
12
<PAGE>
EMPLOYEES
As of April 30, 1996, the Company employed 464 worldwide including 434 persons
in the U.S. of which 280 are in manufacturing, 91 in research and development,
38 in sales and marketing, and 25 in a general and administrative capacity. The
Company also employs a number of temporary employees and consultants on a
contract basis at any one time. As of April 30, 1996, there were 11 such
persons. None of the Company's employees is represented by a labor union. The
Company has not experienced any work stoppages and considers its relations with
its employees to be good.
ITEM 2. PROPERTIES
The Company leases its principal manufacturing, engineering, sales and
administrative facilities consisting of approximately 75,000 square feet in
Alhambra, California. One lease, consisting of four buildings and approximately
50,000 square feet expires on September 30, 1996. Included in the lease
agreement are two option periods for four years beginning on October 1, 1996 and
for five years beginning on October 1, 2000. The base rent for these facilities
is approximately $34,000 per month. On May 20, 1994, the Company entered into a
second lease for an additional building near its existing facilities with
approximately 18,000 square feet, at a cost of approximately $10,800 per month.
This lease expires on September 1, 1997 and has options to renew for three years
on October 1, 1997 and five years on October 1, 2000. A third lease consisting
of approximately 3,000 square feet at a cost of $1,815 per month expires on
April 15, 1998 and includes an option to renew for an additional three year
period on April 15, 1998. In 1996 an additional 8,000 square feet were leased
with a commitment through October 1, 1998 with a two-year renewal option. The
Company also leases additional space on a month-to-month basis for parking at
its main facilities and leases three small sales offices in Atlanta, Georgia,
and Princeton, New Jersey and Philadelphia, Pennsylvania. See Note 7 of Notes to
Consolidated Financial Statements.
In November 1994, the Company purchased approximately 56,500 square feet of
land near its existing facilities at a purchase price of $1.2 million to be used
for future expansion as market conditions dictate. In February 1996, the Company
deposited an additional $450,000 to purchase an additional 20,000 square feet of
space adjacent to the property purchased in 1994. In May, 1996, $90,000 was paid
to finalize the purchase of this property.
ITEM 3. LEGAL PROCEEDINGS
In January 1990 and again in July 1996, the Company received notices from
Rockwell International Corporation ("Rockwell") alleging that a process used by
Ortel for growing epitaxial layers infringes certain broad patent rights that
Rockwell holds. In August 1993, Rockwell sued the U.S. government alleging
infringement of these patent rights with respect to the contracts the U.S.
government has had with at least 15 companies, including Ortel. It is not clear
whether Rockwell holds an enforceable patent. In the event Rockwell does hold an
enforceable patent, the Company expects that in connection with the
commercialization of any product so developed, the Company would seek a license
from Rockwell or contract for the manufacture of the wafers from a licensed
manufacturer.
In March 1992, the Company received a letter from Lucent Technologies
(formerly AT&T Corporation) notifying the Company that it believes that the
Company may be infringing certain of its patent rights. The Company has
discussed the alleged infringement with AT&T Corporation and the Company
believes that AT&T Corporation may be infringing certain of the Company's patent
rights.
If the Company were found to be infringing on any patent holder's rights,
the Company could be subject to liabilities for such infringement, which could
be material, and could be required to seek licenses from other companies or to
refrain from manufacturing certain products. Although patent holders commonly
offer licenses to their patent or other intellectual property rights, no
assurance can be given that the licenses would be offered, or that the terms of
any offered license would be acceptable to the Company or that failure to obtain
a license would not adversely affect the Company's operating results. The
Company does not believe that any outstanding claim of patent infringement
against the Company will have a material adverse effect on its results of
operations or financial condition.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's initial public offering of common stock was effected as of
October 20, 1994. The common stock is listed on the Nasdaq Stock Market under
the symbol "ORTL." The following table sets forth, for the calendar periods
indicated, the range of high and low closing prices for the common stock, as
reported by the Nasdaq Stock Market System:
<TABLE>
<CAPTION>
1996 1995(1)
---------------- -----------------
HIGH LOW HIGH LOW
------- ------ -------- ------
<S> <C> <C> <C> <C>
1st Fiscal Quarter ended July 31..........$19.00 $13.00
2nd Fiscal Quarter ended October 31....... 18.75 9.25 $29.75 $19.95
3rd Fiscal Quarter ended January 31....... 14.00 8.50 29.75 21.50
4th Fiscal Quarter ended April 30......... 17.25 10.88 26.50 12.75
</TABLE>
- - -------------------
(1) Commencing October 20, 1994.
The closing price of the Company's common stock on June 30, 1996 was
$24.50. The approximate number of stockholders of record on June 30, 1996 was
179.
The Company has never declared or paid dividends on its common stock and
currently does not intend to pay dividends in the foreseeable future so that it
may reinvest its earnings in the development of its business. The payment of
dividends in the future will be at the discretion of the Board of Directors. In
addition, the Company's bank line of credit limits the Company's ability to pay
dividends without the lender's consent.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected consolidated financial data with respect to the
Company for the five years ended April 30, 1996. This data should be read in
conjunction with the consolidated financial statements and notes thereto set
forth elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues............................................ $57,666 $50,090 $28,119 $22,354 $15,646
Cost of revenues.................................... 29,477 25,311 13,765 11,169 7,642
------- ------- ------- ------- -------
Gross profit...................................... 28,189 24,779 14,354 11,185 8,004
------- ------- ------- ------- -------
Operating expenses:
Research and development(1)....................... 8,878 6,328 4,411 3,142 3,134
Sales and marketing............................... 7,969 6,306 4,323 3,278 2,371
General and administrative........................ 3,454 2,869 1,693 1,876 1,125
Acquired research and development in-process...... 4,800 - - - -
------- ------- ------- ------- -------
Total operating expenses........................ 25,101 15,503 10,427 8,296 6,630
------- ------- ------- ------- -------
Operating income.................................... 3,088 9,276 3,927 2,889 1,374
Interest income, net................................ 1,842 1,126 300 352 665
Other income (expense), net......................... 765 (48) (117) (52) (45)
------- ------- ------- ------- -------
Income before taxes and cumulative effect of a
change in accounting principle..................... 5,695 10,354 4,110 3,189 1,994
Provision for income taxes.......................... 3,302 4,051 1,531 1,200 741
------- ------- ------- ------- -------
Income before cumulative effect of a change in
accounting principle............................... $ 2,393 $ 6,303 $ 2,579 $ 1,989 $ 1,253
======= ======= ======= ======= =======
Net income.......................................... $ 2,393 $ 6,303 $ 2,579 $ 1,989 $ 1,359
======= ======= ======= ======= =======
Net income per share................................ $.20 $.55 $.30 $.23 $.16
======= ======= ======= ======= =======
Weighted average common and common equivalent
shares outstanding................................. 12,129 11,524 8,578 8,524 8,482
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and short term investments..................... $38,872 $43,881 $10,231 $13,502 $12,568
Total assets........................................ 77,457 74,323 31,041 25,979 22,020
Long-term debt...................................... 6 0 0 0 12
Stockholders' equity................................ 66,274 64,144 24,215 21,477 19,281
</TABLE>
- - -----------------
(1) Revenues from research and development contracts are netted against
research and development expenses.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The discussion in this section contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in Item 1
as well as those discussed in this Item.
OVERVIEW
Ortel has been a pioneer in the adoption of linear fiberoptic technologies
for communications applications. From the Company's founding in 1980 until 1986,
Ortel devoted much of its resources to contract research and development work.
In October 1988, the Company entered into a product development agreement with
GIC to develop a new laser-based product to meet the demanding specifications of
the CATV industry. The Company delivered initial prototypes of laser-transmitter
products in early 1990 and shipped production volumes later that same year.
Until the fiscal quarter ended April 30, 1994, the Company sold its laser-based
products for use by CATV operators in the United States and Canada exclusively
to GIC. While the Company intends to expand its OEM customer base in the United
States and Canada, the Company believes that sales to GIC will continue to
represent a substantial portion of the Company's revenues (see Results of
Operations).
RESULTS OF OPERATIONS
The following table sets forth certain operations data as a percentage of
revenues for the periods indicated and presents results for fiscal 1996 as
reported and excluding a charge of $4.8 million for research and development in-
process related to the acquisition of Avitec AB in Sweden:
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------------------------------
1996
1996 As
As Adjusted
Reported (a) 1995 1994
-------- -------- ----- -----
<S> <C> <C> <C> <C>
Revenues................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................ 51.2 51.2 50.6 49.0
------- -------- ------ ------
Gross profit............................ 48.8 48.8 49.4 51.0
Operating expenses:
Research and development.............. 15.4 15.4 12.6 15.7
Sales and marketing................... 13.8 13.8 12.6 15.4
General and administrative............ 6.0 6.0 5.7 6.0
Acquired research and development
in-process.......................... 8.3 - - -
-------- -------- ------ ------
Total operating expenses............ 43.5 35.2 30.9 37.1
------- -------- ------ ------
Operating income...................... 5.3 13.6 18.5 13.9
Interest income, net.................. 3.2 3.2 2.2 1.1
Other income.......................... 1.3 1.3 - (.4)
------- -------- ------ ------
Income before taxes................... 9.8 18.1 20.7 14.6
Income taxes.......................... 5.7 5.7 8.1 5.4
------- -------- ------ ------
Net income............................ 4.1% 12.4% 12.6% 9.2%
======= ======== ======= ======
</TABLE>
(a) Excluding the $4.8 million non-recurring charge for acquired and development
in-process.
16
<PAGE>
YEARS ENDED APRIL 30, 1996, 1995 AND 1994
Revenues. The following table summarizes the Company's revenue mix
according to various criteria for fiscal years 1996, 1995 and 1994 including all
customers who represent 10% or more of total revenues:
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
GIC..................................... 34.4% 47.6% 44.4%
All other broadband customers........... 37.3 30.4 24.2
----- ----- -----
Total broadband....................... 71.7 78.0 68.6
Wireless and other...................... 28.3 22.0 31.4
----- ----- -----
Total revenue......................... 100.0% 100.0% 100.0
Geographic coverage:
Domestic................................ 68.1% 75.1% 69.5
International........................... 31.9 24.9 30.5
----- ----- -----
Total revenues........................ 100.0% 100.0% 100.0
</TABLE>
The following table summarizes the increase or decrease in revenue mix
compared to the previous fiscal year:
<TABLE>
<CAPTION>
Increase (Decrease) in Revenue
for Years Ended April 30,
1996 1995
---- ----
<S> <C> <C>
GIC.......................................... (17.0)% 91.1%
All other broadband customers................ 41.4 124.0
Total broadband............................ 5.7 102.7
Wireless and other........................... 48.5 24.5
Total revenues............................. 15.1% 78.1%
Geographic coverage:
Domestic..................................... 4.4% 92.3%
International................................ 47.3 45.9
Total revenues............................. 15.1% 78.1%
</TABLE>
During the three fiscal years ended April 30, 1996, the Company's results
were, in large part, dependent upon the level of capital spending on fiberoptic
technologies within the CATV industry. Approximately 72%, 78% and 69% of the
Company's revenues during fiscal years 1996, 1995, and 1994, respectively, were
derived from sales of products designed for use in broadband RF communications
worldwide, mainly for CATV. During this same three year period, sales to GIC
accounted for approximately 34%, 48% and 44% of total revenues, respectively.
While the Company has enjoyed a long-term relationship with this customer, there
can be no assurance that GIC will not secure a second source or continue buying
products from the Company.
The decrease in the rate of revenue growth from 78.1% in fiscal 1995 to
15.1% in fiscal 1996 reflects a slowdown in the growth of broadband revenues
from 102.7% in fiscal 1995 to 5.7% in fiscal 1996. Broadband revenues in fiscal
1996 reflect a decrease of 17.0% in revenues from GIC following a 91.1% increase
in the previous year primarily reflecting a slowdown in spending by U.S. CATV
operators as they awaited the outcome of legislation which would deregulate the
industry. Revenues from all other broadband customers increased 41.4% in fiscal
1996 following an increase of 124.0% in fiscal 1995. The increase in fiscal 1995
reflects the first full year
17
<PAGE>
in which the Company was not exclusive to GIC for CATV DFB transmitters shipped
within the U.S. The Company continued to add business from new broadband
customers throughout fiscal 1996 which helped to mitigate a slowdown in domestic
CATV spending.
Revenues from products sold for wireless and other applications increased
48.5% in fiscal 1996 following a 24.5% increase in fiscal 1995. The accelerated
growth in revenues in fiscal 1996 reflects an improvement in sales of product
for government applications (up 90%), wireless applications (up 32%) and
satellite communications (up 73%) as well as other products distributed by Ortel
Vertriebs in Germany.
Sales to customers outside the U.S. represented 32%, 25% and and 30% of the
Company's revenues in fiscal years 1996, 1995 and 1994, respectively. In terms
of year-over-year growth, domestic revenues increased by 92.3% in fiscal 1995
but only 4.4% in fiscal 1996 reflecting the impact of a softer U.S. CATV
industry. International revenues were up 45.9% in fiscal 1995 and 47.9% in
fiscal 1996.
Gross profit. Gross profit margins were 48.8%, 49.4% and 51.0% in fiscal
years 1996, 1995 and 1994, respectively. The decrease in gross profit margin
from 49.4% to 48.8% in fiscal 1996 was primarily due to a higher mix of product
sold for wireless and satellite communications applications as these products
generally have lower gross margins commensurate with lower production volumes as
compared to the Company's broadband products. The decrease from 51.0% to 49.4%
in fiscal 1995 was related primarily to lower prices initiated by the Company in
order to speed adoption of the Company's linear fiberoptic technology by CATV
operators and to respond to competitive pricing. The Company anticipates that
gross margins in the near term may trend lower as the Company seeks to lower
prices on its broadband products while the mix of wireless product increases
ahead of the economies of scale that come with higher shipment volumes and on-
going cost reduction efforts associated with the introduction of a number of new
products for broadband and wireless applications.
Research and development. Research and development expenses increased 40%
to $8.9 million in fiscal year 1996 and 43% to $6.3 million in fiscal 1995 from
$4.4 million in fiscal year 1994. The number of persons employed in a research
and development capacity increased from 48 at April 30, 1994, to 68 at April 30,
1995, and 99 at April 30, 1996. The Company expects to continue to invest
significant resources for research and product development.
Research and development costs are expensed as incurred and are net of
contract revenues. Revenues from such contracts totaled approximately $1.8
million, $1.1 million and $679,000 in fiscal years 1996, 1995, and 1994,
respectively.
A non-recurring charge of $4.8 million was recognized in fiscal 1996
related to research and development in process associated with the acquisition
of Avitec AB in Sweden. This charge represents the value of future products
which are expected to emerge from ongoing research and development programs as
compared to existing products.
Sales and marketing. Sales and marketing expenses increased to $8.0 million
in fiscal 1996 from $6.3 million in fiscal 1995 and $4.3 million in fiscal year
1994. As a percent of revenues, sales and marketing expenses were 13.8%, 12.6%
and 15.4% in fiscal 1996, 1995 and 1994, respectively. Additional compensation
costs were responsible for an increase of $.4 million and $1.0 million in fiscal
1996 and 1995, respectively. The number of sales and marketing employees
increased to 47 at April 30, 1996 from 41 at April 30, 1995 and 27 at April 30,
1994. The increase was primarily associated with the expansion in the United
States of the Company's direct sales force and marketing organization. All other
sales and marketing costs increased by $1.3 million and $1.0 million in fiscal
1996 and 1995, respectively, and were primarily related to an increase in
spending for advertising, travel and trade shows.
General and administrative. General and administrative expenses increased
to $3.5 million in fiscal 1996 from $2.9 million in fiscal 1995 and $1.7 million
in fiscal 1994. The overall increase in general and administrative expenses from
fiscal year 1994 to 1995 reflected, in part, an increase in the number of
employees working in an administrative capacity to 29 at April 30, 1996 from 22
at April 30, 1995 and 17 at April 30, 1994. Of the increase in general and
administrative expenses during this period, $.1 million and $.5 million is due
to an increase in
18
<PAGE>
compensation costs for fiscal years 1996 and 1995, respectively. Increases of
$.5 million and $.7 million were related to other general and administrative
costs in fiscal 1996 and 1995, respectively. These other costs were related
primarily to the full year impact of expenses associated with the Company's
transition to a public company as of October 20, 1994.
Interest income and other income, net. Interest income and other income,
net of interest expense, increased to $2.6 million in fiscal 1996 from $1.7
million in fiscal 1995 and $183,000 in fiscal 1994. Of the total amount recorded
in fiscal 1996, $913,000 was related to the settlement of an intellectual
property dispute and $1.7 million was primarily for interest income as fiscal
1996 benefited from the full-year impact of additional interest income related
to the cash raised in the Company's initial public offering. The increase in
other income in fiscal 1995 is also related to higher average cash balances
resulting from the proceeds of the Company's initial public offering totaling
$34.1 million in October 1994.
Provision for income taxes. The total provision for income taxes was 58.0%
in fiscal 1996, 39.1% in fiscal 1995 and 37.3% in fiscal 1994. The higher
effective tax rate in fiscal 1996 reflects the nontax-deductible nature of the
charge for research and development in-process. Excluding this charge and
associated foreign tax credits, the effective tax rate was 31.5% for fiscal
1996. This was lower than the effective rate in fiscal 1995 due to lower levels
of profitability combined with higher levels of additional non-tax deductible
interest as well as the impact of credits for research and development and new
state tax credits generated from investing in new capital equipment.
On July 1, 1994, the Company was notified by the Franchise Tax Board of
California that it is to be scheduled for an audit for the tax years ended April
30, 1991 and 1992. On November 17, 1994, the Company was notified by the
Internal Revenue Service that the Company will be audited for tax year ended
April 30, 1993. These audits were completed without any significant adjustment
to previous taxes paid by the Company. On April 2, 1996, the Company was
notified by the Internal Revenue Service that the Company will be audited for
the tax year ended April 30, 1994. See Note 5 of Notes to Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal year 1994, the Company financed its operations primarily with cash
balances as cash from operating activities fell $.5 million short of breakeven
due primarily to the buildup of inventory and accounts receivable caused by an
increase in sales volume while an additional $3.0 million was required for new
capital investment. In fiscal 1995, the Company financed its operations
primarily through cash generated by operating activities of $6.0 million which
financed $5.9 million in new capital investment. In fiscal year 1996, the
Company generated cash from operating activities of $2.4 million but invested
$7.1 million in new capital investment by using cash balances.
As of April 30, 1996, the Company's principal sources of liquidity included
cash and short term investments of $38.9 million. The Company also had a credit
facility for $13 million consisting of a revolving line of credit totaling $5
million expiring on May 1, 1997 and a non-revolving line of credit totaling $8
million expiring on December 31, 1996 with a term repayment option. Interest
rates under the revolving line of credit vary according to market rates of
interest and would have ranged from approximately 7.15%. to 7.625% as of April
30, 1996, at the Company's option. Interest rates under the non-revolving line
of credit also vary according to market rates of interest and would have ranged
from approximately 7.4% to 8.25% as of April 30, 1996, at the Company's option.
In addition, the Company has a $2.0 million unsecured credit facility with
another banking institution expiring on September 30, 1996 and bearing interest
at prime (8.25% as of April 30, 1996). There are no amounts outstanding under
the above-mentioned agreements as of April 30, 1996. See Note 3 of Notes to
Consolidated Financial Statements.
For the fiscal year ended April 30, 1996, the Company's capital
expenditures were approximately $7.1 million. For fiscal 1997, the Company
anticipates capital expenditures of approximately $15.0 million, a substantial
portion of which is budgeted for a new facility located near the current
corporate headquarters. This facility will be used primarily for additional
office space for engineering, sales and marketing and general and administrative
functions which will release space currently occupied by these functions to be
used for manufacturing.
19
<PAGE>
The Company believes that cash, short term investments and anticipated
funds from operations combined with debt financing for the new facility to be
built, will satisfy the Company's projected working capital and capital
expenditure requirements through at least the next twelve months.
RECENT DEVELOPMENTS
In March 1995, the Financial Accounting Standards board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of" (Statement No. 121), effective for fiscal years
beginning after December 31, 1995. Statement No. 121 establishes accounting
standards for the recognition and measurement of impairment of long-lived
assets, certain identifiable intangibles, and goodwill either to be held or
disposed of. The Company's policy is to account for goodwill and all other
intangible assets at the lower of amortized cost or fair value. As part of an
ongoing review of the valuation and amortization of intangible assets,
management assesses the carrying value of the Company's intangible assets if
facts and circumstances suggest that it may be impaired. If this review
indicates that the intangibles will not be recoverable, as determined by an
undiscounted cash flow analysis over the remaining amortization period, the
carrying value of the Company's intangibles would be reduced to its estimated
fair market value. The Company expects to adopt Statement No. 121 in fiscal
1997. This implementation is not expected to have a material impact on the
Company's consolidated financial statements.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (Statement No. 123), issued in October 1995 and effective
for fiscal years beginning after December 15, 1995, permits, but does not
require, a fair value based method of accounting for employee stock options or
similar equity instruments. Statement No. 123 allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees" (APBO No. 25), but requires
pro forma disclosures of net earnings and earning per share as if the fair value
based method of accounting has been applied. While the Company is still
evaluating Statement No. 123, it currently expects to elect to continue to
measure compensation cost under APBO No. 25, and comply with the pro forma
disclosure requirements. If the Company makes this election, Statement No. 123
will have no impact on the Company's consolidated financial position or results
of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is filed as a separate part of this Report (see
page 23).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated herein by reference the information appearing
under the caption "Proposal 1--Election of Directors" and under the caption
"Executive Officers of the Company" of the registrant's definitive Proxy
Statement for its 1996 Annual Meeting to be filed with the Securities and
Exchange Commission on or before August 28, 1996.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated herein by reference the information appearing
under the caption "Executive Compensation" of the registrant's definitive Proxy
Statement for its 1996 Annual Meeting to be filed with the Securities and
Exchange Commission on or before August 28, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated herein by reference the information appearing
under the caption "Voting Securities and Certain Holders Thereof" of the
registrant's definitive Proxy Statement for its 1996 Annual Meeting to be filed
with the Securities and Exchange Commission on or before August 28, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated herein by reference the information appearing
under the caption "Certain Transactions" of the registrant's definitive Proxy
Statement for its 1996 Annual Meeting to be filed with the Securities and
Exchange Commission on or before August 28, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
1. The list of financial statements contained in the accompanying Index to
Consolidated Financial Statements covered by Independent Auditors' Report are
filed as part of this Report (see page 23).
2. Financial Statement Schedules
The list of financial statement schedules contained in the accompanying
Index to Consolidated Financial Statements covered by Independent Auditors'
Report are filed as part of this Report (see page 23).
20
<PAGE>
3. Exhibits
The list of exhibits contained in the Index to Exhibits are filed as part
of this Report (see page 41).
(b) Reports on Form 8-K
A Form 8-K report was filed during the fourth quarter of fiscal year 1996
which reported the acquisition of Avitec AB with related financial statements.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on July 26, 1996.
Ortel Corporation,
a Delaware corporation
By: /s/Wim H.J. Selders
-------------------
Wim H.J. Selders,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - ----------------------------- -------------------------------- -------------
<S> <C> <C>
/s/Wim H.J. Selders Director, President and Chief July 26, 1996
- - ----------------------------- Executive Officer (Principal
Wim H.J. Selders Executive Officer)
/s/Stephen K. Workman Vice President, Finance and July 26, 1996
- - ----------------------------- Chief Financial Officer
Stephen K. Workman (Principal Financial and
Accounting Officer)
/s/Amnon Yariv Chairman of the Board July 26, 1996
- - -----------------------------
Amnon Yariv
/s/Israel Ury Director and Chief Technology July 26, 1996
- - ----------------------------- Officer
Israel Ury
/s/Nadav Bar-Chaim Director, Vice President, July 26, 1996
- - ----------------------------- Device Structures and Materials
Nadav Bar-Chaim and Secretary
/s/Tatsutoku Honda Director July 26, 1996
- - -----------------------------
Tatsutoku Honda
/s/Anthony J. Iorillo Director July 26, 1996
- - -----------------------------
Anthony J. Iorillo
/s/Raymond H. Kaufman Director July 26, 1996
- - -----------------------------
Raymond H. Kaufman
/s/Wayne L. Tyler Director July 26, 1996
- - -----------------------------
Wayne L. Tyler
/s/Ronald L. Young Director July 26, 1996
- - -----------------------------
Ronald L. Young
/s/Hal M. Krisberg Director July 26, 1996
- - -----------------------------
Hal M. Krisberg
</TABLE>
22
<PAGE>
ORTEL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
COVERED BY REPORT OF INDEPENDENT AUDITORS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors......................................... 24
Consolidated Balance Sheets as of April 30, 1996 and 1995.............. 25
Consolidated Statements of Operations for the years ended
April 30, 1996, 1995 and 1994........................................ 26
Consolidated Statements of Stockholders' Equity for the years ended
April 30, 1996, 1995 and 1994........................................ 27
Consolidated Statements of Cash Flows for the years ended
April 30, 1996, 1995 and 1994........................................ 28
Notes to Consolidated Financial Statements............................. 29
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II: Valuation and Qualifying Accounts......................... 40
</TABLE>
All other schedules are omitted because the required information is not
applicable or the information is presented in the consolidated financial
statements or notes thereto.
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ortel Corporation:
We have audited the consolidated financial statements of Ortel Corporation and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the consolidated
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and consolidated financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and consolidated
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ortel Corporation
and subsidiaries as of April 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended April 30, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
Los Angeles, California
June 3, 1996
24
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1996 1995
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents.................................................... $ 15,573 $ 23,804
Short term investments.................................................. 23,299 20,077
Trade receivables less allowance for doubtful accounts of
$325 and $283 at April 30, 1996 and 1995, respectively................ 9,024 9,557
Billed contract costs and fees and other receivables (net).............. 668 861
Inventories............................................................. 9,736 7,847
Deferred tax assets (note 5)............................................ 1,642 1,644
Prepaid expenses and other current assets............................... 697 426
-------- --------
Total current assets............................................... 60,639 64,216
Property, equipment and improvements, at cost
Property................................................................ 1,707 1,227
Equipment............................................................... 18,468 14,368
Office furniture and fixtures........................................... 2,911 1,356
Leasehold improvements.................................................. 3,693 2,705
-------- --------
Total property, equipment and improvements......................... 26,779 19,656
Less accumulated depreciation and amortization.......................... (13,383) (10,144)
-------- --------
Net property, equipment and improvements........................... 13,396 9,512
Intangible assets....................................................... 1,804 230
Other assets (note 6)................................................... 1,618 365
-------- --------
Total assets....................................................... $ 77,457 $ 74,323
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 3,470 $ 2,759
Accrued payroll and related costs....................................... 3,652 4,029
Other accrued liabilities............................................... 1,887 1,481
Income taxes payable (note 5)........................................... 503 967
-------- --------
Total current liabilities.......................................... 9,512 9,236
Deferred income.............................................................. 456 388
Deferred income taxes (note 5)............................................... 1,032 350
Notes payable................................................................ 6 -
Minority interest in subsidiaries............................................ 177 205
Stockholders' equity (notes 4 and 6):
Preferred stock, $.001 par value; 5,000,000 shares authorized;
none issued and outstanding............................................ - -
Common stock, $.001 par value; 25,000,000 shares authorized;
issued and outstanding; 11,358,810 and 11,149,026 in 1996 and 1995..... 11 11
Additional paid in capital.............................................. 51,369 51,044
Retained earnings....................................................... 16,397 14,004
Loans receivable (note 6)............................................... (1,506) (1,070)
Unrealized gains on investments......................................... - 23
Cumulative effect of foreign currency translation....................... 3 132
-------- --------
Net stockholders' equity......................................... 66,274 64,144
-------- --------
Commitments and contingencies (note 7)
Total liabilities and stockholders' equity......................... $ 77,457 $ 74,323
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30,
--------------------------------
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Revenues (notes 8, 9 and 10)............................ $57,666 $50,090 $28,119
Cost of revenues........................................ 29,477 25,311 13,765
------- ------- -------
Gross profit....................................... 28,189 24,779 14,354
Operating expenses:
Research and development........................... 8,878 6,328 4,411
Sales and marketing................................ 7,969 6,306 4,323
General and administrative......................... 3,454 2,869 1,693
Acquired research and development in-process....... 4,800 - -
------- ------- -------
Total operating expenses...................... 25,101 15,503 10,427
------- ------- -------
Operating income........................................ 3,088 9,276 3,927
Other:
Interest income, net............................... 1,842 1,126 300
Other income (expense)............................. 815 88 (63)
Minority interest in net earnings of subsidiaries.. (50) (136) (54)
------- ------- -------
Income before taxes................................ 5,695 10,354 4,110
Provision for income taxes (note 5)..................... 3,302 4,051 1,531
------- ------- -------
Net income.................................... $ 2,393 $ 6,303 $ 2,579
======= ======= =======
Net income per share.................................... $.20 $.55 $.30
======= ======= =======
Weighted average common and common
equivalent shares outstanding........................... 12,129 11,524 8,578
======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 4 AND 6)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CUMULATIVE VALUATION
EFFECT OF ADJUSTMENT
ADDITIONAL FOREIGN OF NET
COMMON PAID IN RETAINED LOANS CURRENCY SHORT TERM STOCKHOLDERS'
STOCK CAPITAL EARNINGS RECEIVABLE TRANSLATION INVESTMENTS EQUITY
------ ---------- -------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1993................ 8 16,484 5,122 (150) 13 21,477
Exercise of stock options for 511,678
shares of common stock at
$.47 to $4.00 per share................ 574 574
Tax benefits arising from exercise of
non-qualified stock options.............. 34 34
Loans from exercise of stock options due
2002-2003 at 5.07% - 5.88%
per year................................ (507) (507)
Effect of foreign currency translation... 58 58
Net income............................... 2,579 2,579
--- ------- ------- ------- ----- ------ -------
Balance at April 30, 1994................ 8 17,092 7,701 (657) 71 24,215
Proceeds from issuance of 2,820,000
shares of common stock at $13
per share............................... 3 33,331 33,334
Exercise of stock options for 191,240
shares of common stock at
$1.10 to $4.00 per share................ 621 621
Loans from exercise of stock options due.
1999-2003 at 6.43%-7.92% per year, net
of repayments........................... (413) (413)
Effect of foreign currency translation... 61 61
Unrealized gains on investments .......... 23 23
Net income............................... 6,303 6,303
--- ------- ------- ------- ----- ---- -------
Balance at April 30, 1995................ $11 $51,044 $14,004 $(1,070) $ 132 $ 23 $64,144
Exercise of stock options for 289,784
shares of common stock at
$9.50 to $18.00 per share............... 794 794
Tax benefits arising from exercise of
non-qualified stock options............. 442 442
Repurchase of 80,000 shares of stock at
an average price of $11.39 per share.... (911) (911)
Loans from exercise of stock options due
1999-2003 at 5.07%-7.92% per year, net
of repayments.......................... (436) (436)
Effect of foreign currency translation... (129) (129)
Unrealized gains on investments.......... (23) (23)
Net income............................... 2,393 2,393
--- ------- ------- ------- ----- ---- -------
Balance at April 30, 1996................ $11 $51,369 $16,397 $(1,506) $ 3 $ - $66,274
=== ======= ======= ======= ===== ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 2,393 $ 6,303 $ 2,579
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization....................................... 3,280 2,250 1,756
Increase in minority interest in subsidiaries....................... (28) 100 27
Loss on disposal of equipment....................................... 10 1 -
Change in assets and liabilities (net of effects of acquired company):
(Increase) decrease in:
Receivables and billed contract costs and fees.................... 1,295 (2,365) (3,944)
Inventories....................................................... (915) (2,170) (2,735)
Deferred tax assets............................................... 2 (1,069) (144)
Prepaid expenses and other assets................................. (1,472) (351) (298)
Intangible assets................................................. (366) - -
Increase (decrease) in:
Accounts payable.................................................. 306 47 1,385
Accrued payroll and related costs................................. (377) 2,024 550
Other accrued liabilities......................................... 186 837 28
Deferred income................................................... (733) 388 -
Deferred income taxes............................................. 487 37 43
Income taxes payable.............................................. (464) 13 212
-------- -------- -------
Net cash provided by (used in) operating activities............... 3,604 6,045 (541)
Cash flows from investing activities:
Capital expenditures................................................ (6,976) (5,928) (2,969)
Investment in Avitec (net of cash acquired)......................... (1,380) - -
Short term investments.............................................. (3,222) (17,491) 566
-------- -------- -------
Net cash used in investing activities............................. (11,578) (23,419) (2,403)
Cash flows from financing activities:
Proceeds from issuance of common stock, net......................... 302 33,978 608
Notes payable....................................................... 6 - -
Proceeds from (repayment of) borrowings under credit line........... - (93) 93
Notes receivable from stockholders.................................. (436) (413) (507)
Principal payments under capital lease obligations.................. - - (13)
-------- -------- -------
Net cash (used in) provided by financing activities............... (128) 33,472 181
Effect of exchange rate changes on cash............................... (129) 61 58
Net increase (decrease) in cash and equivalents....................... (8,231) 16,159 (2,705)
Cash and equivalents at beginning of year............................. 23,804 7,645 10,350
-------- -------- -------
Cash and equivalents at end of year................................... $ 15,573 $ 23,804 $ 7,645
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.......................................................... $ 4 $ 2 $ 10
Income taxes...................................................... 3,083 5,070 1,387
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996, 1995 AND 1994
1. DESCRIPTION OF OPERATION
Ortel pioneered the development of "linear fiberoptic" technology to
address some of the most rapidly changing sectors of the communications
industry. Ortel designs, manufactures, markets, sells and supports a broad range
of linear fiberoptic products that enable the transmission of a wide variety of
digital, digitally compressed or analog information via radio frequency ("RF")
signals on fiberoptic cable. By utilizing this technology, users do not need to
convert RF signals into a digital format or transform them to individual
channels at low frequencies. Linear fiber optics provides cable television
("CATV") system operators a means to transform their traditional one-way, video-
only systems to interactive, two-way, video, voice and data delivery systems.
Other applications that use this technology are satellite earth stations,
cellular networks and certain government communication projects. Ortel's linear
fiberoptic technology enables longer transmission distances, improved signal
quality, higher bandwidth, immunity to interfering signals, and cost savings
over existing network technologies through reduced operating and maintenance
costs from network centralization and simplification by eliminating amplifiers
and lengthy runs of coaxial cable or waveguides.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain prior year balances in the accompanying consolidated financial
statements have been reclassified to conform to the current year presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and Ortel Vertriebs GmbH, a 75% owned subsidiary,Ortel SARL, a 90% owned
subsidiary and Avitec AB, a wholly owned subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.
Product Revenue Recognition
Revenue on products shipped to customers is recognized upon shipment from
the Company's facilities, net of allowance for returns.
Contract Revenue Recognition
Revenues from research and development contracts are netted against
research and development expenses. Net contract revenue aggregated approximately
$1,753,000, $1,055,000 and $679,000 in fiscal years 1996, 1995 and 1994,
respectively.
Revenues and fees from cost reimbursable contracts are recognized based on
the ratio of total costs incurred to total estimated costs.
Revenues and fees from fixed price contracts are recognized on the
percentage of completion method; however, no income is recognized until such
time as a reasonable profit estimation can be made. Provisions for estimated
losses on incomplete contracts are made when such losses become determinable.
29
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
APRIL 30, 1996, 1995 AND 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED
Use of Estimates
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make certain estimates and
assumptions. These affect the reported amounts of assets, liabilities, and the
amount of contingent assets or liabilities disclosed in the consolidated
financial statements. Actual results could differ from the estimates made.
Depreciation and Amortization
Equipment and office furniture and fixtures are depreciated using the
straight-line method over estimated useful lives of three to seven years.
Leasehold improvements are amortized over the useful life of the asset or the
length of the lease, whichever is less, including any option periods where
options are expected to be exercised.
Credit Risk
The Company sells its products to customers throughout the world. Management
performs regular evaluations concerning the ability of its customers to satisfy
their obligations and records a provision for doubtful accounts based upon these
evaluations. The Company's credit losses for the periods presented are
insignificant and have not exceeded managements' estimates.
Fair Value of Financial Instruments
The carrying amounts of financial instruments approximate fair value as of
April 30, 1996. The carrying amounts related to cash and equivalents, short-term
investments and notes payable approximate fair value due to the relatively
short maturity of such instruments.
Research and Development
Company-sponsored research and development costs are expensed as incurred.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
------------------
1996 1995
------- ------
<S> <C> <C>
Raw materials.............. $2,617 $2,622
Work-in-process............ 6,797 4,657
Finished goods............. 322 568
------ ------
Total inventories....... $9,736 $7,847
====== ======
</TABLE>
30
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
APRIL 30, 1996, 1995 AND 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED
Cash Equivalents
Cash equivalents include short-term commercial paper, money market funds,
and municipal securities managed by banking institutions totaling $10.0 million
and $22.0 million as of April 30, 1996 and 1995, respectively. Cash being
managed by these banking institutions includes securities with maturities of 90
days or less which can be liquidated in a manner that is equivalent to cash.
Short-term Investments
Short-term investments consist of interest bearing securities with
maturities greater than 90 days and consist of U.S. treasuries and municipal
securities. The Company adopted the provisions of Statement of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities (Statement 115)" at May 1, 1994. Under Statement 115, the
Company has classified its short-term investments as available-for-sale.
Available-for-sale securities are stated at market value and unrealized holding
gains and losses, net of the related tax effect, are excluded from earnings and
are reported as a separate component of stockholders' equity until realized. A
decline in the market value of the security below cost that is deemed other than
temporary is charged to earnings resulting in the establishment of a new cost
basis for the security. At April 30, 1996 and 1995, the Company's marketable
investment securities consisted principally of highly liquid investments in tax
free municipal obligations with various maturity dates through July 1, 1998. The
difference between market value and cost of these securities at April 30, 1996
and 1995 was immaterial.
Foreign Currency Translation
Under the provisions of SFAS No. 52, "Foreign Currency Translation," all
assets and liabilities in the balance sheets of foreign subsidiaries whose
functional currency is other than the U.S. dollar are translated at year-end
exchange rates, and translation gains and losses are not included in determining
net income but are accumulated in a separate component of stockholders' equity.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (Statement No. 123), issued in October, 1995 and effective
for fiscal years beginning after December 15, 1995, encourages but does not
require, a fair value based method of accounting for employee stock options or
similar equity instruments. Statement No. 123 allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees' (APBO No. 25), but requires
pro forma disclosures of net earnings per share as if the fair value based
method of accounting had been applied. The Company expects to adopt Statement
No. 123 in fiscal year 1997. While the Company is still evaluating Statement No.
123, it currently expects to elect to continue to measure compensation cost
under APBO No. 25, and comply with the pro forma disclosure requirements. If the
Company makes this election, Statement No. 123 will have no impact on the
Company's consolidated financial position or results of operations.
31
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
APRIL 30, 1996, 1995 AND 1994
2. Summary of Significant Accounting Policies--Continued
Net Income Per Share
Net income per share is based on the weighted average common shares and
common equivalent shares outstanding for each period, including common shares
issued upon conversion of preferred shares outstanding to common shares as of
the effective date of the Company's public offering (see also Note 4).
Additionally, in accordance with regulations of the Securities and Exchange
Commission, common shares issued and common equivalent shares related to stock
options granted within one year of the Company's initial public offering,
including those shares issued pursuant to the exercise of stock options, have
been included for all periods presented using the treasury stock method.
3. BORROWINGS UNDER CREDIT LINE
On June 2, 1995, the Company entered into a credit agreement for $13
million consisting of a revolving line of credit totaling $5 million expiring on
May 1, 1997 and a non-revolving line of credit totaling $8 million with a term
repayment option expiring on May 1, 1996. The non-revolving line of credit was
renewed subsequent to year end and expires on December 31, 1996. There were no
borrowings outstanding as of April 30, 1996.
The Company entered into an unsecured credit agreement totaling $2,000,000
on September 30, 1995 which expires on September 30, 1996. Borrowings under this
credit facility bear interest at the prime lending rate. There were no
borrowings outstanding at April 30, 1996 and 1995.
The Company has guaranteed certain borrowings of its subsidiary in France
via a letter of credit totaling FF 780,000 (equivalent to approximately
$150,800). There were no borrowings outstanding by this subsidiary as of April
30, 1996. Borrowings under the line bear interest at rates negotiated at the
time borrowings arise.
4. STOCKHOLDERS' EQUITY
Initial Public Offering of Common Stock
The Company issued 4,370,000 shares of common stock at $13.00 per share on
October 20, 1994. The Company received proceeds from the sale of 2,820,000 of
such shares with the remaining shares sold by selling shareholders. Proceeds to
the Company from the sale of stock in this offering totaled approximately $33.3
million net of related offering expenses. Prior to the offering, the Board of
Directors approved a three-for-two stock split of issued and outstanding Common
Stock and Preferred Stock. Additionally, the Board authorized 5,000,000 shares
of undesignated Preferred Stock, increased the number of authorized shares of
Common Stock to 25,000,000 and adopted a par value of $.001 per share for Common
Stock and Preferred Stock. All shares in the accompanying consolidated financial
statements have been retroactively adjusted for all periods presented to reflect
the stock split, the new series of undesignated Preferred Stock and the
conversion of 1,489,500 shares of Preferred Stock into 1,489,500 shares of
Common Stock which occurred on the effective date of the Company's offering.
32
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
APRIL 30, 1996, 1995 AND 1994
4. STOCKHOLDERS' EQUITY--CONTINUED
Stock Options
During calendar 1990, the stockholders of the Company approved the 1990
Stock Option Plan (the "1990 Plan") which replaced the previous 1981 Incentive
Stock Option Plan. Under the 1990 Plan, the Company has reserved up to 2,400,000
shares of its common stock for issuance to eligible employees, officers and
directors. Options under the 1990 Plan vest over a varying period not to exceed
10 years, subject to the discretion of the Plan's administrative committee. Both
incentive stock options and non-qualified stock options are authorized to be
granted under the 1990 Plan. Upon completion of the Company's initial public
offering, no further options were granted under the 1990 Plan.
During fiscal year 1995, the Company approved the 1994 Equity Participation
Plan, pursuant to which 240,000 shares of common stock were initially reserved
for issuance. The shares of common stock authorized to be issued under this plan
increases by 6% of the shares of common stock outstanding at the beginning of
the following fiscal year.
The following table summarizes all activity under a 1981 Incentive Stock
Option Plan, the 1990 Plan and the 1994 Equity Participation Plan as well as
certain nonqualified options granted not pursuant to any plan.
<TABLE>
<CAPTION>
1981 1990 1994 NON- PRICE PER
PLAN PLAN PLAN(1) QUALIFIED TOTAL SHARE
-------- --------- ------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at April 30, 1993 601,176 1,074,000 - 110,803 1,785,979 $ .47-$4.00
Granted.................... - 515,250 - - 515,250 $ 4.00-$6.67
Exercised.................. (493,141) (5,100) - (13,437) (511,678) $ .47-$4.00
Cancelled.................. (2,219) (37,200) - - (39,419) $ 1.33-$4.00
-------- --------- ------- ------- ---------
Outstanding at April 30, 1994 105,816 1,546,950 - 97,366 1,750,132 $ .69-$6.67
Granted..................... - 375,000 198,000 - 573,000 $ 8.00-$24.25
Exercised................... (50,890) (140,350) - - (191,240) $ 1.10-$4.00
Cancelled................... - (4,200) - - (4,200) $ 4.00
-------- --------- ------- ------- ---------
Outstanding at April 30, 1995 54,926 1,777,400 198,000 97,366 2,127,692 $ .69-$24.25
Granted.................... - - 595,578 - 595,578 $11.25-$17.63
Exercised.................. (48,568) (165,300) - (75,916) (289,784) $ .69-$8.00
Cancelled.................. - (38,700) (14,700) - (53,400) $ 4.00-$24.25
-------- --------- ------- ------- ---------
Outstanding at April 30, 1996 6,358 1,573,400 778,878 21,450 2,380,086 $ 1.10-$24.25
======== ========= ======= ======= =========
Total authorized............. 6,358 1,573,400 908,942 21,450 2,510,150
Remaining to be granted...... - - 130,064 - 130,064
Exercisable.................. 6,358 795,350 38,700 21,450 861,858
</TABLE>
(1) The shares of stock authorized to be issued under this Plan, increases by 6%
of the shares of common stock outstanding at the beginning of the following
fiscal year. Effective May 1, 1996, the number of options authorized to be
granted increased to 1,590,470 based on common stock outstanding of
11,358,810 shares on April 30, 1996.
33
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
APRIL 30, 1996, 1995 AND 1994
4. Stockholders' Equity-Continued
For financial reporting purposes, the Company recognizes compensation
expense for the difference between the estimated fair market value of the common
stock and the stock option price at date of grant, if any, over the vesting
period. Further, to the extent the Company derives a tax benefit from non-
qualified options exercised by employees, such benefit is credited to additional
paid-in capital when realized on the Company's income tax return. Tax benefits
realized totaling $442,000 and $33,786 were credited to common stock in 1996 and
1994, respectively. No tax benefits were realized in 1995.
Stock Repurchase
In November, 1995, the Company announced a plan to repurchase up to one million
shares of common stock from time to time as market conditions dictate. During
the year ended April 30, 1996, 80,000 shares of common stock were repurchased at
a cost of $911,000.
5. INCOME TAXES
The provision for income taxes is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------------------
1996 1995 1994
------- ------ -------
<S> <C> <C> <C>
Federal:
Current........................................... $2,062 $3,474 $1,179
Deferred.......................................... 141 (792) (79)
------ ------ ------
2,203 2,682 1,100
State:
Current........................................... 825 1,134 320
Deferred.......................................... 4 (240) (22)
------ ------ ------
829 894 298
Foreign:
Current........................................... 270 475 133
------ ------ ------
$3,302 $4,051 $1,531
====== ====== ======
</TABLE>
34
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
APRIL 30, 1996, 1995 AND 1994
5. INCOME TAXES-CONTINUED
Temporary differences which give rise to deferred tax assets and liabilities are
as follows (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------------------------------
1996 1995
--------------------- -------------------
ASSET LIABILITY ASSET LIABILITY
--------- --------- ------ ----------
<S> <C> <C> <C> <C>
Inventory reserves/adjustments $ 819 - $ 927 -
Accrued vacation.............. 243 - 199 -
Warranty accrual.............. 241 - 201 -
Bad debt reserve.............. 130 - 114 -
Goodwill, net of amortization. - $ 338 - -
Depreciation.................. - 486 - $ 350
Other......................... 209 208 203 -
------ ------ ------ ------
Subtotal................. 1,642 1,032 1,644 350
Less valuation allowance...... - - - -
------ ------ ------ ------
Total.................... $1,642 $1,032 $1,644 $ 350
====== ====== ====== ======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Based on the level of
historical taxable income and projections of future taxable income over the
periods which the deferred tax assets are deductible, as of April 30, 1996,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences and that a valuation allowance is not
required.
The consolidated effective income tax rate on income before income taxes
differs from the United States statutory income tax rate for the reasons set
forth in the following table:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------------------------
1996 1995 1994
------ ----- -----
<S> <C> <C> <C>
U.S. statutory tax rate............. 34.0% 34.1% 34.0
Utilization of tax credits.......... (3.6) (2.5) (5.2)
Tax effect of permanent differences. (9.5) (2.0) (1.4)
Tax rate differential on foreign (.9) .9 1.6
earnings............................
Permanent difference for in-process
research and development related to
acquisition......................... 36.5 - -
State taxes......................... 1.4 5.8 4.1
Net other........................... .1 2.8 4.2
---- ---- -----
Effective rate.................... 58.0% 39.1% 37.3%
==== ==== ====
</TABLE>
35
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
APRIL 30, 1996, 1995 AND 1994
6. RELATED PARTY TRANSACTIONS
During fiscal year 1995, the Company loaned $495,110 to certain officers and
key employees related to the exercise of 141,148 incentive stock options at
$1.33 to $4.00 per share. These loans are full recourse and secured by those
shares of common stock resulting from such exercise. The loans are payable in
full during April 18, 1999 to September 1, 2003 with interest payable annually
at a rate of 6.43% to 7.34% in accordance with IRS guidelines on such loans. In
addition, the Company extended loans totaling $88,320 related to the alternative
minimum tax on the exercise of these stock options and on similar terms and
conditions as the underlying loans based on the amount exercised.
During fiscal year 1995, approximately, $82,299 was received as payment
against the principal portion of loans extended for the exercise of incentive
stock options and another $29,966 was received against loans extended for the
payment of alternative minimum taxes related to such exercises.
During fiscal year 1996, the Company loaned $511,400 to certain officers and
key employees related to the exercise of 127,764 incentive stock options at
$1.10 to $8.00 per share. These loans are full recourse and secured by those
shares of common stock resulting from such exercise. The loans are payable in
full during May 17, 1999 to October 23, 1999 with interest payable annually at a
rate of 6.31% to 7.12% in accordance with IRS guidelines on such loans. In
addition, the Company extended loans totaling $1,010,832 related to the
alternative minimum tax on the exercise of these stock options and on similar
terms and conditions as the underlying loans based on the amount exercised.
During fiscal year 1996, approximately, $75,000 was received as payment
against the principal portion of loans extended for the exercise of incentive
stock options and another $25,400 was received against loans extended for the
payment of alternative minimum taxes related to such exercises.
Loans extended for the exercise of incentive stock options are netted against
equity while those loans extended to cover alternative minimum taxes resulting
from such exercises are classified as long-term receivables.
7. COMMITMENTS AND CONTINGENCIES
LEASES
As of April 30, 1996, the Company leased its operating facilities consisting
of six buildings and a portion of a seventh in Alhambra, California. A lease
for four buildings provides for a four year renewal beginning on October 1, 1996
and a five year renewal beginning on October 1, 2000. This agreement also
provides that the Company is responsible for maintenance costs and for property
taxes over a predetermined base amount. This facility lease is subject to an
increase based on the Consumer Price Index ("CPI") as of the end of September of
each year.
During fiscal 1995, the Company entered into two leases for additional space
also in Alhambra, CA. Under the first lease, the initial lease term covers the
period through September 30, 1997 with an option to renew for three years on
October 1, 1997. This lease is subject to a CPI adjustment beginning on July 1,
1996. Under a second lease for a portion of a building, the initial lease term
covers the period through April 15, 1998, with an option to renew for three
years. This lease is also subject to a CPI adjustment beginning in 1996.
36
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
APRIL 30, 1996, 1995 AND 1994
7. Commitments and Contingencies-Continued
During fiscal 1996, the Company entered into one lease for additional space
also in Alhambra, CA. The initial lease term covers the period through
September 30, 1998 with an option to renew for two years on October 1, 1998.
This lease is also subject to a CPI adjustment beginning on October 1, 1996.
Summarized below are total future minimum lease commitments for these
Alhambra, CA. facilities, field sales offices and other equipment (including the
next option to renew under all leases but excluding adjustments for CPI
increases:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDING
APRIL 30,
--------------
<S> <C>
1997 $745,000
1998 $736,000
1999 $661,000
2000 $556,000
2001 $244,000
</TABLE>
PATENTS
From time to time, the Company receives letters claiming infringement of
certain patent rights purportedly owned by potential claimants. Certain of such
letters propose prospective royalty arrangements and indeterminate claims for
prior patent use. While in the opinion of management, such assertions are
without merit, certain of these are being reviewed at the present time and,
based in part upon advice of counsel, management believes the ultimate outcome
of such matters will not materially affect the Company's financial position or
results of operations.
8. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
During the fiscal years ended April 30, 1996, 1995 and 1994, revenues from the
Communications Division of General Instrument Corporation represented 34%, 48%
and 44% of total revenues, respectively. This was the only customer to account
for more than 10% of revenues during any of these periods.
The Company sells its products generally to large CATV equipment manufacturers
and telecommunications companies. Accounts receivable from the Company's largest
single customer aggregated approximately $2.4 million, $3.1 million and $2.7
million at April 30, 1996, 1995 and 1994 or 26%, 32% and 35% of total trade
receivables, respectively.
37
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
APRIL 30, 1996, 1995 AND 1994
9. SUPPLEMENTAL INFORMATION AND INTERNATIONAL OPERATIONS
Revenues, pretax income and net income from foreign and domestic operations
reflect results on the basis of the country in which operations are conducted
irrespective of where product is shipped. These results are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Domestic operations...................... $48,502 $46,018 $25,748
International operations................. 9,164 4,072 2,371
------- ------- -------
Total revenues...................... $57,666 $50,090 $28,119
======= ======= =======
Domestic pretax.......................... $ 9,825 $ 9,137 $ 3,669
International pretax income (loss)....... (4,130) 1,217 441
------- ------- -------
Pretax income...................... $ 5,695 $10,354 $ 4,110
======= ======= =======
Domestic net income...................... $ 6,793 $ 5,560 $ 2,270
International net income................. (4,400) 743 309
------- ------- -------
Net income.................... $ 2,393 $ 6,303 $ 2,579
======= ======= =======
</TABLE>
International revenues are principally derived from sales to customers located
in Europe. The net loss from foreign operations reflects a non-recurring charge
for research and devleopment in-process associated with the acquisition of
Avitec AB in Sweden. Identifiable assets attributable to foreign operations,
which principally consist of trade receivables from European customers and
inventories, totalled $5.7 million, $4.1 million, and $3.2 million at April 30,
1996, 1995 and 1994, respectively.
The Company purchased 100% of Avitec AB of Sweden on March 14, 1996 for
$6.7 million in cash with an additional amount not to exceed approximately $3.0
million to be paid in the year 2001 depending on levels of profitability
achieved until that time. Of the amount paid, $6.0 million was in excess of the
net asset value of Avitec of which $4.8 million was charged as an expense for
research and development in-process. The remainder is to be amortized over a
period of five to seven years. The pro forma results of operations assuming
Avitec AB had been acquired at the beginning of 1996 have not been presented as
the impact on the annual financial statements would be insignificant.
During 1996, the Company settled certain litigation with a third party
related to an intellectual property dispute and received $913,000 as one-third
of the total settlement. This amount is included in other income in the
accompanying consolidated financial statements. Additional amounts to be
received will be recognized when due.
38
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
APRIL 30, 1996, 1995 AND 1994
10. Quarterly Information (unaudited)
Set forth below is selected quarterly consolidated financial data with respect
to the Company for the two years ended April 30, 1996 and 1995. This data should
be read in conjunction with the consolidated financial statements and notes
thereto set forth elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,1996
-------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Q1 Q2 Q3 Q4 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues............................................................... $14,423 $14,445 $13,400 $15,398 $57,666
Cost of revenues ...................................................... 7,337 7,243 6,851 8,046 29,477
------- ------- ------- ------- -------
Gross profit ........................................................ 7,086 7,202 6,549 7,352 28,189
------- ------- ------- ------- -------
Operating expenses:
Research and development............................................. 2,258 2,220 2,329 2,071 8,878
Sales and marketing ................................................. 1,824 2,053 1,918 2,174 7,969
General and administrative .......................................... 766 896 784 1,008 3,454
Acquired research and development in-process ........................ - - - 4,800 4,800
------- ------- ------- ------- -------
Total operating expenses .......................................... 4,848 5,169 5,031 10,053 25,101
------- ------- ------- ------- -------
Operating income (loss) ............................................... 2,238 2,033 1,518 (2,701) 3,088
Other income, net ..................................................... 463 485 408 1,251 2,607
------- ------- ------- ------- -------
Income (loss) before taxes............................................. 2,701 2,518 1,926 (1,450) 5,695
Provision for income taxes ............................................ 1,017 890 513 882 3,302
------- ------- ------- ------- -------
Net income ............................................................ $ 1,684 $ 1,628 $ 1,413 $(2,332) $ 2,393
======= ======= ======= ======= =======
Net income (loss) per share ........................................... $ .14 $ .13 $ .12 $ (.19) $ .20
======= ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding ........................................ 12,352 12,194 11,741 12,056 12,129
======= ======= ======= ======= =======
YEAR ENDED APRIL 30,1995
-------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Q1 Q2 Q3 Q4 1995
------- ------- ------- ------- -------
Consolidated Statement of Operations Data:
Revenues .............................................................. $10,074 $12,184 $13,830 $14,002 $50,090
Cost of revenues ...................................................... 5,122 6,132 6,968 7,089 25,311
------- ------- ------- ------- -------
Gross profit ........................................................ 4,952 6,052 6,862 6,913 24,779
------- ------- ------- ------- -------
Operating expenses:
Research and development............................................. 1,272 1,536 1,653 1,867 6,328
Sales and marketing ................................................. 1,441 1,544 1,576 1,745 6,306
General and administrative .......................................... 555 691 867 756 2,869
------- ------- ------- ------- -------
Total operating expenses .......................................... 3,268 3,771 4,096 4,368 15,503
------- ------- ------- ------- -------
Operating income ...................................................... 1,684 2,281 2,766 2,545 9,276
Other income, net ..................................................... 104 115 363 496 1,078
------- ------- ------- ------- -------
Income before taxes.................................................... 1,788 2,396 3,129 3,041 10,354
Provision for income taxes ............................................ 667 963 1,253 1,168 4,051
------- ------- ------- ------- -------
Net income ............................................................ $ 1,121 $ 1,433 $ 1,876 $ 1,873 $ 6,303
======= ======= ======= ======= =======
Net income per share .................................................. $ .12 $ .14 $ .15 $ .15 $ .55
======= ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding ........................................ 9,170 10,114 12,611 12,512 11,524
======= ======= ======= ======= =======
</TABLE>
39
<PAGE>
SCHEDULE II
ORTEL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Balance at
Beginning Balance
of at End
Description Year Additions Deductions of Year
- - ----------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C>
Year ended April 30, 1994:
Allowance for doubtful
accounts........................ 100,000 100,000
Inventory reserve................ 400,000 125,182 525,182
Year ended April 30, 1995:
Allowance for doubtful
accounts........................ 100,000 200,000 16,651(1) 283,349
Inventory reserve................ 525,182 622,186 1,147,368
Year ended April 30, 1996:
Allowance for doubtful
accounts....................... 283,349 41,651 325,000
Inventory reserve............... 1,147,368 81,341(2) 1,066,027
</TABLE>
(1) Write-off of uncollectible accounts
(2) Write-off of obsolete materials
40
<PAGE>
EXHIBIT INDEX
Exhibit No. Document Description Page No.
----------- -------------------- --------
3.1 Certificate of Incorporation. (Note 1)
3.2 Bylaws of Ortel Corporation. (Note 1)
10.1 Lease, dated September 23, 1991, (Note 1)
between Ortel Corporation and Rim
Development Co.
10.2 Lease, dated May 20, 1994, between (Note 1)
Ortel Corporation and Wai Fong Un.
10.3 Consulting Agreement, dated (Note 1)
January 3, 1994, between Ortel
Corporation and Wayne Tyler.
10.4 Consulting Agreement, dated March (Note 1)
2, 1990, as amended, between Ortel
Corporation and Amnon Yariv.
10.5 Employment Agreement, dated (Note 1)
September 14, 1990, between Ortel
Corporation and Wim H.J. Selders.
10.6 Employment Agreement, dated (Note 1)
September 14, 1990, between Ortel
Corporation and Israel Ury.
10.7 Employment Agreement, dated (Note 1)
September 14, 1990, between Ortel
Corporation and Nadav Bar-Chaim.
10.8 1981 Incentive Stock Option Plan (Note 1)
of Ortel Corporation.
10.9 1990 Stock Option Plan of Ortel (Note 1)
Corporation.
10.10 Loan Agreement, dated September (Note 1)
30, 1993, between Ortel
Corporation and First Interstate
Bank.
10.11 Form of Indemnification Agreement. (Note 1)
10.12 Common Stock Purchase Agreement, (Note 1)
dated March 26, 1990, between
Sumitomo Cement Co., Ltd. and
Ortel Corporation.
10.13 Key Shareholders Agreement, dated (Note 1)
as of March 26, 1990, among Wim
H.J. Selders, Dr. Ury, Dr. Yariv,
Dr. Bar-Chaim, Sumitomo Cement
Co., Ltd., The Ury Family Trust
and Ortel Corporation.
10.14 Agreement Concerning Certain (Note 1)
Financial and Business
Arrangements, dated as of March
26, 1990 between Sumitomo Cement
Co., Ltd. and Ortel Corporation.
10.15 Voting Agreement of Sumitomo (Note 1)
Cement Co., Ltd., dated as of
March 26, 1990 between Sumitomo
Cement Co., Ltd. and Ortel
Corporation.
10.16 Agreement dated as of November 19, (Note 1)
1993, between Ortel Corporation
and General Instrument Corporation.
10.17 Agreement, dated as of January 24, (Note 1)
1994, between Ortel Corporation
and General Instrument Corporation.
<PAGE>
Exhibit No. Document Description Page No.
----------- -------------------- --------
10.18 Modification Agreement, dated (Note 1)
1985, between Ortel Corporation
and certain investors.
10.19 Class A Common Stock Purchase (Note 1)
Agreement, dated as of December
14, 1981, between Ortel
Corporation and certain investors.
10.20 1994 Equity Participation Plan of (Note 1)
Ortel Corporation.
10.21 Severance Agreement, dated as of (Note 1)
August 26, 1994, between Ortel
Corporation and Stephen K. Workman.
10.22 Stock Purchase Agreement dated March (Note 2)
12, 1996 between Hakan Samuelsson
and Ortel Corporation
10.23 Stock Purchase Agreement dated March (Note 2)
12, 1996 between Christa Samuelsson
and Ortel Corporation
10.24 Loan Agreement, dated June 2, 1995
between Ortel Corporation and Bank
of America
10.25 Amendment to Loan Agreement dated
September 30, 1995 between Ortel
Coporation and First Interstate Bank
11.1 Statement Regarding Computation of (Note 1)
Per Share Earnings.
21.1 Subsidiaries of Ortel Corporation. Exhibit 21
23.1 Consent of KPMG Peat Marwick LLP. Exhibit 23
__________________
Note 1 Previously filed by the Registrant in Registration No.
33-79188 and incorporated by reference herein pursuant to
Rule 12b-32 of the Exchange Act.
Note 2 Previously filed by the Registrant in its 8K filing dated
March 26, 1996.
<PAGE>
EXHIBIT 21
----------
SUBSIDIARIES
1. Ortel Vertriebs GmbH, a corporation organized under the laws of Germany
2. Ortel SARL, a corporation organized under the laws of France
3. Avitec AB, a corporation organized under the laws of Sweden
43
<PAGE>
EXHIBIT 23
----------
ACCOUNTANTS' CONSENT
The Board of Directors
Ortel Corporation:
We consent to incorporation by reference in the registration statements (No. 33-
91182 and 33-87540) on Forms S-8 of Ortel Corporation of our report dated June
3, 1996, relating to the consolidated balance sheets of Ortel Corporation and
subsidiaries as of April 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended April 30, 1996 and the related schedule,
which report appears in the April 30, 1996, annual report on Form 10-K of Ortel
Corporation.
KPMG Peat Marwick LLP
Los Angeles, California
July 26, 1996
44
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> APR-30-1996
<CASH> 15,573
<SECURITIES> 23,299
<RECEIVABLES> 10,017
<ALLOWANCES> (325)
<INVENTORY> 9,736
<CURRENT-ASSETS> 60,639
<PP&E> 26,779
<DEPRECIATION> (13,383)
<TOTAL-ASSETS> 77,457
<CURRENT-LIABILITIES> 9,512
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 66,263
<TOTAL-LIABILITY-AND-EQUITY> 77,457
<SALES> 57,666
<TOTAL-REVENUES> 57,666
<CGS> 29,477
<TOTAL-COSTS> 29,477
<OTHER-EXPENSES> 22,448<F1>
<LOSS-PROVISION> 42
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 5,695
<INCOME-TAX> 3,302
<INCOME-CONTINUING> 2,393
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,393
<EPS-PRIMARY> .20
<EPS-DILUTED> .19
<FN>
<F1>THESE RESULTS REFLECT A NON-RECURRING CHARGE OF $4.8 MILLION ($.39 PER SHARE)
FOR RESEARCH AND DEVELOPMENT IN-PROCESS RELATED TO THE ACQUISITION OF AVITEC AB
IN SWEDEN.
</FN>
</TABLE>
<PAGE>
EXHIBIT 10.24
Bank Of America Business Loan Agreement
National Trust and Savings Association
- - --------------------------------------------------------------------------------
This Agreement dated as of 6/2/ , 1995, is between Bank of American National
--------
Trust and Savings Association (the "Bank") and Ortel Corporation (the
"Borrower").
1. FACILITY NO. 1: LINE OF CREDIT AMOUNT AND TERMS
1.1 Line of Credit Amount.
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrower. The amount of the line of credit (the
"Facility No. 1 Commitment") is Five Million Dollars ($5,000,000).
(b) This is revolving line of credit with a within line facility for letters
of credit. During the availability period, the Borrower may repay
principal amounts and reborrow them.
(c) The Borrower agrees not to permit the outstanding principal balance of the
line of credit plus the outstanding amounts of any letters of credit,
including amounts drawn on letters of credit and not yet reimbursed, to
exceed the Facility No. 1 Commitment.
1.2 Availability Period. The line of credit is available between the date of
this Agreement and May 1, 1997 (the "Facility No. 1 Expiration Date") unless the
Borrower is in default.
1.3 Interest Rate.
(a) Unless the Borrower elects an optional interest rate as described below,
the interest rate is the Bank's Reference Rate.
(b) The Reference Rate is the rate of interest publicly announced from time to
time by the Bank in San Francisco, California, as its Reference Rate. The
Reference Rate is set by the Bank based on various factors, including the
Bank's costs and desired return, general economic conditions and other
factors, and is used as a reference point for pricing some loans. The Bank
may price loans to its customers at, above, or below the Reference Rate.
Any change in the Reference Rate shall take effect at the opening of
business on the day specified in the public announcement of a change in
the Bank's Reference Rate.
1.4 Repayment Terms.
(a) The Borrower will pay interest on May 30, 1995, and then monthly
thereafter until payment in full of any principal outstanding under this
line of credit .
(b) The Borrower will repay in full and principal and any unpaid interest or
other charges outstanding under this line of credit no later than the
facility No. 1 Expiration Date.
(c) Any amount bearing interest at an optional interest rate (as described
below) may be repaid at the end of the applicable interest period, which
shall be no later than the Facility No. 1 Expiration Date.
- - --------------------------------------------------------------------------------
-1-
<PAGE>
1.5 Optional Interest Rates. Instead of the interest rate based on the Bank's
Reference Rate, the Borrower may elect to have all or portions of the line of
credit (during the availability period) bear interest at the rate(s) described
below during an interest period agreed to by the Bank and the Borrower. Each
interest rate is a rate per year. Interest will be paid on the last day of each
interest period, and on the last day each month during the interest period. At
the end of any interest period, the interest rate will revert to the rate based
on the Reference Rate, unless the Borrower has designated another optional
interest rate for the portion.
1.6 CD Rate. The Borrower may elect to have all or portions of the principal
balance of the line of credit bear interest at the CD Rate plus 1.75% percentage
points. Designation of a CD Rate portion is subject to the following
requirements:
(a) The interest period during which the CD Rate will be in effect will be 30,
60, 90, 180 or 365 days long (or, at the Bank's option, for other
maturities requested by the Borrower).
(b) Each CD Rate portion will be for an amount not less than Five Hundred
Thousand Dollars ($500,00).
(c) The Borrower may not elect a CD Rate with respect to any portion of the
principal balance of the line of credit which is scheduled to be repaid
before the last day of the applicable interest period.
(d) Any portion of the principal balance of the line of credit already bearing
interest at the CD Rate will not be converted to a different rate during
its interest period.
(e) The "CD Rate" means the interest rate determined by the following formula.
(All amounts in the calculation will be determined by the Bank as of the
first day of the interest period, and will be rounded upward to the
nearest 1/100 of one percent.)
CD Rate = Certificate of Deposit Rate + Assessment Rate
---------------------------
(1.00 - Reserve Percentage)
Where,
(i) "Assessment Rate" means the annual rate that is payable to the
Federal Deposit Insurance Corporation (or any successor) ("FDIC")
by a member of the Bank Insurance Fund that is classified as well
capitalized and within supervisory subgroup "A" (or a comparable
successor assessment risk classification within the meaning of 12
C.F.R. (S)327.3(d)) for insuring time deposits at offices of such
member in the United States. If the FDIC ceases to assess time
deposits based upon such classifications, then the Bank shall, in
its discretion, select an appropriate successor Assessment Rate
from among the range of annual assessment rates that are payable to
the FDIC by commercial banks for insuring time deposits at offices
of such banks in the United States.
(ii) "Certificate of Deposit Rate" means the arithmetic average of the
rates of interest bid by two or more certificate of deposit dealers
for the purchase at face value of certificates of deposit:
. with a term equal to the applicable CD Rate interest
period;
. in an amount equal to the CD Rate portion; and
. issued by major United States banks.
The certificate of deposit dealers will be selected by the Bank and
will be of recognized standing.
- - --------------------------------------------------------------------------------
-2-
<PAGE>
(iii) "Reserve Percentage" means the total of the maximum reserve
percentage for determining the reserves to be maintained by member
banks of the Federal Reserve System for:
. non-personal time deposits in the United States;
. in the amount of One Hundred Thousand Dollars
($100,000) or more;
. with a term equal to the applicable CD Rate interest
period.
The percentage will be expressed as a decimal, and will include,
but not be limited to, marginal, emergency, supplemental, special,
and other reserve percentages.
(f) Each prepayment of a CD Rate portion, whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid, and a prepayment fee equal to the amount
(if any) by which:
(i) the additional interest which would have been payable on the amount
prepaid had it not been paid until the last day of the interest
period, exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the certificate of deposit
market for a period starting on the date on which it was prepaid
and ending on the last day of the interest period for such portion.
(g) The Bank will have no obligation to accept an election for a CD Rate
portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for period equal to
the interest period, of a CD Rate portion are not available in the
certificate of deposit market; or
(ii) the CD Rate does not accurately reflect the cost of a CD Rate
portion.
1.7 Short Term Fixed Rate. The Borrower may elect to have all or portions of
the principal balance of the line of credit bear interest at the Short Term
Fixed Rate, subject to the following requirements:
(a) The "Short Term Fixed Rate" means the Short Term Base Rate plus one and
three-quarters (1.75) percentage points.
(b) The "Short Term Fixed Rate" means the fixed interest rate per annum,
determined solely by the Bank on the first day of the applicable interest
period for the Short Term Fixed Rate portion, as the rate at which the
Bank would be able to borrow funds in the Money Market in the amount of
the Short Term Fixed Rate portion and with an interest and principal
payment schedule equal to the Short Term Fixed Rate portion and for a term
equal to the applicable interest period. The Short Term Base Rate shall
include adjustments for reserve requirements, federal deposit insurance,
and any other similar adjustments which the Bank deems appropriate. The
Short Term Base Rate is the Bank's estimate only and the Bank is under no
obligation to actually purchase or match funds for any transaction.
(c) "Money Market" means one or more wholesale funding markets available to
the Bank, including domestic negotiable certificates of deposit,
eurodollar deposits, bank deposit notes or other appropriate money market
instruments selected by the Bank.
(d) The interest period during which the Short Term Fixed Rate will be in
effect will be one year or less.
(e) Each Short Term Fixed Rate portion will be for an amount not less than the
following:
(i) for interest periods of 14 days or longer, Five Hundred Thousand
Dollars ($500,000).
- - --------------------------------------------------------------------------------
-3-
<PAGE>
(ii) for interest periods of 1 to 3 days, Five Million Dollars
($5,000,000).
(iii) for interest periods of between 4 days and 13 days, an amount
which, when multiplied by the number of days in the applicable interest
period, is not less than fifteen million (15,000,000) dollar-days.
(f) Any portion of the principal balance of the line of credit already bearing
interest at the Short Term Fixed Rate will not be converted to a different
rate during its interest period.
(g) Each prepayment of a Short Term Fixed Rate portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee equal to the
amount (if any) by which:
(i) the additional interest which would have been payable on the amount
prepaid had it not been prepaid, exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the Money Market for a
period starting on the date on which it was prepaid and ending on
the last day of the interest period for such portion (or the
scheduled payment date for the amount prepaid, if earlier).
1.8 LIBOR RATE. The Borrower may elect to have all or portions of the
principal balance bear interest at the LIBOR Rate plus 1.75 percentage points.
Designation of a LIBOR Rate portion is subject to the following requirements:
(a) The interest period during which the LIBOR Rate will be in effect will be
7, 14, 21, 30, 60, 90, 180 or 365 days. The last day of the interest
period will be determined by the Bank using the practices of the London
inter-bank market.
(b) Each LIBOR Rate portion will be for an amount not less than Five Hundred
Thousand Dollars ($500,000) for interest periods of 30 days or longer. For
shorter maturities, each LIBOR Rate portion will be for amount which, when
multiplied by the number of days in the applicable interest-period, is not
less than fifteen million (15,000,000) dollar days.
(c) The Borrower shall irrevocably request a LIBOR Rate portion no later than
9:00 a.m. San Francisco Time three (3) banking days before the
commencement of the interest period.
(d) The "LIBOR Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All amounts
in the calculation will be determined by the Bank as of the first day of
the interest period.)
London Rate
LIBOR Rate = ------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Rate" means the interest rate (rounded upward to the
nearest 1/16th of one percent) at which the Bank's London Branch, London,
Great Britain, would offer U.S. dollar deposits for the applicable
interest period to other major banks in the London inter-bank market at
approximately 11:00 a.m. London time (2) banking days before the
commencement of the interest period.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by member banks
of the Federal Reserve System for Eurocurrency Liabilities, as defined in
the Federal Reserve Board Regulation D, rounded upward to the nearest
1/100
- - --------------------------------------------------------------------------------
-4-
<PAGE>
of one percent. The percentage will be expressed as a decimal, and will
include, but not be limited to, marginal, emergency, supplemental,
special, and other reserve percentages.
(e) The Borrower may not elect a LIBOR Rate with respect to any principal
amount which is scheduled to be repaid before the last day of the
applicable interest period.
(f) Any portion of the principal balance already bearing interest at the
LIBOR Rate will not be converted to a different rate during its interest
period.
(g) Each prepayment of a LIBOR Rate portion whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid and a prepayment fee as described below.
A "prepayment" is a payment of an amount on a date earlier than the
scheduled payment date for such amount as required by this Agreement.
The prepayment fee shall be equal to the amount (if any) by which:
(i) the additional interest which would have been payable during the
interest period on the amount prepaid had it not been prepaid, exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the London inter-bank market
for a period starting on the date on which it was prepaid and ending on
the last day of the interest period for such portion (or the scheduled
payment date for the amount prepaid, if earlier).
(h) The Bank will have no obligation to accept an election for a LIBOR Rate
portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal to
the interest period, of a LIBOR Rate portion are not available in
the London inter-bank market; or
(ii) the LIBOR Rate does not accurately reflect the cost of a LIBOR
Rate portion.
1.9 Letters of Credit. This line of credit may be used for financing:
(i) commercial letters of credit with a maximum maturity of 365 days
but not to extend more than 60 days beyond the Facility 1 Expiration
Date. Each commercial letter of credit will require drafts payable at
sight or up to 90 days after sight.
(ii) standby letters of credit with a maximum maturity of 365 days but
not to extend more than 60 days beyond the Facility 1 Expiration Date.
(iii) The amount of letters of credit outstanding at any one time,
(including amounts drawn on letters of credit and not yet reimbursed),
may not exceed One Million Dollars ($1,000,000).
The Borrower agrees:
(a) any sum drawn under a letter of credit may, at the option of the Bank,
be added to the principal amount outstanding under this Agreement. The
amount will bear interest and be due as described elsewhere in this
Agreement.
(b) if there is a default under this Agreement, to immediately prepay and
make the Bank whole for any outstanding letters of credit.
(c) the issuance of any letter of credit and any amendment to a letter of
credit is subject to the Bank's written approval and must be in form and
content satisfactory to the Bank and in favor of a beneficiary
acceptable to the Bank.
- - --------------------------------------------------------------------------------
-5-
<PAGE>
(d) to sign the Bank's form Application and Security Agreement for
Commercial Letter of Credit or Application and Agreement for Standby
Letter of Credit.
(e) to pay any issuance and/or other fees that the Bank notifies the
Borrower will be charged for issuing and processing letters of credit
for the Borrower.
(f) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
2. FACILITY NO.2: LINE OF CREDIT AMOUNT AND TERMS
2.1 Line of Credit Amount.
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrower. The amount of the line of credit (the
"Facility No. 2 Commitment") is Eight Million Dollars ($8,000,000).
(b) This is a non-revolving line of credit with a term repayment option. Any
amount borrowed, even if repaid before the end of the availability
period, permanently reduces the remaining available line of credit.
(c) The Borrower agrees not to permit the outstanding principal balance of
the line of credit to exceed the Facility No. 2 Commitment.
2.2 Availability Period. The line of credit is available between the date of
this Agreement and May 1, 1996 (the "Facility No. 2 Expiration Date")
unless the Borrower is in default.
2.3 Interest Rate. Unless the Borrower elects an optional interest rate as
described below, the interest rate is the Bank's Reference Rate.
2.4 Repayment Terms.
(a) The Borrower will pay interest on May 30, 1995, and then monthly
thereafter until payment in full of any principal outstanding under this
line of credit.
(b) Any amount bearing interest at an optional interest rate (as described
below) may be repaid at the end of the applicable interest period, which
shall be no later than the Facility No. 2 Expiration Date.
(c) The Borrower will repay the principal amount outstanding on the Facility
No. 2 Expiration Date in 60 successive equal monthly installments
starting May 30, 1996. On April 30, 2001, the Borrower will repay the
remaining principal balance plus any interest then due.
(d) The Borrower may prepay the loan in full or in part at any time. The
prepayment will be applied to the most remote installment of principal
due under this Agreement.
2.5. Mandatory Prepayment; Early Termination. Anything herein to the contrary
notwithstanding, if the Facility NO. 1, as now in effect or as hereafter
renewed, amended, or restated, terminates at the request of the
Borrower, the entire principal balance of Facility No. 2 together with
all accrued interest thereon, shall be due and payable on the effective
date of such termination.
2.6 Optional Interest Rates. Instead of the interest rate based on the
Bank's Reference Rate, the Borrower may elect to have all or portions of
the line of credit (during the availability period and term repayment
period) bear interest at the rate(s) described below during an interest
period agreed to by the
- - -------------------------------------------------------------------------------
LCA1CMLL -6- 63-SLAML01
<PAGE>
Bank and the Borrower. Each interest rate is a rate per year. Interest will be
paid on the last day of each interest period, and on the last day each month
during the interest period. At the end of any interest period, the interest
rate will revert to the rate based on the Reference Rate, unless the Borrower
has designated another optional interest rate for the portion.
2.7 CD Rate. The Borrower may elect to have all or portions of the principal
balance of the line of credit bear interest at the CD Rate plus 2.00% percentage
points. Designation of a CD Rate portion is subject to the following
requirements:
(a) The interest period during which the CD Rate will be in effect will be 30,
60, 90, 180 or 365 days long (or, at the Bank's option, for other
maturities requested by the Borrower).
(b) Each CD Rate portion will be for an amount not less than Five Hundred
Thousand Dollars ($500,000).
(c) The Borrower may not elect a CD Rate with respect to any portion of the
principal balance of the line of credit which is scheduled to be repaid
before the last day of the applicable interest period.
(d) Any portion of the principal balance of the line of credit already bearing
interest at the CD Rate will not be converted to a different rate during
its interest period.
(e) The "CD Rate" means the interest rate determined by the following
formula. (All amounts in the calculation will be determined by the Bank
as of the first day of the interest period, and will be rounded upward to
the nearest 1/100 of one percent.)
CD Rate= Certificate of Deposit Rate + Assessment Rate
---------------------------
(1.00 - Reserve Percentage)
Where,
(i) "Assessment Rate" means the annual assessment rate that is payable
to the Federal Deposit Insurance Corporation (or any successor)
("FDIC") by a member of the Bank Insurance Fund that is classified
as well capitalized and within supervisory subgroup "A" (or a
comparable successor assessment risk classification within the
meaning of 12 C.F.R. (S)327.3(d)) for insuring time deposits at
offices of such member in the United States. If FDIC ceases to
assess time deposits based upon such classifications, then the Bank
shall, in its discretion, select an appropriate successor Assessment
Rate from among the range of annual assessment rates that are
payable to the FDIC by commercial banks for insuring time deposits
at offices of such banks in the United States.
(ii) "Certificate of Deposit Rate" means the arithmetic average of the
rates of interest bid by two or more certificates of deposit dealers
for the purchase at face value of certificates of deposit:
. with a term equal to the applicable CD Rate interest
period:
. in an amount equal to the CD Rate portion; and
. issued by major United States banks.
The certificate of deposit dealers will be selected by the Bank and
will be of recognized standing.
(iii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by member
banks of the Federal Reserve System for:
. non-personal time deposits in the United States;
-7-
<PAGE>
. in the amount of One Hundred Thousand Dollars ($100,000)
or more;
. with a term equal to the applicable CD Rate interest
period.
The percentage will be expressed as a decimal, and will include, but
not be limited to, marginal, emergency, supplemental, special, and
other reserve percentages.
(f) Each prepayment of a CD Rate portion, whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid, and a prepayment fee equal to the amount
(if any) by which:
(i) the additional interest which would have been payable on the amount
prepaid had it not been paid until the last day of the interest
period, exceeds
(ii) the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the certificate of deposit market
for a period starting on the date on which it was prepaid and ending
on the last day of the interest period for such portion.
(g) The Bank will have no obligation to accept an election for a CD Rate
portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal to the
interest period, of a CD Rate portion are not available in the
certificate of deposit market; or
(ii) the CD Rate does not accurately reflect the cost of a CD Rate
portion.
2.8 Short Term Fixed Rate. The Borrower may elect to have all or portions of
the principal balance of the line of credit bear interest at the Short Term
Fixed Rate, subject to the following requirements:
(a) The "Short Term Fixed Rate" means the Short Term Base Rate plus 2.00%
percentage points.
(b) The "Short Term Base Rate" means the fixed interest rate per annum,
determined solely by the Bank on the first day of the applicable interest
period for the Short Term Fixed Rate portion, as the rate at which the Bank
would be able to borrow funds in the Money Market in the amount of the
Short Term Fixed Rate portion and with an interest and principal payment
schedule equal to the Short Term Fixed Rate portion and for a term equal to
the applicable interest period. The Short Term Base Rate shall include
adjustments for reserve requirements, federal deposit insurance, and any
other similar adjustment which the Bank deems appropriate. The Short Term
Base Rate is the Bank's estimate only and the Bank is under no obligation
to actually purchase or match funds for any transaction.
(c) "Money Market" means one or more wholesale funding markets available to the
Bank, including domestic negotiable certificates of deposit, eurodollar
deposits, bank deposit notes or other appropriate money market instruments
selected by the Bank.
(d) The interest period during which the Short Term Fixed Rate will be in
effect will be one year or less.
(e) Each Short Term Fixed Rate portion will be for an amount not less than the
following:
(i) for interest periods of 14 days or longer, Five Hundred Thousand
Dollars ($500,000).
(ii) for interest periods of 1 to 3 days, Five Million Dollars
($5,000,000).
(iii) for interest periods of between 4 days and 13 days, an amount which,
when multiplied by the number of days in the applicable interest
period, is not less than fifteen million (15,000,000) dollar-days.
- - --------------------------------------------------------------------------------
-8-
<PAGE>
(f) Any portion of the principal balance of the line of credit already bearing
interest at the Short Term Fixed Rate will not be converted to a different
rate during its interest period.
(g) Each prepayment of a Short Term Fixed Rate portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee equal to the
amount (if any) by which:
(i) the additional interest which would have been payable on the amount
prepaid had it not been prepaid, exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the Money Market for a period
starting on the date on which it was prepaid and ending on the last day of
the interest period for such portion (or the scheduled payment date for
the amount prepaid, if earlier).
2.9 LIBOR RATE. The Borrower may elect to have all or portions of the principal
balance bear interest at the LIBOR Rate plus 2.00% percentage points.
Designation of a LIBOR Rate portion is subject to the following requirements:
(a) The interest period during which the LIBOR Rate will be in effect will be
7, 14, 21, 30, 60, 90, 180 or 365 days. The last day of the interest
period will be determined by the Bank using the practices of the London
inter-bank market.
(b) Each LIBOR Rate portion will be for an amount not less than Five Hundred
Thousand Dollars ($500,000) for interest periods of 30 days or longer. For
shorter maturities, each Libor Rate portion will be for amount which,
when multiplied by the number of days in the applicable interest-period,
is not less than fifteen million (15,000,000) dollar days.
(c) The Borrower shall irrevocably request a LIBOR Rate portion no later than
9:00 a.m. San Francisco Time three (3) banking days before the
commencement of the interest period.
(d) The "LIBOR Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All amounts
in the calculation will be determined by the Bank as of the first day of
the interest period.)
London Rate
LIBOR Rate = ---------------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Rate" means the interest rate (rounded upward to the
nearest 1/16th of one percent) at which the Bank's London Branch, London,
Great Britain, would offer U. S. dollar deposits for the applicable
interest period to other major banks in the London inter-bank market at
approximately 11:00 a.m. London time two (2) banking days before the
commencement of the interest period.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by member banks
of the Federal Reserve System for Eurocurrency Liabilities, as defined in
Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of
one percent. The percentage will be expressed as a decimal, and will
include, but not be limited to, marginal, emergency, supplemental,
special, and other reserve percentages.
(e) The Borrower may not elect a LIBOR Rate with respect to any principal
amount which is scheduled to be repaid before the last day of the
applicable interest period.
- - -------------------------------------------------------------------------------
-9-
<PAGE>
(f) Any portion of the principal balance already bearing interest at the LIBOR
Rate will not be converted to a different rate during its interest period.
(g) Each prepayment of a LIBOR Rate portion whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid and a prepayment fee as described below. A
"prepayment" is a payment of an amount on a date earlier than the
scheduled payment date for such amount as required by this Agreement. The
prepayment fee shall be equal to the amount (if any) by which:
(i) the additional interest which would have been payable during the
interest period on the amount prepaid had it not been prepaid, exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the London inter-bank market for
a period starting on the date on which it was prepaid and ending on the
last day of the interest period for such portion (or the scheduled payment
date for the amount prepaid, if earlier).
(h) The Bank will have no obligation to accept an election for a LIBOR Rate
portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal to
the interest period, of a LIBOR Rate portion are not available in the
London Inter-bank market; or
(ii) the LIBOR Rate does not accurately reflect the cost of a LIBOR Rate
portion.
2.10 Long Term Rate. The Borrower may elect to have all or portions of the
principal balance of the line of credit bear interest at the Long Term Rate,
subject to the following requirements:
(a) The interest period during which the Long Term Rate will be in effect will
be one year or more. The interest period must begin on or after the last
day of the availability period specified above. The Borrower will
immediately begin repaying principal of the Long Term Rate portion under
an amortization schedule agreed to by the Bank and the Borrower at the
time of the designation. These payments will be separate from the payments
required by the paragraph above entitled "Repayment Terms," which will be
calculated without taking into account any Long Term Rate portions.
(b) The "Long Term Rate" means the Long Term Base Rate plus two (2.00)
percentage points.
(c) The "Long Term Base Rate" means the fixed interest rate per annum,
determined solely by the Bank on the first day of the applicable interest
period for the Long Term Rate portion, as the rate at which the Bank would
be able to borrow funds in the Money Market in the amount of the Long Term
Rate portion and with an interest payment frequency and principal
repayment schedule equal to the Long Term Rate portion and for a term
equal to the applicable interest period. The Long Term Base Rate shall
include adjustments for reserve requirements, federal deposit insurance,
and any other similar adjustment which the Bank deems appropriate. The
Long Term Base Rate is the Bank's estimate only and the Bank is under no
obligation to actually purchase or match funds for any transaction.
(d) "Money Market" means one or more wholesale funding markets available to
the Bank, including domestic negotiable certificates of deposit,
eurodollar deposits, bank deposit notes or other appropriate money market
instruments selected by the Bank.
(e) Each Long Term Rate portion will be for an amount not less than One
Hundred Thousand Dollars ($100,000).
-10-
<PAGE>
(f) Any portion of the principal balance of the line of credit already bearing
interest at the Long Term Rate will not be converted to a different rate
during its interest period.
(g) The Borrower may prepay the Long Term Rate portion in whole or in part in
the minimum amount of One Hundred Thousand Dollars ($100,000). The
Borrower will give the Bank irrevocable written notice of the Borrower's
intention to make the prepayment, specifying the date and amount of the
prepayment. The notice must be received by the Bank at least 5 banking
days in advance of the prepayment. All prepayments of principal on the
Long Term Rate portion will be applied on the most remote principal
installment or installments then unpaid.
(h) Each prepayment of a Long Term Rate portion, whether voluntary, by reason
of acceleration or otherwise, will be accompanied by payment of all
accrued interest on the amount of the prepayment and the prepayment fee
described below.
(i) The prepayment fee will be the sum of fees calculated separately for each
Prepaid Installment, as follows:
(i) The Bank will first determine the amount of interest which would
have accrued each month for the Prepaid Installment had it remained
outstanding until the applicable Original Payment Date, using the Long
Term Rate;
(ii) The Bank will then subtract from each monthly interest amount
determined in (i), above, the amount of interest which would accrue for
that Prepaid Installment if it were reinvested from the date of prepayment
through the Original Payment Date, using the following rate:
(A) If the Original Payment Date is more than 5 years after the
date of prepayment: the Treasury Rate plus one-quarter of one
percentage point;
(B) If the Original Payment Date is 5 years or less after the date
of prepayment: the Money Market Rate.
(iii) If (i) minus (ii) for the Prepaid Installment is greater than zero,
the Bank will discount the monthly differences to the date of prepayment
by the rate used in (ii) above. The sum of the discounted monthly
differences is the prepayment fee for that Prepaid Installment.
(j) The following definitions will apply to the calculation of the prepayment
fee:
"Money Market Rate" means the fixed interest rate per annum which the Bank
determines could be obtained by reinvesting a specified Prepaid
Installment in the Money Market from the date of prepayment through the
Original Payment Date.
"Original Payment Dates" mean the dates on which principal of the Long
Term Rate portion would have been paid if there had been no prepayment. If
a portion of the principal would have been paid later than the end of the
interest period in effect at the time of prepayment, then the Original
Payment Date for that portion will be the last day of the interest period.
"Prepaid Installment" means the amount of the prepaid principal of the
Long Term Rate portion which would have been paid on a single Original
Payment Date.
"Treasury Rate" means the interest rate yield for U.S. Government Treasury
Securities which the Bank determines could be obtained by reinvesting a
specified Prepaid Installment in such securities from the date of
prepayment through the Original Payment Date.
-11-
<PAGE>
(i) The Bank may adjust the Treasury Rate and Money Market Rate to reflect
the compounding, accrual basis, or other costs of the Long Term Rate
portion. Each of the rates is the Bank's estimate only and the Bank is
under no obligation to actually reinvest any prepayment. The rates will be
based on information from either the Telerate or Reuters information
services, The Wall Street Journal, or other information sources the Bank
deems appropriate.
3. DISBURSEMENTS, PAYMENTS AND COSTS
3.1 Requests for Credit. Each request for an extension of credit will be made
in writing in a manner acceptable to the Bank, or by another means acceptable to
the Bank.
3.2 Disbursements and Payments. Each disbursement by the Bank and each
payment by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the Bank from
time to time;
(b) made for the account of the Bank's branch selected by the Bank from time
to time;
(c) made in immediately available funds, or such other type of funds selected
by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at its
discretion, require the Borrower to sign one or more promissory notes.
3.3 Direct Debit (Pre-Billing)
(a) The Borrower agrees that the Bank will debit the Borrower's deposit
account number 14637-01336, or such other of the Borrower's accounts with
the Bank as designated in writing by the Borrower (the "Designated
Account") on the date each payment of principal and interest from the
Borrower becomes due (the "Due Date"). If the Due Date is not a banking
day, the Designated Account will be debited on the next banking day.
(b) Approximately 10 days prior to each Due Date, the Bank will mail to the
Borrower a statement of the amounts that will be due on that Due Date (the
"Billed Amount"). The calculation will be made on the assumption that no
new extensions of credit or payments will be made between the date of the
billing statement and the Due Date, and that there will be no changes in
the applicable interest rate.
(c) The Bank will debit the Designated Account for the Billed Amount,
regardless of the actual amount due on that date (the "Accrued Amount").
If the Billed Amount debited to the Designated Account differs from the
Accrued Amount, the discrepancy will be treated as follows:
(i) If the Billed Amount is less than the Accrued Amount, the Billed
Amount for the following Due Date will be increased by the amount of
the discrepancy. The Borrower will not be in default by reason of
any such discrepancy.
(ii) If the Billed Amount is more than the Accrued Amount, the Billed
Amount for the following Due Date will be decreased by the amount of
the discrepancy.
Regardless of any such discrepancy, interest will continue to accrue based
on the actual amount of principal outstanding without compounding. The
Bank will not pay the Borrower interest on any overpayment.
-12-
<PAGE>
(d) The Borrower will maintain sufficient funds in the Designated Account to
cover each debit. If there are insufficient funds in the Designated
Account on the date the Bank enters any debit authorized by this
Agreement, the debit will be reversed.
3.4 Banking Days. Unless otherwise provided in this Agreement, a banking day
is a day other than a Saturday or a Sunday on which the Bank is open for
business in California. For amounts bearing interest at a LIBOR rate, a banking
day is a day other than a Saturday or a Sunday on which the Bank is open for
business in California, New York and London and dealing in offshore dollars.
All payments and disbursements which would be due on a day which is not a
banking day will be due on the next banking day. All payments received on a day
which is not a banking day will be applied to the credit on the next banking
day.
3.5 Taxes. The Borrower will not deduct any taxes from any payments it makes
to the Bank. If any government authority imposes any taxes on any payments made
by the Borrower, the Borrower will pay the taxes and will also pay to the Bank,
at the time interest is paid, any additional amount which the Bank specifies as
necessary to preserve the after-tax yield the Bank would have received if such
taxes had not been imposed. Upon request by the Bank, the Borrower will confirm
that it has paid the taxes by giving the Bank official tax receipts (or
notarized copies) within 30 days after the due date. However, the Borrower will
not pay the Bank's net income taxes.
3.6 Additional Costs. The Borrower will pay the Bank, on demand, for the
Bank's costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:
(a) any reserve or deposit requirement; and
(b) any capital requirements relating to the Bank's assets and commitments for
credit.
3.7 Interest Calculation. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher
fee than if a 365-day year is used.
3.8 Interest on Late Payments. At the Bank's sole option in each instance,
any amount not paid when due under this Agreement (including interest) shall
bear interest from the due date at the Bank's Reference Rate plus one percentage
point. This may result in compounding of interest.
3.9 Default Rate. Upon the occurrence and during the continuation of any
default under this Agreement, advances under this Agreement will at the option
of the Bank bear interest at a rate per annum which is one percentage point
higher than the rate of interest otherwise provided under this Agreement. This
will not constitute a waiver of any event of default.
4. CONDITIONS
The Bank must receive the following items, in form and content acceptable to the
Bank, before it is required to extend any credit to the Borrower under this
Agreement:
4.1 Authorizations. Evidence that the execution, delivery and performance by
the Borrower (and any guarantor) of this Agreement and any instrument or
agreement required under this Agreement have been duly authorized.
4.2 Insurance. Evidence of insurance coverage, as required in the "Covenants"
section of this Agreement.
4.3 Other Items. Any other items that the Bank reasonably requires.
<PAGE>
5. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation.
5.1 Organization of Borrower. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
5.2 Authorization. This Agreement, and any instrument or agreement required
hereunder, are within the Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
5.3 Enforceable Agreement. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
5.4 Good Standing. In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
5.5 No Conflicts. This Agreement does not conflict with any law, agreement, or
obligation by which the Borrower is bound.
5.6 Financial Information. All financial and other information that has been or
will be supplied to the Bank is:
(a) sufficiently complete to give the Bank accurate knowledge of the Borrower's
(and any guarantor's) financial condition.
(b) in form and content required by the Bank.
(c) in compliance with all government regulations that apply.
5.7 Lawsuits. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower, which, if lost, would materially impair the
Borrower's ability to repay the loan, except as have been disclosed in writing
to the Bank.
5.8 Permits, Franchises. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
5.9 Other Obligations. The Borrower is not in default on any material
obligation for borrowed money, any material purchase money obligation or any
other material lease, commitment, contract, instrument or obligation which, if
immediately paid or satisfied by the Borrower, would materially impair the
Borrower's ability to repay the loan.
5.10 Income Tax Returns. The Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year.
5.11 No Event of Default. There is no event which his, or with notice or lapse
of time or both would be, a default under this Agreement.
5.12 ERISA Plans.
- - --------------------------------------------------------------------------------
-14-
<PAGE>
(a) The Borrower has fulfilled its obligations, if any, under the minimum
funding standards of ERISA and the Code with respect to each Plan and is in
compliance in all material respects with the presently applicable
provisions of ERISA and the Code, and has not incurred any liability with
respect to any Plan under Title IV of ERISA.
(b) No reportable event has occurred under Section 4043(b) of ERISA for which
the PBGC requires 30 day notice.
(c) No action by the Borrower to terminate or withdraw from any Plan has been
taken and no notice of intent to terminate a Plan has been filed under
Section 4041 of ERISA.
(d) No proceeding has been commenced with respect to a Plan under Section 4042
of ERISA, and no event has occurred or condition exists which might
constitute grounds for the commencement of such a proceeding.
(e) The following terms have the meanings indicated for purposes of this
Agreement:
(i) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(ii) "ERISA" means the Employee Retirement Income Act of 1974, as amended
from time to time.
(iii) "PBGC" means the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA.
(iv) "Plan" means any employee pension benefit plan maintained or
contributed to by the Borrower and insured by the Pension Benefit
Guaranty Corporation under Title IV of ERISA.
6. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
6.1 Use of Proceeds. To use the proceeds of Facility No. 1 only to provide for
operating capital and the issuance of letters of credit, and the proceeds of
Facility No. 2 only to finance the acquisition of equipment, product lines, or
businesses as otherwise permitted under the provisions of this Agreement.
6.2 Financial Information. To provide the following financial information and
statements and such additional information as requested by the Bank from time to
time:
(a) Within 120 days of the Borrower's fiscal year end, the Borrower's annual
financial statements. These financial statements must be audited by a
Certified Public Accountant ("CPA") acceptable to the Bank. The statements
shall be prepared on a consolidated and consolidating basis.
(b) Within 45 days of the period's end, the Borrower's quarterly financial
statements. These financial statements may be Borrower prepared. The
statements shall be prepared on a consolidated and consolidating basis.
(c) Copies of the Borrower's Form 10-K Annual Report within 120 days and Form
10-Q Quarterly Report within 45 days after the date of filing with the
Securities and Exchange Commission.
6.3 Quick Ratio. To maintain a ratio of quick assets to current liabilities of
at least 1.75:1.0.
"Quick assets" means cash, short-term cash investments, net trade receivables
and marketable securities not classified as long-term investments.
- - --------------------------------------------------------------------------------
-15-
<PAGE>
6.4 Tangible Net Worth. To maintain tangible net worth equal to at least the
amounts indicated for each period specified below:
Period Amounts
------ -------
From the date hereof through
April 29, 1995 $58,000,000
From April 30, 1995 and thereafter $60,000,000
"Tangible net worth" means the gross book value of the Borrower's assets
(excluding goodwill, patents, trademarks, trade names, organization expense,
treasury stock, unamortized debt discount and expense, deferred research and
development costs, deferred marketing expenses, and other like intangibles, and
monies due from affiliates, officers, directors or shareholders of the Borrower)
less total liabilities, including but not limited to accrued and deferred income
taxes, and any reserves against assets.
6.5 Total Liabilities to Tangible Net Worth Ratio. To maintain a ratio of total
liabilities to tangible net worth not exceeding 0.75:1.0.
"Total liabilities" means the sum of current liabilities plus long term
liabilities.
6.6 Adjusted EBITDA Debt Coverage Ratio. To maintain an Adjusted EBITDA Debt
Coverage Ratio of at least 2.0:1.0.
"Adjusted EBITDA Debt Coverage Ratio" means the ratio of Adjusted EBITDA less
dividends, distributions and draws to the sum of interest expense and the
current portion of long-term debt. Adjusted Earnings Before Interest, Taxes,
Depreciation and Amortization ("Adjusted EBITDA") means the sum of net income
before taxes, plus depreciation and amortization, plus interest expense. This
ratio will be calculated at the end of each fiscal quarter, using fiscal
year-to-date results on an annualized basis. The current portion of long term
debt will be measured as of the last day of the preceding fiscal year.
6.7 Limitation on Losses. Not to incur operating losses of more than Five
Hundred Thousand Dollars ($500,000) in any single quarter over a four (4)
consecutive quarter period.
6.8 Profitability. To maintain an operating profit before taxes and
extraordinary items of at least Two Million Dollars ($2,000,000) as of the
annual accounting period. This covenant to be calculated at the end of each
fiscal quarter, using the results of that quarter and each of the 3 immediately
preceding quarters.
6.9 Liquidity. To maintain unencumbered liquid assets equal to at least 115% of
the principal amount outstanding under this Agreement for 30 consecutive days
during each line year.
"Liquid assets" means the following assets of the Borrower:
(a) cash and certificates of deposit;
(b) readily marketable securities (including commercial paper, but excluding
restricted stock and stock subject to the provisions of Rule 144 of the
Securities and Exchange Commission)
If more than 25% of the value of the Borrower's liquid assets is represented by
margin stock, the Borrower will provide the Bank a Form U-1 Purpose Statement,
and the Bank and the Borrower will comply with the restrictions imposed by
Regulation U of the Federal Reserve, which may require a reduction in the amount
of credit provided to the Borrower.
- - --------------------------------------------------------------------------------
-16-
<PAGE>
6.10 Other Debts. Not to have outstanding or incur any direct or contingent
debts or lease obligations (other than those to the Bank), or become liable for
the debts of others without the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of business.
(c) Obtaining surety bonds in the usual course of business.
(d) Additional debts and lease obligations for the acquisition of fixed or
capital assets which do not exceed a total principal amount of Seven
Million Dollars ($7,000,000) in any single fiscal year.
6.11 Other Liens. Not to create, assume, or allow any security interest or
lien (including judicial liens) on property the Borrower now or later owns,
except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Additional purchase money security interests in personal or real property
acquired after the date of this Agreement if the total principal amount of
debts secured by such liens does not exceed Seven Million Dollars
($7,000,000) in any single fiscal year.
6.12 Capital Expenditures. Not to spend or incur obligations (including the
total amount of any capital leases) for more than Thirty Three Million
Dollars ($33,000,000) at fiscal year 1995 and fiscal year 1996 combined
and Fifteen Million Dollars ($15,000,000) each fiscal year thereafter to
acquire fixed or capital assets.
6.13 Notices to Bank. To promptly notify the Bank in writing of:
(a) any lawsuit over Five Hundred Thousand Dollars ($500,000) against the
Borrower (or any guarantor).
(b) any substantial dispute between the Borrower (or any guarantor) and any
government authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's (or any guarantor's)
financial condition or operations.
(e) any change in the Borrower's name, legal structure, place of business, or
chief executive office if the Borrower has more than one place of
business.
6.14 Books and Records. To maintain adequate books and records.
6.15 Audits. To allow the Bank and its agents to inspect the Borrower's
properties and examine, audit and make copies of books and records at any
reasonable time. If any of the Borrower's properties, books or records are in
the possession of a third party, the Borrower authorizes that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records.
6.16 Compliance with Laws. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business.
- - -------------------------------------------------------------------------------
-17-
<PAGE>
6.17 Preservation Of Rights. To maintain and preserve all rights, privileges,
and franchises the Borrower now has.
6.18 Maintenance of Properties. To make any repairs, renewals, or replacements
to keep the Borrower's properties in good working condition.
6.19 Perfection of Liens. To help the Bank perfect and protect its security
interests and liens, and reimburse it for related costs it incurs to protect its
security interests and liens.
6.20 Cooperation. To take any action requested by the Bank to carry out the
intent of this Agreement.
6.21 Insurance.
(a) General Business Insurance. To maintain insurance satisfactory to the Bank
as to amount, nature and carrier covering property damage (including loss
of use and occupancy) to any of the Borrower's properties, public
liability insurance including coverage for contractual liability, product
liability and workers' compensation, and any other insurance which is
usual for the Borrower's business.
6.22 Additional Negative Covenants. Not to, without the Bank's written
consent:
(a) engage in any business activities substantially different from the
Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, pool, joint venture, syndicate, or
other combination if the Borrower's liabilities incurred as a result of
any such action or actions increase by more than in excess Five Million
Dollars ($5,000,000) in the aggregate, or if the Borrower is not the
surviving entity of such action or actions.
(d) lease, or dispose of all or a substantial part of the Borrower's business
or the Borrower's assets.
(e) acquire or purchase any product line or any business or its assets (i) for
a purchase price or prices in excess of Five Million Dollars ($5,000,000)
in the aggregate, or (ii) if the board of directors or equivalent
governing body of the business being acquired or, if required by law, the
requisite percentage of any class of equity of such business, has not
consented to such acquisition.
(f) sell or otherwise dispose of any assets for less than fair market value,
or enter into any sale any leaseback agreement covering any of its fixed
or capital assets if the Borrower's liabilities incurred as a result of
such action increase by more than Seven Million Dollars ($7,000,000) in
the aggregate.
(g) voluntarily suspend its business for more than 21 successive days in any
calendar year.
6.23 ERISA Plans. To give prompt written notice to the Bank of:
(a) The occurrence of any reportable event under Section 4043(b) of ERISA for
which the PBGC requires 30 day notice.
(b) Any action by the Borrower to terminate or withdraw from a Plan or the
filing of any notice of intent to terminate under Section 4041 of ERISA.
(c) Any notice of noncompliance made with respect to a Plan under Section
4041(b) of ERISA.
(d) The commencement of any proceeding with respect to a Plan under Section
4042 of ERISA.
- - --------------------------------------------------------------------------------
-18-
<PAGE>
7. HAZARDOUS WASTE INDEMNIFICATION
The Borrower will indemnify and hold harmless the Bank from any loss or
liability directly or indirectly arising out of the use, generation,
manufacture, production, storage, release, threatened release, discharge,
disposal or presence of a hazardous substance. This indemnity will apply whether
the hazardous substance is on, under or about the Borrower's property or
operations or property leased to the Borrower. The indemnity includes but is not
limited to attorney's fees (including the reasonable estimate of the allocated
cost of in-house counsel and staff). The indemnity extends to the Bank, its
parent, subsidiaries and all of their directors, officers, employees, agents,
successors, attorneys and assigns. For these purposes, the term "hazardous
substances" means any substance which is or becomes designated as "hazardous" or
"toxic" under any federal, state of local law. This indemnity will survive
repayment of the Borrower's obligations to the Bank.
8. DEFAULT
If any of the following events occur, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy," below, with respect to the Borrower, then the
entire debt outstanding under this Agreement will automatically be due
immediately.
8.1 Failure to Pay. The Borrower fails to make a payment under this Agreement
within 30 days after the date when due.
8.2 False Information. The Borrower has given the Bank false or misleading
information or representations.
8.3 Bankruptcy. The Borrower (or any guarantor) files a bankruptcy petition, a
bankruptcy petition is filed against the Borrower (or any guarantor), or the
Borrower (or any guarantor) makes a general assignment for the benefit of
creditors is dismissed within a period of 30 days after the filing; provided,
however, that the Bank will not be obligated to extend any additional credit to
the Borrower during that period.
8.4 Receivers. A receiver or similar official is appointed for the Borrower's
(or any guarantor's) business, or the business is terminated.
8.5 Lawsuits. Any lawsuit or lawsuits are filed on behalf of one or more
trade creditors against the Borrower which, if successful, would in the
Bank's sole reasonable judgment adversely affect the Borrower's ability to repay
the loan.
8.6 Judgments. Any judgments or arbitration awards are entered against the
Borrower, or the Borrower enters into any settlement agreements with respect
to any litigation or arbitration in any aggregate amount which, if paid would in
the Bank's sole reasonable judgment adversely affect the Borrower's ability to
repay the loan.
8.7 Government Action. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's (or any guarantor's)
financial condition or ability to repay.
8.8 Material Adverse Change. In the Bank's sole reasonable judgment, a
material adverse change occurs in the Borrower's ability to repay the loan.
8.9 Cross-default. Any default occurs under any agreement in connection with
any credit the Borrower has obtained from anyone else or which the Borrower has
guaranteed, and payment in full of such credit by the Borrower would in the
Bank's sole reasonable judgment materially adversely affect the Borrower's
ability to repay the loan.
- - --------------------------------------------------------------------------------
-19-
<PAGE>
8.10 Other Bank Agreements. The Borrower is in default on any other material
obligation to the Bank for borrowed money, and payment in full of such
obligation would in the Bank's sole reasonable judgment materially adversely
affect the Borrower's ability to repay the loan.
8.11 ERISA Plans. The occurrence of any one or more of the following events
with respect to the Borrower, provided such event or events could reasonably be
expected, in the judgment of the Bank, to subject the Borrower to any tax,
penalty or liability (or any combination of the foregoing) which, in the
aggregate, could have a material adverse effect on the financial condition of
the Borrower with respect to a Plan:
(a) A reportable event shall occur with respect to a Plan which is, in the
reasonable judgment of the Bank likely to result in the termination of
such Plan for purposes of Title IV of ERISA.
(b) Any Plan termination (or commencement of proceedings to terminate a Plan)
or the Borrower's full or partial withdrawal from a Plan.
8.12 Other Breach Under Agreement. The Borrower fails to meet the conditions
of, or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article. If, in the Bank's opinion, the breach
is capable of being remedied, the breach will not be considered an event of
default under this Agreement for a period of thirty (30) days after the date on
which the Bank gives written notice of the breach to the Borrower; provided,
however, that the Bank will not be obligated to extend any additional credit to
the Borrower during that period.
9. ENFORCING THIS AGREEMENT; MISCELLANEOUS
9.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
9.2 California Law. This Agreement is governed by California law.
9.3 Successors and Assigns. This Agreement is binding on the Borrower's and
the Bank's successors and assignees. The Borrower agrees that it may not assign
this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees; provided
that such actual or potential participants or assignees shall agree to treat all
financial information exchanged as confidential. If a participation is sold or
the loan is assigned, the purchaser will have the right of set-off against the
Borrower.
9.4 Arbitration
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those that
arise from:
(i) This Agreement (including any renewals, extensions or modifications
of this Agreement);
(ii) Any document, agreement or procedure related to or delivered in
connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted
between the Borrower and the Bank, including claims for injury to
persons, property or business interests (torts).
- - --------------------------------------------------------------------------------
-20-
<PAGE>
(b) At the request of the Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United States
Arbitration Act. The United States Arbitration Act will apply even though
this Agreement provides that it is governed by California law.
(c) Arbitration proceedings will be administered by the American Arbitration
Association and will be subject to its commercial rules of arbitration.
(d) For purposes of the application of the statute of limitations, the filing
of an arbitration pursuant to this paragraph is the equivalent of the
filing of a lawsuit, and any claim or controversy which may be arbitrated
under this paragraph is subject to any applicable statute of limitations.
The arbitrators will have the authority to decide whether any such claim or
controversy is barred by the statute of limitations and, if so, to dismiss
the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the arbitrators
will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be submitted
to any authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the controversy or claim,
at the time of the proposed submission to arbitration, arises from or
relates to an obligation to the Bank secured by real property located in
California. In this case, both the Borrower and the Bank must consent to
submission of the claim or controversy to arbitration. If both parties do
not consent to arbitration, the controversy or claim will be settled as
follows:
(i) The Borrower and the Bank will designate a referee (or a panel of
referees) selected under the auspices of the American Arbitration
Association in the same manner as arbitrators are selected in
Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees) will be appointed
by a court as provided in California Code of Civil Procedure Section
638 and the following related sections;
(iii) The referee (or the presiding referee of the panel) will be an active
attorney or a retired judge; and
(iv) The award that results from the decision of the referee (or the
panel) will be entered as a judgment in the court that appointed the
referee, in accordance with the provisions of California Code of
Civil Procedure Sections 644 and 645.
(h) This provision does not limit the right of the Borrower or the Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property collateral;
or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
- - --------------------------------------------------------------------------------
-21-
<PAGE>
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrower or the Bank, including
the suing party, to submit the controversy or claim to arbitration if the
other party contests the lawsuit. However, if the controversy or claim
arises from or relates to an obligation to the Bank which is secured by
real property located in California at the time of the proposed submission
to arbitration, this right is limited according to the provision above
requiring the consent of both the Borrower and the Bank to seek
resolution through arbitration.
(j) If the Bank forecloses against any real property securing this Agreement,
the Bank has the option to exercise the power of sale under the deed of
trust or mortgage, or to proceed by judicial foreclosure.
9.5 Severability; Waivers. If any part of this Agreement is not enforceable,
the rest of the Agreement may be enforced. The Bank retains all rights, even if
it makes a loan after default. If the Bank waives a default, it may enforce a
later default. Any consent or waiver under this Agreement must be in writing.
9.6 Attorneys' Fees. The Borrower shall reimburse the Bank for any reasonable
costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and including
any amendment, waiver, "workout" or restructuring under this Agreement. In the
event of a lawsuit or arbitration proceeding, the prevailing party is entitled
to recover costs and reasonable attorneys' fees incurred in connection with the
lawsuit or arbitration proceeding, as determined by the court or arbitrator. As
used in this paragraph, "attorneys' fees" includes the allocated costs of in-
house counsel.
9.7 One Agreement. This Agreement and any related security or other agreements
required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank
and the Borrower concerning this credit; and
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
9.8 Notices. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrower may specify from time to time in writing.
9.9 Headings. Article and paragraph headings are for reference only and shall
not affect the interpretation or meaning of any provisions of this Agreement.
9.10 Counterparts. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the different parties on separate counterparts
each of which, when so executed, shall be deemed an original but all such
counterparts shall constitute but one and the same agreement.
- - --------------------------------------------------------------------------------
-22-
<PAGE>
This Agreement is executed as of the date stated at the top of the first page.
[Logo of Bank of America]
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION Ortel Corporation
/s/ Kjell Gronvold /s/ Wim H. J. Selders
- - ------------------------ -----------------------
By: Kjell Gronvold By: Wim H. J. Selders
Vice President Title: President/Chief Executive
Officer
/s/ Stephen K. Workman
------------------------
By: Stephen K. Workman
Title: Vice President-Finance/
Chief Financial Officer
Address where notices to the Bank Address where notices to the Borrower
are to be sent: are to be sent:
15625 East Stafford Street 2105 West Chestnut Street
City of Industry, California 91744 Alhambra, California 91803-1542
- - -------------------------------------------------------------------------------
-23-
<PAGE>
[LOGO OF BANK OF AMERICA] Amendment to Documents
- - --------------------------------------------------------------------------------
AMENDMENT NO. 1 TO BUSINESS LOAN AGREEMENT
This Amendment No. 1 (the "Amendment") dated as of June 10, 1996 is between
-------
Bank of America National Trust and Savings Association (the "Bank") and Ortel
Corporation (the "Borrower").
RECITALS
--------
A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of June 2, 1995 (the "Agreement").
B. The Bank and the Borrower desire to amend the Agreement.
AGREEMENT
---------
1. Definitions. Capitalized terms used but not defined in this
-----------
Amendment shall have the meaning given to them in the Agreement.
2. Amendments. The Agreement is hereby amended as follows:
----------
2.2 In Paragraph 2.2 of the Agreement, the date "December 31, 1996"
is substituted for the date "May 1, 1996."
3. Effect of Amendment. Except as provided in this Amendment, all of the
-------------------
terms and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of
this Amendment.
Bank of America
National Trust and Savings Association Ortel Corporation
/s/ Kjell Gronvold /s/ Wim H. J. Selders
- - ---------------------------------- ---------------------------------
By: Kjell Gronvold, Vice President By: Wim H. J. Selders, President/
Chief Executive Officer
/s/ Stephen K. Workman
---------------------------------
By: Stephen K. Workman, Vice
President-Finance/Chief
Financial Officer
- - --------------------------------------------------------------------------------
-1-
<PAGE>
EXHIBIT 10.25
CHANGE IN TERMS AGREEMENT
================================================================================
Borrower: ORTEL CORPORATION Lender: First Interstate Bank of California
2015 West Chestnut Street San Gabriel Corporate Center
Alhambra, CA 91803-1542 1000 E. Garvey Ave. South, Ste. 360
West Covina, CA 91790
================================================================================
Principal Amount: $2,000,000.00 Date of Agreement: September 30, 1995
DESCRIPTION OF EXISTING INDEBTEDNESS. All indebtedness of Borrower under the
revolving credit note in the original amount of $1,000,000.00 dated September
26, 1994, maturing on September 30, 1995.
DESCRIPTION OF CHANGE IN TERMS. Effective September 30, 1995, the face amount of
the existing indebtedness described above is hereby increased to $2,000,000.00.
The maturity date of the existing indebtedness described above is hereby
extended to September 30, 1996, when the entire unpaid principal balance, all
accrued and unpaid interest, and all other amounts payable thereunder shall be
due and payable.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of
the original obligation or obligations, including all agreements evidenced or
securing the obligation(s), remain unchanged and in full force and effect.
Consent by Lender to this Agreement does not waive Lender's right to strict
performance of the obligation(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement will constitute a satisfaction
of the obligation(s). It is the intention of Lender to retain as liable parties
all makers and endorsers of the original obligation(s), including accommodation
parties, unless a party is expressly released by Lender in writing. Any maker or
endorser, including accommodation makers, will not be released by virtue of this
Agreement. If any person who signed the original obligation does not sign this
Agreement below, then all persons signing below acknowledge that this Agreement
is given conditionally, based on the representation to Lender that the non-
signing party consents to the changes and provisions of this Agreement or
otherwise will not be released by it. This waiver applies not only to any
initial extension, modification or release, but also to all such subsequent
actions.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED
COPY OF THE AGREEMENT.
BORROWER:
ORTEL CORPORATION
By: /s/ Wim H. J. Selders 3/9/96
----------------------------------------------------
Wim H. J. Selders, President/Chief Executive Officer
LENDER:
First Interstate Bank of California
By:
-----------------------------------------------------
Authorized Officer
================================================================================
<PAGE>
FIRST AMENDMENT TO LOAN AGREEMENT
---------------------------------
This first Amendment is entered into as of September 30, 1995 between First
Interstate Bank of California ("Bank") and Ortel Corporation ("Company").
Recitals
--------
A. Bank and Company entered into a certain Loan Agreement (including Addendum
A) dated September 26, 1994 (collectively known as the "Agreement").
B. Bank and Company desire to amend the Agreement.
Agreement
---------
1. Addendum A is hereby deleted and replaced in its entirety by this First
Amendment to the Loan Agreement.
2. Paragraph 4.6 (Litigation) is hereby amended to read:
There are no actions, suits, proceedings or investigations pending or, to
the knowledge of Company upon reasonable inquiry, threatened against or
affecting Company at law, in equity, or before or by any governmental
department, commission, board, bureau, agency, or instrumentality, domestic
or foreign, which would materially impair the company's ability to repay
its obligations. Company is not in default of any order, writ, injunction
or decree which would materially impair the Company's ability to repay its
obligations.
3. Paragraph 4.8 (Other Agreements) is hereby amended to read:
Company is not in default in the performance, observance or fulfillment of
any of the obligations, covenants or conditions contained in any debenture,
note or other evidence of indebtedness of Company or in any indenture or
agreement of Company which would materially impair the Company's ability to
repay its obligations.
4. The following is added to Subparagraph 5.1 (A):
Acceptability of CPA by Bank shall not be unreasonably denied and said
certificate shall be defined as an opinion letter with an unqualified
opinion and the footnotes to financial statement with any violations
disclosed in the footnotes.
<PAGE>
Ortel Corporation Page 2
First Amendment to Loan Agreement
5. Paragraph 5.9 (Net Worth) is hereby amended to read:
Company is to maintain an Effective Tangible Net Worth of Twenty Four
Million Dollars ($24,000,000). Effective Tangible Net Worth is defined as
net worth plus any subordinated debt less intangibles less due from
officers less due from affiliated companies. Company may have no more than
two loss quarters per fiscal year, and Company is to remain profitable over
the entire fiscal year. Company is to maintain at all times a ratio of
Total Liabilities To Effective Tangible Net Worth of no more than 0.50 to
1.00.
6. Paragraph 6.1 (C) (Encumbrances and Liens) is hereby amended to read:
Purchase money security interests for property hereafter acquired in excess
of Seven Million Five Hundred Thousand Dollars ($7,500,000) annually,
conditional sale agreements, or other title retention agreements, with
respect to property hereafter acquired, provided, however, that no such
security interest of agreement shall extend to any property other than such
after-acquired property.
7. Paragraph 6.2 (Borrowings) is hereby amended to read:
Sell or discount any accounts or evidences of indebtedness or other right
to payment of money, nor incur, or have outstanding at any time, any
indebtedness for borrowed money except for indebtedness incurred pursuant
to this Agreement or other written agreement with Bank, nor incur, directly
or indirectly, any other liability or obligation for borrowed money, except
for purchase money security interest in assets up to a maximum of Seven
Million Five Hundred Thousand Dollars ($7,500,000) as defined in paragraph
6.1 and new unsecured indebtedness up to Fifteen Million Dollars
($15,000,000).
8. Paragraph 6.4 (Loans, Guarantees, Investments) is hereby amended as
follows:
(c) other investments which in the aggregate during the term of this
Agreement do not exceed Seven Million Dollars ($7,000,000).
9. Paragraph 6.6 (Disposal of Assets) is hereby amended to read:
Sell, lease, assign, transfer or otherwise dispose of any material part of
its property or assets, now owned or hereafter acquired, except obsolete or
worn-out property and real estate not used or useful in its business, and
except for inventory sold in the ordinary course of business and except for
the sale/lease back of a proposed new head office building.
<PAGE>
Ortel Corporation
First Amendment to Loan Agreement
10. Paragraph 6.7 (Payment of Dividends) is hereby amended to read:
Company will not declare or pay any dividends upon its shares of stock now
or hereafter outstanding in excess of 50% of net income during any fiscal
year, except dividends payable in the capital stock of Company, or make
any distribution of assets to its stockholders as such, whether in cash,
property, or securities.
11. Paragraph 6.8 (Purchase or Retirement of Stock) is hereby amended to read:
Acquire, purchase, or redeem or retire any share of its capital stock now
or hereafter outstanding for value in excess of Fifteen Million Dollars
($15,000,000).
12. Paragraph 6.9 (Limitation on Fixed Assets Expenditures) is hereby amended
to read:
Expend for fixed assets in the fiscal years ending April 30, 1996 and
April 30, 1997 in excess of an aggregate of Thirty Million Dollars
($30,000,000) and in excess of any aggregate of Fifteen Million Dollars
($15,000,000) in any fiscal year thereafter.
13. Paragraph 6.10 (Limitations on Leasing), first sentence, is hereby amended
to read:
Lease or become liable as a lessee upon any lease of real or personal
property if the aggregate rental payments under all such leases accrued
and to accrue shall exceed Seven Million Dollars ($7,000,000) for each
fiscal year of Company.
14. Paragraph 6.11 (Default under Other Agreements or Indentures) is hereby
amended to read:
Commit or do, or fail to commit or do, any act or thing which would
constitute an event of default under any of the terms or provisions of any
other agreement, indenture, contract, document or instrument executed, or
to be executed by Company which would materially impair the Company's
ability to repay its obligations.
15. Paragraph 7.1 (Events of Default) is hereby amended as follows:
7.1(A). The following is added to this Subparagraph:
<PAGE>
Ortel Corporation
First Amendment to Loan Agreement
Company shall have five (5) business days to cure such default beginning
the day the Company obtains knowledge, or should have obtained knowledge,
of the default.
7.1(C). The following is added to this Subparagraph:
Company shall have thirty (30) days to cure such default beginning the day
the Company obtains knowledge, or should have obtained knowledge, of the
default.
7.1(D). The following is added to this Subparagraph:
Such failure to perform is limited to borrowed funds, leased assets, or
purchase money security interest of assets, and such failure to perform
entitles the lender to accelerate the credit. Company shall have thirty
(30) days to cure such default beginning the day the Company obtains
knowledge, or should have obtained knowledge, of the default.
7.1(H). Section (a) is amended to read:
(a) a period of 30 days
16. Except as provided in this Amendment, all of the terms and conditions of
the Agreement shall remain in full force and effect.
In Witness Whereof, the parties hereto have executed this Amendment as of the
day and year first above written.
FIRST INTERSTATE BANK OF CALIFORNIA ORTEL CORPORATION
By: /s/ Jutta Graham By: /s/ Wim H. J. Selders
-------------------- --------------------------
Title: Vice President Title: President
-------------------- --------------------------
3/12/96
