<PAGE>
SECURITES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-22598
ORTEL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-3494360
(State or Other Jurisdiction of (I.R.S.Employer)
Incorporation or Organization) Identification No.)
2015 WEST CHESTNUT STREET, ALHAMBRA, CALIFORNIA 91803-1542
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (626) 281-3636
not applicable
--------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
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
---- -----
As of January 31, 1998, there were 11,702,535 shares of the registrant's
$.001 par value Common Stock outstanding.
Page 1 of 17 Pages
Exhibit Index on Page 16
<PAGE>
ORTEL CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page(s)
-------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of January 31, 1998
(unaudited) and April 30, 1997 (audited)............................... 3
Condensed Consolidated Statements of Income (unaudited) for the fiscal
quarter and nine months ended January 31, 1998 and 1997................ 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the
nine months ended January 31,1998 and 1997............................. 5
Notes to Condensed Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................ 15
Signatures............................................................................ 16
Index to Exhibits..................................................................... 17
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ORTEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
January 31, April 30,
1998 1997
--------------------------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents.............................................. $11,531 $18,865
Short-term investments................................................. 17,467 15,697
Accounts receivable (net).............................................. 15,058 13,762
Other receivables...................................................... 1,406 1,276
Inventories (note 4)................................................... 11,614 13,960
Deferred tax assets.................................................... 2,511 2,454
Prepaid and other current assets....................................... 1,010 987
------- -------
Total current assets.................................................. 60,597 67,001
Property, equipment and improvements (net)............................... 18,995 18,057
Intangible assets (note 6)............................................... 3,048 2,901
Other assets (note 5).................................................... 8,079 3,037
------- -------
Total assets.......................................................... $90,719 $90,996
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable....................................................... $ 4,198 $ 5,574
Accrued liabilities.................................................... 4,847 7,091
Income taxes payable................................................... 68 1,399
------- -------
Total current liabilities............................................. 9,113 14,064
Deferred income.......................................................... 381 395
Deferred income taxes.................................................... 1,451 1,409
Notes payable............................................................ - -
Minority interest........................................................ 234 245
Stockholders' equity:
Preferred stock, $.001 par value; authorized 5,000,000 shares, none - -
issued and outstanding.................................................
Common stock, $.001 par value; authorized 25,000,000 shares,
11,702,535 and 11,499,743 issued and outstanding at January 31, 1998
and April 30, 1997, respectively..................................... 12 11
Additional paid-in capital.............................................. 53,033 51,930
Retained earnings....................................................... 28,489 24,712
Loans receivable........................................................ (1,484) (1,341)
Unrealized gain/(losses) on investments................................. 24 (4)
Cumulative effect of foreign currency translation....................... (534) (425)
------- -------
Net stockholders' equity.............................................. 79,540 74,883
------- -------
Total liabilities and stockholders' equity............................ $90,719 $90,996
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
ORTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
------------------ -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues...................................................... $18,769 $22,967 $60,568 $61,093
Cost of revenues.............................................. 11,531 11,829 34,711 31,631
------- ------- ------- -------
Gross profit................................................ 7,238 11,138 25,857 29,462
Operating expenses:...........................................
Research and development.................................... 3,291 3,808 9,823 9,584
Sales and marketing......................................... 2,330 2,643 7,426 7,337
General and administrative.................................. 1,604 1,809 4,432 4,661
------- ------- ------- -------
Total operating expenses.................................. 7,225 8,260 21,681 21,582
------- ------- ------- -------
Operating income.............................................. 13 2,878 4,176 7,880
Interest income (net)......................................... 367 335 991 1,110
Other non-operating income (expense).......................... (110) (257) (179) (221)
------- ------- ------- -------
Income before income tax expense (benefit).................... 270 2,956 4,988 8,769
Provision for income tax expense (benefit).................... (101) 867 1,211 2,747
------- ------- ------- -------
Net income (note 3)...................................... $ 371 $ 2,089 $ 3,777 $ 6,022
======= ======= ======= =======
Shares and common equivalent shares used in computation of
net income per share - - Basic............................... 11,697 11,490 11,536 11,441
======= ======= ======= =======
Shares and common equivalent shares used in computation of
net income per share - - Diluted............................. 12,522 12,733 12,948 12,711
======= ======= ======= =======
Net income per share - - Basic (note 2)....................... $ .03 $ .18 $ .33 $ .53
======= ======= ======= =======
Net income per share - - Diluted (note 2).................... $ .03 $ .16 $ .29 $ .47
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
ORTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
January 31, January 31,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 3,777 $ 6,022
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization............................................ 4,402 3,250
Gain on disposal of equipment............................................ 2 (92)
Minority interest in subsidiaries........................................ (12) 53
Net effect of foreign currency translation............................ 32 -
Changes in operating assets and liabilities:...............................
(Increase) decrease in:...................................................
Receivables.............................................................. (1,426) (5,241)
Inventories.............................................................. 2,346 (2,300)
Deferred tax asset....................................................... (57) (584)
Prepaid and other assets................................................. (169) (260)
Intangible assets........................................................ (74) (1,382)
Increase (decrease) in:.....................................................
Accounts payable and accrued liabilities................................. (3,620) 2,965
Deferred income.......................................................... (14) (28)
Deferred income taxes.................................................... 27 269
Income taxes payable..................................................... (1,331) 627
-------- --------
Net cash provided by operating activities................................... 3,883 3,299
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................ (4,845) (7,168)
Investment in unconsolidated subsidiaries................................... (5,437) (1,708)
Short-term investments...................................................... (1,770) (2,153)
Increase in valuation of short-term investments............................. - (22)
-------- --------
Net cash used in investing activities....................................... (12,052) (11,051)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net................................. 1,120 1091
Notes receivable from stockholders.......................................... (143) 194
-------- --------
Net cash provided by financing activities................................... 977 1,285
Effect of exchange rate changes on cash..................................... (142) (244)
-------- --------
Net increase (decrease) in cash and equivalents............................. (7,334) (6,711)
Cash and cash equivalents, beginning of period.............................. 18,865 15,573
-------- --------
Cash and cash equivalents, end of period.................................... $ 11,531 $ 8,862
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for
Interest.................................................................. $ 8 $ 8
Income taxes.............................................................. $ 2,557 $ 2,435
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
ORTEL CORPORATION
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company without audit (except for the balance sheet
information as of April 30, 1997 which was derived from audited consolidated
financial statements) and, in the opinion of management, contain all adjustments
necessary to present fairly the consolidated financial position at January 31,
1998, and the condensed consolidated results of operations for the nine-month
periods ended January 31, 1998 and January 31, 1997, and the condensed
consolidated cash flows for the nine-month periods ended January 31, 1998, and
January 31, 1997 in accordance with generally accepted accounting principles.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to rules and regulations of
the Securities and Exchange Commission, although the Company believes that the
disclosures in the consolidated financial statements are adequate to ensure the
information presented is not misleading.
The results of operations for the nine-month period ended January 31, 1998
are not necessarily indicative of the results to be expected for the entire
fiscal year and should be read in conjunction with a discussion of risk factors
in the Company's annual report on Form 10-K for the fiscal year ended April 30,
1997.
2. Per Share Information
---------------------
Net income per share is based on the weighted average common and common
equivalent shares outstanding for each period including common shares issuable
upon the exercise of stock options. In presenting this information, the Company
has adopted FASB 131 for all current and prior year period. Under this new
accounting rule, basic EPS reflects only shares outstanding during the period
while fully diluted shares are comparable with prior definitions incorporating
the impact of stock options outstanding.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 128. This Statement requires the presentation of basic and diluted net
income per share. Basic net income per common share is computed using the
weighted average number of common shares outstanding during the period. Diluted
net income per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period. Dilutive
common equivalent shares consist of common stock issuable upon exercise of stock
options using the treasury stock method.
Net income per share for all periods presented is summarized as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31 January 31
------------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income................................ $ 371 $ 2,089 $ 3,777 $ 6,022
======= ======= ======= =======
Weighted average shares outstanding:
Common shares........................... 11,697 11,490 11,536 11,441
Dilutive Stock options.................. 825 1,243 1,412 1,270
------- ------- ------- -------
Total................................ 12,522 12,733 12,948 12,711
======= ======= ======= =======
Net income per share Basic............... $ .03 $ .18 $ .33 $ .53
======= ======= ======= =======
Net income per share Diluted.............. $ .03 $ .16 $ .29 $ .47
======= ======= ======= =======
</TABLE>
6
<PAGE>
ORTEL CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
3. Income taxes
------------
Income taxes for the respective periods were computed using the effective
tax rate estimated to be applicable for the fiscal year, which is subject to
ongoing review and evaluation by management.
4. Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
<TABLE>
<CAPTION>
January 31, 1998 April 30, 1997
---------------------- ---------------------
(unaudited) (audited)
<S> <C> <C>
Raw materials...................................... $ 5,512 $ 6,412
Work-in-process.................................... 5,103 6,820
Finished goods..................................... 999 728
------- -------
Total inventories............................. $11,614 $13,960
======= =======
</TABLE>
5. Investments in unconsolidated subsidiaries
------------------------------------------
In May 1997, Ortel made a $5 million investment in the launch of a new
telecommunications network equipment manufacturing company know as Tellium, Inc.
The Company's $5 million investment has been accounted for under the cost
method.
In October 1996, the Company acquired a minority (34%) interest in Shenzhen
Photon Technology Co., Ltd. "Photon" based in Shenzhen, China, with a cash
investment of $2.4 million plus associated acquisition costs for a total
investment of $2.9 million. The investment includes net assets valued at $1.7
million with the remainder classified as goodwill to be amortized over ten
years. The operating results of Photon have been accounted for under the equity
method of accounting.
In June 1997, the Company made an additional $437,000 investment in Photon,
raising its ownership interest to approximately 43%.
6. Deferred distribution costs
---------------------------
During the period ended October 31, 1996, 70,000 shares of non-qualified
stock options were issued to the management of Photon. The value of those
options under SFAS 123 "Accounting for Stock Options", was estimated to be
$731,000 which were to be amortized and incorporated into the operating results
over seven years. In May 1997, these options were canceled and a new grant for
the same number of options was issued at a price of $13.25 with a new vesting
schedule. The value of these options (Deferred Distribution Costs) was
estimated to be $534,000 which is being amortized over five years. The deferred
distribution costs have been included in other assets in the accompanying
condensed consolidated financial statements.
7
<PAGE>
ORTEL CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
7. Cash and cash equivalents
--------------------------
Cash consists of cash and cash equivalents (defined as marketable securities
with original maturities of 90 days or less) in the amount of $11.5 million and
$18.9 million as of January 31, 1998 and April 30, 1997 respectively, and short-
term investments (marketable securities with maturities of more than 90 days) of
$17.5 million and $15.7 million as of January 31, 1998 and April 30, 1997,
respectively.
Under Financial Accounting Standards Board Statement 115, the Company has
classified its short-term investments as available-for-sale. Available-for-sale
securities are stated at market value and unrealized holding gains and losses,
net of the related tax effect, are excluded from earnings and are reported as a
separate component of stockholders' equity until realized. A decline in the
market value of the security below cost that is deemed other than temporary is
charged to earnings resulting in the establishment of a new cost basis for the
security.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information." These new accounting standards are
for disclosure purposes and the Company is analyzing the impact of these
standards for future reporting.
8
<PAGE>
ORTEL CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the unaudited condensed consolidated
financial statements included herein. 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 the Company's Form 10-K report for the year ended April
30, 1997.
In its earnings release on February 26, 1998, the Company announced that
while international sales are up 57% year-to-date compared to the prior year,
the continuing Asian economic crisis coupled with weakness in Europe adversely
impacted the Company's results for the most recent quarter and that further
weakness in international sales in the fourth quarter will result in an
operating loss.
Results of Operations
The following table sets forth the statements of income as a percentage of
revenues.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
---------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues...................................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............................................. 61.4 51.5 57.3 51.8
----- ----- ----- -----
Gross profit................................................ 38.6 48.5 42.7 48.2
Operating expenses:
Research and development.................................... 17.5 16.6 16.2 15.7
Sales and marketing......................................... 12.4 11.5 12.3 12.0
General and administrative.................................. 8.6 7.9 7.3 7.6
----- ----- ----- -----
Total operating expenses.................................... 38.5 36.0 35.8 35.3
----- ----- ----- -----
Operating income.............................................. .1 12.5 6.9 12.9
Other income, net............................................. 1.3 .4 1.3 1.5
----- ----- ----- -----
Income before income taxes.................................. 1.4 12.9 8.2 14.4
Provision for income taxes.................................... (.6) 3.8 2.0 4.5
----- ----- ----- -----
Net income.................................................. 2.0% 9.1% 6.2% 9.9%
===== ===== ===== =====
</TABLE>
9
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
The following table highlights certain aspects of the Company's revenues for
the three-month and nine-month periods ended January 31, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
------------------------ --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues (thousands)...................... $18,769 $22,967 $60,568 $61,093
======= ======= ======= =======
Broadband products...................... $11,262 $18,274 $36,588 $49,093
Other products.......................... 7,507 4,693 23,980 12,000
------- ------- ------- -------
Total........................... $18,769 $22,967 $60,568 $61,093
======= ======= ======= =======
Geographic coverage (thousands):
Domestic................................ $10,084 $14,946 $29,519 $41,324
International........................... 8,685 8,021 31,049 19,769
------- ------- ------- -------
Total........................... $18,769 $22,967 $60,568 $61,093
======= ======= ======= =======
As a percent of revenues:
Broadband products...................... 60.0% 79.6% 60.4% 80.4%
Other products.......................... 40.0 20.4 39.6 19.6
------- ------- ------- -------
Total........................... 100.0% 100.0% 100.0% 100.0%
======= ======= ======= =======
Geographic coverage:
Domestic................................ 53.7% 65.1% 48.7% 67.6%
International........................... 46.3 34.9 51.3 32.4
------- ------- ------- -------
Total........................... 100.0% 100.0% 100.0% 100.0%
======= ======= ======= =======
</TABLE>
THIRD QUARTER
Revenues
Revenues of $18.8 million for the third quarter ended January 31, 1998,
decreased by $4.2 million or 18% from $23.0 million in the comparable quarter of
the previous year. This decrease reflected lower broadband product sales of
$11.3 million, down $7.0 million or 38% from $18.3 million in the prior year
period due to lower demand from both domestic and international customers for
the Company's broadband products. Lower domestic broadband sales generally
reflects lower levels of spending for CATV network upgrades while international
business has been impacted by the Asian economic crisis and low subscription
rates for CATV service within Europe. Broadband revenues represented 60% of
total revenues in the most recent quarter compared to 80% in the prior year
period. Revenues of $7.5 million from the sale of wireless, satellite
communications and other product applications increased by $2.8 million or 60%
compared to the prior year period and increased as a percent of revenue to 40%
from 20% in the prior year.
On a sequential basis, revenues of $18.3 million in the third quarter of
fiscal 1998 decreased by 15.0% from $22.1 million in the second quarter.
Broadband revenues of $11.3 million in the third quarter decreased by $1.2
million or 9.8% from the second quarter while all other revenues of $7.5 million
in the third quarter decreased by $2.1 million or 21.8% from the second quarter.
The decrease in broadband revenues from the previous quarter is due to a
decrease in international sales primarily in Asia and Europe while domestic
revenues rose sequentially. The decrease in revenues in the third quarter for
all other communications applications reflects an increase in revenues for the
Company's in-building wireless products and a larger decrease in revenues from
the Company's satellite communications business, both of which tend to vary on a
quarterly basis.
As stated in the Company's earnings release on February 26, 1998, further
weakness in international sales in the near-term will result in an operating
loss in the fourth quarter.
10
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
Sales to international customers totaled $8.7 million or 46% of revenues for
the third quarter of fiscal 1998 compared to $8.0 million or 35% of revenues for
the comparable quarter last year, an increase of 8%. Approximately 23% of the
Company's product sales were to customers in Asia. The Company is aware that
some sales to domestic customers ultimately have international destinations.
On a sequential basis, total domestic revenues of $10.1 million in the third
quarter decreased by 5.5% from $10.7 million in the second quarter while
international revenues of $8.7 million in the third quarter decreased $2.7
million or 23.9% from $11.4 million in the second quarter. The decrease in
domestic revenues is related to products sold for wireless and satellite
communications applications. The decrease in international revenues primarily
reflects weakness in demand for the Company's broadband products, related in
turn to recent economic developments within Asia and lower demand for CATV
upgrades within Europe.
Gross Profit
Gross profit of $7.2 million for the third quarter of fiscal 1998
represented 38.6% of revenue compared to 48.5% in the comparable period last
year. The decrease in gross margin compared to the prior year reflects (i) lower
overall revenues coupled with on-going fixed costs, (ii) lower average sales
prices for the Company's broadband products in conjunction with a temporary
increase in demand for lower performance units during the quarter, and (iii) a
shift in the mix of business from broadband to other product groups where
volumes and economies of scale were not as favorable.
Research and Development
Research and development expenses of $3.3 million for the third quarter of
fiscal 1998 decreased by $.5 million or 14% from $3.8 million in the comparable
quarter last year compared. With revenues 18% lower than the comparable quarter
in the prior year, research and development expense as a percentage of revenues
increased to 17.5% from 16.6% in the comparable quarter last year.
Sales and Marketing
Sales and marketing expenses of $2.3 million for the third quarter of fiscal
1998 decreased by $.3 million or 12% from $2.6 million in the comparable quarter
last year, but increased as a percentage of revenues to 12.4% from 11.5% in the
comparable quarter last year.
General and Administrative
General and administrative expenses of $1.6 million for the third quarter of
fiscal 1998 decreased by $.2 million or 11% from $1.8 million in the comparable
quarter last year, but increased as a percentage of revenues to 8.6% from 7.9%
in the same quarter of last year.
11
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
YEAR-TO-DATE
Revenues
Revenues of $60.6 million for the nine months ended January 31, 1998
decreased by $.5 million or less than 1% from $61.1 million in the comparable
period of the previous year. Total revenues from broadband products were $36.6
million, down $12.5 million or 25% from the prior year period. This decrease
primarily reflects the slowdown in spending for CATV network upgrades in the
U.S. while sales to international customers have increased compared to the prior
year-to-date period. Broadband revenues represented 60% of total revenues
compared to 80% in the prior year period. Revenues of $24.0 million from the
sale of wireless, satellite communications and other product applications
increased by $12 million or 100% compared to the prior year period and increased
as a percent of total revenues to 40% from 20% in the prior year period.
Sales to international customers totaled $31.0 million or 51% of revenues
for the nine months of fiscal 1998 compared to $19.8 million or approximately
32% of revenues for the comparable period last year, an increase of 57%. An
increase in sales to Asia accounted for most of the year-over-year increase and
represented approximately 24% of total revenues for the year compared to just 7%
in the prior year period. However, economic problems in this region of the
world are likely to result in a continuation of the same weakness encountered
during the most recent quarter. The Company is aware that some sales to
domestic customers ultimately have international destinations.
Gross Profit
Gross profit of $25.9 million for the nine months of fiscal 1998 represented
42.7% of revenue compared to 48.2% in the comparable period last year. The
decrease in gross margin compared to the prior year reflects i) lower revenues
coupled with on-going fixed costs, ii) lower average sales prices for the
Company's broadband products, and iii) a shift in business mix from broadband to
other product groups where volumes and economies of scale are not as favorable.
Research and Development
Research and development expenses of $9.8 million for the nine months of
fiscal 1998 increased by $.3 million or 2% from the comparable period last year.
With revenues only slightly lower, research and development expense as a
percentage of revenues increased to 16.2% compared to 15.7% in the comparable
period last year.
12
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
Sales and Marketing
Sales and marketing expenses of $7.4 million for the nine months of fiscal
1998 were similar to the comparable quarter last year. With revenues only
slightly lower, sales and marketing expense as a percentage of revenues
increased to 12.3% compared to 12.0% in the comparable period last year.
General and Administrative
General and administrative expenses of $4.4 million for the nine months of
fiscal 1998 decreased slightly compared to $4.7 million for the comparable
period last year and decreased as a percentage of revenues to 7.3% from 7.6% for
the same period.
Liquidity and Capital Resources
At January 31, 1998, the Company had working capital of $51 million,
including $11.5 million in cash and cash equivalents and $17.5 million in short-
term investments. For the nine-month period ended January 31, 1998, the
Company's operating activities generated $3.9 million in cash. Cash from
operating activities includes net income of $3.8 million plus depreciation and
amortization of $4.4 million plus a reduction in inventory of $2.3 million
offset by an increase in trade receivables of $1.4 million and a decrease in
accounts payable, taxes payable and other accrued liabilities totaling $5.0
million.
Cash flow from investing activities includes a $5 million investment in
Tellium, Inc. made in May 1997, and an additional $437,000 investment in Photon
Technology Co., Ltd., made in June, 1997. Cash flow from financing activities
was $1.1 million and included proceeds from issuance of common stock through
stock option exercises offset by a repurchase of 25,000 shares of the Company's
common stock during the third quarter.
On September 1, 1997, the $2 million unsecured line of credit with Wells
Fargo Bank expired and was not renewed. The Company had no borrowings
outstanding under this credit facility.
13
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
On September 9, 1997, the Company renewed an unsecured line of credit
totaling $5 million with Bank of America, expiring on September 30, 1998.
Interest rates vary according to market rates of interest. There were no
borrowings outstanding under this credit facility at January 31, 1998
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
Reference is hereby made to the Exhibit Index commencing on page 17.
b. No reports were filed on Form 8-K during the quarter ended January 31,
1998
14
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
DATE: March 17, 1998 ORTEL CORPORATION
(Registrant)
By: /s/ Wim H.J. Selders
-------------------------------------
Wim H.J. Selders,
President and Chief Executive
Officer
By: /s/ Stephen K. Workman
-------------------------------------
Stephen K. Workman,
Vice President, Finance and Chief
Financial Officer
15
<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)
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 Consulting Agreement, dated January 3, 1994, between Ortel (Note 1)
Corporation and Wayne Tyler.
10.4 Consulting Agreement, dated March 2, 1990, as amended, between (Note 1)
Ortel Corporation and Amnon Yariv.
10.5 Employment Agreement, dated September 14, 1990, between Ortel (Note 1)
Corporation and Wim H.J. Selders.
10.6 Employment Agreement, dated September 14, 1990, between Ortel (Note 1)
Corporation and Israel Ury.
10.7 Employment Agreement, dated September 14, 1990, between Ortel (Note 1)
Corporation and Nadav Bar-Chaim.
10.8 1981 Incentive Stock Option Plan of Ortel Corporation. (Note 1)
10.9 1990 Stock Option Plan of Ortel Corporation. (Note 1)
10.10 Loan Agreement, dated September 30, 1993, between Ortel Corporation (Note 1)
and First Interstate Bank.
10.11 Form of Indemnification Agreement. (Note 1)
10.12 Common Stock Purchase Agreement, dated March 26, 1990, between (Note 1)
Sumitomo Cement Co., Ltd. and Ortel Corporation.
10.13 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.
10.14 Agreement Concerning Certain Financial and Business Arrangements, (Note 1)
dated as of March 26, 1990 between Sumitomo Cement Co., Ltd. and
Ortel Corporation.
10.15 Voting Agreement of Sumitomo Cement Co., Ltd., dated as of March (Note 1)
26, 1990 between Sumitomo Cement Co., Ltd. and Ortel Corporation.
10.16 Agreement dated as of November 19, 1993, between Ortel Corporation (Note 1)
and General Instrument Corporation.
10.17 Agreement, dated as of January 24, 1994, between Ortel Corporation (Note 1)
and General Instrument Corporation.
10.18 Modification Agreement, dated 1985, between Ortel Corporation and (Note 1)
certain investors.
10.19 Class A Common Stock Purchase Agreement, dated as of December 14, (Note 1)
1981, between Ortel Corporation and certain investors.
10.20 1994 Equity Participation Plan of Ortel Corporation. (Note 1)
10.21 Severance Agreement, dated as of August 26, 1994, between Ortel (Note 1)
Corporation and Stephen K. Workman.
10.22 Stock Purchase Agreement dated March 12, 1996 between Hakan (Note 2)
Samuelsson and Ortel Corporation.
10.23 Stock Purchase Agreement dated March 12, 1996 between Christa (Note 2)
Samuelsson and Ortel Corporation.
10.24 Loan Agreement, dated June 2, 1995 between Ortel Corporation and (Note 3)
Bank of America.
</TABLE>
16
<PAGE>
EXHIBIT INDEX (CONTINUED)
<TABLE>
<CAPTION>
Exhibit No. Document Description Page No.
- ----------- -------------------- --------
<S> <C> <C>
10.25 Amendment to Loan Agreement dated September 30, 1995 between Ortel (Note 3)
Corporation and First Interstate Bank.
10.26 Amendment dated January 17, 1997 to Loan Agreement dated September 30, (Note 4)
1995 between Ortel Corporation and Wells Fargo Bank, National Association
(formerly First Interstate Bank)
10.27 Amendment No. 2 dated September 9, 1997 to Loan Agreement dated June 2, (Note 5)
1995 between Ortel Corporation and Bank of America.
10.28 Severance Agreement, dated December 1, 1997, between Ortel Page 18
Corporation and Douglas H. Morais.
10.29 Amendment No. 1 dated June 10, 1996 to Loan Agreement dated September 30, Page 22
1995 between Ortel Corporation and Wells Fargo Bank, National Association
(formerly First Interstate Bank).
27.0 Financial Data Schedule Page 23
</TABLE>
__________
______
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 10Q filing for the
quarter ended October 31, 1997
17
<PAGE>
EXHIBIT 10.28
SEVERANCE AGREEMENT
This Severance Agreement ("Agreement") is made as of December 1, 1997 by
and between ORTEL CORPORATION, a California corporation ("Ortel"), and Douglas
H. Morais, and individual ("Executive").
WHEREAS, Executive is employed by Ortel as its Executive Vice President,
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 12(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" whether by the Company or by Executive:
(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 termination.
-18-
<PAGE>
(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 of 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.
(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 by 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 of 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.
-19-
<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 judgement 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
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 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.
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.
-20-
<PAGE>
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/Douglas H. Morias By /s/Wim H.J. Selders
- --------------------------- -------------------------
Douglas H. Morais Wim H.J. Selders
President and Chief Executive
Officer
-21-
<PAGE>
EXHIBIT 10.29
- --------------------------------------------------------------------------------
[LOGO OF BANK OF AMERICA] AMENDMENT TO DOCUMENTS
- --------------------------------------------------------------------------------
AMENDMENT NO. 1 TO BUSINESS LOAN AGREEMENT
This Amendment No. 1 (the "Amendment") dated as of June 10, 1996 is between
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank") and ORTEL
CORPORATION (the "Borrower").
RECITALS
--------
A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of June 22, 1995 (the "Agreement").
B. The Bank and the Borrower desire to amend the Agreement.
AGREEMENT
---------
1. DEFINITIONS. Capitalized terms used but not defined in this Amendment
-----------
shall have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
----------
2.2 In Paragraph 2.2 of the Agreement, the date "December 31, 1996" is
substituted for the date "May 1, 1996."
3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the
-------------------
terms and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
<TABLE>
<S> <C>
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION ORTEL CORPORATION
/s/ Kjell Gronvold /s/ Wim H. J. Selders
- ----------------------------------- -------------------------------------------------
By: Kjell Gronvold, Vice President By: Wim H. J. Selders, President/Chief Executive
Officer
/s/ Stephen K. Workman
-------------------------------------------------
By: Stephen K. Workman, Vice President-
Finance/Chief Financial Officer
</TABLE>
- -------------------------------------------------------------------------------
-22-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 11,531
<SECURITIES> 17,467
<RECEIVABLES> 15,450
<ALLOWANCES> 392
<INVENTORY> 11,614
<CURRENT-ASSETS> 60,597
<PP&E> 39,821
<DEPRECIATION> 20,826
<TOTAL-ASSETS> 90,719
<CURRENT-LIABILITIES> 9,113
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 90,717
<TOTAL-LIABILITY-AND-EQUITY> 90,719
<SALES> 60,568
<TOTAL-REVENUES> 60,568
<CGS> 34,666
<TOTAL-COSTS> 34,666
<OTHER-EXPENSES> 9,823<F1>
<LOSS-PROVISION> 45<F2>
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> 4,988
<INCOME-TAX> 1,211
<INCOME-CONTINUING> 3,777
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,777
<EPS-PRIMARY> .33
<EPS-DILUTED> .29
<FN>
<F1>RESEARCH AND DEVELOPMENT EXPENSES
<F2>PROVISION FOR BAD DEBT
</FN>
</TABLE>
