<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, 1998
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)
<TABLE>
<S> <C> <C>
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)
</TABLE>
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, 1998 was $113 million based on the closing
sales price of such stock on such date of $15.50 per share.
[_] 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, 1998 was 11,766,944.
______________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Proxy Statement for its 1998 Annual Meeting of
Stockholders to be held on September 25, 1998 are incorporated by this reference
into Part III as set forth herein.
1
<PAGE>
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 totaled $46.9 million, $63.2 million and $41.3
million or approximately 61%, 77% and 72% of the Company's total revenues in
fiscal years 1998, 1997, and 1996 respectively.
Other users of this technology include satellite earth station operators and
certain government agencies 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 non-fiber solutions. The Company's
intellectual know-how with respect to developing and manufacturing
optoelectronic devices has more recently been applied to developing products for
digital telecommunications applications wherein signals are transmitted and
received by high frequency pulses of light over fiberoptic cable. Revenues from
the sale of these other fiberoptic products for satellite and government
applications and telecommunciations totaled $17.6 million, $10.9 million and
$10.2 million or approximately 23%, 13% and 17% of the Company's total revenues
in fiscal years 1998, 1997, and 1996, respectively.
Building on its knowledge of RF electronics, the Company has also positioned
itself as a leading supplier of wireless communication products which enhance
the coverage of base stations for cellular, PCS and other wireless services.
Revenues from the sale of products for these applications totaled $12.4 million,
$8.4 million and $6.2 million or approximately 16%, 10% and 11% of the Company's
total revenues in fiscal 1998, 1997, and 1996, respectively.
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 and the development of fiberoptic links for
remoting satellite antennas at microwave frequencies. 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 for both OEMs
and end-users.
During fiscal 1997, the Company invested in Photon Technology Co., Ltd., a
joint venture based in Shenzhen, China. 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.
Throughout most of its history, the Company concentrated its R&D efforts in
the area of linear fiberoptics and did not develop semiconductor laser products
for the telecommunications industry which relied on lasers using
2
<PAGE>
pulse-code modulation (i.e. existence of a pulse of light is equivalent to a 1
while absence of a pulse is equivalent to a 0). However, during fiscal 1997, the
Company announced its first product for telecommunications applications and, in
May 1997, invested in Tellium, Incorporated, 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 systems for dense wavelength
division multiplexing ("DWDM") applications. They recently introduced three
systems into the marketplace consisting of a long distance optically amplified
WDM transmission system appropriate for inter-exchange carriers, a short-reach
WDM transmission system suitable for local exchange carriers (LECs) and
competitive local exchange carriers (CLECs), and an optical cross-connect system
for interconnecting optical data streams. Ortel expects to supply components
used in DWDM applications.
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.
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.
3
<PAGE>
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.
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 contributed 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.
4
<PAGE>
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). Subsequently, the Company
introduced products operating up to 860 MHz for CATV networks in Europe and
other parts of the world. 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 1997, less
than 50% of the U.S. CATV subscribers are served by networks that have been
upgraded to 550MHz-750MHz while less than 20% of subscribers are served by
networks that are two-way capable. Internationally, where CATV penetration is
much less, the percentage of networks that have been upgraded is even lower.
Through fiscal 1998, 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 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.
Signals at 1550nm can also be amplified by the use of erbium-doped fiber in
conjunction with 980nm pump laser modules and certain other components. These
erbium-doped fiberoptic amplifiers ("EDFAs") function as repeaters to send
signals even farther. The Company manufactures subsystem products for these
applications incorporating a number of critical technologies including 980nm
pump laser modules and the 1550nm source laser. The Company began shipping
products for these applications in fiscal 1998.
SATELLITE COMMUNICATIONS
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. That need is
expected to grow during the next few years with the startup of wireless
satellite communications services being planned by low-earth orbit ("LEO") and
middle-earth orbit ("MEO") operators (together known as Big LEO) such as
Globalstar, Iridium, ICO, and ORBCOMM.
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.
While it is currently estimated that only about 5% of earth stations today
incorporate any fiberoptic links in their facilities, management believes that
linear fiberoptics capable of handling multiple RF signals over a single fiber
will play a key role in the future development of this industry.
5
<PAGE>
Several companies have introduced wireless broadcast television services (also
known as direct broadcast satellite or DBS) in competition with cable television
operators including DirectTV, Primestar, and Echostar. These services rely on
the use of small aperture antennas to capture satellite signals which are then
available for distribution to one or more television sets over coxial cable.
However, these wireless broadcast services to date have achieved minimal
penetration in multi-dwelling units ("MDU") such as large apartment or
condominium buildings. The distribution of such signals using fiberoptic links
offers a number of advantages over copper-based solutions. With approximately
25% of U.S. households living in MDU's and even a greater percentage in many
other parts of the world internationally, the Company has recently developed
products for use by this emerging industry as well.
TELECOMMUNICATIONS
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 by utilizing digital lasers which send high frequency pulses of light.
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 64 wavelengths are now being used to expand greatly the
capacity of the installed base of optical fiber.
Today's networks largely rely on fiberoptic technologies which support the
transmission and amplification of signals at a wavelength of 1550nm. As with
CATV networks which rely on similar technology, the ability to amplify these
signals is based on the use of erbium-doped fiberoptic amplifiers incorporating
980nm pump laser modules in conjunction with certain other components. The
Company introduced for sale 980nm pump laser modules for these applications to
OEMs in fiscal 1998 and expects to develop other products for telecommunications
applications which build on the Company's core strengths in the area of
semiconductor laser processing and optoelectronics.
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 "fiber-
fed" repeater. "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. Fiber-fed repeaters 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 more 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.
6
<PAGE>
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 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 base
station signal generating equipment, 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 are lower than for a
base station due to the smaller size of a typical repeater product which
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 fiber-fed repeater).
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 and in-building RF distribution systems are
used to improve signal coverage area and reduce dropped call rates.
Expanded capacity. In CDMA systems in which capacity is the sum of all
dependent received signal levels at the base station, repeaters can be used
to enhance system capacity by lowering the transmission power of wireless
phones in an area of weak coverage.
The use of repeater products in the U.S. for PCS coverage has been slow to
develop to date for a number of reasons. In addition to the "legacy" of
equipment problems associated with the use of broadband repeaters in analog
cellular networks was the fact that the newer channel selective products were
not ready for deployment at the time major PCS operators in the U.S. were
designing their networks for the initial startup phase of services.
Nevertheless, PCS operators in the U.S. are expected to increasingly use
repeaters in filling "holes" and expanding coverage in future phases of their
networks.
In Europe and many other parts of the world, GSM900 digital cellular systems
and DCS1800 digital systems are being deployed. A number of the operators of
such systems incorporate repeaters as a part of the initial rollout of services.
The Company offers several repeater products to this market segment, its most
recent offering being a high-power GSM repeater which provides an attractive
alternative to standard power GSM base stations.
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.
7
<PAGE>
BROADBAND RF COMMUNICATIONS.
Ortel is a leading supplier of fiberoptic transmitter sub-systems and receiver
modules to OEMs 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 61%, 77%, and 72% of the Company's revenues in fiscal years 1998,
1997, and 1996, 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>
- ------------------------------------------------------------------------------------------------
Broadband RF Communications
- ------------------------------------------------------------------------------------------------
RF First Latest
Frequency(MHz)/ Version Version
Description Power (mw) Where Used Introduced Introduced
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
1310nm OEM CATV
Laser Module 50-860 MHz transmitter systems February February
1998 1998
- ------------------------------------------------------------------------------------------------
1310nm OEM
Transmitter 40-860 MHz CATV headend August June
Subassembly 1990 1997
- ------------------------------------------------------------------------------------------------
1310nm Cooled
OEM Return 5-200 MHz CATV hub June June
Path Laser 1996 1996
- ------------------------------------------------------------------------------------------------
1310nm
Photodiode 40-860 MHz CATV optical January July
Receiver node 1989 1994
- ------------------------------------------------------------------------------------------------
1550nm OEM
Laser 40-860 MHz CATV headend April April
Transmitter 1996 1996
- ------------------------------------------------------------------------------------------------
1550nm Optical CATV signal
Amplifier 25-150 mW amplification between
(EDFA) headend and secondary April April
headends/hubs 1996 1998
- ------------------------------------------------------------------------------------------------
1550nm OEM 40 mW CATV 1550nm October May
Laser Module transmitter systems 1996 1998
- ------------------------------------------------------------------------------------------------
1550nm Cooled OEM
AWDM
Return Path 6 mW CATV hub June June
Laser Module 1998 1998
- ------------------------------------------------------------------------------------------------
1550nm OEM AWDM
Forward Path 10 mW CATV 1550nm June June
Laser Module Transmitter Systems 1998 1998
- -----------------------------------------------------------------------------------------------
</TABLE>
SATELLITE COMMUNICATIONS
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.
8
<PAGE>
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. This product line is also used by certain government agencies
such as the U.S. Air Force to upgrade their communications capabilities
worldwide. The Company also offers a low cost product (System 5100) for a
wideband, microwave fiberoptic interfacility link between the satellite earth
terminal antenna and a satellite receiver. A new version of this L-band link was
incorporated into a fiberoptic system called "Light Links" which enables
satellite-delivered services including television and internet access to be
distributed from one antenna to hundreds of receivers in medium and large
office buildings and multi-dwelling units (MDUs).
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>
- -----------------------------------------------------------------------------------------------
Satellite Communications
- -----------------------------------------------------------------------------------------------
First Latest
Version Version
Description Specifications Where Used Introduced Introduced
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiberoptic 70 MHz Satellite
Transmission Link 140 MHz earth station November March
1 transponder VSAT hub 1993 1998
- -----------------------------------------------------------------------------------------------
Teleport
Fiberoptic 950- 2,050 MHz TV broadcast November March
Transmission Link 12 transponders CATV headend 1990 1998
- -----------------------------------------------------------------------------------------------
3.6-4.2 GHz
Fiberoptic 5.8-6.5 GHz
Transmission Link 7.25-8.4 GHz
10.95-12.75 GHz Satellite
14.0-14.5 GHz Earth station November April
12 transponders TV broadcast 1993 1998
- -----------------------------------------------------------------------------------------------
Fiberoptic 950-2050 MHz Multi-Dwelling July
Transmission Link 45-860 MHz Units (MDVs) 1998
- -----------------------------------------------------------------------------------------------
</TABLE>
Telecommunications
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 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, EDFAs are used to amplify linear fiberoptic signals while
the same device can be used to amplify digital signals in telephone and data
networks.
The Company has also announced an OC-192 (industry classification for optical
devices operating at 10.0 gigabits per second ("Gbps") receiver module which can
be used in both TDM and WDM applications. Ortel is applying its experience in
high speed linear fiberoptics to develop additional high speed digital products
as well.
The following table lists certain of the Company's current products for
telecommunications applications. 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>
980nm pump laser 90-150 mW Optical July April
amplifiers 1996 1998
- ---------------------------------------------------------------------------------------------
Telecom
OC-192 receiver 10.0 Gbps networks using February February
module TDM and WDM 1998 1998
equipment
- ---------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
WIRELESS COMMUNICATIONS.
Ortel offers "off-air" and "fiber-fed" repeaters to end-users and OEMs for
many major cellular and PCS standards including CDMA1900, GSM900, 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/receiver for single-fiber links to fiber-
fed repeaters and a high dynamic range transmitter/receiver for fiber-fed
repeaters 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 Version Version
Description Frequency(MHz) Where Used Introduced Introduced
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DFB Laser Cellular base station
Transmitter 800-1000 MHz for analog, digital August April
Photodiode and dual-mode 1992 1994
Receiver microcell antenna
- --------------------------------------------------------------------------------------------------------------
DFB Laser Personal
Transmitter and 1.7-2.2 GHz communications April 1994 April 1994
Photodiode Receiver networks
- --------------------------------------------------------------------------------------------------------------
DFB Laser
Transmitter 175-1000 MHz For UHF, VHF and April 1994 April 1994
Links cellular applications
- --------------------------------------------------------------------------------------------------------------
Fiberoptic Antenna 800-1000 MHz In-building cellular, February September
System 1.7-2.2 GHz PCS, and Wireless PBX 1995 1995
- --------------------------------------------------------------------------------------------------------------
Medium Power Remote off-air and fiber September September
CDMA Repeaters 1850-1990MHz feed from base station 1996 1996
- --------------------------------------------------------------------------------------------------------------
Medium Power GSM Remote off-air and fiber March March
Repeaters 890-960 MHz feed from base station 1996 1996
- --------------------------------------------------------------------------------------------------------------
Medium Power
DCS1800/PCS1900 1750-1990MHz Remote off-air and fiber November March
Repeaters feed from base station 1994 1996
- --------------------------------------------------------------------------------------------------------------
High Power GSM Remote off-air fed from March March
Repeaters 890-960 MHz base station 1996 1996
- --------------------------------------------------------------------------------------------------------------
Repeaters for Remote off-air feed
underground from main RF source
emergency 75-1000 MHz for tunnels, subways 1986 1998
communications and underground
systems facilities
- --------------------------------------------------------------------------------------------------------------
</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") 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.
10
<PAGE>
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, electronically 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. With the acquisition of Avitec AB of Sweden in March 1996, the
Company 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, Ortel'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 Ortel to provide the wireless operator with the means of
monitoring the use and performance of the repeater. The acquisition of Avitec
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.
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. Accordingly, the Company continued to spend at
historical levels in fiscal 1998 despite a reduction in revenues compared to the
prior year. The Company 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 1998, 1997, and 1996 research and development
expenses were approximately $13.6 million, $13.3 million, and $8.9 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 $730,000, $1,489,000, and $1,753,000 in fiscal years 1998, 1997, and 1996,
respectively, are netted against research and development expenses.
11
<PAGE>
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 OEMs and end users with respect to the Company's repeater products. In the
United States, the Company maintains its own sales force. Additionally in the
U.S., Ortel uses several distributors which have been signed to distribute the
Company's satellite communications products.
Internationally, the Company uses 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 four subsidiaries,
Avitec AB in Sweden, Ortel SARL in France, Ortel Vertriebs GmbH in Germany, and
Ortel Asia Private, Ltd. Sales to customers outside of the United States
represented 49%, 34%, and 32% of the Company's total revenues in fiscal years
1998, 1997, and 1996, 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 for the past several years has been General
Instrument Corporation ("GI") . In fiscal 1998, Ortel shipped $11.9 million of
broadband products to GI. Approximately 15%, 30%, and 34% of the Company's
total revenues in fiscal years 1998, 1997, and 1996, respectively, were derived
from sales to GI of products for use by CATV operators. Until March 1994, Ortel
sold CATV transmission products for use in the United States and Canada
exclusively to GI. This relationship was based in part on a development
agreement pursuant to which GI 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 GI will not secure a second source or
continue buying products from the Company.
Since March 1994, Ortel has shipped broadband DFB laser-based CATV products to
other OEMs in the United States. Sales of broadband products to domestic
customers other than GI represented 20%, 25%, and 17% of total revenues in
fiscal years 1998, 1997, and 1996, respectively. The increase in sales to other
customers in fiscal years 1998 and 1997 reflect the addition of Antec
Corporation as a customer beginning in May 1996. Sales to this customer
represented 11% and 16% of total revenues in fiscal 1998 and 1997, respectively.
Approximately 38%, 56%, and 54% of the Company's revenues in fiscal years
1998, 1997, and 1996, respectively, were derived from sales of products to the
Company's top five largest customers.
MANUFACTURING AND SUPPLIERS
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.
12
<PAGE>
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. 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'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;
however the loss of any sole supplier could have a materially adverse effect on
the Company.
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 manufactured
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 sixteen foreign patents and a number of foreign patent
applications pending in Europe and other countries. There can be no assurance
that any patent owned by the Company will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future patent
applications will be issued with the scope of the claims sought by the Company,
if at all. Furthermore, there can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology, duplicate
the Company's technology or design around the patents owned by the Company. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries. The Company generally enters into
confidentiality or license agreements with its employees and consultants, and
vendors and customers as needed, and generally limits access to and distribution
of its proprietary information. Nevertheless, there can be no assurance that the
steps taken by the Company will prevent misappropriation of its technology. In
addition, litigation may be necessary in the future to enforce the Company's
patents and other intellectual property rights, to protect the Company's trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition or results of operations. For a description of litigation relating to
the Company's patents, see "Legal Proceedings."
The Company holds a number of registered trademarks with the U.S. Patent and
Trademark Office: ORTEL(R), ORTEL CORPORATION(R) (when appearing with the
Company's logo) and the phrase MAKING LIGHT WORK FOR YOU(R) as well as the word
MIRRORCELL(R) used for the Company's repeater product line. The company also
holds registered trademarks on two phrases which describe applications of its
products: RADIO ON FIBER(R), refers to the transmission of radio signals using
linear fiberoptic technology and MICROWAVES ON FIBER(R) which describes a
product's capability to transmit signals over optical fiber whose frequencies
lie in the microwave range. In addition, the Company has a pending application
for FIBEROPTIC ANTENNA(TM), which is used in association with its fiberoptic
systems for providing in-building cellular and PCS coverage. The Company also
has a registered foreign trademark for ORTEL(R) when it appears with the logo in
Germany, France, Italy, United Kingdom, Japan and South Korea; and has applied
for registration in a number of other countries.
13
<PAGE>
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, 1998, the Company employed 507 worldwide including 459 persons
in the U.S. On a worldwide basis, 320 were in manufacturing, 87 in research and
development, 66 in sales and marketing, and 34 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, 1998, there
were 7 consultants and 18 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 15%, 30%, and 34% of the Company's total revenues in fiscal
years 1998, 1997, and 1996, respectively, were derived from sales to General
Instrument Corporation ("GI"). Approximately 11% and 16% of total revenues were
derived from sales to Antec Corporation in fiscal 1998 and 1997, respectively.
Neither company is under any 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 either company will continue to purchase the Company's products.
While the decrease in sales of the Company's products in fiscal 1998 was
primarily related to general industry factors as opposed to the use of
alternative suppliers, there can be no assurance that sales to either GI or
Antec Corporation will reach or exceed historical levels in any future period. A
substantial decrease in sales to either of these customers would have a material
adverse effect on the Company's results of operations and financial condition.
Sales to the top five largest customers represented 38%, 56%, and 54% of the
Company's total revenues in fiscal year 1998, 1997, and 1996, respectively. A
substantial portion of revenues from each of these customers during this period
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 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 and financial condition.
14
<PAGE>
DEPENDENCE ON CATV INDUSTRY CAPITAL SPENDING.
Approximately 61%, 77%, and 72% of the Company's total revenues in fiscal
years 1998, 1997, and 1996, 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. The effect of
such pricing actions played an important role in the decrease in gross margins
from 48% in fiscal 1997 to 41% in fiscal 1998. Other factors which can impact
gross margins include new market entrants and foreign exchange rates (see
"Highly Competitive Marketplace" and "International Operations").
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
products, and the failure to do so could have a material adverse effect on the
Company's results of operations or financial condition.
15
<PAGE>
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. 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 former 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.
SATELLITE COMMUNICATIONS. Currently, the Company offers earth station
operators a variety of products for satellite communications applications at
various frequencies. While there are many advantages to using fiberoptics in
these interfacility links, only about 5% of earth stations currently use such
products with most having deployed other solutions based on coaxial cable or
waveguide before fiberoptic solutions were possible. However, there is no
guaranty that these operators will use fiberoptic solutions in the future or
that significant competition will not develop which could adversely impact the
amount of revenues realized from sales of these products. Other companies
offering a fiberoptic solution to these operators include Foxcom.
TELECOMMUNICATIONS. Currently, the Company offers a variety of products for
telecommunications applications including pump laser and receiver module
products. 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, the
Company's products will compete with much larger, entrenched suppliers
including Lucent, SDL, Lasertron (a division of Oak Industries), and Uniphase.
16
<PAGE>
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.
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.
17
<PAGE>
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.
RISKS OF INTERNATIONAL OPERATIONS.
Sales to customers outside of the United States represented 49%, 34%, and 32%
of the Company's total revenues in fiscal years 1998, 1997, and 1996,
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.
The Company's sale to Asia increased to $17.3 million in fiscal 1998 compared
to $7.4 million in fiscal 1997. Although this increase was significant, it
cannot be assumed that such an increase will reoccur or even be sustained in
future periods. Economic conditions in Asia make it a particular volatile area
of the world with an unpredictable impact on the Company.
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.
18
<PAGE>
EARTHQUAKE.
The Company's headquarters and all of its manufacturing and research and
development operations (other than its Avitec operations which is located in,
Sweden) are located near major earthquake fault lines. While the Company has
taken measures to mitigate the potential impact of a major earthquake, the
Company's results of operations and financial condition could be materially
adversely affected in the event of such an earthquake near Alhambra, California.
CREDIT RISK.
Cash and cash equivalents and short investments are maintained with several
high quality credit quality financial institutions. As part of its cash
management process, the Company performs periodic evaluations of the relative
credit ratings of these financial institutions. The Company has established
guidelines relative to diversification and maturities that attempt to maintain
safety and liquidity.
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.
YEAR 2000
The Company is assessing the impact the year 2000 issue will have on its
products and internal information systems and has begun corrective efforts in
these areas. The Company does not anticipate that addressing the year 2000
problem for its internal information systems and current and future products
will have a material impact on its operations or financial results. The Company
has certain key relationships with customer and suppliers. If these customers
and suppliers fail to adequately address the year 2000 issue, this could have a
material adverse impact on the Company's operations and financial results. The
Company is still assessing the effect the year 2000 issue will have on its
customers and suppliers and, at this time, cannot determine the impact it will
have.
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 38% 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.
19
<PAGE>
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 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 111,000 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 Period Option Period 1 Option Period 2
No(s). (Approx.)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 - 4 50,000 10/96 - 9/2000 10/2000 - 9/2005 None
- ----------------------------------------------------------------------------------------------------------
5 18,000 10/97 - 9/2000 10/2000 - 9/2005 None
- ----------------------------------------------------------------------------------------------------------
6 East 9,300 7/98 - 6/2000 7/2000 - 6/2003 None
- ----------------------------------------------------------------------------------------------------------
7 8,000 2/96 - 9/1998 10/1998 - 9/2000 10/2000 - 9/2005
- ----------------------------------------------------------------------------------------------------------
9 7,500 5/97 - 4/2000 5/2000 - 4/2003 5/2003 - 4/2006
- ----------------------------------------------------------------------------------------------------------
10 7,500 9/97 - 8/2000 9/2000 - 8/2003 9/2003 - 8/2006
- ----------------------------------------------------------------------------------------------------------
Trailers 10,700 Owned or rented month-to-month
- ----------------------------------------------------------------------------------------------------------
Total 111,000
- ---------------------------------------
</TABLE>
In July 1998 the Company entered into a two-year lease of a building it
previously leased in two increments each covered by a separate lease. The
building is approximately 9,300 square feet and monthly rents are about $5,500.
This lease includes an option for an additional three years.
20
<PAGE>
In December 1997, the Company entered into a ten-year lease for approximately
3.4 acres of automobile parking. The location is adjacent to both the current
leased facilities and the purchased property.
The Company also leases additional space on a month-to-month basis for office
and storage space at its main facilities and leases small sales offices in
Atlanta, Georgia, and Philadelphia, Pennsylvania. Sales offices in France,
Germany, Beijing, and Singapore 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.
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
construct a building on this site as market conditions dictate.
ITEM 3. LEGAL PROCEEDINGS
During fiscal 1996, the Company settled certain litigation with a third party
related to an intellectual property dispute and has now received the total
settlement aggregating $3 million. Included in other income in the accompanying
consolidated financial statements is $1 million in each year fiscal 1998, 1997
and 1996 less related litigation expenses.
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.
Since then a subsequent ruling of the Court of Appeals for the federal circuit
has sent the case back to trial court.
If the Company were found to be infringing on any patent holder's rights, the
Company could be subject to liabilities for such infringement, which could be
material, and could be required to seek licenses from other companies or to
refrain from manufacturing certain products. Although patent holders commonly
offer licenses to their patent or other intellectual property rights, no
assurance can be given that the licenses would be offered, or that the terms of
any offered license would be acceptable to the Company or that failure to obtain
a license would not adversely affect the Company's operating results.
The Company 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As filed in the 10Q for the quarter ended October 31, 1997.
21
<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 1998 FISCAL 1997
----------------------- -------------------------
HIGH LOW HIGH LOW
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
1st Quarter ended July 31................................. $22.00 $12.00 $27.00 $14.75
2nd Quarter ended October 31.............................. 25.00 18.88 26.25 17.50
3rd Quarter ended January 31.............................. 23.88 12.88 25.63 15.25
4th Quarter ended April 30................................ 15.38 10.69 24.63 10.88
</TABLE>
The closing price of the Company's common stock on June 30, 1998 was $15.50.
The approximate number of stockholders of record on June 30, 1998 was 167.
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.
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected consolidated financial data of the Company for the
five years ended April 30, 1998. 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)
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues........................................ $ 76,870 $ 82,554 $ 57,666 $50,090 $ 28,119
Cost of revenues................................ 45,011 42,846 29,477 25,311 13,765
---------- ---------- ---------- ------- ---------
Gross profit.................................. 31,859 39,708 28,189 24,779 14,354
---------- ---------- ---------- ------- ---------
Operating expenses:
Research and development(1)................... 13,567 13,333 8,878 6,328 4,411
Sales and marketing........................... 10,537 10,605 7,969 6,306 4,323
General and administrative.................... 6,157 5,968 3,454 2,869 1,693
Acquired research and development in-process - - 4,800 - -
---------- ---------- ---------- ------- ---------
Total operating expenses.................... 30,261 29,906 25,101 15,503 10,427
---------- ---------- ---------- ------- ---------
Operating income.............................. 1,598 9,802 3,088 9,276 3,927
Interest income, net............................ 1,278 1,458 1,842 1,126 300
Other income (expense), net..................... 584 743 765 (48) (117)
---------- ---------- ---------- ------- ---------
Income before income taxes.................... 3,460 12,003 5,695 10,354 4,110
Provision for income taxes...................... 723 3,688 3,302 4,051 1,531
---------- ---------- ---------- ------- ---------
Net income.................................... $ 2,737 $ 8,315 $ 2,393 $ 6,303 $ 2,579
========== ========== ========== ======= =========
Net income per share:
Basic..................................... $ .24 $ .73 $ .21 $ .62 $ .33
========== ========== ========== ======= =========
Diluted................................... $ .22 $ .66 $ .19 $ .55 $ .31
========== ========== ========== ======= =========
Shares used in share computation
Basic..................................... 11,634 11,463 11,312 10,157 7,766
Diluted................................... 12,637 12,609 12,361 11,506 8,211
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and short term investments.............. $28,668 $34,562 $38,872 $43,881 $10,231
Total assets................................. 90,341 90,996 77,457 74,323 31,041
Long-term debt............................... 0 0 6 0 0
Stockholders' equity......................... 78,784 74,883 66,274 64,144 24,215
Working capital................................. 49,622 52,937 51,127 54,980 18,329
</TABLE>
- --------------------
(1) Revenues from research and development contracts are netted against
research and development expenses.
23
<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 1998 with
comparisons to fiscal 1997 and 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
1998 1997 Reported Adjusted (1)
---------- ---------- -------- ---------------
<S> <C> <C> <C> <C>
Revenues.......................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................................. 58.6 51.9 51.2 51.2
----- ----- ----- -----
Gross profit...................................... 41.4 48.1 48.8 48.8
Operating expenses:
Research and development...................... 17.6 16.1 15.4 15.4
Sales and marketing........................... 13.7 12.9 13.8 13.8
General and administrative.................... 8.0 7.2 6.0 6.0
Acquired research and development in-process - - 8.3 -
----- ----- ----- -----
Total operating expenses................. 39.3 36.2 43.5 35.2
----- ----- ----- -----
Operating income............................... 2.1 11.9 5.3 13.6
Interest income, net.............................. 1.7 1.8 3.2 3.2
Other income...................................... .7 .9 1.3 1.3
----- ----- ----- -----
Income before taxes............................ 4.5 14.6 9.8 18.1
Income taxes...................................... .9 4.5 5.7 5.7
----- ----- ----- -----
Net income..................................... 3.6% 10.1% 4.1% 12.4%
===== ===== ===== =====
</TABLE>
(1) Excluding the $4.8 million non-recurring charge for acquired research and
development in-process.
24
<PAGE>
YEARS ENDED APRIL 30, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 CHANGE 1997 CHANGE 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE $76,870 (7%) $82,554 43% $57,666
</TABLE>
The following table summarizes the Company's revenue mix according to
various criteria for fiscal years 1998, 1997, and 1996 including all customers
who represent 10% or more of total revenues:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
GI................................. 15.4% 30.1% 34.4%
Antec.............................. 10.5 15.7 --
All other broadband customers...... 35.1 30.8 37.3
----- ----- -----
Total broadband.................. 61.0 76.6 71.7
Wireless and other................. 39.0 23.4 28.3
----- ----- -----
Total revenues................... 100.0% 100.0% 100.0%
===== ===== =====
Geographic coverage:
Domestic........................... 50.6% 66.2% 68.1%
International...................... 49.4 33.8 31.9
----- ----- -----
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
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
GI................................... (52.3)% 25.5% (17.0)%
Antec................................ (37.7) N/A --
All other broadband customers........ 6.1 25.2 41.4
Total broadband.................... (25.8) 52.9 5.7
Satcom, Telecom and Wireless......... 55.0 18.5 48.5
Total revenues..................... (7.0) 43.2% 15.1%
Geographic coverage:
Domestic............................. (26.7)% 39.1% 4.4%
International........................ 28.8 51.8 47.3
Total revenues..................... (6.9)% 43.2% 15.1%
</TABLE>
During the three fiscal years ended April 30, 1998, the Company's results
were, in large part, dependent upon the level of capital spending on fiberoptic
technologies within the CATV industry. Approximately 61%, 77%, and 72% of the
Company's revenues during fiscal years 1998, 1997, and 1996, 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 GI
accounted for approximately 15%, 30%, and 34% of total revenues, respectively.
While the Company has enjoyed a long-term relationship with this customer, there
can be no assurance that GI will not secure a second source or continue buying
products from the Company.
25
<PAGE>
REVENUE-CONTINUED
The 7% reduction in revenue in fiscal 1998 is the result of a 26% reduction in
broadband revenues vs. the prior year partially offset by a 55% increase in
revenue for satcom, telecom and wireless applications. The reduction in
broadband revenues reflects a continued slowdown in the domestic broadband
industry due in part to a reduction in spending by Tele-Communications, Inc.
(TCI) for network upgrades and, a reduction in the average price of forward path
transmitters sold during the year in response to competitive pressures emanating
from an unfavorable movement in foreign exchange rates. The increase in non-
broadband revenue was driven primarily by an increase in revenue for satellite
and wireless applications.
Total broadband revenues in fiscal 1997 reflected an increase of 25.5% in
revenues from GI (following a 17.0% decrease in the previous year) and the
addition of Antec as a new domestic customer. Sales to Antec represented 52% of
the total increase in revenues in fiscal 1997 and 59% of the increase in
broadband revenues.
The 18.5% increase in revenues for satellite, telecom and wireless
applications compared to an increase of 48.5% in the prior year, 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
satellite communications applications.
In terms of sales on a geographic basis, domestic revenues decreased by 27% in
fiscal 1998 reflecting a significant decrease in sales to GI and Antec. This
follows a 39% increase in domestic revenues in fiscal 1997 resulting from higher
sales to GI and the addition of Antec as a new customer.
Sales to customers outside the U.S. represented 49%, 34%, and 32% of the
Company's total revenues in fiscal years 1998, 1997, and 1996, respectively.
International revenues were up 29% in fiscal 1998 following a 51.8% increase in
fiscal 1997. 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) 1998 CHANGE 1997 CHANGE 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GROSS PROFIT $31,859 (20%) $39,708 41% $28,189
% OF REVENUE 41.4% 48.1% 48.8%
</TABLE>
Gross profit margins were 41.4%, 48.1%, and 48.8% in fiscal years 1998, 1997,
and 1996, respectively. The decrease in gross margins to 41.4% in fiscal 1998
as compared to 48.8% in fiscal 1997 reflected 1) a reduction in total revenues
while certain other costs remain relatively fixed, 2) a reduction in the average
price of forward path transmitters in response to competitive pressures
emanating from an unfavorable movement in foreign exchange rates and 3) the
startup costs related to the introduction of certain new products. 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 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.
26
<PAGE>
<TABLE>
<CAPTION>
(dollars in thousands) 1998 CHANGE 1997 CHANGE 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESEARCH & DEVELOPMENT $13,567 2% $13,333 50% $8,878
% OF REVENUE 17.6% 16.1% 15.4%
</TABLE>
Research and development expenses were relatively unchanged in fiscal 1998 vs.
fiscal 1997 and, as a result, increased as a percent of revenue to 17.6% from
16.1% in the previous year. Research and development expenses increased over
50% to $13.3 million in fiscal year 1997 compared to those in fiscal year 1996.
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 $.7 million, $1.5 million, and $1.8 million in fiscal years 1998,
1997, and 1996, 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) 1998 CHANGE 1997 CHANGE 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SALES & MARKETING $10,537 (1%) $10,605 33% $7,969
% OF REVENUE 13.7% 12.9% 13.8%
</TABLE>
Sales and marketing expenses of $10.5 million in fiscal 1998 were relatively
unchanged vs. fiscal 1997 and, as a result, increased as a percent of revenue to
13.7% from 12.9% in the previous year. Sales and marketing expenses of $10.6
million in fiscal 1997 increased by 33% over the previous year, primarily due to
additional compensation costs totaling $1.7 million. 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) 1998 CHANGE 1997 CHANGE 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GENERAL & ADMINISTRATIVE $6,157 3% $5,968 73% 3,454
% OF REVENUE 8.0% 7.2% 6.0%
</TABLE>
General and administrative expenses of $6.2 million in fiscal 1998 were
relatively unchanged vs. fiscal 1997 and, as a result, increased as a percent of
revenue to 8% from 7.2% in the previous year. 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) 1998 CHANGE 1997 CHANGE 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ACQUIRED R&D IN-PROCESS $--- --- $-- (100%) $4,800
% 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.
27
<PAGE>
<TABLE>
<CAPTION>
(dollars in thousands) 1998 CHANGE 1997 CHANGE 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST/OTHER INCOME (NET) $1,862 (15%) $2,201 (16%) $2,607
% OF REVENUE 2.4% 2.7% 4.5%
</TABLE>
Interest and other income, net of interest expense of $1.9 million in fiscal
1998 was down from $2.2 million in fiscal 1997 and $2.6 million in fiscal 1996
primarily due to lower average cash balances. Each fiscal year shown above
includes approximately $900,000 (net of litigation expenses) related to the
settlement of an intellectual property dispute. No further payments are expected
related to this dispute.
<TABLE>
<CAPTION>
(dollars in thousands) 1998 CHANGE 1997 CHANGE 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME TAXES $ 723 (80%) 3,688 12% $3,302
% OF REVENUE 0.9% 4.5% 5.7%
Effective Tax Rate 20.9% 30.7% 58.0%
</TABLE>
The consolidated effective income tax rate was 20.9% in fiscal 1998, 30.7% in
fiscal 1997 and 58.0% in fiscal 1996. The net decrease of 9.8% from fiscal year
1997 to 1998 related to utilization of tax credits. 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.
The U.S. Internal Revenue Service (IRS) has completed its audit of the
Company's income tax returns for fiscal years ended April 30, 1994 and 1995,
without any significant adjustments. The IRS is currently auditing the
Company's income tax return for the fiscal year ended April 30, 1996. The
current audit is in process and the outcome and adjustments, if any, cannot be
determined at this time. However, in the opinion of management, the resolution
of this matter will not have a material effect on its financial condition or
results of operations.
YEAR 2000
The Company is assessing the impact the year 2000 issue will have on its
products and internal information systems and has begun corrective efforts in
these areas. The Company does not anticipate that addressing the year 2000
problem for its internal information systems and current and future products
will have a material impact on its operations or financial results. The Company
has certain key relationships with suppliers. If these suppliers fail to
adequately address the year 2000 issue for the products they provide the
Company, this could have a material adverse impact on the Company's operations
and financial results. The Company is still assessing the effect the year 2000
issue will have on its suppliers and, at this time, cannot determine the impact
it will have.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal year 1998, the Company generated cash from operating activities of
$6.2 million while investing $7.3 million in capital equipment and another
$5.8 million in joint ventures of which Tellium represented $5.2 million. Net
of $1.2 million in proceeds from the exercise of stock options and $300,000 in
short term investments, cash and cash equivalents decreased by $6.2 million in
fiscal 1998.
As of April 30, 1998, the Company's principal sources of liquidity included
cash and short term investments of $28.7 million. The Company also had a credit
facility for $5.0 million consisting of an unsecured revolving line of credit
which expires on September 30, 1998. The revolving line of credit is renewable
at the Company's option. The interest rate under the revolving line of credit
is 7.06% as of April 30, 1998. The Company had a $2.0 million unsecured credit
facility with another banking institution which expired on September 1, 1997.
There were no amounts outstanding under the above mentioned agreements as of
April 30, 1998. See Note 3 of Notes to Consolidated Financial Statements.
The Company believes that cash, short term investments and anticipated funds
from operations combined with debt financing will satisfy the Company's
projected working capital and capital expenditure requirements through the next
twelve months.
28
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The Company is required to adopt SFAS No. 130
during the quarterly period ended July 31, 1998. This statement establishes
standards for reporting comprehensive income and its components in a full set of
general-purpose financial statements. The standard requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as the other financial statements. The Company is currently
evaluating the impact of this standard.
In June 1997, the Financial Accounting Standards Board also issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." The
Company is required to adopt the disclosures of SFAS No. 131 beginning with its
April 30, 1999 annual financial statements. This statement establishes
standards for the way companies are to report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The Company is currently
evaluating the impact of this standard.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is filed as a separate part of this Report (see page
32).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
<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 1998 Annual Meeting to be filed with the Securities and
Exchange Commission on or before August 28, 1998.
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 1998 Annual Meeting to be filed with the Securities and
Exchange Commission on or before August 28, 1998.
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 1998 Annual Meeting to be filed
with the Securities and Exchange Commission on or before August 28, 1998.
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 1998 Annual Meeting to be filed with the Securities and
Exchange Commission on or before August 28, 1998.
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 32).
2. Financial Statement Schedule
The financial statement schedule contained in the accompanying Index to
Consolidated Financial Statements covered by Independent Auditors' Report are
filed as part of this Report (see page 32).
3. Exhibits
The list of exhibits contained in the Index to Exhibits are filed as part
of this Report (see page 53).
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the fiscal year ended April 30, 1998.
30
<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 27, 1998
- ----------------------------- Executive Officer (Principal
Wim H.J. Selders Executive Officer)
/s/Stephen K. Workman Vice President, Finance and Chief July 27, 1998
- ----------------------------- Financial Officer (Principal
Stephen K. Workman Financial and Accounting Officer)
/s/Amnon Yariv Chairman of the Board July 27, 1998
- -----------------------------
Amnon Yariv
/s/Israel Ury Director and Chief Technology Officer July 27, 1998
- -----------------------------
Israel Ury
/s/Nadav Bar-Chaim Director, Senior Vice President, July 27, 1998
- ----------------------------- Operations and Secretary
Nadav Bar-Chaim
/s/Tatsutoku Honda Director July 27, 1998
- -----------------------------
Tatsutoku Honda
/s/Anthony J. Iorillo Director July 27, 1998
- -----------------------------
Anthony J. Iorillo
/s/Raymond H. Kaufman Director July 27, 1998
- -----------------------------
Raymond H. Kaufman
/s/Wayne L. Tyler Director July 27, 1998
- -----------------------------
Wayne L. Tyler
/s/Ronald L. Young Director July 27, 1998
- -----------------------------
Ronald L. Young
/s/Hal M. Krisberg Director July 27, 1998
- -----------------------------
Hal M. Krisberg
</TABLE>
31
<PAGE>
ORTEL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
COVERED BY INDEPENDENT AUDITORS REPORT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors Report..................................................... 33
Consolidated Balance Sheets as of April 30, 1998 and 1997....................... 34
Consolidated Statements of Operations for the years ended
April 30, 1998, 1997, and 1996................................................ 35
Consolidated Statements of Stockholders' Equity for the years ended
April 30, 1998, 1997, and 1996................................................ 36
Consolidated Statements of Cash Flows for the years ended
April 30, 1998, 1997, and 1996................................................ 37
Notes to Consolidated Financial Statements...................................... 38
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II: Valuation and Qualifying Accounts................................. 54
</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.
32
<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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended April 30, 1998, 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 22, 1998
33
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30,
------------------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................................... $ 12,656 $ 18,865
Short term investments.................................................... 16,012 15,697
Trade receivables less allowance for doubtful accounts of
$307 and $347 at April 30, 1998 and 1997, respectively.............. 13,049 13,762
Billed contract costs and fees and other receivables (net)................ 1,415 1,276
Inventories............................................................... 11,198 13,960
Income taxes receivable................................................... 530 ---
Deferred tax assets ...................................................... 2,775 2,454
Prepaid expenses and other current assets................................. 1,281 987
-------- --------
Total current assets............................................ 58,916 67,001
Property, equipment and improvements, at cost:
Property.................................................................. 1,796 1,796
Equipment................................................................. 28,408 24,263
Office furniture and fixtures............................................. 4,813 4,417
Leasehold improvements.................................................... 5,208 4,969
-------- --------
Total property, equipment and improvements...................... 40,225 35,445
Less accumulated depreciation and amortization............................ (20,183) (17,388)
-------- --------
Net property, equipment and improvements........................ 20,042 18,057
Intangible assets, net........................................................ 2,581 2,901
Other assets ................................................................. 8,802 3,037
-------- --------
Total assets.................................................... $ 90,341 $ 90,996
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 3,685 $ 5,574
Accrued payroll and related costs......................................... 2,899 4,290
Other accrued liabilities................................................. 2,538 2,801
Income taxes payable ..................................................... 172 1,399
-------- --------
Total current liabilities....................................... 9,294 14,064
Deferred income............................................................... 400 395
Deferred income taxes ........................................................ 1,598 1,409
-------- --------
Total liabilities ............................................................ 11,292 15,868
Minority interest in subsidiaries............................................. 265 245
Stockholders' equity:
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: 11,713,371 and 11,499,743 in 1998 and 1997............. 12 11
Additional paid in capital................................................ 53,101 51,930
Retained earnings......................................................... 27,449 24,712
Loans receivable ......................................................... (1,460) (1,341)
Unrealized losses on available-for-sale investments....................... 24 (4)
Cumulative effect of foreign currency translation......................... (342) (425)
-------- --------
Net stockholders' equity........................................ 78,784 74,883
-------- --------
Commitments and contingencies (note 7)
Total liabilities and stockholders' equity...................... $ 90,341 $ 90,996
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenues ........................................................... $76,870 $82,554 $57,666
Cost of revenues.................................................... 45,011 42,846 29,477
------- ------- -------
Gross profit.................................................... 31,859 39,708 28,189
Operating expenses:
Research and development........................................ 13,567 13,333 8,878
Sales and marketing............................................. 10,537 10,605 7,969
General and administrative...................................... 6,157 5,968 3,454
Acquired research and development in-process.................... - - 4,800
------- ------- -------
Total operating expenses............................... 30,261 29,906 25,101
------- ------- -------
Operating income................................................ 1,598 9,802 3,088
Other:
Interest income, net............................................ 1,278 1,458 1,842
Other income (expense).......................................... 688 812 815
Minority interest in net earnings of subsidiaries............... (104) (69) (50)
------- ------- -------
Income before income taxes............................. 3,460 12,003 5,695
Provision for income taxes ......................................... 723 3,688 3,302
------- ------- -------
Net income............................................. $ 2,737 $ 8,315 $ 2,393
======= ======= =======
Net income per share:
Basic............................................................ $ .24 $ .73 $ .21
======= ======= =======
Diluted.......................................................... $ .22 $ .66 $ .19
======= ======= =======
Shares used in per share computation:
Basic............................................................ 11,634 11,463 11,312
Diluted.......................................................... 12,637 12,609 12,361
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
VALUATION
ADJUSTMENT CUMMULATIVE
OF EFFECT OF
ADDITIONAL AVAILABLE FOREIGN NET
COMMON PAID IN RETAINED LOANS FOR SALE CURRENCY STOCKHOLDERS'
STOCK CAPITAL EARNINGS RECEIVALBE INVESTMENTS TRANSLATION EQUITY
---------- ---------- -------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1995 $11 $51,044 $14,004 $(1,070) $ 23 $132 $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) $ 0 $ 3 $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)
Compensation expense related to issuance
of stock options to Photon employees...... 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) $ (4) $(425) $74,883
Exercise of stock options for 238,328
shares of common stock at $1.33 to
$17.26 per share.......................... 1,226 1,226
Tax benefits arising from exercise of non-
qualified stock options................... 250 250
Repurchase of 25,000 shares of stock at an
average price of $16.52 per share......... 1 (413) (412)
Compensation expense related to issuance
of stock Option to Photon employees....... 108 108
Loans from exercise of stock options due
2000-2001 at 5.7%-6.85% per year, net
of repayments........................... (119) (119)
Effect of foreign currency translation..... 83 83
Unrealized losses on investments.......... 28 28
Net income................................. 2,737 2737
--------- ---------- -------- ---------- ---------- ------------ ----------
Balance at April 30, 1998 $12 $53,101 $27,449 $(1,460) $ 24 $(342) $78,784
=== ======= ======= ======== ==== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
---------------------------------
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 2,737 $ 8,315 $ 2,393
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................................... 5,791 4,428 3,280
Increase (decrease) in minority interest in subsidiaries............... 20 68 (28)
Gain/loss on disposal of equipment..................................... 77 - 10
Net effect of foreign currency translation............................. 170 (228) (93)
Compensation expense related to Photon stock options................... 108 51 -
Change in assets and liabilities (net of effects of acquired company):
Receivables and billed contract costs and fees...................... 574 (5,346) 1,295
Inventories......................................................... 2,762 (4,224) (915)
Income tax receivable............................................... (530) - -
Deferred tax assets................................................. (321) (812) 2
Prepaid expenses and other assets................................... (621) (255) (486)
Intangible assets................................................... 311 (779) (366)
Accounts payable.................................................... (1,889) 2,104 306
Accrued payroll and related costs................................... (1,391) 638 (377)
Other accrued liabilities........................................... (264) 914 186
Deferred income..................................................... 5 (61) (733)
Deferred income taxes............................................... 189 377 487
Income taxes payable................................................ (1,227) 896 (464)
-------- ------- --------
Net cash provided by operating activities...................... 6,501 6,086 4,497
-------- ------- --------
Cash flows from investing activities:
Capital expenditures..................................................... (7,267) (8,729) (6,976)
Investment in subsidiaries and affiliates (net of cash acquired)......... (5,753) (2,428) (1,380)
Short term investments................................................... (315) 7,598 (3,222)
-------- ------- --------
Net cash used in investing activities.......................... (13,335) (3,559) (11,578)
-------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net.............................. 861 288 (209)
Proceeds from repayment of stockholder loans............................. 112 387 75
Alternative minimum tax related-party loans for stock option exercises.. (262) 296 (986)
Notes payable............................................................ --- (6) 6
-------- ------- --------
Net cash (used in) provided by financing activities............ 711 965 (1,114)
-------- ------- --------
Effect of exchange rate changes on cash and cash equivalents................. (86) (200) (36)
-------- ------- --------
Net increase (decrease) in cash and equivalents................ (6,209) 3,292 (8,231)
Cash and equivalents at beginning of year.................................... 18,865 15,573 23,804
-------- ------- --------
Cash and equivalents at end of year.......................................... $ 12,656 $18,865 $ 15,573
======== ======= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................................... $ 11 $ 4 $ 4
Income taxes........................................................... 2,611 3,227 3,083
Supplemental disclosure of non-cash financing activities:
Loans to related parties for stock option exercises................... $ 231 $ 222 $ 511
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 61% of the Company's total revenues in fiscal 1998.
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 39% of the Company's total revenues in fiscal year 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, Avitec AB, and Ortel Asia Private Limited both wholly-owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated in consolidation.
Investment in Affiliated Companies
The $5.2 million investment in Tellium, Inc., is accounted for by the cost
method. There is, accordingly, no recognition of the losses to date incurred by
Tellium in the Company's financial results. As of April 30, 1998 the Company
owns approximately 22% of the equity of Tellium with a portion in excess of 2%
held in the form of non-voting preferred stock. Therefore, the Company believes
the accounting of the investment meets the criteria required under the cost
method.
During fiscal 1998, the Company increased its investment in Photon Technology
Co., Ltd. based in Shenzhen, China. The increase of $400,000 adds to the initial
investment of $2.4 million made in fiscal 1997. The investment includes the
Company's share of net assets valued at $2.1 million. The balance of the
investment represented goodwill to be amortized on a straight line basis over
ten years. The Company owns approximately 43% of Photon as of April 30, 1998
which compares to 34% ownership at April 30, 1997. The operating results of
Photon is included in other income as the investment is not consolidated, but
accounted for under the equity method.
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.
38
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Product Revenue Recognition
Revenue on products shipped to customers is recognized upon shipment from the
Company's facilities, net of allowance for returns.
Contract Revenue Recognition
Revenue from research and development contracts are netted against research
and development expenses. Revenue from cost reimbursable contracts are
recognized based on the ratio of total costs incurred to total estimated costs.
Revenue 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. Contract
revenue aggregated approximately $730,000, $1,489,000, and $1,753,000 in fiscal
years 1998, 1997, and 1996, respectively.
Warranty Reserves
The Company estimates warranty reserves required by applying historical
experience with regard to probabilities of failure and cost to product sales
covered by warranty terms. Warranty reserve amounts included in other accrued
liabilities were $1.2 million and $.9 million at April 30, 1998 and April 30,
1997, respectively.
Use of Estimates
The preparation of financial statements in conformity with Generally Accepted
Accounting Principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses in the reporting period. Actual results
could differ from these estimates.
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.
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 were
insignificant and have not exceeded management's estimates to date.
Fair Value of Financial Instruments
The carrying amounts of short-term investments 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.
39
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
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
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Raw materials........................................ $ 4,998 $ 6,412
Work-in-process...................................... 5,199 6,820
Finished goods....................................... 1,001 728
------- -------
Total inventories.............................. $11,198 $13,960
======= =======
</TABLE>
Cash Equivalents
Cash equivalents include short-term commercial paper, money market funds and
municipal securities managed by banking institutions totaling $7.8 million and
$13.5 million as of April 30, 1998 and 1997, 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, 1998 and 1997, the Company's marketable investment
securities consisted principally of highly liquid investments in tax free
municipal obligations with various maturity dates through December 05, 2000.
The difference between market value and cost of these securities at April 30,
1998 and 1997 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. Gains (losses) from foreign currency
transactions were $109,000, ($89,000) and $56,000 for the fiscal years 1998,
1997, and 1996, respectively.
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
40
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
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.
Net Income Per Share
In the third quarter of fiscal year 1998, the Company adopted SFAS No. 128,
"Earnings Per Share," which established new methods for computing and presenting
earnings per share ("EPS") and replaced the presentation of primary and fully-
diluted EPS with basic and diluted EPS. Basic earnings per share is based on
the weighted average number of shares outstanding and excludes the dilutive
effect of unexercised common stock equivalents. Diluted earnings per share is
based on the weighted average number of shares outstanding and includes the
dilutive effect of unexercised common stock equivalents. Net income per share
for all years presented is summarized as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------------------------------
BASIC AND DILUTED COMPUTATIONS 1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Net income:.................................................. $ 2,737 $ 8,315 $ 2,393
======= ======= =======
Shares used for basic per share computations -
Weighted average shares outstanding......................... 11,634 11,463 11,312
Effect of dilutive securities - stock options.............. 1,003 1,146 1,049
------- ------- -------
Shares used for diluted per share computations............. 12,637 12,609 12,361
======= ======= =======
Net income per share:
Basic...................................................... $ .24 $ .73 $ .21
Diluted.................................................... $ .22 $ .66 $ .19
</TABLE>
Options to purchase 824,349, 622,505, and 616,452 shares at weighted average
exercise price of $20.28, $23.75, and $19.54 were outstanding at April 30, 1998,
1997, and 1996 respectively, but were not included in the computation of diluted
net income per share because the exercise price of the options was greater than
the average market price of the common shares and, therefore, the effect would
be antidilutive.
41
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Net income per share is based on the weighted average common shares and common
equivalent shares outstanding for each period.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The Company is required to adopt SFAS No. 130
during the quarterly period ended July 31, 1998. This statement establishes
standards for reporting comprehensive income and its components in a full set of
general-purpose financial statements. The standard requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as the other financial statements. The Company is currently
evaluating the impact of this standard.
In June 1997, the Financial Accounting Standards Board also issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." The
Company is required to adopt the disclosures of SFAS No. 131 beginning with its
April 30, 1999 annual financial statements. This statement establishes
standards for the way companies are to report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The Company is currently
evaluating the impact of this standard.
Reclassifications
Certain prior year balances in the accompanying consolidated financial
statements have been reclassified to conform to the current year presentation.
3. BANK LINE OF CREDIT
The Company has an unsecured revolving line of credit for $5 million which
carries an interest rate of 7.06% and expires in September, 1998. The revolving
line of credit is renewable at the Company's option. There were no borrowings
outstanding as of April 30, 1998.
4. STOCKHOLDERS' EQUITY
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.
Repurchases of 25,000, 50,000, and 80,000 shares were made at a total cost of
$413,000, $604,000, and $911,000 in the fiscal years 1998, 1997, and 1996
respectively.
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 in October, 1994 no further options were
granted under the 1990 Plan.
42
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. STOCKHOLDERS' EQUITY-CONTINUED
During fiscal year 1995, the stockholders of 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 annually by 6% of the total common shares
outstanding at the beginning of the following fiscal year.
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 stock options granted not pursuant to any plan.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
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, 1995 54,926 1,777,400 198,000 97,366 2,127,692 $ 6.36 728,194
Granted................. - - 595,578 - 595,578 $16.09
Exercised............... (48,568) (165,300) - (75,916) (289,784) $ 2.68
Canceled................ - (38,700) (14,700) - (53,400) $10.06
------- --------- --------- ------ ---------
Outstanding at April 30, 1996 6,358 1,573,400 778,878 21,450 2,380,086 $ 9.15 855,408
Granted................. - - 686,571 - 686,571 $21.38
Exercised............... (6,358) (177,900) (4,925) (1,750) (190,933) $ 4.56
Canceled................ (-) (27,000) (30,466) (-) (57,466) $11.10
------- --------- --------- ------ ---------
Outstanding at April 30, 1997 - 1,368,500 1,430,058 19,700 2,818,258 $12.40 1,180,690
Granted................. - - 1,301,276 - 1,301,276 $14.65
Exercised............... - (196,875) (21,753) (19,700) (238,328) $ 5.14
Canceled................ - (23,650) (674,713) - (698,363) $19.73
Outstanding at April 30, 1998 - 1,147,975 2,034,868 - 3,182,843 $12.25 1,379,055
========= ========= ====== =========
Total authorized............. - 1,147,975 2,275,530 - 3,423,505
Remaining to be granted...... - - 213,984 - 213,984
Exercisable.................. - 960,250 418,805 - 1,379,055 $9.00
</TABLE>
(1) Effective May 1, 1998, the number of options authorized to be granted
increased to 2,978,332.
43
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. STOCKHOLDERS' EQUITY-CONTINUED
The weighted average fair market value of option's granted in fiscal years
1998, 1997, and 1996 was $7.86, $12.27, and $9.08 respectively, on the date of
grant using Black-Sholes option-pricing model with the assumptions tabled below.
The following table summarized information regarding options outstanding and
options exercisable at April 30, 1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Weighted-
Number of Average Weighted- Weighted-
Options Remaining Average Number of Average Price of
Range of Outstanding at Contractual Life Exercise Options Exercisable
Exercise Prices April 30, 1998 (years) Price Exercisable Options
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4.00 - $ 4.00 861,550 4.21 $ 4.00 784,450 $ 4.00
$ 6.67 - $11.25 365,042 6.74 $ 8.63 195,675 $ 8.27
$ 12.00 - $12.88 225,859 9.40 $12.50 31,053 $12.60
$ 13.25 - $13.50 390,289 9.06 $13.26 0 $ 0.00
$ 14.00 - $15.13 495,926 9.00 $15.04 16,246 $14.00
$ 16.50 - $17.88 464,276 7.47 $17.29 206,575 $17.22
$ 20.25 - $24.25 379,901 7.72 $23.47 145,056 $24.23
$ 4.00 - $24.25 3,182,843 7.10 $12.25 1,379,055 $ 9.00
========= ==== ====== ========= ======
</TABLE>
During fiscal 1997 approximately 70,000 stock option shares were granted to
key employees of Photon 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 1998, in return for the cancellation of this prior stock option, a
new grant of 70,000 option shares were granted to the employees of Photon at an
option price of $13.25 which was the fair market value on that new date of
grant. During fiscal 1998 and 1997, approximately $108,000 and $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 $250,000 and $241,000 were credited to additional paid in
capital in 1998 and 1997, respectively.
Stock-Based Compensation
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 income would have been reduced to the pro forma amounts
indicated below and the next page:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------
<S> <C> <C> <C>
ASSUMPTIONS 1998 1997 1996
---------- ---------- ----------
Expected dividend yield.................... --% --% --%
Risk-free interest rate..................... 6.19% 6.50% 6.14%
Expected volatility......................... 50% 50% 50%
Expected life (years)....................... 5.5 6.2 6.2
</TABLE>
44
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. STOCKHOLDERS' EQUITY-CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
--------------------------------------------------------
1998 1997 1996
PRO FORMA NET INCOME AND PER SHARE ------------------ -------------- --------------
<S> <C> <C> <C>
Net Income:
As reported.............................. $2,737 $8,315 $2,393
Pro forma................................ $1,195 $6,441 $1,039
Net income per share
As reported:
Basic................................ $ .24 $ .73 $ .21
Diluted.............................. $ .22 $ .66 $ .19
Pro forma:
Basic................................ $ .09 $ .53 $ .09
Diluted.............................. $ .09 $ .49 $ .08
</TABLE>
The full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the above pro forma disclosures because compensation
cost is reflected over the options' vesting periods and compensation cost for
options granted prior to fiscal year 1996 is not considered. Because additional
option grants are expected to be made each year, the above pro forma disclosures
are not representative of pro forma effects of reported net income for future
years.
5. INCOME TAXES
The provision for income taxes is comprised of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------------------------
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Federal:
Current..................................... $ 352 $3,530 $2,062
Deferred.................................... (30) (319) 141
----- ------ ------
Total....................................... 322 3,211 2,203
State:
Current..................................... 65 73 825
Deferred.................................... (8) 140 4
----- ------ ------
Total....................................... 57 213 829
Foreign:
Current..................................... 456 520 270
Deferred.................................... (112) (256) -
----- ------ ------
Total....................................... 344 264 270
----- ------ ------
Total.................................... $ 723 $3,688 $3,302
===== ====== ======
</TABLE>
45
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. INCOME TAXES-CONTINUED
Temporary differences which give rise to deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------------------------------------------
1998 1997
--------------------------------- ------------------------------
ASSET LIABILITY ASSET LIABILITY
-------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Inventory reserves................................ $1,141 -- $1,122 --
Accrued vacation.................................. 387 -- 379 --
Warranty accrual.................................. 494 -- 373 --
Bad debt reserve.................................. 123 -- 139 --
Goodwill, net of amortization..................... --- $ 216 -- $ 276
Depreciation...................................... --- 821 -- 732
Other............................................. 630 561 441 401
------ ------ ------ ------
Sub total.................................... 2,775 1,598 2,454 1,409
Less valuation allowance.......................... --- --- -- --
------ ------ ------ ------
Total........................................ $2,775 $1,598 $2,454 $1,409
====== ====== ====== ======
</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, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences and that a valuation allowance is not required.
The consolidated effective income tax rate on income before income taxes
differs from the United States statutory income tax rate for the reasons set
forth in the following table:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------------------------
1998 1997 1996
------------ ------------- --------------
<S> <C> <C> <C>
U.S. statutory tax rate...................................... 34.0% 34.0% 34.0%
Utilization of tax credits................................... (11.9) (3.1) (3.6)
Tax effect of permanent differences.......................... (3.8) (2.8) (9.5)
Tax rate differential on foreign earnings.................... 3.9 1.1 ( .9)
Permanent difference for in-process research and
development related to acquisition.......................... - - 36.5
State income taxes........................................... 1.1 2.2 1.4
Other........................................................ (2.4) (.7) .1
---- ----
Effective rate............................................... 20.9% 30.7% 58.0%
===== ==== ====
</TABLE>
The U.S. Internal Revenue Service (IRS) has completed its audit of the
Company's income tax returns for fiscal years ended April 30, 1994 and 1995,
without any significant adjustments. The IRS is currently auditing the Company's
income tax return for the fiscal year ended April 30, 1996. The current audit is
in process and the outcome and adjustments, if any, cannot be determined at this
time. However, in the opinion of management, the resolution of this matter will
not have a material effect on its financial condition or results of operations.
46
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 other
assets.
<TABLE>
<CAPTION>
NO. OF
STOCK STOCK LOAN AMT LOAN LOAN
OPTION OPTION AMOUNT MATURITY DATES INTEREST RATES AMOUNT TOTAL
SHARES PRICE ($000) ($000) ($000)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
New Loans................ 45,750 $4.00 - 8.00 231 5/06/2000 - 8/08/2001 5.70 - 6.85% 262 493
Payments................. (112) ( - ) (112)
----- ----- -----
Balance at April 30, 1998 1,460 1,240 2,700
===== ===== =====
</TABLE>
Purchases from and Sales to Related Parties
The Company purchases from and sells to Sumitomo Osaka Cement Co., Ltd.
(Sumitomo) which owns approximately 20% of the Company's common stock. The
Company also purchases from and sells to Photon in which the Company owns
approximately 43%. Sales and purchases to related parties are made at prices
and with payment terms comparable to unrelated parties. The amount of sales and
purchases to related parties is tabled below.
<TABLE>
<CAPTION>
SUMITOMO PHOTON
PURCHASES PURCHASES
FROM SALES TO FROM SALES TO
----------------------------- -----------------------
<S> <C> <C> <C> <C>
1998 $650,000 $1,860,000 $823,000 $622,000
1997 $828,000 $2,156,000 0 0
1996 $593,000 $1,309,000 0 0
</TABLE>
At April 30, 1998 accounts payable to Sumitomo and Photon were approximately
$50,000 and $310,000, respectively. At April 30, 1998 accounts receivable from
Sumitomo and Photon were approximately $790,000 and $575,000, respectively.
Leases
As of April 30, 1998, the Company leased its operating facilities consisting
of nine 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"). The annual cost of leased facilities
was approximately $910,000, $725,000, and $650,000 in the fiscal years 1998,
1997, and 1996, respectively.
47
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. COMMITMENTS AND CONTINGENCIES-CONTINUED
During fiscal 1998, the Company entered into two leases for an additional
15,000 square feet of space in Alhambra, California. The initial lease periods
are through the year 2000 with options through 2006. Monthly cost of this
additional space is approximately $15,000.
Subsequent to April 30, 1998, the Company entered into a two-year lease of a
building it previously leased in two increments each covered by a separate
lease. The building is approximately 9,300 square feet and monthly rents are
about $5,500. This lease includes an option for an additional 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):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING APRIL 30, $000
---------------------------- --------
<S> <C>
1999 $958
2000 $928
2001 $909
2002 $896
2003 $901
</TABLE>
Patents
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.
Since then a subsequent ruling of the Court of Appeals for the federal circuit
has sent the case back to trial court.
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.
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.
48
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. COMMITMENTS AND CONTINGENCIES-CONTINUED
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 $2.6
million to be paid in the year 2001 depending on levels of profitability
achieved until that time. No liability currently exists related to this
additional payment.
8. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
During the fiscal years ended April 30, 1998, 1997, and 1996, revenues from
General Instrument (GI) represented 15%, 30%, and 34% of total revenues,
respectively. During the fiscal years ended April 30, 1998 and 1997 the
Company's revenues from Antec Corporation represented 11% and 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 GI, the Company's
largest single customer, aggregated approximately $1.8 million, $3.2 million,
and $2.4 million at April 30, 1998, 1997, and 1996 or 13%, 24%, and 26% of total
trade receivables, respectively. Accounts receivable from Antec, the Company's
next largest customer, totaled $3.2 million and $.9 million at April 30, 1998
and 1997. There were no accounts receivable from Antec at April 30, 1996.
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
------------------------------------------
1998 1997 1996/(1)/
---------- ---------- ------------
<S> <C> <C> <C>
REVENUE
Domestic operations................. $68,402 $74,514 $52,628
International operations............ 13,437 15,474 9,164
Intercompany eliminations........... (4,969) (7,434) (4,126)
------- ------- -------
Total revenues................. $76,870 $82,554 $57,666
======= ======= =======
PRETAX INCOME (LOSS)
Domestic operations................. $ 2,365 $13,182 $10,007
International operations............ 55 (67) (4,130)
Intercompany eliminations........... 1,040 (1,112) (182)
------- ------- -------
Pretax income.................. $ 3,460 $12,003 $ 5,695
======= ======= =======
NET INCOME (LOSS)
Domestic operations................. $ 1,985 $ 9,757 $ 6,975
International operations............ (288) (330) (4,400)
Intercompany eliminations........... 1,040 (1,112) (182)
------- ------- -------
Net income..................... $ 2,737 $ 8,315 $ 2,393
======= ======= =======
</TABLE>
/(1)/ 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.
49
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. SUPPLEMENTAL INFORMATION AND INTERNATIONAL OPERATIONS-CONTINUED
Identifiable assets attributable to foreign operations, which principally
consist of trade receivables from European customers and inventories, totaled
$7.7 million, $8.4 million, and $5.7 million at April 30, 1998, 1997, and 1996,
respectively.
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 $445,000, $407,000, and $330,000 to the 401(k) Plan during the
years ended April 30, 1998, 1997, and 1996, respectively.
50
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1998 and 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 30,1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------------------------------------------------------------------------
Q1 Q2 Q3 Q4 Total
----------- ------------ ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues................................................. $ 19,710 $ 22,089 $ 18,769 $ 16,302 $ 76,870
Cost of revenues......................................... 10,954 12,226 11,531 10,300 45,011
-------- -------- -------- -------- ---------
Gross profit........................................ 8,756 9,863 7,238 6,002 31,859
-------- -------- -------- -------- ---------
Operating expenses:
Research and development............................ 2,998 3,534 3,291 3,744 13,567
Sales and marketing................................. 2,469 2,627 2,330 3,111 10,537
General and administrative.......................... 1,337 1,491 1,604 1,725 6,157
-------- -------- -------- -------- ---------
Total operating expenses....................... 6,804 7,652 7,225 8,580 30,261
-------- -------- -------- -------- ---------
Operating income (loss).................................. 1,952 2,211 13 (2,578) 1,598
Other income, (net)...................................... 187 368 257 1,050 1,862
-------- -------- -------- -------- ---------
Income (loss) before taxes............................... 2,139 2,579 270 (1,528) 3,460
Provision/(benefit) for income taxes..................... 644 668 (101) (488) 723
-------- -------- -------- -------- ---------
Net income (loss)........................................ $ 1,495 $ 1,911 $ 371 $ (1,040) $ 2,737
======== ======== ======== ======== =========
Net Income (loss) per share:/(a)/
Basic................................................. $ .13 $ .16 $ .03 $ (.09) $ .24
======== ======== ======== ======== =========
Diluted............................................... $ .12 $ .15 $ .03 $ (.09) $ .22
======== ======== ======== ======== =========
Shares used in per share computations:
Basic............................................... 11,524 11,624 11,684 11,707 11,634
Diluted............................................. 12,559 12,963 12,654 12,379 12,637
<CAPTION>
YEAR ENDED APRIL 30,1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------------------------------------------------------------------------
Q1 Q2 Q3 Q4 Total
----------- ------------ ------------ ----------- --------------
<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: /(a)/
Basic................................................. $ .16 $ 19 $ .18 $ .20 $ .73
======== ======== ======== ======== =========
Diluted............................................... $ .14 $ .17 $ .16 $ .18 $ .66
======== ======== ======== ======== =========
Shares used in per share computation:
Basic............................................... 11,406 11,412 11,490 11,503 11,463
Diluted............................................. 12,657 12,639 12,663 12,401 12,609
</TABLE>
/(a)/ Quarterly per share amounts may not aggregate to total per share amounts
for the year
51
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1998, 1997, AND 1996
(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, 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
Year ended April 30, 1998
Allowance for doubtful accounts 347 61 101(1) 307
Inventory reserve...................... 1,976 2,475 1,682(2) 2,769
</TABLE>
(1) Write-off of uncollectible accounts
(2) Write-off of obsolete materials
52
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document Description Page No.
- ----------- --------------------- --------
<S> <C> <C>
3.1 Certificate of Incorporation. (Note 1)
3.2 Bylaws of Ortel Corporation. (Note 1)
4.1 Common Stock Purchase Agreement, dated March 26, 1990, between (Note 1)
Sumitomo Cement Co., Ltd. and Ortel Corporation.
4.2 Modification Agreement, dated 1985, between Ortel Corporation and (Note 1)
certain investors.
10.1 Lease, dated September 23, 1991, between Ortel Corporation and Rim (Note 1)
Development Co.
10.2 Lease, dated May 20, 1994, between Ortel Corporation and (Note 1)
Wai Fong Un.
10.3 Employment Agreement, dated September 14, 1990, between Ortel (Note 1)
Corporation and Wim H.J. Selders.
10.4 Employment Agreement, dated September 14, 1990, between Ortel (Note 1)
Corporation and Israel Ury.
10.5 Employment Agreement, dated September 14, 1990, between Ortel (Note 1)
Corporation and Nadav Bar-Chaim.
10.6 1981 Incentive Stock Option Plan of Ortel Corporation. (Note 1)
10.7 1990 Stock Option Plan of Ortel Corporation. (Note 1)
10.8 Form of Indemnification Agreement. (Note 1)
10.9 Key Shareholders Agreement, dated as of March 26, 1990, among Wim (Note 1)
H.J. Selders, Dr. Ury, Dr. Yariv, Dr. Bar-Chaim, Sumitomo Cement
Co., Ltd., The Ury Family Trust and Ortel Corporation.
10.10 Agreement Concerning Certain Financial and Business Arrangements, (Note 1)
dated as of March 26, 1990 between Sumitomo Cement Co., Ltd. and
Ortel Corporation.
10.11 1994 Equity Participation Plan of Ortel Corporation. (Note 1)
10.12 Severance Agreement, dated as of August 26, 1994, between Ortel (Note 1)
Corporation and Stephen K. Workman.
10.13 Stock Purchase Agreement dated March 12, 1996 between Hakan (Note 2)
Samuelsson and Ortel Corporation.
10.14 Loan Agreement, dated June 2, 1995 between Ortel Corporation and (Note 3)
Bank of America.
10.15 Amendment No. 2 dated September 9, 1997 to Loan Agreement dated (Note 5)
June 2, 1995 between Ortel Corporation and Bank of America.
10.16 Severance Agreement, dated December 1, 1997, between Ortel (Note 6)
Corporation and Douglas H. Morais.
10.17 Severance Agreement, dated March 6, 1998, between Ortel Corporation Page 57
and Lyle B. Boarts
21.1 Subsidiaries of Ortel Corporation. Exhibit 21
23.1 Consent of KPMG Peat Marwick LLP. Exhibit 23
27.0 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT INDEX (CONTINUED)
__________________
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
Note 4 Previously filed by the Registrant in its 10-K filing for the year-
ended April 30, 1997.
Note 5 Previously filed by the Registrant in its 10-Q filing for the quarter
ended October 31, 1997.
Note 6 Previously filed by the Registrant in its 10-Q filing for the quarter
ended January 31, 1998.
<PAGE>
Exhibit 10.17
CHANGE OF CONTROL AGREEMENT
This Severance Agreement ("Agreement") is made as of March 6, 1998 by and
between ORTEL CORPORATION, a Delaware corporation ("Ortel"), and Lyle B. Boarts,
and individual ("Executive").
WHEREAS, Executive is employed by Ortel as its Vice President,
Administration, and in such other executive capacity or capacities as the board
of directors of Ortel may from time to time prescribe.
In consideration of the mutual promises and covenants set forth below,
Ortel and Executive agree as follows:
Section 1- Definition
- ----------- ----------
For purposes of this Agreement, a "Change in Control" shall mean the
occurrence of one or more of the following events: (i) a single person or
entity or group of affiliated persons or entities (including a "group" as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended
(the "1934 Act")) is or becomes, directly or indirectly, the "beneficial owner"
(as defined in Rule 13d-3 promulgated under the 1934 Act) of securities of Ortel
representing 40% or more of the total number of votes that may cast for the
election of directors of Ortel, or (ii) a merger or other business combination
of Ortel with another person or entity is consummated, or all or substantially
all of the assets of Ortel are sold to another person or entity, as a result of
which merger, combination or sale the shareholders of Ortel immediately prior to
the consummation of such transaction own, immediately after consummation of such
transaction, equity securities possessing less than 70% of the voting power of
the surviving or acquiring person or entity (or any person or entity in control
of the surviving or acquiring person or entity, the equity securities of which
are issued or transferred in such transaction), or (iii) as the result of or in
connection with any tender or exchange offer for the purchase of securities of
Ortel (other than an offer by Ortel for its securities), a merger,
consolidation, sale of assets, contested election of directors of Ortel or any
combination thereof, the persons who are directors of Ortel before such tender,
exchange offer, merger, consolidation, sale, contested election or combination
thereof cease to constitute a majority of the board of directors of Ortel or any
successor to Ortel.
Section 2 - Termination Payments
- ---------- --------------------
(a) In the event of termination of Executive's employment within six
months following a "Change in Control":
(i) Ortel shall continue to pay Executive his basic salary on
a monthly basis as in effect immediately prior to the date of termination for
the twenty-four month period commencing on the effective date of such
termination.
(ii) Ortel shall continue to provide Executive all other
benefits as in effect immediately prior to the date of termination, including
but not limited to group health and life insurance benefits and an automobile
allowance, for the twenty-four month period commencing on the effective date of
such termination. Notwithstanding the foregoing, Ortel's obligations to provide
these benefits to Executive shall cease upon and to the extent Executive
acquires substantially similar benefits from an employer other than Ortel.
<PAGE>
(b) Executive may elect at any time prior to January 30 of the year
following the year in which Executive's employment is terminated within six
months of a Change in Control, to be paid a lump sum severance allowance, in
lieu of the termination payments described in Section 2(a) above, in an amount
equal to 85% of the aggregate amount of compensation payable to Executive
thereunder. Ortel shall pay such lump sum severance allowance to Executive
within thirty (30) days following such election by Executive.
Section 3 - No Obligation to Mitigate Damages
- --------- ---------------------------------
In the event of a termination of Executive's employment within six
months of a Change in Control, Executive shall have no obligation to mitigate
damages by seeking other employment and will be entitled to continue to receive
the payments and other benefits provided for in Section 2(a) and 2(b) of this
Agreement.
Section 4 - Reimbursement for Taxes
- --------- -----------------------
In the event that Executive becomes entitled to payments or other
benefits upon termination in accordance with Section 2(a) and any such payments
or benefits will be subject to the tax (the "Excise Tax") imposed by Section
4999 of the Code (or any similar tax that may hereafter be imposed), the Company
shall pay to the Executive, at the time specified in Section 2(a), an amount in
addition to that provided for in Section 2(a) such that the net amount retained
by the Executive, after deduction of any Excise Tax on such Section 2(a)
payments or benefits and any federal, state and local income tax and Excise Tax
upon the payment of any additional amount provided for by this Section, shall be
equal to the amount provided for in Section 2(a).
Section 5 - Assignment; Agreement to Survive Dissolution or Merger
- ---------- ------------------------------------------------------
Subject to Executive's right to terminate his employment, this
Agreement shall not be terminated by the voluntary or involuntary dissolution of
Ortel or by any merger where Ortel is not the surviving or resulting
corporation, or upon any transfer of all or substantially all of the business or
assets of Ortel. In the event of any such merger or transfer, the provisions of
this Agreement shall be binding on and shall inure to the benefit of the
surviving entity or the entity to which such business or assets shall be
transferred. This Agreement may not be assigned by Executive.
<PAGE>
Section 6 - Arbitration
- ---------- -----------
Except as provided in Section 7 hereof, any controversy or claim
arising out of or relating to this Agreement, or breach thereof, shall be
settled by arbitration in accordance with the Rules of the American Arbitration
Association, and judgment upon any proper award rendered by the arbitrators may
be entered in any court having jurisdiction thereof. There shall be three
arbitrators, one to be chosen directly by each party at will, and the third
arbitrator to be selected by the two arbitrators so chosen. To the extent
permitted by the Rules of the American Arbitration Association and not limited
by Section 7 hereof, the selected arbitrators may grant equitable relief. If
Ortel breaches its obligation under Section 2, it shall pay for all the costs of
arbitration. Otherwise, each party shall pay the fees of the arbitrator
selected by him and of his own attorneys, and the expenses of his witnesses and
all other expenses connected with the presentation of his case, while the costs
of the arbitration including the cost of the record or transcripts thereof, if
any, administrative fees, and all other fees and costs shall be borne equally by
the parties.
Section 7 - Choice of Law
- ---------- -------------
The formation, construction and performance of this Agreement shall be
in accordance with the laws of the State of California.
Section 8 - Notices
- ---------- -------
Any notice to Ortel required or permitted hereunder shall be given in
writing, either by personal service or by registered or certified mail, postage
prepaid, duty addressed to the President of Ortel at Ortel's then principal
place of business. Any such notice to Executive shall be given in a like
manner, and if mailed, shall be addressed to Executive at his residence. For
the purpose of determining compliance with any time limit herein, a notice sent
by mail shall be deemed given on the postmark date. Any other notice shall be
deemed given upon receipt of the notice.
Section 9 - Sole and Entire Agreement; Separability
- ---------- ---------------------------------------
This Agreement constitutes the sole and entire existing agreement
between the parties and completely and correctly expresses all of the rights and
obligations of the parties. All prior agreements are completely superseded and
revoked insofar as any such prior agreement might have given rise to any
enforceable right. In the event any Section or portion thereof is declared
illegal, the remainder of this Agreement shall remain in full force and effect.
<PAGE>
Section 10 - Waivers
- ---------- -------
The waiver in any particular instance or series of instances of any
term or condition of this Agreement or any breach hereof by either party shall
not constitute a waiver of such term or condition or of any breach thereof in
any other instance.
Section 11 - Agreement
- ---------- ---------
This Agreement is subject to amendment only by subsequent written
agreement between, and executed by, the parties hereto. Commencement or
continuation of any custom or practice shall not constitute an amendment hereof
or give additional rights to Executive or create additional obligations of Ortel
with respect to matters covered by this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement at Alhambra,
California.
ORTEL CORPORATION
/s/ Lyle B. Boarts By /s/ Wim H.J. Selders
- ----------------------------- ------------------------
Lyle B. Boarts Wim H.J. Selders
President and Chief Executive Officer
<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
4. Ortel Asia Private Limited, a corporation organized under the laws of the
Republic of Singapore.
<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
22, 1998, relating to the consolidated balance sheets of Ortel Corporation and
subsidiaries as of April 30, 1998 and 1997, 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, 1998, and the related schedule,
which report appears in the April 30, 1998, Annual Report on Form 10-K of Ortel
Corporation.
KPMG Peat Marwick LLP
Los Angeles, California
July 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<CASH> 12,265
<SECURITIES> 16,012
<RECEIVABLES> 13,356
<ALLOWANCES> 307
<INVENTORY> 11,198
<CURRENT-ASSETS> 58,915
<PP&E> 40,225
<DEPRECIATION> 20,183
<TOTAL-ASSETS> 90,341
<CURRENT-LIABILITIES> 9,294
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 78,772
<TOTAL-LIABILITY-AND-EQUITY> 90,341
<SALES> 76,870
<TOTAL-REVENUES> 76,870
<CGS> 44,950
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,567<F1>
<LOSS-PROVISION> 61<F2>
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 3,460
<INCOME-TAX> 723
<INCOME-CONTINUING> 2,737
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,737
<EPS-PRIMARY> $.24
<EPS-DILUTED> $.22
<FN>
<F1>Research & Development expenses
<F2>Provision for Bad Debt
</FN>
</TABLE>
