<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, 1997
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: (626) 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, $.001 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, 1997 was $ 127 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, 1997 was 11,535,068.
________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Proxy Statement for its 1997 Annual Meeting of
Stockholders to be held on September 26, 1997 are incorporated by this reference
into Part III as set forth herein.
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PART I
Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that
its expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations are discussed in Risk Factors.
ITEM 1. BUSINESS
Ortel Corporation ("Ortel" or the "Company") pioneered the development of
"linear fiberoptic" technology that enables the transmission 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 fiber optics and coaxial cable. Today, linear fiberoptics
enables cable television ("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 77% of the Company's
total revenues in fiscal 1997.
Other applications for this technology are satellite earth stations, cellular
and personal communications services (PCS) and certain government communication
projects, all of which capitalize on the inherent ability of this technology to
enable longer transmission distances, improve signal quality, increase
bandwidth, and provide immunity to interfering signals and operating cost
savings as compared to most other solutions. The Company's intellectual know-
how with respect to developing and manufacturing optoelectronic devices has
recently been applied to developing products for digital telecommunications
applications. Building on its knowledge of RF electronics, the Company has also
positioned itself as a leading supplier of wireless repeaters which enhance the
coverage of base stations for cellular, PCS and other wireless services.
Revenues from the sale of products for these non-broadband applications
accounted for approximately 23% of the Company's total revenues in fiscal 1997.
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 transmits
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 original equipment manufacturers ("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, expanded the
Company's technical capabilities and wireless product offering and gave the
Company the means to build a complete line of repeater products or fiberoptic
microcells for both OEMs and end-users.
During fiscal 1997, the Company announced products for telecommunications
applications and, subsequent to fiscal year-end, invested in Tellium Inc., a
startup venture backed by Ortel, Scientific Applications (SAIC) and a number of
venture capital firms led by Oak Investment Partners. Tellium is expected to
develop subsystems for dense wavelength division multiplexing ("WDM")
applications. Ortel expects to supply components and subsystems to Tellium and
others.
The Company's principal executive offices are located at 2015 West Chestnut
Street, Alhambra, California 91803-1542 U.S.A. Its telephone number is (626)
281-3636.
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INDUSTRY BACKGROUND
BROADBAND COMMUNICATIONS
PRIOR TO LINEAR FIBEROPTICS (PRIOR TO 1987)
Fiberoptic cables transport optical signals (i.e., information represented as
light energy) through ultra-pure strands of glass. The first lasers developed
for the purpose of transmitting signals over fiberoptic cable operated in an
"on-off" fashion known as digital modulation. With the ability of these signals
to be transmitted over long distances without any significant distortion in the
signal received and the accompanying benefits of increased bandwidth and lower
operating costs, this technology was quickly deployed for long-distance
terrestrial communication links, submarine links and for carrying regional
intercity traffic.
Many communications systems use radio frequency (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 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.
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
and "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.
Fiberoptics offered a potential solution to the limitations associated with
the transmission of RF signals over coaxial cable and waveguides. 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.
In spite of these advances, there had been no widespread adoption of
fiberoptics in broadband RF, cellular and wireless and satellite communications
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 communications systems.
For this reason, the Company initially focused its research and development
efforts on developing a solution to this problem.
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THE INTRODUCTION OF LINEAR FIBEROPTICS (1987)
In mid-1987, the Company was the first to demonstrate that amplitude modulated
CATV signals could be cost-effectively transmitted over fiber. 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. Based on that demonstration, Ortel began the process of
commercializing this technology and began shipping product in volume beginning
in 1990.
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 internet access, video on demand, home shopping,
interactive games and telecommuting.
. 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.
With these benefits in mind, cable operators in the United States (U.S.) began
upgrading their networks in 1990 primarily to increase channel capacity, reduce
operating costs and improve reliability. In the latter half of calendar 1993,
Ortel introduced the industry's first digital-ready laser operating at up to 750
MHz (previous lasers were capable of 550 MHz). With this added spectrum, cable
operators could now conceive of a fully interactive network capable of offering
high-speed data, telephony and other narrowband services. As of the end of
calendar 1996, the U.S. CATV industry had upgraded approximately 18% of its
network to 750 MHz with approximately 14% operating at 550 MHz, 20% operating at
450 MHz and the remainder (approximately 48%) operating at less than 450 MHz.
Until fiscal 1996, the Company's broadband products were primarily deployed by
CATV operators to transmit signals between a CATV headend and an optical node
near the home, thereby bypassing multiple cascades of coaxial amplifiers. These
products incorporated a distributed feedback chip ("DFB") operating at a
wavelength of 1310nm which was ideally suited for such distances (generally less
than 30 km). The DFB chip modulates the light intensity internally by applying
a signal directly to the chip itself. As the U.S. CATV industry has
consolidated its subscriber base in order to eliminate redundant headends, it
has also sought to interconnect
4
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headends to achieve greater operating efficiencies. To do so, requires that the
signals be transmitted much longer distances using products that use external
modulation and operate at a wavelength of 1550nm. With external modulation, a
steady optical signal is transmitted from a laser through a separate device that
modulates the amount of light transmitted in response to the application of a
broadband RF signal. The Company has recently introduced products for these
applications as well.
WIRELESS COMMUNICATIONS.
Cellular telephone systems, operating at 800 MHz in the U.S. and 900 MHz in
many other parts of the world, have used RF signals to transmit telephone
conversations to and from mobile users using traditional analog or new digital
formats via fixed "base stations." Each base station serves a single "cell," a
geographical area inside of which mobile users can communicate with the same
base station. In many instances, these signals are blocked by buildings, hills
or other obstacles resulting in incomplete coverage ("shadow" areas). In other
instances, the operator desires to extend the area of coverage into subways,
office buildings and large buildings such as airport terminals, exhibit halls or
shopping malls. User demands for better service and less tolerance for dropped
calls require system operators to address these issues by 1) installing
additional base stations and supporting equipment or 2) installing one or more
remote antennas ("repeaters") which can receive and re-transmit the radio
signals to enhance signal coverage in the desired location.
Operators will typically employ two methods for establishing a link between
the base station and remote antenna: 1) an "off-air" repeater, or, 2) a
fiberoptic link ("microcell"). "Off-air" repeaters are the more popular means of
providing a communications link with the base station due to the ease with which
they are deployed without any peripheral support. Fiberoptic microcells are
most useful in distributing RF signals inside buildings, tunnels or other
underground systems. They can also be used to bring a unique set of
frequencies from one base station to an area that is served by another, but
which is limited in capacity.
While the use of repeaters in analog cellular systems was fairly limited,
dramatic changes taking place with respect to the use of higher frequencies to
distribute RF signals for personal communications services ("PCS") promise to
make repeaters a common technique for extending signal coverage. These
systems, operating at 1900 MHz in the U.S. ("PCS 1900") and 1800 MHz in Europe
("DCS 1800") and other parts of the world, promise to integrate several
services in a single mobile phone unit including paging, fax, voice, and data
and all within a smaller profile than the cellular counterpart. In the U.S.,
operators have bid over $20 billion to-date for the right to transmit at these
higher frequencies and began to deploy equipment for these networks in 1996.
Because PCS operators are faced with additional coverage problems associated
with the loss of signal strength at PCS frequencies compared to cellular
frequencies, management believes repeaters will play an important role in
providing a cost-effective solution for deploying these networks. The benefits
of using these products include:
. 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. By
minimizing the amount of signal generating equipment at the base station,
the operator avoids an investment in excess capacity when additional signal
coverage is the primary concern.
. Reduced real estate costs. Site costs for a repeater or fiberoptic
microcell are lower than for a base station as a microcell is much smaller
and can be located on the side of a building, pole or other convenient
location. No additional supporting equipment is required other than for
power and, in certain instances, a connection with a telephone line or
fiberoptic cable (in the case of a fiberoptic microcell).
. Reduced backhaul costs. Repeaters do not require microwave or T1 links
for backhaul to the switch.
. Reduced installation and maintenance costs for in-building applications.
The use of fiberoptic cable for RF signal distribution inside large
buildings in place of coaxial cable eliminates the need to use amplifiers,
which simplifies the design and installation procedures and reduces
maintenance costs.
. Improved service. Repeaters, fiberoptic microcells and in-building RF
distribution systems are used to improve signal coverage area and reduce
dropped call rates.
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TELECOMMUNICATIONS
Even with the advent of fiberoptics, satellites remain an important
communications medium. Satellite earth stations have traditionally relied upon
coaxial cable and waveguides to transport RF satellite signals between antennas
and nearby control rooms. The distance between the antenna and control room has
historically been limited by the deterioration of signal strength using coaxial
cables and waveguides. 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. This need is
being met by linear fiberoptics capable of handling multiple RF signals over a
single fiber.
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 for 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.
. 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.
Telephone networks in many parts of the world are under increasing pressure to
transport an ever-growing volume of traffic due to the rapid growth of fax,
data, voice and internet services while a trend toward industry deregulation
both in the U.S. and abroad provides new impetus for providing these services in
a cost effective manner. The deployment of fiberoptic cable beginning in the
early 1980's has helped these network keep pace with the growing demand for
bandwidth. The amount of information that can be transported over an optical
fiber has been steadily increasing by the technique of Time Division
Multiplexing ("TDM") and Wavelength Division Multiplexing ("WDM"). These
techniques expand capacity by increasing the transmission bit rate at a given
wavelength and by increasing the number of wavelengths employed. Transmission
speeds up to 10 gigabits per second and up to 32 wavelengths are now being used
to expand greatly the capacity of the installed base of optical fiber.
PRODUCTS
Ortel's optoelectronic 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 OEMs 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.
Ortel's ability to design and manufacture wireless products incorporating RF
electronic circuitry to process signals for various communications applications
was greatly enhanced with the acquisition of Avitec AB in Sweden in March, 1996.
This acquisition allowed the Company to accelerate the process of introducing a
number of repeater products for PCS operators in the U.S. and elsewhere in the
world including "off air" repeaters as well as fiberoptic microcells
incorporating the Company's optoelectronic know-how.
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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 networks in the United States and
abroad for both 1310nm and 1550nm wavelengths. Sales of transmitter products
and receiver products for use in broadband RF networks accounted for
approximately 77%, 72% and 78% of the Company's revenues in fiscal years 1997,
1996 and 1995, 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 (date of first
public announcement) as well as the date of introduction of the most recent
version of that product.
<TABLE>
<CAPTION>
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Broadband RF Communications
- ------------------------------------------------------------------------------------------------------------------------------------
RF First Latest
Frequency(MHz)/ Version Version
Description Power (mw) Where Used Introduced Introduced
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1310nm DFB
Laser August March
Transmitter 40-750 MHz CATV headend 1990 1997
- ------------------------------------------------------------------------------------------------------------------------------------
1310nm DFB Laser July June
Transmitter 40-860 MHz CATV headend 1992 1997
(International)
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1310nm OEM September April
System 40-860 MHz CATV headend 1995 1996
Transmitter
- ------------------------------------------------------------------------------------------------------------------------------------
1310nm DFB
Return 5-200 MHz CATV optical June June
Path Laser node 1996 1996
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1310nm
Photodiode 40-860 MHz CATV optical January July
Receiver node 1989 1994
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1550nm OEM
Laser 40-860 MHz CATV headend April April
Transmitter 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
CATV signal
1550nm Optical amplification between
Amplifier headend and secondary April April
(EDFA) 25-100 mW headends/hubs 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
1550nm OEM CATV 1550nm October October
Laser Module 30 mW transmitter systems 1996 1996
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</TABLE>
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WIRELESS COMMUNICATIONS.
Ortel offers "off-air" and fiberoptic repeaters to end-users and OEMs for many
major cellular and PCS standards including CDMA, GSM, DCS1800 and PCS1900. The
Company has also developed a line of complementary products designed to be
integrated by cellular, PCS and other wireless system manufacturers into
equipment cabinets and specialized outdoor RF repeaters. These products include
a transmitter for single-fiber links to microcells and a high dynamic range
transmitter for microcells with heavy traffic loading
A new fiberoptic antenna system was introduced by Ortel during fiscal 1995.
This 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 throughout a building.
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 (date of first public announcement) as well as
the date of introduction of the most recent version of that product.
<TABLE>
<CAPTION>
Wireless Communications
- -----------------------------------------------------------------------------------------------------------------------------------
First Latest
RF Number of Version Version
Description Frequency(MHz) Channels Where Used Introduced Introduced
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DFB Laser Cellular base station
Transmitter 800-1000 MHz 96 for analog, digital August April
Photodiode and dual-mode 1992 1994
Receiver microcell antenna
- -----------------------------------------------------------------------------------------------------------------------------------
DFB Laser Personal
Transmitter and 1.7-2.2 GHz 96 communications April April
Photodiode Receiver networks 1994 1994
- -----------------------------------------------------------------------------------------------------------------------------------
DFB Laser
Transmitter 175-1000 MHz 96 For UHF, VHF and April April
Links cellular applications 1994 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Fiberoptic Antenna 800-1000 MHz In-building cellular, February September
System 1.7-2.2 GHz 48 PCS, and Wireless PBX 1995 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Medium Power Remote off-air and fiber September September
CDMA Repeaters 1.7-2.2 GHz 8-32 feed from base station 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Medium Power GSM
Repeaters 900-960 MHz 8-32 Remote off-air and fiber March March
feed from base station 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Medium Power
DCS1800/PCS1900 1.7-2.2 GHz 8-16 Remote off-air and fiber November March
Repeaters feed from base station 1994 1996
- -----------------------------------------------------------------------------------------------------------------------------------
High Power GSM
Repeaters 900-960 MHz 8 Remote off-air fed March March
from base station 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Repeaters for
underground 75-1000 MHz Various Remote off-air feed
emergency from main RF source
communications for tunnels, subways and
systems underground facilities 1986 1995
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
TELECOMMUNICATIONS.
Ortel has developed complete rack mounted transmission equipment for small to
very large earth station designs. Ortel's products are used with both receive-
only antennas and transmit-and-receive antennas by the originators of television
programming, major international telecommunications organizations and by
government and defense communications agencies.
In October 1993, Ortel announced its System 8000 product line, which enables
operators of major satellite communication earth stations including the Intelsat
and Inmarsat networks to transmit all interfacility signals for standard
satellite frequency bands between the control room and antennas over fiberoptic
cable. More recently, the Company announced a low cost product (System 5100)
for a wideband, microwave fiberoptic interfacility link between the satellite
earth terminal antenna and a satellite receiver.
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While the Company has previously focused its product development efforts in
the area of linear fiberoptics and RF electronics, it has more recently begun to
apply its technical talents to developing digital optoelectronic devices and
subsystems. The 980nm pump laser module announced during the past year is the
Company's first such product. This module is used in erbium-doped fiber
amplifiers ("EDFAs") to amplify signals which are transmitted at a wavelength of
1550nm over long distances. For CATV applications, the pump laser is used to
amplify linear fiberoptic signals while the same device can be used to amplify
digital signals in telephone networks.
The Company has also announced an OC-48 (industry classification for optical
devices operating at 2.5 gigabits per second ("Gbps") receiver module which can
be used in both TDM and WDM applications and expects to develop additional
products for the WDM marketplace resulting from joint development efforts with
Tellium. Such products are expected to be sold to Tellium and others.
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 (date of first public announcement) as well as the
date of introduction of the most recent version of that product.
<TABLE>
<CAPTION>
Telecommunications
- -----------------------------------------------------------------------------------------------------------------------
First Latest
Version Version
Description Specifications Where Used Introduced Introduced
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiberoptic 70 MHz Satellite November September
Transmission Link 140 MHz earth station 1993 1994
1 transponder VSAT hub
- -----------------------------------------------------------------------------------------------------------------------
Teleport
Fiberoptic 950- 2,050 MHz TV broadcast November May
Transmission Link 12 transponders CATV headend 1990 1996
- -----------------------------------------------------------------------------------------------------------------------
3.6-4.2 GHz
Fiberoptic 5.8-6.5 GHz Satellite November March
Transmission Link 10.95-12.75 GHz earth station 1993 1995
14.0-14.5 GHz TV broadcast
12 transponders
- -----------------------------------------------------------------------------------------------------------------------
980nm pump laser 90-120 mW Optical amplifiers July July
1996 1996
- -----------------------------------------------------------------------------------------------------------------------
Telephone networks
OC-48 receiver module 2.5 Gbps using TDM and February February
WDM equipment 1997 1997
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
TECHNOLOGY
Ortel's leadership in delivering fiberoptic and wireless communications
systems is based upon its expertise in a number of key technologies. These
include:
ADVANCED OPTOELECTRONIC SEMICONDUCTOR TECHNOLOGY.
Each of the Company's high performance product lines are built around indium
phosphide and gallium arsenide based laser and photodiode devices fabricated at
Ortel using state of the art nanoscale epitaxial technologies. The lasers used
in most of the Company's products use Distributed Feedback ("DFB") principles to
ensure single frequency operation. Ortel's proprietary designs have been
optimized for high output power and linear operation. These designs ensure that
the light output from the laser transmitter is accurately proportional to the
electrical current input, thereby guaranteeing low levels of signal distortion
in RF communications links.
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OPTOELECTRONIC PACKAGING.
Packaging is a critical aspect of fiberoptic product performance. Every laser
and photodiode package is hermetically sealed and provides for the electrical
connection from the external 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
electrical interface and is used in several of the Company's laser products.
RF ELECTRONICS.
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 designs, which provides critical performance advantages in Ortel's
laser-based products for CATV applications, optically cancel distortion over a
wide frequency range. 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 analog 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, operation 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 communication products 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.
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 99 employees at the end of fiscal 1996 to 118 employees at the
end of fiscal 1997. 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 a 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 1997, 1996 and 1995 research and development expenses were
approximately $13.3 million, $8.9 million, and $6.3 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 $1,489,000, $1,753,000, and $1,055,000 in fiscal years 1997, 1996 and 1995,
respectively, are netted against research and development expenses.
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MARKETING AND SALES
Ortel markets and sells its products worldwide to OEM manufacturers and system
integrators that serve the broadband and satellite communications sectors and to
both OEM's and end users with respect to the Company's wireless products. In the
United States, the Company maintains its own sales force, which currently
includes nine sales engineers at the Company headquarters, two in Atlanta,
Georgia, and three in Philadelphia, Pennsylvania. Additionally in the U.S.,
Ortel has 7 distributors which have been signed to distribute the Company's
satellite communications products.
Internationally, the Company has 27 distributors in 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. The Company also sells its products through three subsidiaries,
Avitec AB in Sweden, Ortel SARL in France and Ortel Vertriebs GmbH in Germany.
Sales to customers outside of the United States represented 34%, 32% and 25% of
the Company's revenues in fiscal years 1997, 1996 and 1995, respectively.
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 make it necessary to modify the physical and 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.
CUSTOMERS
Ortel's largest customer is General Instrument Communications Division
("GIC"). In fiscal year 1997, Ortel shipped $24.9 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 30%, 34% and 48% of the Company's revenues in fiscal years 1997,
1996 and 1995, 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 47%, 38% and 30% of total
revenues in fiscal years 1997, 1996 and 1995, respectively.
Approximately 25%, 20% and 19% of the Company's revenues in fiscal years 1997,
1996 and 1995, respectively, were derived from sales of products to the
Company's next four largest customers.
MANUFACTURING AND SUPPLIERS
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Most of Ortel's manufacturing operations are 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. The Company also manufactures repeater products at its
wholly-owned Swedish subsidiary, Avitec AB.
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 Company purchases
several components from sole suppliers for which alternative sources are either
not available or for which several months would be needed to qualify a second
source.
The Company assembles most 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
This topic is discussed in the Risk Factors section under Highly Competitive
Marketplace.
INTELLECTUAL PROPERTY
Because of the rapidly evolving nature of the telecommunications industry, the
Company believes that its ability to develop a continuous stream of new
innovations along with its accumulated base of intellectual property is
extremely important. 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 sixteen United States patents and has a number of
patent applications on file at the United States Patent and Trademark Office.
The Company also has fifteen 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."
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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 as well as the word Mirrorcell
used for the Company's repeater product line. 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) to enter the cable
industry, the cable companies to enter the local phone business and the long
distance phone companies to compete in local phone and video markets. Management
believes that this legislation will promote competition and, hence, at some
point accelerate the upgrading of networks by both cable and telephone
operators. However, both telephone companies and cable companies are still
subject to certain rules under this act which could have the effect of limiting
capital expenditures by CATV operators and thus could have a material adverse
effect on the Company's results of operations.
EMPLOYEES
As of April 30, 1997, the Company employed 558 worldwide including 509 persons
in the U.S. On a worldwide basis, 348 were in manufacturing, 118 in research and
development, 54 in sales and marketing, and 38 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, 1997, there
were 7 consultants and 50 temporary employees most of whom were in
manufacturing. 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.
RISK FACTORS
Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations are discussed below:
DEPENDENCE ON LARGE CUSTOMERS.
Approximately 30%, 34% and 48% of the Company's revenues in fiscal years
1997, 1996 and 1995, respectively, were derived from sales to General
Instrument Corporation ("GIC"). GIC is under no contractual obligation to
purchase any specified amount of the Company's products or to provide the
Company with binding forecasts of product purchases for any period. As a result,
there can be no assurance that GIC will continue to purchase the Company's
products. While in the past, Ortel has been the exclusive supplier to GIC of
laser-based products for CATV applications, management is aware that GIC
evaluated similar products from other manufacturers and expects that, in the
future, GIC will purchase at least a portion of its requirements from at least
one other source. Accordingly, there can be no assurance that sales to GIC will
reach or exceed historical levels in any future period. A substantial decrease
in sales to GIC, due to GIC using an additional or different supplier or for any
other reason, would have a material adverse effect on the Company's results of
operations and financial condition.
Sales to the next four largest customers represented 25%, 20% and 19% of the
Company's revenues in fiscal year 1997, 1996 and 1995, respectively. In the most
recent fiscal year, sales to Antec Corporation alone represented 16% of total
revenues. A substantial portion of revenues from each of these customers in
fiscal years 1997, 1996 and 1995 was attributable to a single product or product
line. The Company expects that it will continue to be dependent upon these
customers for a significant portion of its revenues in future periods, although
none of them is obligated to purchase any specified amount of products or to
provide the Company with binding forecasts of product purchases for any period.
Accordingly, there can be no assurance that any sales to these
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entities, individually or as a group, will continue, or if continued will reach
or exceed historical levels in any future period. Any substantial decrease or
delay in sales to one or more of these entities would have a material adverse
effect on the Company's results of operations.
DEPENDENCE ON CATV INDUSTRY CAPITAL SPENDING.
Approximately 77%, 72% and 78% of the Company's revenues in fiscal years
1997, 1996 and 1995 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
(DBS), government regulation of cable operators and general economic conditions.
There can be no assurance that CATV operators will continue capital spending for
constructing, rebuilding, maintaining or upgrading their systems. Any
substantial decrease or delay in capital spending by CATV operators would have a
material adverse effect on the Company's results of operations and financial
condition.
FLUCTUATION IN QUARTERLY OPERATING RESULTS.
The Company's quarterly operating results have fluctuated and may continue to
fluctuate as a result of a number of factors, including changes in market
demand, prices of the Company's or its competitors' products, increased
competition, length of sales cycles, new product introductions by the Company or
its competition, market acceptance of new or existing products, manufacturing
yields, the cost and availability of components, the mix of the Company's
customer base or sales channels, the mix of products sold, the level of
international sales and general economic conditions. The Company's
manufacturing costs are affected by the cost and availability of components,
inefficiencies encountered during the manufacturing process, manufacturing
yields, the rate of inventory obsolescence and other factors. In the past, the
Company's manufacturing costs have fluctuated, due in part to fluctuations in
production, which have adversely affected the Company's results of operations.
The Company's gross margin varies by product due to specific product pricing,
design characteristics, production volumes and other factors. The Company's
expenditure levels for operating costs including research and development, sales
and marketing and general administrative are relatively fixed in the short term.
As a result, variations in timing of revenues can cause significant variations
in quarterly results of operations. In addition, since a significant portion of
the Company's business is derived from orders placed by a few large customers,
the timing of such orders can cause material fluctuations in the Company's
business and operating results. Anticipated orders from the Company's customers
have in the past failed to materialize and delivery schedules have been deferred
or canceled as a result of changes in customer requirements. If sales are below
expectations in any given quarter, the adverse impact of the shortfall on the
Company's operating results may be magnified by the Company's inability to
adjust spending to compensate for the shortfall. The Company may also reduce
prices or increase spending in response to competition or to pursue new market
opportunities. Accordingly, there can be no assurance that the Company will be
able to maintain historical levels of profitability, particularly on a quarterly
basis.
DECREASE IN GROSS MARGINS.
In order to respond to competitive pricing, Ortel has lowered and may further
lower the prices of its products. Unless the Company is able to reduce costs
commensurate with such price reductions, the result will be lower gross margins.
There can be no assurance that the lowering of prices will increase or maintain
the sales of the Company's products, or that the effect of such price reductions
will not be to lower the Company's profitability in the future.
RISK OF FAILURE TO MANAGE GROWTH.
The Company's growth has placed, and could continue to place, a significant
strain on the Company's resources in two respects: 1) finding experienced and
qualified management and 2) managing the transition from older products in order
to minimize disruption in customer ordering patterns, avoid excessive levels of
older product inventories and ensure that adequate supplies of new products can
be delivered to meet customer demand. There can be no assurance that the
Company will successfully manage this growth or the transition to selling new
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products, and the failure to do so could have a material adverse effect on the
Company's results of operations or financial condition.
HIGHLY COMPETITIVE MARKETPLACE. Within each of its market sectors, the
Company faces current or potential competition from (i) direct competitors, (ii)
potential entrants, (iii) suppliers of alternative network technology and (iv)
our own customers in those instances where they desire to manufacture a portion
of the product in-house.
BROADBAND. The growth of broadband RF networks for CATV has created a highly
competitive marketplace for linear fiberoptic products. The Company expects that
direct and indirect competition will increase in the future with a number of
these competitors and potential entrants possessing greater financial,
scientific, manufacturing, marketing and sales resources. Additional competition
could adversely affect the Company's results of operations or financial
condition through price reductions, loss of market share and delays in the
timing of customer orders.
Currently, the Company's direct competitors include both domestic and foreign
companies such as Mitsubishi, Fujitsu, NEC, Lucent Technologies (formerly AT&T
Microelectronics), Philips and Uniphase. As the market for linear fiberoptic
products grows, new competitors are likely to emerge.
There are also several alternative network technologies which could directly
or indirectly affect demand for the Company's products. For example, certain
telephone companies are experimenting with a network known as "digital fiber to
the curb" offered by Broadband Technologies and Nextlevel, a division of General
Instrument Corporation. This network uses PCM digital fiberoptic technology
rather than linear fiberoptics. If telephone companies were to widely deploy
such a network and were successful in gaining market share at the expense of the
CATV industry, then this could lead to lower levels of profitability which could
affect the ability of the CATV industry to finance the upgrade of its broadband
infrastructure reducing the demand for the Company's products. Similarly, in
broadband RF communications, CATV operators compete with the satellite delivery
of television signals to the home such as through the DirecTV(TM) system
launched by Hughes Communications. These systems do not require a broadband RF
coaxial network on the ground. To the extent that these systems reduce the
number of CATV subscribers, the net impact could be a reduction in demand for
the Company's products. CATV operators themselves could elect to deploy
wireless television, called MMDS or LMDS, which can also be deployed without
coaxial or fiberoptic distribution networks and has been tested in several large
cities. Many industry observers claim that MMDS and LMDS systems can be made
interactive with suitable high frequency transmission devices installed in the
home. Widespread adoption of any of these technologies would also reduce the
demand for the Company's products.
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.
WIRELESS. Currently, the Company offers solutions to extend the area of
coverage of cellular and PCS base stations utilizing repeater products which
connect to the base station via linear fiberoptic signals or through the air.
Direct competitors for its repeater products for cellular and PCS networks
includes companies such as Allen Telecom, and Allgon. New entrants are
expected to develop products for this relatively new marketplace. In addition,
development of smaller more economical base stations by base station
manufacturers such as Lucent Technologies, Ericsson, Motorola, Nokia, Nortel and
Qualcomm represents an alternative approach to extending the coverage offered by
these networks. Although generally more expensive to install and operate than
the use of repeaters, smaller base stations add capacity to the network whereas
the use of wireless repeaters does not.
TELECOMMUNICATIONS. Currently, the Company offers a variety of products for
telecommunications applications including pump laser and receiver module
products, and fiberoptic systems for satellite communications. While the
Company's product offerings for telecommunications applications is currently
limited, the Company plans to invest significant resources to gain a meaningful
presence in this marketplace. In doing so,
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the Company's products will compete with much larger, entrenched suppliers.
RISKS OF INTERNAL WAFER FABRICATION.
The Company relies exclusively on its own production capability for critical
semiconductor lasers and photodiodes used in many of its products. Because the
Company manufactures these and other key components of its products at its own
facility, and such components are not readily available from other sources, any
interruption in manufacturing would have a material adverse affect on the
Company's results of operations and financial condition. Furthermore, the
Company has a limited number of employees dedicated to the operation and
maintenance of its wafer fabrication equipment, the loss of which could impact
the Company's ability to effectively operate and service such equipment. Wafer
fabrication is sensitive to a wide variety of factors, including variation and
impurities in the raw materials, difficulties in the fabrication process,
performance of the manufacturing equipment, defects in the masks used to print
circuits on a wafer and the level of contaminants in the manufacturing
environment. The Company has periodically experienced lower than expected
production yields that have adversely affected gross margins and delayed product
shipments. There can be no assurance that the Company will be able to maintain
acceptable production yields in the future. To the extent that the Company does
not achieve acceptable manufacturing yields or experiences product shipment
delays, the Company's results of operations and financial condition would be
materially adversely affected.
NEED TO EFFECTIVELY MANAGE MANUFACTURING PROCESSES.
The Company's success will depend in part on whether it will be able to
effectively manage its various manufacturing processes, including wafer
fabrication and device packaging. No assurance can be given that the Company
will be able to effectively manage its various manufacturing processes. The
failure to effectively manage manufacturing processes in a timely fashion would
have a material adverse effect on the Company's results of operations and
financial condition.
RISKS OF LENGTHY SALES CYCLES.
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 modification of the physical or electrical
specifications of the product. Finally, negotiations regarding volume, delivery
and price take place. For this reason, the Company's products typically have a
lengthy sales cycle. Lengthy sales cycles subject the Company to a number of
significant risks, including fluctuations in operating results and inventory
obsolescence, over which the Company has little or no control.
DEPENDENCE ON KEY PERSONNEL.
The Company's future success depends in large part on the continued service
of its key management and technical personnel and on whether or not the Company
will be able to continue to attract and retain highly-skilled engineering,
manufacturing, marketing and managerial personnel. The competition for such
personnel is intense, and the loss of key employees could have a material
adverse effect on the results of operations or financial condition of the
Company.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT.
The broadband, wireless and telecom markets are characterized by the
continuing advancement of technology. A significant component of the Company's
business strategy is the development of new applications for new and existing
technologies for use in the broadband, wireless and telecommunications
industries. There can be no assurance that the technologies and applications
under development by the Company will be successfully developed, or, if they are
successfully developed, that they will achieve market acceptance. If the
Company is unable, for technological or other reasons, to develop and introduce
products and applications in a timely manner in response to changing market
conditions or customer requirements, the Company's results of operations and
financial condition could be materially adversely affected.
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RISKS OF INTERNATIONAL OPERATIONS.
Sales to customers outside of the United States represented 34%, 32% and 25%
of the Company's revenues in fiscal years 1997, 1996 and 1995, respectively.
Such sales are subject to certain risks such as changes in foreign government
regulations and telecommunications standards, export license requirements,
tariffs and taxes, other trade barriers, fluctuations in foreign currency
exchange rates, difficulties in staffing and managing foreign operations, and
political and economic instability. Fluctuations in currency exchange rates
could cause the Company's products to become relatively more expensive to
customers in a particular country, leading to a reduction in sales or
profitability in that country. Payment cycles for international customers are
typically longer than those for customers in the United States. There can be no
assurance that international markets will continue to develop or that the
Company will receive additional contracts to supply its products for use in
systems and equipment in international markets. The Company's results of
operations or financial condition could be materially adversely effected if
international markets do not continue to develop, the Company does not continue
to receive additional contracts to supply its products for use in systems and
equipment in international markets or the Company's international sales are
affected by the other risks of international operations.
DEPENDENCE ON SINGLE SOURCE AND OTHER THIRD PARTY SUPPLIERS.
The Company sources certain components from single vendors (domestic or
international) for which a second source is not available. While the Company
attempts to maintain a safety stock of these and other key components, an
inability to obtain these components on a timely basis and in adequate
quantities or an increase in the price of these components could have a material
adverse effect on the Company's results of operations or financial condition.
DEPENDENCE ON TIMELY RECEIPT OF ACCEPTABLE COMPONENTS.
The Company depends on timely receipt of non-defective components to meet its
manufacturing schedule. The Company's operating results or financial condition
could be adversely affected by receipt of a significant number of defective
components or the delay of component delivery, an increase in component prices
or the inability of the Company to obtain lower component prices in response to
competitive pressures on the pricing of the Company's products.
POTENTIAL ADVERSE IMPACT OF ENVIRONMENTAL REGULATIONS.
The Company is subject to a wide variety of federal, state and local
governmental regulations related to the storage, use, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its manufacturing
process. There can be no assurance that environmental regulations will not
impose the need for additional capital equipment or other requirements. Further,
such regulations could restrict expansion of the Company's operations. Any
failure by the Company to obtain required permits for, control the use of, or
adequately restrict the discharge of, hazardous substances under present or
future regulations could subject the Company to substantial liability or could
cause its manufacturing operations to be suspended. Such liability or suspension
of manufacturing operations could have a material adverse effect on the
Company's results of operations or financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY.
The Company's future success and competitive position is dependent in part
upon its proprietary technology, and the Company relies in part on patent,
trademark and copyright law to protect its intellectual property. 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. 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 results of operations or financial condition.
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RISK OF PATENT INFRINGEMENT CLAIMS.
From time to time the Company has received, and may receive in the future,
notice of claims of infringement of other parties' proprietary rights. While the
Company has had certain claims made within the past several years, the Company
is not currently aware of any claims which are being actively pursued. However,
there can be no assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted against
the Company affect the Company's business, financial condition or results of
operations. Irrespective of the validity or the successful assertion of such
claims, the Company would incur significant costs and diversion of resources
with respect to the defense thereof which could have a material adverse effect
on the Company's business, financial condition or results of operations. If any
claims or actions are asserted against the Company, the Company may seek to
obtain a license under a third party's intellectual property rights. There can
be no assurance, however, that under such circumstances, a license would be
available under reasonable terms or at all. The failure to obtain a license to a
third party's intellectual property rights on commercially reasonable terms
could have a material adverse effect on the Company's results of operations or
financial condition.
CONTROL OF THE COMPANY BY OFFICERS AND DIRECTORS.
The Company's officers, directors and their affiliates beneficially own
approximately 34% of the outstanding shares of the Company's Common Stock. As a
result, such persons, acting together, would have the ability to exercise
significant influence over all matters requiring stockholder approval. The
concentration of ownership could have the effect of delaying or preventing a
change in control of the Company and could have a material adverse effect on the
market value of the Company's Common Stock.
POTENTIAL ISSUANCE OF PREFERRED STOCK AND OTHER ANTI-TAKEOVER PROVISIONS.
The Board of Directors have the authority to issue up to 5,000,000 shares of
undesignated Preferred Stock, to determine the powers, preferences and rights
and the qualifications, limitations or restrictions granted to or imposed upon
any unissued series of undesignated Preferred Stock and to fix the number of
shares constituting any series and the designation of such series, without any
further vote or action by the Company's stockholders. The Preferred Stock could
be issued with voting, liquidation, dividend and other rights superior to the
rights of the Common Stock. Furthermore, such Preferred Stock may have other
rights, including economic rights, senior to the Common Stock, and as a result,
the issuance of such stock could have a material adverse effect on the market
value of the Common Stock. In addition, the Company's Certificate of
Incorporation eliminates the right of stockholders to act without a meeting and
does not provide cumulative voting for the election of directors or the right of
stockholders to call special meetings. The Company's Certificate of
Incorporation also provides for a classified board of directors. The ability of
the Board to issue Preferred Stock and these other provisions of the Company's
Certificate of Incorporation and Bylaws may have the effect of deterring hostile
takeovers or delaying changes in control or management of the Company. The
Company is also afforded the protection of Section 203 of the Delaware General
Corporation Law, which could delay or prevent a change in control of the
Company, impede a merger, consolidation or other business combination involving
the Company or discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of the Company. Any of these provisions
which may have the effect of delaying or preventing a change in control of the
Company could have a material adverse effect on the market value of the
Company's Common Stock.
On March 3, 1995, the Company's Board of Directors adopted a Stockholders
Rights Plan that is intended to protect Stockholder interests in the event the
Company is confronted with coercive takeover tactics. Pursuant to the Plan, the
Company distributed Rights to purchase shares of a newly created series of Ortel
Preferred Stock. Under certain circumstances these Rights become the rights to
purchase shares of common stock of the Company or securities of an acquiring
entity at one-half market value. The Rights may be exercised only if certain
events occur. The Rights are not intended to prevent a takeover of Ortel. They
are designed to deal with the possibility of unilateral actions by hostile
acquirers that could deprive the Board of Directors and stockholders of Ortel of
their ability to determine the Company's destiny and obtain the highest price
for the Company's common stock.
DIVIDENDS UNLIKELY AND LIMITED.
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
18
<PAGE>
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.
ITEM 2. PROPERTIES
The Company leases its principal manufacturing, engineering, sales and
administrative facilities consisting of approximately 83,000 square feet in
Alhambra, California. Total monthly cost of these leased facilities is
approximately $60,000. Significant leases are as follows:
<TABLE>
<CAPTION>
Building Square Footage Current Lease Option Period 1 Option Period 2
No(s). (Approx.) Period
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 - 4 48,000 10/96 - 9/2000 10/2000 - 9/2005 None
- -------------------------------------------------------------------------------------------
5 18,000 7/94 - 9/1997 10/1997 - 9/2000 10/2000 - 9/2005
- -------------------------------------------------------------------------------------------
6 East 3,000 4/95 - 4/1998 5/1998 - 4/2001 None
- -------------------------------------------------------------------------------------------
6 West 6,300 3/95 - 2/1998 3/1998 - 2/2000 None
- -------------------------------------------------------------------------------------------
7 8,000 2/96 - 9/1998 10/1998 - 9/2000 10/2000 - 9/2005
- -----------------------------
Total 83,300
- -----------------------------
</TABLE>
The Company also leases additional space on a month-to-month basis for parking
at its main facilities and leases small sales offices in Atlanta, Georgia, and
Philadelphia, Pennsylvania. Sales offices in France and Germany are also leased.
With the acquisition of Avitec AB in Sweden, the Company assumed the lease for
approximately 10,000 square feet with an approximate monthly cost of $24,000.
This lease expires on June 30, 1999 and there is no renewal option. See Note 7
of Notes to Consolidated Financial Statements.
Subsequent to April 30, 1997, the Company entered into two additional leases
for a total of 15,000 square feet at a monthly cost of approximately $7,000. The
initial lease periods are through the year 2000 with options through 2006.
The Company has also purchased approximately 76,500 square feet of land
(56,500 square feet in November 1994 and 20,000 square feet in May 1996) near
its existing facilities at a cost of $1.8 million. The Company expects to begin
construction of a building on this site during fiscal 1998 as market conditions
dictate.
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 fifteen companies, including Ortel. During
fiscal 1997, this patent was held invalid in a court action brought by Rockwell.
Rockwell is appealing this judgment.
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 Lucent and the Company believes that
Lucent 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held September 27, 1996 for the following
purposes:
19
<PAGE>
1. Proposal One: The election of the following members of the Board of
Directors was approved as follows:
<TABLE>
<CAPTION>
Name For Withhold
- ------------------- --------- --------
<S> <C> <C>
Tatsutoku Honda 8,531,209 27,824
Hal M. Krisbergh 8,551,599 7,434
Israel Ury 8,549,599 9,434
Ronald Young 8,551,499 7,534
</TABLE>
2. Proposal Two: The ratification of KPMG Peat Marwick LLP as the Company's
independent public accountants for the fiscal year ended April 30, 1997 was
approved as follows:
<TABLE>
<CAPTION>
For Against Abstain Not Voted
- ------------ ------- ------- ---------
<S> <C> <C> <C>
8,542,943 8,010 8,080 2,888,917
</TABLE>
20
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
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>
FISCAL 1997 FISCAL 1996
--------------- ---------------
HIGH LOW HIGH LOW
------ ------ -------- ------
<S> <C> <C> <C> <C>
1st Quarter ended July 31...... $27.00 $14.75 $19.00 $13.00
2nd Quarter ended October 31... 26.25 17.50 18.75 9.25
3rd Quarter ended January 31... 25.63 15.25 14.00 8.50
4th Quarter ended April 30..... 24.63 10.88 17.25 10.88
</TABLE>
The closing price of the Company's common stock on June 30, 1997 was $18.00.
The approximate number of stockholders of record on June 30, 1997 was 176.
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.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected consolidated financial data of the Company for the
five years ended April 30, 1997. 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)
--------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Revenues................................ $82,554 $57,666 $50,090 $28,119 $22,354
Cost of revenues........................ 42,846 29,477 25,311 13,765 11,169
------- ------- ------- ------- -------
Gross profit.......................... 39,708 28,189 24,779 14,354 11,185
------- ------- ------- ------- -------
Operating expenses:
Research and development(1)........... 13,333 8,878 6,328 4,411 3,142
Sales and marketing................... 10,605 7,969 6,306 4,323 3,278
General and administrative............ 5,968 3,454 2,869 1,693 1,876
Acquired research and development
in-process - 4,800 - - -
------- ------- ------- ------- -------
Total operating expenses............ 29,906 25,101 15,503 10,427 8,296
------- ------- ------- ------- -------
Operating income........................ 9,802 3,088 9,276 3,927 2,889
Interest income, net.................... 1,458 1,842 1,126 300 352
Other income (expense), net............. 743 765 (48) (117) (52)
------- ------- ------- ------- -------
Income before income taxes.............. 12,003 5,695 10,354 4,110 3,189
Provision for income taxes.............. 3,688 3,302 4,051 1,531 1,200
------- ------- ------- ------- -------
Net income.............................. $ 8,315 $ 2,393 $ 6,303 $ 2,579 $ 1,989
======= ======= ======= ======= =======
Net income per share.................... $.67 $.20 $.55 $.30 $.23
======= ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding.......... 12,491 12,129 11,524 8,578 8,524
======= ======= ======= ======= =======
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and short term investments......... $34,562 $38,872 $43,881 $10,231 $13,502
Total assets............................ 90,996 77,457 74,323 31,041 25,979
Long-term debt.......................... 0 6 0 0 0
Stockholders' equity.................... 74,883 66,274 64,144 24,215 21,477
</TABLE>
(1) Revenues from research and development contracts are netted against research
and development expenses.
22
<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.
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 1997 with
comparisons to fiscal 1996 as reported and as adjusted to exclude 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
1997 Reported Adjusted (a) 1995
---------------------------------------------
<S> <C> <C> <C> <C>
Revenues................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................ 51.9 51.2 51.2 50.6
----- ----- ----- -----
Gross profit............................ 48.1 48.8 48.8 49.4
Operating expenses:
Research and development................ 16.1 15.4 15.4 12.6
Sales and marketing..................... 12.9 13.8 13.8 12.6
General and administrative.............. 7.2 6.0 6.0 5.7
Acquired research and development
in-process - 8.3 - -
----- ----- ----- -----
Total operating expenses................ 36.2 43.5 35.2 30.9
----- ----- ----- -----
Operating income........................ 11.9 5.3 13.6 18.5
Interest income, net.................... 1.8 3.2 3.2 2.2
Other income............................ .9 1.3 1.3 -
----- ----- ----- -----
Income before taxes..................... 14.6 9.8 18.1 20.7
Income taxes............................ 4.5 5.7 5.7 8.1
----- ----- ----- -----
Net income.............................. 10.1% 4.1% 12.4% 12.6%
===== ===== ===== =====
</TABLE>
(a) Excluding the $4.8 million non-recurring charge for acquired research and
development in-process.
23
<PAGE>
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 CHANGE 1996 CHANGE 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE $82,554 43% $57,666 15% $50,090
</TABLE>
The following table summarizes the Company's revenue mix according to various
criteria for fiscal years 1997, 1996 and 1995 including all customers who
represent 10% or more of total revenues:
YEAR ENDED APRIL 30
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------
<S> <C> <C> <C>
GIC............................. 30.1% 34.4% 47.6%
Antec........................... 15.7 -- --
All other broadband customers... 30.8 37.3 30.4
----- ----- -----
Total broadband............... 76.6 71.7 78.0
Wireless and other.............. 23.4 28.3 22.0
----- ----- -----
Total revenues................ 100.0% 100.0% 100.0%
===== ===== =====
Geographic coverage:
Domestic........................ 66.2% 68.1% 75.1%
International................... 33.8 31.9 24.9
----- ----- -----
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
------------------------------
1997 1996 1995
------------------------------
<S> <C> <C> <C>
GIC............................. 25.5% (17.0)% 91.1%
Antec........................... N/A -- --
All other broadband customers... 25.2 41.4 124.0
Total broadband 52.9 5.7 102.7
Wireless and other.............. 18.5 48.5 24.5
Total revenues................ 43.2% 15.1% 78.1%
Geographic coverage:
Domestic........................ 39.1% 4.4% 92.3%
International................... 51.8 47.3 45.9
Total revenues................ 43.2% 15.1% 78.1%
</TABLE>
During the three fiscal years ended April 30, 1997, the Company's results
were, in large part, dependent upon the level of capital spending on fiberoptic
technologies within the CATV industry. Approximately 77%, 72% and 78% of the
Company's revenues during fiscal years 1997, 1996 and 1995, 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 30%, 34% and 48% 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.
24
<PAGE>
The increase in the rate of revenue growth from 15.1% in fiscal 1996 to 43.2%
in fiscal 1997 reflects (1) an increase in revenue from sales to GIC, (2) the
addition of Antec as a new domestic broadband customer, (3) an increase in
demand for the Company's broadband products from international customers
generally and 4) an increase in revenue from sales of products for wireless and
satellite communications applications.
Total broadband revenues in fiscal 1997 reflect a total increase of 52.9%
which represents an increase of 25.5% in revenues from GIC (following a 17.0%
decrease in the previous year) and the addition of Antec as a new domestic
customer. The reduction in fiscal 1996 GIC revenues primarily reflected 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 25.2% in fiscal 1997 following an increase of
41.4% in fiscal 1996 with the higher rate of growth largely attributable to the
addition of Antec as a customer in fiscal 1997.
Revenues from products sold for wireless and other applications increased
18.5% in fiscal 1997 following a 48.5% increase in fiscal 1996. The lower rate
of growth in fiscal 1997 reflects the loss of a domestic customer with whom
the Company now competes in the sale of repeater products for PCS applications
as well as a lower rate of growth for government and satellite communications.
The growth in fiscal 1996 revenues primarily reflected an improvement in sales
of products for government applications.
In terms of year-over-year growth, domestic revenues increased by 39.1% in
fiscal 1997 reflecting a significant increase in sales to GIC as well as the
impact of Antec as a new domestic CATV customer. Domestic revenue in fiscal
1996 increased only 4.4% over fiscal 1995 reflecting the impact of a softer U.S.
CATV industry.
Sales to customers outside the U.S. represented 34%, 32% and 25% of the
Company's revenues in fiscal years 1997, 1996 and 1995, respectively.
International revenues were up 51.8% in fiscal 1997 following a 47.3% increase
in fiscal 1996. Fiscal 1997 benefited from including a full year's results of
Avitec acquired in March 1996 plus strong demand from the Company's Asian
customers. The increase in fiscal 1996 international sales reflected higher
sales to French and Australian customers.
<TABLE>
<CAPTION>
(dollars in thousands) 1997 CHANGE 1996 CHANGE 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GROSS PROFIT $39,708 41% $28,189 14% $24,779
% OF REVENUE 48.1% 48.8% 49.4%
</TABLE>
Gross profit margins were 48.1%, 48.8% and 49.4% in fiscal years 1997, 1996
and 1995, respectively. The decrease in gross profit margin from 48.8% in
fiscal 1996 to 48.1% in fiscal 1997 was primarily due to a higher mix of product
sold for wireless 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 49.4% in fiscal 1995 to 48.8% in fiscal
1996 was primarily due to a higher mix of products sold for both the wireless
and satellite communications applications, again related to lower production
volumes when compared to broadband products. The Company anticipates that gross
margins in the near term may trend lower as a result of 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.
25
<PAGE>
<TABLE>
<CAPTION>
(dollars in thousands) 1997 CHANGE 1996 CHANGE 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESEARCH & DEVELOPMENT $13,333 50% $8,878 40% $6,328
% OF REVENUE 16.1% 15.4% 12.6%
</TABLE>
Research and development expenses increased over 50% to $13.3 million in
fiscal year 1997 compared to those in fiscal year 1996 and 40% to $8.9 million
in fiscal 1996 from $6.3 million in fiscal year 1995. Increases in compensation
and other personnel-related costs plus direct project material costs accounted
for almost $2.6 million of the $4.5 million increase. Most of the remaining
increase reflects the full year impact of Avitec and lower contract revenues.
Research and development costs are expensed as incurred and are net of contract
revenues. Revenues from such contracts totaled approximately $1.5 million, $1.8
million, and $1.1 million in fiscal years 1997, 1996 and 1995, respectively.
The Company has, in the past, maintained a strong research and development
program and expects to continue to invest significant resources for research and
product development.
<TABLE>
<CAPTION>
(dollars in thousands) 1997 CHANGE 1996 CHANGE 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SALES & MARKETING $10,605 33% $7,969 26% $6,306
% OF REVENUE 12.9% 13.8% 12.6%
</TABLE>
Sales and marketing expenses increased to $10.6 million in fiscal 1997 from
$8.0 million in fiscal 1996 and $6.3 million in fiscal year 1995. As a percent
of revenues, sales and marketing expenses were 12.9%, 13.8% and 12.6% in fiscal
1997, 1996 and 1995, respectively. Additional compensation costs were
responsible for an increase of $1.7 million and $.4 million in fiscal 1997 and
1996, respectively. All other sales and marketing costs increased by $.9 million
and $1.3 million in fiscal 1997 and 1996, respectively, and were primarily
related to an increase in spending for advertising, travel and trade shows.
<TABLE>
<CAPTION>
(dollars in thousands) 1997 CHANGE 1996 CHANGE 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GENERAL & ADMINISTRATIVE $5,968 73% 3,454 20% $2,869
% OF REVENUE 7.2% 6.0% 5.7%
</TABLE>
General and administrative expenses increased to $6.0 million in fiscal 1997
from $3.5 million in fiscal 1996 and $2.9 million in fiscal 1995. The increase
in general and administrative expenses from fiscal year 1996 to 1997 is
principally a full year's impact of Avitec AB general and administrative costs
as well as a full year of amortization of intangible assets related to the
fiscal 1996 acquisition of this subsidiary. Also included is a minor cost for a
partial year's amortization of intangible assets and non-qualified stock options
related to the October 1996, investment in the unconsolidated subsidiary Photon
Technology Co., Ltd. These two items accounted for $1.4 million of the $2.5
million increase. Of the remaining increase in general and administrative
expenses during this period, $.9 million represents additional compensation,
costs of consultants and recruiting costs of new employees.
<TABLE>
<CAPTION>
(dollars in thousands) 1997 CHANGE 1996 CHANGE 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ACQUIRED R&D INPROCESS $ -- (100%) $4,800 100% $ --
% OF REVENUE --% 8.3% --%
</TABLE>
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.
26
<PAGE>
<TABLE>
<CAPTION>
(dollars in thousands) 1997 CHANGE 1996 CHANGE 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST/OTHER INCOME (NET) $2,201 (16)% $2,607 142% $1,078
% OF REVENUE 2.7% 4.5% 2.2%
</TABLE>
Interest income and other income, net of interest expense, decreased to $2.2
million in fiscal 1997 from $2.6 million in fiscal 1996. Of the total amount
recorded in fiscal 1997, $905,000 was related to the settlement of an
intellectual property dispute and $1.5 million was primarily for interest income
related to the Company's cash investments. This compares to fiscal 1996
recorded amounts of $913,000 related to the intellectual property dispute
settlement and $1.8 million of interest income related to the Company's cash
investments. The increase to $2.6 million in fiscal 1996 from $1.1 million in
fiscal 1995 is primarily for interest income related to cash investments
resulting from the Company's initial public offering in October, 1994. In
fiscal year 1998 the third and final payment related to the intellectual
property settlement will be received resulting in income of approximately
$900,000.
<TABLE>
<CAPTION>
(dollars in thousands) 1997 CHANGE 1996 CHANGE 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME TAXES 3,688 12% $3,302 (18%) $4,051
% OF REVENUE 4.5% 5.7% 8.1%
</TABLE>
The consolidated effective income tax rate was 30.7% in fiscal 1997, 58.0% in
fiscal 1996 and 39.1% in fiscal 1995. The higher unadjusted effective tax rate
in fiscal 1996 reflected the non-tax-deductible nature of the charge for
research and development in-process. Excluding this charge and associated
foreign tax benefits, the effective tax rate was 31.5% in fiscal 1996. This
adjusted fiscal 1996 effective rate 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.
The U.S. Internal Revenue Service is currently auditing the Company's fiscal
years ended April 30, 1994 and 1995. See Note 5 of Notes to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal year 1997, the Company generated cash from operating activities of
$6.6 million but invested $11.2 million in new capital equipment and
subsidiaries by using cash balances. Accounts receivable increased
proportionately to revenues. Inventory increased in support of increased demand
for all products but especially repeaters and also because of other new products
introduced in the fourth quarter.
In fiscal year 1996, the Company generated cash from operating activities of
$3.6 million but invested $8.4 million in new capital equipment and subsidiaries
by using cash balances.
In fiscal year 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.
As of April 30, 1997, the Company's principal sources of liquidity included
cash and short term investments of $34.6 million. The Company also had a credit
facility for $5.0 million consisting of an unsecured revolving line of credit
which expired on May 1, 1997. The revolving line of credit is renewable at the
Company's option. Interest rates under the revolving line of credit vary
according to market rates of interest and ranged from approximately 7.2% to 8.5%
as of April 30, 1997. In addition, the Company has a $2.0 million unsecured
credit facility with another banking institution expiring on September 1, 1997
and bearing interest at prime (8.5% as of April 30, 1997). There were no
amounts outstanding under the above mentioned agreements as of April 30, 1997.
See Note 3 of Notes to Consolidated Financial Statements.
27
<PAGE>
For the fiscal year ended April 30, 1997, the Company's capital expenditures
were approximately $8.7 million. For the fiscal year 1998, the Company
anticipates capital expenditures of approximately $14 million, a substantial
portion of which is budgeted for the start of construction of a new facility
located near the current corporate headquarters. This facility will be used
primarily for additional office space for research and development, sales,
marketing and administrative functions which will release space currently
occupied by these functions to be used for manufacturing.
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 the next twelve months.
Subsequent to April 30, 1997 the Company invested $5.0 million in a startup
venture, Tellium, Inc., which is expected to develop subsystems for dense
wavelength division multiplexing applications.
RECENT DEVELOPMENTS
In February, 1997, the Financial Standards Board issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 specifies new standards designed to improve
the earnings per share (EPS) information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements and increasing the comparability of EPS data on an international
basis. Some of the changes made to simplify the EPS computations include: (a)
eliminating the presentation of primary EPS and replacing it with basic EPS,
with the principal difference being that common stock equivalents are not
considered in computing basic EPS, (b) eliminating the modified treasury stock
method and the three percent materiality provision and (c) revising the
contingent share provision and the supplemental EPS data requirements. SFAS No.
128 also makes a number of changes to existing disclosure statements issued for
periods ending after December 15, 1997, including interim periods. The Company
has not determined the impact of the implementation of SFAS No. 128.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is filed as a separate part of this Report (see page
30).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
<PAGE>
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 1997 Annual Meeting to be filed with the Securities and
Exchange Commission on or before August 28, 1997.
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 1997 Annual Meeting to be filed with the Securities and
Exchange Commission on or before August 28, 1997.
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 1997 Annual Meeting to be filed
with the Securities and Exchange Commission on or before August 28, 1997.
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 1997 Annual Meeting to be filed with the Securities and
Exchange Commission on or before August 28, 1997.
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 31).
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 31).
3. Exhibits
The list of exhibits contained in the Index to Exhibits are filed as part
of this Report (see page 51).
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the fiscal year ended April 30, 1997.
29
<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 28, 1997.
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 28, 1997
- ----------------------------- Executive Officer (Principal
Wim H.J. Selders Executive Officer)
/s/ Stephen K. Workman Vice President, Finance and July 28, 1997
- ----------------------------- Chief Financial Officer
Stephen K. Workman (Principal Financial and
Accounting Officer)
/s/ Amnon Yariv Chairman of the Board July 28, 1997
- -----------------------------
Amnon Yariv
/s/ Israel Ury Director and Chief Technology July 28, 1997
- ----------------------------- Officer
Israel Ury
/s/ Nadav Bar-Chaim Director, Vice President, Device July 28, 1997
- ----------------------------- Structures and Materials and
Nadav Bar-Chaim Secretary
/s/ Tatsutoku Honda Director July 28, 1997
- -----------------------------
Tatsutoku Honda
/s/ Anthony J. Iorillo Director July 28, 1997
- -----------------------------
Anthony J. Iorillo
/s/ Raymond H. Kaufman Director July 28, 1997
- -----------------------------
Raymond H. Kaufman
/s/ Wayne L. Tyler Director July 28, 1997
- -----------------------------
Wayne L. Tyler
/s/ Ronald L. Young Director July 28, 1997
- -----------------------------
Ronald L. Young
/s/ Hal M. Krisberg Director July 28, 1997
- -----------------------------
Hal M. Krisberg
</TABLE>
30
<PAGE>
ORTEL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
COVERED BY INDEPENDENT AUDITORS REPORT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors Report............. 32
Consolidated Balance Sheets as of April
30, 1997 and 1996...................... 33
Consolidated Statements of Operations
for the years ended April 30, 1997,
1996, and 1995......................... 34
Consolidated Statements of Stockholders'
Equity for the years ended April 30,
1997, 1996, and 1995................... 35
Consolidated Statements of Cash Flows
for the years ended April 30, 1997,
1996, and 1995......................... 36
Notes to Consolidated Financial
Statements............................. 37
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II: Valuation and Qualifying
Accounts............................... 50
</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.
31
<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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended April 30, 1997, 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
May 30, 1997
32
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents.................... $ 18,865 $ 15,573
Short term investments.................. 15,697 23,299
Trade receivables less allowance for
doubtful accounts of $347 and $325 at
April 30, 1997 and 1996, respectively.. 13,762 9,024
Billed contract costs and fees and
other receivables (net)................ 1,276 668
Inventories............................. 13,960 9,736
Deferred tax assets (note 5)............ 2,454 1,642
Prepaid expenses and other current
assets................................. 987 697
-------- --------
Total current assets.................... 67,001 60,639
Property, equipment and improvements,
at cost:
Property................................ 1,796 1,707
Equipment............................... 24,263 18,468
Office furniture and fixtures........... 4,417 2,911
Leasehold improvements.................. 4,969 3,693
-------- --------
Total property, equipment and
improvements........................... 35,445 26,779
Less accumulated depreciation and
amortization........................... (17,388) (13,383)
-------- --------
Net property, equipment and improvements 18,057 13,396
Intangible assets, net.................. 2,901 1,804
Other assets (note 6)................... 3,037 1,618
-------- --------
Total assets............................ $ 90,996 $ 77,457
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................ $ 5,574 $ 3,470
Accrued payroll and related costs....... 4,290 3,652
Other accrued liabilities............... 2,801 1,887
Income taxes payable (note 5)........... 1,399 503
-------- --------
Total current liabilities............... 14,064 9,512
Deferred income......................... 395 456
Deferred income taxes (note 5).......... 1,409 1,032
Notes payable........................... - 6
Minority interest in subsidiaries....... 245 177
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: 11,499,743 and
11,358,810 in 1997 and 1996............ 11 11
Additional paid in capital.............. 51,930 51,369
Retained earnings....................... 24,712 16,397
Loans receivable (note 6)............... (1,341) (1,506)
Unrealized losses on investments........ (4) -
Cumulative effect of foreign currency
translation............................ (425) 3
-------- --------
Net stockholders' equity................ 74,883 66,274
-------- --------
Commitments and contingencies (note 7)
Total liabilities and stockholders'
equity................................. $ 90,996 $ 77,457
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Revenues (notes 8, 9 and 11)............ $82,554 $57,666 $50,090
Cost of revenues........................ 42,846 29,477 25,311
------- ------- -------
Gross profit.......................... 39,708 28,189 24,779
Operating expenses:
Research and development.............. 13,333 8,878 6,328
Sales and marketing................... 10,605 7,969 6,306
General and administrative............ 5,968 3,454 2,869
Acquired research and development
in-process........................... - 4,800 -
------- ------- -------
Total operating expenses.......... 29,906 25,101 15,503
------- ------- -------
Operating income........................ 9,802 3,088 9,276
Other:
Interest income, net.................. 1,458 1,842 1,126
Other income (expense)................ 812 815 88
Minority interest in net earnings of
subsidiaries......................... (69) (50) (136)
------- ------- -------
Income before income taxes... 12,003 5,695 10,354
Provision for income taxes (note 5) 3,688 3,302 4,051
------- ------- -------
Net income........................ 8,315 $ 2,393 $ 6,303
======= ======= =======
Net income per share.................... $.67 $.20 $.55
======= ======= =======
Weighted average common and common
equivalent shares outstanding........... 12,491 12,129 11,524
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
34
<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, 1994..... $ 8 $17,092 $ 7,701 $ (657) $ 71 $ 0 $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 $ 0 $66,274
Exercise of stock options for
190,993 shares of common
stock at $1.10 to $17.25
per share.................... $ 873 $ 873
Tax benefits arising from
exercise of non- qualified
stock options................ 241 241
Repurchase of 50,000 shares
of stock at an average
price of $12.08 per share.... (604) (604)
Photon Stock Option (See
Note 4)...................... 51 51
Loans from exercise of stock
options due 2000-2001 at
6.36%-6.6% per year, net
of repayments................ 165 165
Effect of foreign currency
translation.................. (428) (428)
Unrealized losses on
investments.................. (4) (4)
Net income.................... 8,315 8,315
--- ------- ------- ------- ----- ---- -------
Balance at April 30, 1997 $11 $51,930 $24,712 $(1,341) $(425) $ (4) $74,883
=== ======= ======= ======= ===== ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
-------------------------------
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................... $ 8,315 $ 2,393 $ 6,303
Adjustments to reconcile net income
to net cash provided by
operating activities:............
Depreciation and amortization........ 4,479 3,280 2,250
Increase in minority interest in
subsidiaries........................ 68 (28) 100
Gain/loss on disposal of equipment... - 10 1
Net effect of foreign currrency
translation......................... (228) (93) 28
Change in assets and liabilities
(net of effects of acquired company):
(Increase) decrease in:
Receivables and billed contract
costs and fees...................... (5,346) 1,295 (2,365)
Inventories.......................... (4,224) ( 915) (2,170)
Deferred tax assets.................. (812) 2 (1,069)
Prepaid expenses and other assets.... 41 (1,472) (351)
Intangible assets.................... (779) ( 366) --
Increase (decrease) in:
Accounts payable..................... 2,104 306 47
Accrued payroll and related costs.... 638 (377) 2,024
Other accrued liabilities............ 914 186 837
Deferred income...................... (61) (733) 388
Deferred income taxes................ 377 487 37
Income taxes payable................. 896 (464) 13
------- -------- --------
Net cash provided by operating
activities.......................... 6,382 3,511 6,073
------- -------- --------
Cash flows from investing activities:
Capital expenditures................. (8,729) (6,976) (5,928)
Investment in subsidiaries (net of
cash acquired)...................... (2,428) (1,380) --
Short term investments............... 7,598 (3,222) (17,491)
------- -------- --------
Net cash used in investing activities (3,559) (11,578) (23,419)
------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common
stock, net.......................... 510 302 33,978
Notes payable........................ (6) 6 --
Borrowings under credit line......... -- -- (93)
Notes receivable from stockholders,
net................................. 165 (436) (413)
------- -------- --------
Net cash (used in) provided by
financing activities................ 669 (128) 33,472
------- -------- --------
Effect of exchange rate changes on cash. (200) (36) 33
------- -------- --------
Net increase (decrease) in cash and
equivalents......................... 3,292 (8,231) 16,159
Cash and equivalents at beginning of
year................................... 15,573 23,804 7,645
------- -------- --------
Cash and equivalents at end of year..... $18,865 $ 15,573 $ 23,804
======= ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest............................. $ 4 $ 4 $ 2
Income taxes......................... 3,227 3,083 5,070
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997, 1996 AND 1995
1. DESCRIPTION OF OPERATIONS (UNAUDITED)
Ortel Corporation ("Ortel" or the "Company") pioneered the development of
"linear fiberoptic" technology that enables the transmission 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 77% of the Company's total revenues in fiscal 1997.
Other applications for this technology are satellite earth stations, cellular
and personal communications systems ("PCS") and certain government communication
projects, all of which capitalize on the inherent ability of this technology to
enable longer transmission distances, improve signal quality, higher bandwidth,
and provide immunity to interfering signals and operating cost savings as
compared to most other solutions. The Company's intellectual know-how with
respect to developing and manufacturing optoelectronic devices has recently been
applied to developing products for digital telecommunications applications.
Building on its knowledge of RF electronics, the Company has also positioned
itself as a leading supplier of wireless repeaters which enhance the coverage of
base stations for cellular, PCS and other wireless services. Revenues from the
sale of products for these non-broadband applications accounted for
approximately 23% of the Company's total revenues in fiscal year 1997.
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.
Investment in Affiliated Company
Investment in the equity of an affiliated company, Photon Technology
Company, Limited (Photon) is accounted for by the equity method. The excess of
cost of the stock of the affiliate over the Company's proportionate share of
Photon's net assets at the acquisition date is being amortized on a straight
line basis over ten years. The Company's owns approximately 34% of Photon.
Subsequent to year-end, the Company increased its investment in Photon raising
its ownership to approximately 43%.
Product Revenue Recognition
Revenue on products shipped to customers is recognized upon shipment from the
Company's facilities, net of allowance for returns.
37
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Contract Revenue Recognition
Revenue from research and development contracts are netted against research
and development expenses. Net contract revenue aggregated approximately
$1,489,000, $1,753,000 and $1,055,000 in fiscal years 1997, 1996 and 1995,
respectively.
Revenue and fees from cost reimbursable contracts are recognized based on the
ratio of total costs incurred to total estimated costs.
Revenue 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
uncompleted contracts are made when such losses become determinable.
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, 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 estimated 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 management's estimates to date.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including 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>
YEAR ENDED APRIL 30
-------------------
1997 1996
-------- --------
<S> <C> <C>
Raw materials............. $ 6,412 $2,617
Work-in-process........... 6,820 6,797
Finished goods............ 728 322
------- ------
Total inventories... $13,960 $9,736
======= ======
</TABLE>
38
<PAGE>
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 $13.5 million and
$10.0 million as of April 30, 1997 and 1996, respectively. Cash equivalents
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 original
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 (SFAS 115)" at May 1, 1994. Under SFAS 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, 1997 and 1996, the Company's marketable investment
securities consisted principally of highly liquid investments in tax free
municipal obligations with various maturity dates through November 1, 1999. The
difference between market value and cost of these securities at April 30, 1997
and 1996 was immaterial.
Foreign Currency Translation
Under the provisions of Statement of Financial Accounting Standard 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.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, on May 1, 1996. This Statement requires
that long-lived assets and certain identifiable intangibles including goodwill
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future operating cash flows (undiscounted and without interest)
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
Accounting for Stock Options
Prior to May 1, 1996, The Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
Under APB Opinion No. 25, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeded the exercise
price. On May 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"),
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per share disclosure
for employee stock option grants made in fiscal year 1996 and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
39
<PAGE>
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.
Net income per share is based on the weighted average common and common
equivalent shares outstanding for each period including common shares issuable
upon the exercise of stock options. Net income per share for all years
presented is summarized as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Net income............................. $ 8,315 $ 2,393 $ 6,303
======= ======= =======
Weighted average shares outstanding:
Common shares issued............. 11,463 11,312 10,157
Stock options.................... 1,028 817 1,367
------- ------- -------
Total............................ 12,491 12,129 11,524
======= ======= =======
Net income per share................... $ .67 $ .20 $ .55
======= ======= =======
</TABLE>
For the years ended April 30, 1997, 1996 and 1995 fully diluted income per
share did not differ materially from primary income per share; accordingly,
fully diluted income per share has not been presented.
Recent Developments
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 specifies new standards designed to
improve the earnings per share (EPS) information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements and increasing the comparability of EPS data on an
international basis. Some of the changes made to simplify the EPS computations
include: (a) eliminating the presentation of primary EPS and replacing it with
basic EPS, with the principal difference being that common stock equivalents are
not considered in computing basic EPS, (b) eliminating the modified treasury
stock method and the three percent materiality provision and (c) revising the
contingent share provision and the supplemental EPS data requirements. SFAS No.
128 also makes a number of changes to existing disclosure statements issued for
periods ending after December 15, 1997, including interim periods. The Company
has not determined the impact of the implementation of SFAS No. 128.
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 originally expiring
on May 1, 1997 and a non-revolving line of credit totaling $8 million with a
term repayment option originally expiring on May 1, 1996. The non-revolving line
of credit was renewed and expired on December 31, 1996. The revolving and non-
revolving lines of credit are renewable at the Company's option. There were no
borrowings outstanding as of April 30, 1997.
The Company entered into an unsecured credit agreement totaling $2 million on
September 30, 1995. The credit facility was renewed during fiscal year 1997 and
expires on September 1, 1997. Borrowings under this credit facility bear
interest at the prime lending rate. There were no borrowings outstanding as of
April 30, 1997.
The Company had guaranteed certain borrowings of its subsidiary in France via
a letter of credit totaling
40
<PAGE>
FF 780,000 (equivalent to approximately $151,400). This letter of credit expired
on June 30, 1996 and is no longer required. There were no borrowings outstanding
by this subsidiary as of April 30, 1997.
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.
4. STOCKHOLDERS' EQUITY-CONTINUED
Stock Repurchases
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, 1997, 50,000 shares of common stock were repurchased at
a cost of $604,000. During the year ended April 30, 1996, 80,000 shares of
common stock were repurchased at a cost of $911,000.
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 reserved up to 2,400,000 shares
of its common stock for issuance to eligible employees, officers and directors
upon exercise of options granted. Options under the 1990 Plan vest over a
varying period not to exceed ten years, subject to the discretion of the Plan's
administrative committee. Both incentive stock options and nonqualified 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.
41
<PAGE>
The following table summarizes all activity under the 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- EXERCISE PRICE
PLAN PLAN PLAN(1) QUALIFIED TOTAL PER SHARE EXERCISABLE
--------- --------- --------- --------- --------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding at April 30, 1993 601,176 1,074,000 -- 110,803 1,785,979 $.47 - $ 4.00 836,512
Granted................... -- 515,250 -- -- 515,250 $4.00 - $ 6.67
Exercised................. (493,141) (5,100) -- (13,437) (511,678) $ .47 - $ 4.00
Canceled.................. (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 - $ 6.67 586,431
Granted................... -- 375,000 198,000 -- 573,000 $8.00 - $24.25
Exercised................. (50,890) (140,350) -- -- (191,240) $1.10 - $ 4.00
Canceled.................. -- (4,200) -- -- (4,200) $4.00
--------- --------- --------- -------- --------- ----------------- ----------
Outstanding at April 30, 1995 54,926 1,777,400 198,000 97,366 2,127,692 $.69 - $24.25 728,194
Granted................... -- -- 595,578 -- 595,578 $11.25 - $17.63
Exercised................. (48,568) (165,300) -- (75,916) (289,784) $ .69 - $8.00
Canceled.................. -- (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 - $24.25 855,408
Granted................... -- -- 686,571 -- 686,571 $1.00 - $24.25
Exercised................. (6,358) (177,900) (4,925) (1,750) (190,933) $1.10 - $17.25
Canceled.................. (-) (27,000) (30,466) (-) (57,466) $4.00 - $24.25
--------- --------- --------- -------- --------- ----------------- ----------
Outstanding at April 30, 1997 -- 1,368,500 1,430,058 19,700 2,818,258 $1.10 - $24.25 1,180,690
========= ========= ========= ======== =========
Total authorized............. -- 1,368,500 1,585,545 19,700 2,973,745
Remaining to be granted...... -- -- 155,487 -- 155,487
Exercisable.................. -- 945,700 215,290 19,700 1,180,690
</TABLE>
(1) Effective May 1, 1997, the number of options authorized to be granted
increased to 2,275,530.
42
<PAGE>
4. STOCKHOLDERS' EQUITY-CONTINUED
The weighted average remaining contractual life of stock options outstanding
as of April 30, 1997 was as follows:
<TABLE>
<CAPTION>
Number of Weighted-Average Weighted- Weighted-
Options Remaining Average Number of Average Price of
Range of Outstanding at Contractual Life Exercise Options Exercisable
Exercise Prices April 30, 1997 (years) Price Exercisable Options
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.33 - $ 1.33 19,700 2.6 $ 1.33 19,700 $ 1.33
$ 4.00 - $ 4.00 1,036,550 5.2 $ 4.00 819,950 $ 4.00
$ 6.67 - $ 8.00 332,250 7.2 $ 7.97 125,750 $ 7.98
$11.00 - $16.50 275,900 9.0 $12.50 40,992 $13.46
$17.25 - $17.63 396,625 8.1 $17.30 97,898 $17.30
$20.25 - $24.25 757,233 8.5 $23.44 76,400 $24.25
--------- --- ------ --------- ------
Total 2,818,258 7.1 $12.37 1,180,690 $ 7.12
========= === ====== ========= ======
</TABLE>
During fiscal 1997 approximately 70,000 stock option shares were granted a key
employee of Photon Technology Company, Limited, at an option price of $20.75
which was the fair market value on the date of grant. These options vest over
a five-year period. During fiscal 1997, approximately $51,000 was recorded as
expense related to these options. The amount of expense was determined using
the Black-Sholes option-pricing model with the same assumptions tabled below.
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 exercise 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 $241,000 and $442,000 were credited to additional paid in
capital in 1997 and 1996, respectively. No tax benefits were realized in 1995.
Stock-Based Compensation
The per share weighted-average fair value of stock options granted during
fiscal years 1997 and 1996 was $12.27 and $9.09, respectively, on the date of
grant using the Black Sholes option-pricing model with the following weighted-
average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------
1997 1996
--------------------
<S> <C> <C>
Expected dividend yield... -% -%
Risk-free interest rate... 6.50% 6.14%
Expected volatility....... 50% 50%
Expected life (years)..... 6.2 6.2
</TABLE>
The Company applies APB Opinion No. 25 in accounting for stock-based
compensation. Because options were granted at fair market value, no
compensation cost has been recognized for its stock options except as related to
those given to key employees of Photon. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net earnings would have been reduced to the pro forma
amounts indicated below:
43
<PAGE>
4. STOCKHOLDERS' EQUITY-CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
-------------------
1997 1996
------- ---------
<S> <C> <C>
Net income
As reported............ $8,315 $2,393
Pro forma.............. 6,441 $1,039
Net earnings per share
As reported............... $ .67 $ .20
Pro forma................. $ .54 $ .09
</TABLE>
Pro forma net earnings reflects only options granted in fiscal years 1997 and
1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net earnings
amounts presented above because compensation cost is reflected over the options'
vesting period of four or five years and because compensation cost for options
granted prior to May 1, 1996 is not considered.
5. INCOME TAXES
The provision for income taxes is comprised of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Federal:
Current............................... $3,530 $2,062 $3,474
Deferred.............................. (319) 141 (792)
------ ------ ------
Total Federal......................... 3,211 2,203 2,682
State:
Current............................... 73 825 1,134
Deferred.............................. 140 4 (240)
------ ------ ------
Total State........................... 213 829 894
Foreign:
Current............................... 520 270 475
Deferred.............................. (256) - -
------ ------ ------
Total Foreign......................... 264 270 475
Grand Total......................... $3,688 $3,302 $4,051
====== ====== ======
</TABLE>
Temporary differences which give rise to deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------
1997 1996
--------------------- ------------------
ASSET LIABILITY ASSET LIABILITY
------- ---------- ----- ----------
<S> <C> <C> <C> <C>
Inventory reserves/adjustments.......... $1,122 -- $ 819 --
Accrued vacation........................ 379 -- 243 --
Warranty accrual........................ 373 -- 241 --
Bad debt reserve........................ 139 -- 130 --
Goodwill, net of amortization........... -- $ 276 -- $ 338
Depreciation............................ -- 732 -- 486
Other................................... 441 401 209 208
------ ------ ------ ------
Sub total............................ 2,454 1,409 1,642 1,032
Less valuation allowance................ -- -- -- --
------ ------ ------ ------
Total................................ $2,454 $1,409 $1,642 $1,032
====== ====== ====== ======
</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, 1997,
management believes
44
<PAGE>
5. INCOME TAXES-CONTINUED
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,
--------------------
1997 1996 1995
---------------------
<S> <C> <C> <C>
U.S. statutory tax rate................. 34.0% 34.0% 34.1%
Utilization of tax credits.............. (3.1) (3.6) (2.5)
Tax effect of permanent differences..... (2.8) (9.5) (2.0)
Tax rate differential on foreign
earnings............................... 1.1 (.9) .9
Permanent difference for in-process
research and development related to
acquisition............................ - 36.5 -
State taxes............................. 2.2 1.4 5.8
Net other............................... (.7) .1 2.8
---- ---- ----
Effective rate.......................... 30.7% 58.0% 39.1%
==== ==== ====
</TABLE>
6. RELATED PARTY TRANSACTIONS
Loans to Related Parties
From time to time the Company makes loans to certain officers and key
employees related to the exercise of stock options. These loans are full
recourse and secured by the shares of common stock issued upon such exercise.
Interest is payable annually at rates specified below in accordance with
Internal Revenue Service (IRS) guidelines on such loans. In addition, the
Company extends loans 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. 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.
<TABLE>
<CAPTION>
NO. OF
STOCK STOCK LOAN AMT LOAN LOAN
OPTION OPTION AMOUNT MATURITY DATES INTEREST AMOUNT TOTALS
SHARES PRICE ($000) RATES ($000) ($000)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1994 657 230 887
New Loans............... 141,148 $1.13 - 4.00 495 4/18/99 - 9/01/2003 6.43 - 7.34% 88 583
Payments................ (82) (30) (112)
----- ----- -----
Balance at April 30, 1995 1,070 288 1,358
New Loans............... 127,764 $1.10 - 8.00 511 5/17/99 - 10/23/1999 6.31 - 7.12% 1,011 1,522
Payments................ (75) (25) (100)
----- ----- -----
Balance at April 30, 1996 1,506 1,274 2,780
New Loans............... 49,400 $4.00 - 8.00 222 5/06/2000 - 3/07/2001 6.36 - 6.60% - 222
Payments................ (387) (296) (683)
----- ----- -----
Balance at April 30, 1997 1,341 978 2,319
====== ===== =====
</TABLE>
Purchases from and Sales to Related Parties
The Company purchases from and sells to Sumitomo Osaka Cement Co., Ltd. which
owns approximately 20% of the Company's common stock. Purchases from Sumitomo
were approximately $828,000, $593,000 and $460,000 in fiscal years 1997, 1996
and 1995, respectively. Sales to Sumitomo were approximately $2,156,000,
$1,309,000 and $317,000 in fiscal years 1997, 1996 and 1995, respectively.
Sales to related parties are made at prices comparable to sales made to
unrelated parties.
45
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
Leases
As of April 30, 1997, the Company leased its operating facilities
consisting of seven buildings in Alhambra, California. These agreements
typically provide that the Company is responsible for maintenance costs and for
property taxes over a predetermined base amount. Some leases are subject to an
annual increase based on the Consumer Price Index ("CPI").
During fiscal 1997, the Company exercised its option to extend the term of
a lease for four buildings through September 30, 2000. There remains a five-year
renewal option beginning on October 1, 2000. Additionally, the Company assumed
the lease for the remaining portion of a building it partially occupied. This
lease expires February 28, 1998 and has a two-year renewal option.
During fiscal 1996, the Company entered into one lease for additional space
also in Alhambra, California. The initial lease term covers the period through
September 30, 1998 with an option to renew for two years on October 1, 1998.
During fiscal 1995, the Company entered into two leases for additional
space also in Alhambra, California. 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. 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.
Summarized below are total future minimum lease commitments for these
Alhambra, California facilities, field sales offices and other equipment
(including the next option to renew under all leases but excluding adjustments
for CPI increases) (in thousands):
FISCAL YEAR ENDING APRIL 30,
----------------------------
1998 $ 819
1999 $ 691
2000 $ 546
2001 $ 440
2002 $ 403
Thereafter $1,377
Subsequent to April 30, 1997, the Company entered into two additional
leases for a total of 15,000 square feet at a monthly cost of approximately
$7,000. The initial lease periods are through the year 2000 with options through
2006.
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, 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.
Legal Proceedings
The Company is, from time to time, involved in routine legal matters
incidental to its business. In the opinion of Company management, the resolution
of such matters will not have a material effect on its financial condition or
results of operations.
46
<PAGE>
7. COMMITMENTS AND CONTINGENCIES-CONTINUED
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 fifteen companies, including Ortel. During
fiscal 1997, this patent was held invalid in a court action brought by Rockwell.
Rockwell is appealing this judgment.
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 Lucent and the Company believes that
Lucent 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.
8. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
During the fiscal years ended April 30, 1997, 1996 and 1995, revenues from GIC
(formerly General Instrument Corporation) represented 30%, 34%, and 48% of total
revenues, respectively. During the fiscal year ended April 30, 1997 the Company
recognized its first revenues from Antec Corporation which represented 16% of
total revenues. There were no other customers which accounted 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 GIC, the Company's
largest single customer, aggregated approximately $3.2 million, $2.4 million,
and $3.1 million at April 30, 1997, 1996 and 1995 or 24%, 26%, and 32% of total
trade receivables, respectively.
47
<PAGE>
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.
These results are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
---------------------------------
1997 1996 1995
---------------------------------
<S> <C> <C> <C>
Domestic operations.................. $74,514 $52,628 $46,019
International operations............. 15,474 9,164 9,047
Intercompany eliminations............ (7,434) (4,126) (4,976)
------- ------- -------
Total revenues................. $82,554 $57,666 $50,090
======= ======= =======
Domestic pretax income............... $13,182 $10,007 $ 9,915
International pretax income (loss)... (67) (4,130) 1,217
Intercompany eliminations............ (1,112) (182) (778)
------- ------- -------
Pretax income.................. $12,003 $ 5,695 $10,354
======= ======= =======
Domestic net income.................. $ 9,757 $ 6,975 $ 6,338
International net income (loss)...... (330) (4,400) 743
Intercompany eliminations............ (1,112) (182) (778)
------- ------- -------
Net income..................... $ 8,315 $ 2,393 $ 6,303
======= ======= =======
</TABLE>
International revenues are principally derived from sales to customers
located in Europe. The fiscal 1997 loss from foreign operations is principally
operational losses incurred by Avitec AB of Sweden and includes the amortization
of intangible assets recorded at the time of acquisition. The fiscal year 1996
net loss from foreign operations includes a non-recurring charge for research
and development in-process associated with the acquisition of Avitec.
Identifiable assets attributable to foreign operations, which principally
consist of trade receivables from European customers and inventories, totaled
$8.4 million, $5.7 million, and $4.1 million at April 30, 1997, 1996 and 1995,
respectively.
During fiscal 1997, the Company invested $2.4 million in Photon Technology
Co., Ltd. based in Shenzhen, China. The investment includes net assets valued at
$1.7 million. The balance of the investment represented goodwill to be amortized
over ten years. The operating results of Photon is included in other income as
the investment is not consolidated, but accounted for under the equity method.
Photon is one of the first companies in China with the technical expertise to
manufacture fiber-optic components. This investment provides the Company with
the opportunity to capitalize on a lower cost manufacturing source as well as to
enhance the Company's presence in that country.
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 being amortized over a
period of five to ten 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 has now received two-thirds of
the total settlement aggregating $3 million. Included in other income in the
accompanying consolidated financial statements is $1 million in both fiscal 1997
and 1996 less related litigation expenses. The remaining one-third will be
recognized during fiscal 1998.
10. 401(k) PLAN
During fiscal 1989, the Company established a 401(k) benefit plan ("401(k)
Plan") allowing each employee to contribute up to a maximum of 17% of gross
salary or $9,500, whichever is less. The Company will match the employee's
contributions based on certain percentages of the employee's contributions, as
defined, up to Internal Revenue Service applicable limits. The Company made
contributions of $407,000, $330,000 and $231,000 to the 401(k) Plan during the
years ended April 30, 1997, 1996 and 1995, respectively.
48
<PAGE>
11. QUARTERLY INFORMATION (UNAUDITED)
Set forth below is selected quarterly consolidated financial data with
respect to the Company for the two years ended April 30, 1997 and 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 30,1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------
Q1 Q2 Q3 Q4 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues...................................................... $17,252 $20,874 $22,967 $21,461 $82,554
Cost of revenues.............................................. 8,898 10,904 11,829 11,215 42,846
------- ------- ------- ------- -------
Gross profit............................................... 8,354 9,970 11,138 10,246 39,708
------- ------- ------- ------- -------
Operating expenses:
Research and development................................... 2,558 3,218 3,808 3,749 13,333
Sales and marketing........................................ 2,391 2,303 2,643 3,268 10,605
General and administrative................................. 1,205 1,647 1,809 1,307 5,968
Total operating expenses................................ 6,154 7,168 8,260 8,324 29,906
------- ------- ------- ------- -------
Operating income.............................................. 2,200 2,802 2,878 1,922 9,802
Other income, net............................................. 454 357 78 1,312 2,201
------- ------- ------- ------- -------
Income before taxes........................................... 2,654 3,159 2,956 3,234 12,003
Provision for income taxes.................................... 867 1,013 867 941 3,688
------- ------- ------- ------- -------
Net income.................................................... $ 1,787 $ 2,146 $ 2,089 $ 2,293 $ 8,315
======= ======= ======= ======= =======
Net income per share.......................................... $.14 $.17 $.17 $.19 $.67
======= ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding................................ 12,605 12,585 12,585 11,996 12,491
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------
Q1 Q2 Q3 Q4 1997
------- ------- ------- ------- -------
<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 (loss)............................................. $ 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
======= ======= ======= ======= =======
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
On May 8, 1997, Ortel announced its participation in the launch of a new
telecommunications network equipment manufacturing company known as Tellium,
Inc. The new venture, backed by Ortel, Scientific Applications and a venture
capital group led by Oak Investment Partners, will develop, manufacture, and
market telecommunications equipment based on dense wavelength division
multiplexing ("WDM") technology while Ortel will jointly develop WDM components
and subsystems with Tellium. The Company's $5 million investment will be
accounted for under the cost method.
Subsequent to year-end the Company increased its investment in Photon
raising its ownership to approximately 43%.
49
<PAGE>
SCHEDULE II
ORTEL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at
Beginning Balance at
Description of Year Additions Deductions End of Year
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended April 30, 1995:
Allowance for doubtful accounts 100 200 17/(1)/ 283
Inventory reserve.................... 525 622 1,147
Year ended April 30, 1996:
Allowance for doubtful accounts 283 42 325
Inventory reserve.................... 1,147 81/(2)/ 1,066
Year ended April 30, 1997:
Allowance for doubtful accounts 325 60 38/(1)/ 347
Inventory reserve.................... 1,066 912 2/(2)/ 1,976
</TABLE>
(1) Write-off of uncollectible accounts
(2) Write-off of obsolete materials
50
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Document Description Page No.
----------- -------------------- --------
<C> <S>
3.1 Certificate of Incorporation. (Note 1)
3.2 Bylaws of Ortel Corporation. (Note 1)
10.1 Lease, dated September 23, 1991, between Ortel Corporation and Rim
Development Co. (Note 1)
10.2 Lease, dated May 20, 1994, between Ortel Corporation and Wai Fong Un. (Note 1)
10.3 Consulting Agreement, dated January 3, 1994, between Ortel
Corporation and Wayne Tyler. (Note 1)
10.4 Consulting Agreement, dated March 2, 1990, as amended, between
Ortel Corporation and Amnon Yariv. (Note 1)
10.5 Employment Agreement, dated September 14, 1990, between Ortel
Corporation and Wim H.J. Selders. (Note 1)
10.6 Employment Agreement, dated September 14, 1990, between
Ortel Corporation and Israel Ury. (Note 1)
10.7 Employment Agreement, dated September 14, 1990, between
Ortel Corporation and Nadav Bar-Chaim. (Note 1)
10.8 1981 Incentive Stock Option Plan of Ortel Corporation. (Note 1)
10.9 1990 Stock Option Plan of Ortel Corporation. (Note 1)
10.10 Loan Agreement, dated September 30, 1993, between
Ortel Corporation and First Interstate Bank. (Note 1)
10.11 Form of Indemnification Agreement. (Note 1)
10.12 Common Stock Purchase Agreement, dated March 26, 1990, between
Sumitomo Cement Co., Ltd. and Ortel Corporation. (Note 1)
10.13 Key Shareholders Agreement, dated 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. (Note 1)
10.14 Agreement Concerning Certain Financial and Business Arrangements,
dated as of March 26, 1990 between Sumitomo Cement Co., Ltd. and
Ortel Corporation. (Note 1)
10.15 Voting Agreement of Sumitomo Cement Co., Ltd., dated as of March 26, 1990
between Sumitomo Cement Co., Ltd. and Ortel Corporation. (Note 1)
10.16 Agreement dated as of November 19, 1993, between Ortel Corporation and
General Instrument Corporation. (Note 1)
10.17 Agreement, dated as of January 24, 1994, between Ortel Corporation and
General Instrument Corporation. (Note 1)
10.18 Modification Agreement, dated 1985, between Ortel Corporation and
certain investors. (Note 1)
10.19 Class A Common Stock Purchase Agreement, dated as of December 14,
1981, between Ortel Corporation and certain investors. (Note 1)
10.20 1994 Equity Participation Plan of Ortel Corporation. (Note 1)
10.21 Severance Agreement, dated as of August 26, 1994, between
Ortel Corporation and Stephen K. Workman. (Note 1)
10.22 Stock Purchase Agreement dated March 12, 1996 between
Hakan Samuelsson and Ortel Corporation. (Note 2)
10.23 Stock Purchase Agreement dated March 12, 1996 between
Christa Samuelsson and Ortel Corporation. (Note 2)
10.24 Loan Agreement, dated June 2, 1995 between Ortel Corporation and
Bank of America.
</TABLE>
51
<PAGE>
EXHIBIT INDEX (continued)
<TABLE>
<CAPTION>
Exhibit No. Document Description Page No.
----------- -------------------- --------
<C> <S>
10.25 Amendment to Loan Agreement dated September 30, 1995 between Ortel
Corporation and First Interstate Bank. (Note 3)
10.26 Amendment to Loan Agreement dated September 30, 1995 between Ortel
Corporation and Wells Fargo Bank, National Association (formerly
First Interstate Bank 53
11.1 Statement Regarding Computation of Per Share Earnings. (Note 1)
21.1 Subsidiaries of Ortel Corporation. 54
23.1 Consent of KPMG Peat Marwick LLP. 55
27.0 Financial Data Schedule
__________________
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
Note 3 Previously filed by the Registrant in its 10-K filing for the year ended
April 30, 1996
</TABLE>
52
<PAGE>
EXHIBIT 10.26
-------------
January 17, 1997
Mr. Wim H. J. Selders
President/Chief Executive Officer
Ortel Corporation
2015 West Chestnut Street
Alhambra, CA 91803-1542
Dear Mr. Selders:
This letter is to confirm that Wells Fargo Bank, National Association,
successor by merger to First Interstate Bank of California ("Bank"), has agreed
to extend the maturity date of the credit accommodation granted by Bank as
"First Interstate Bank of California" to Ortel Corporation ("Borrower") in the
maximum principal amount of Two Million Dollars ($2,000,000.00) ("Line of
Credit"), pursuant to the Loan Agreement dated as of September 26, 1994, as
amended by the First Amendment to Loan Agreement dated as of September 30, 1995,
and the Change in Terms Agreement dated September 30, 1995 (as amended, "Loan
Agreement"), and evidenced by the Revolving Credit Note dated September 26,
1996, executed by Borrower to the order of Bank as "First Interstate Bank of
California," which was increased from $1,000,000.00 to $2,000,000.00 by said
Change in Terms Agreement (as amended, Note").
As of the date of this letter the outstanding principal balance of the Line
of Credit is $-0-.
The maturity date of said credit accommodation is hereby extended until
September 1, 1997. The Loan Agreement and the Note shall be deemed hereby to
reflect said new maturity date.
The Note provided for certain rate options, including without limitation a
CD rate option. The Note shall be deemed modified hereby to delete such CD rate
option.
Except as expressly provided herein, all terms and conditions of the Note,
the Loan Agreement and any related loan documents (collectively, "Loan
Documents") shall remain in full force and effect, without waiver or
modification.
Notwithstanding anything to the contrary herein or in the Loan Documents,
Bank shall have no obligation to issue any letters of credit for the account of
Borrower hereafter.
Borrower acknowledges that Bank has not committed to make any renewal or
further extension of the maturity date of the above-described credit
accommodation beyond the new maturity date specified herein, and that any such
renewal or further extension remains in the sole discretion of Bank. This letter
constitutes the entire agreement between Bank and Borrower with respect to the
maturity date extension for the above-described credit accommodation, and
supersedes all prior negotiations, discussions and correspondence concerning
said extension.
Please acknowledge your acceptance of the terms and conditions contained
herein by dating and signing one copy below and returning it to my attention at
the above address on or before February 7, 1997.
Very truly yours,
WELLS FARGO BANK
NATIONAL ASSOCIATION
/s/ Nancy Martorano
Nancy Martorano
Vice President
Acknowledged and accepted by:
ORTEL CORPORATION
By: /s/ Wim H. J. Selders
-------------------------
Wim H. J. Selders
President/Chief Executive Officer
53
<PAGE>
EXHIBIT 21.1
------------
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
54
<PAGE>
EXHIBIT 23.1
------------
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 May
30, 1997, relating to the consolidated balance sheets of Ortel Corporation and
subsidiaries as of April 30, 1997 and 1996, 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, 1997, and the related schedule,
which report appears in the April 30, 1997, annual report on Form 10-K of Ortel
Corporation.
KPMG Peat Marwick LLP
Los Angeles, California
55
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-30-1997
<CASH> 18,865
<SECURITIES> 15,697
<RECEIVABLES> 15,385
<ALLOWANCES> 347
<INVENTORY> 13,960
<CURRENT-ASSETS> 67,001
<PP&E> 35,445
<DEPRECIATION> 17,388
<TOTAL-ASSETS> 90,996
<CURRENT-LIABILITIES> 14,064
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 74,872
<TOTAL-LIABILITY-AND-EQUITY> 90,996
<SALES> 82,554
<TOTAL-REVENUES> 82,554
<CGS> 42,753
<TOTAL-COSTS> 42,753
<OTHER-EXPENSES> 13,333
<LOSS-PROVISION> 93
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> 12,003
<INCOME-TAX> 3,688
<INCOME-CONTINUING> 8,315
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,315
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
</TABLE>
