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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, 1999
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)
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Delaware 0-22598 95-3494360
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation or organization) Identification No.)
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2015 West Chestnut Street, Alhambra, California 91803-1542
(Address of principal executive offices) (Zip Code)
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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, 1999 was $81 million based on the closing sales
price of such stock on such date of $10.625 per share.
[X] 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, 1999 was 11,975,156
______________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Proxy Statement for its 1999 Annual Meeting of
Stockholders to be held on September 24, 1999 are incorporated by this reference
into Part III as set forth herein.
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ORTEL CORPORATION
INDEX
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PART I
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Item 1. Description of Business................................................................. 1
Item 2. Description of Property.................................................................21
Item 3. Legal Proceedings.......................................................................21
Item 4. Submission of Matters to a Vote of Security Holders.....................................22
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters....................22
Item 6. Selected Financial Data.................................................................23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...24
Item 8. Financial Statements and Supplementary Data.............................................28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....28
PART III
Item 10. Directors and Executive Officers of the Registrant.....................................29
Item 11. Executive Compensation.................................................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................29
Item 13. Certain Relationships and Related Transactions.........................................29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................29
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PART I
Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that
its expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations are discussed in Risk Factors.
Item 1. BUSINESS
Ortel Corporation ("Ortel" or the "Company") has been in the forefront of
semiconductor optoelectronics for almost two decades. With its deep technical
roots, Ortel has been a leading innovator providing solutions that enable the
high speed transmission and utilization of bandwidth for the communications
industry. Advanced technology, in-depth understanding of end-user applications
and close working relationships with major manufacturers have made Ortel a
leading supplier of optoelectronic components in the cable television (CATV),
satellite communications and wireless markets and more recently a strong
presence in the data communications and telecommunications markets.
Ortel 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 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.
Fiber distribution systems utilizing Ortel's proprietary technology have
enabled multiple system operators (MSO's), satellite earth station operators and
certain government agencies to capitalize on the inherent ability of this
technology to transmit signals over longer transmission distances, thereby
improving signal quality, increasing bandwidth, and providing immunity to
interfering signals and ultimately providing 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. The company's recent announcement of solutions for 10 Gb
transmission and reception has already been well received by customers.
Building on its knowledge of RF electronics, the Company has also positioned
itself as a leading supplier of wireless communication products which enhances
the coverage of base stations for cellular, PCS and other wireless services.
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.
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
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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 850 MHz.
Concurrent with the development of its linear fiberoptic technology for CATV
applications, the Company also leveraged its strengths in high speed
optoelectronics to develop transmitter-receiver links which could be sold to end
users and original equipment manufacturers ("OEMs") and used for the
transmission of RF signals that enable the remoting of satellite antennas over
long distances, up to 80 Km. 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. In June 1999, the Company announced its
intention to sell its Wireless operations in order to focus on its fiber optic
business.
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 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 has
followed that with the successful introduction of 10 Gb lasers and receivers
during fiscal 1999.
The Company has made several strategic investments and acquisitions,
beginning with the acquisition of Avitec AB of Sweden in March 1996, which
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
fiberoptic components. This investment provides the Company with the
opportunity to capitalize on a lower cost manufacturing source as well as
enhance the Company's presence in that country. In May 1997, the Company
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. Tellium recently introduced three systems
into the market place 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 carrier (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.
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 degradation 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 copper cables (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.
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When RF signals are transmitted through coaxial cables or waveguides, signal
strength and quality deteriorate as transmission distance increases. To
compensate for these effects, system designers had to either (i) use other
compensating RF equipment, such as amplifiers and equalizers, or (ii) limit the
distance between various pieces of RF equipment. Amplifiers and equalizers
introduce cost, reliability and performance limitations to the overall system
design. Limiting the transmission distance has placed restrictions on the range
and flexibility of the overall system design. In addition, coaxial cable and
waveguides have often been heavy, inflexible and difficult to install.
CATV networks have relied on a "tree and branch" coaxial cable network, with
multiple cascaded amplifiers to overcome the signal deterioration, to distribute
television signals to subscribers. This "tree and branch" architecture evolved
as the only cost-effective cable network for CATV systems. The range of CATV
networks has been limited because only a certain number of amplifiers can be
cascaded without degrading the signal unacceptably. To reach more distant
subscribers, new transmission control facilities ("headends") had to be built
and "super-trunk" lines had to be installed to convey a high quality signal deep
into the network. As the number of CATV channels multiplied, requiring increased
system bandwidth and additional amplifiers, CATV operators were faced with
expensive re-builds of their systems to provide increased channel capacity.
Fiberoptics offered a potential solution to the limitations associated with
the transmission of RF signals over coaxial cable and waveguides. Compared to
coaxial and waveguide cables, fiberoptic cables provide significant performance
advantages, including (i) longer transmission distance, (ii) greater signal
capacity (e.g., higher bandwidth), (iii) reduced cable size and weight and (iv)
invulnerability to interference from external electronic signals.
In spite of these advances, there had been no widespread adoption of
fiberoptics in broadband RF, cellular and wireless and satellite communications
systems. The fiberoptic technology designed for "on/off" operation could not
reproduce all of the RF signals used in these communications systems. To be used
with RF signals, lasers had to reproduce the exact wave form of the original
signal at every instant in time ("linear" operation) and at sufficiently high
frequencies and light output power. These and other technical limitations
presented a dilemma to proponents of fiberoptic transmission in broadband RF,
cellular and wireless and satellite communications systems. For this reason,
the Company initially focused its research and development efforts on developing
a solution to this problem.
The introduction of linear fiberoptics (1987)
In mid-1987, the Company was the first to demonstrate that CATV signals could
be cost-effectively transmitted over fiber. Unlike traditional "on/off" digital
lasers, Ortel's proprietary linear lasers proportionally change the intensity of
the light signal with the CATV 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 changing the
intensity of the light signal, the Company's linear fiberoptic technology
enables the transmission of CATV 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
shipping product in volume beginning in 1990.
The Company's linear fiberoptic technology dramatically changed the
architecture for CATV systems 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. The hybrid fiber/coax architecture 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
high speed services, such as telephony, 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
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improved signal quality, higher capacity and allows cable television
operators to increase the number of channels offered.
Use of existing infrastructure. Ortel's linear fiberoptic technology
allows the CATV industry to use the "last mile" of the existing coaxial
cable infrastructure connecting the network to individual homes, thereby
reducing the investment required to upgrade the network.
Scalability. The use of the Company's products in hybrid fiber/coax
networks allows network operators to expand channel capacity by segmenting
these networks such that fewer homes are served by any one laser. In
addition, because "digital switching" occurs at one end of the network
rather than in the "field," these networks may more easily be upgraded in a
cost-effective manner in the future.
Transparency to subscribers. The Company's products enable subscribers to
continue using their existing television sets and set-top converters,
because the CATV signals are transmitted in standard technical formats.
Reduced maintenance. Network reliability is increased and operating costs
are reduced as a result of a simplified network layout and fewer cascaded
amplifiers requiring field service.
With these benefits in mind, cable operators in the United States (U.S.)
began upgrading their networks in 1990 primarily to increase channel capacity,
reduce operating costs and improve reliability. In the latter half of calendar
1993, Ortel introduced the industry's first digital-ready laser operating at up
to 750 MHz (previous lasers were capable of 550 MHz). 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 1998, 60% of
the U.S. CATV subscribers are served by interactive networks while less than 30%
of subscribers are served by networks that are high speed two-way capable.
Internationally, where CATV penetration is much less, the percentage of networks
that have been upgraded is even lower.
Through fiscal 1999, 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. 1310nm
is still the wavelength of choice for distributing CATV signals. However,
increased consumer demand for higher speed interactivity is forcing cable
companies to look at additional ways of exploiting the inherent capacity of the
fiber. One way is to use multiple wavelengths of light on the same fiber. The
additional wavelengths are centered at 1550nm. Because transmission of signals
at 1550nm requires stringent requirements on the laser, the Company used its
technological strengths to develop a laser well suited for this application.
The Company began shipping product for this application in FY 1999 and has
captured significant market share. 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 1550nm source lasers.
Satellite Communications
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")
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and middle-earth orbit ("MEO") operators (together known as Big LEO) such as
Globalstar, Iridium, ICO, SkyBridge, Spaceway, Ellipso, and Teledesic.
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 12 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 7% 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.
Several companies have introduced wireless broadcast television services
(also known as direct broadcast satellite or DBS) in competition with cable
television operators including DirectTV 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 coaxial 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 MDUs and even a greater percentage in many
other parts of the world internationally, the Company has recently developed
products for use by this emerging market 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 networks 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 use of Time Division Multiplexing ("TDM") and
Wavelength Division Multiplexing ("WDM"). The first of these techniques expands
capacity by increasing the transmission bit rate at a given wavelength while the
second increases 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.
In fiscal 1999 Ortel introduced a 10 Gb PIN receiver family of products with
performance surpassing all products of its kind currently available on the
market. This has been confirmed by a significant contract award from a major
telecommunications manufacturer to supply our 10 Gb receivers. In addition,
Ortel has announced and is sampling directly modulated 10 Gb lasers.
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
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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.
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, 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
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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 or "Engine" 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 technology.
Broadband Communications
Ortel is a leading supplier of lasers, fiberoptic transmitter engines and
receiver modules to OEMs for use in broadband 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.
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.
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Broadband Communications
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RF Frequency First Latest
(MHz) Version Version
Description / Power (mw) Where Used Introduced Introduced
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1310nm OEM CATV Transmitter
Laser Module 50-860 MHz Systems February 1998 November 1998
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1310nm OEM CATV
Transmitter Engine 40-860 MHz Headend August 1990 December 1998
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1310nm Cooled OEM CATV
Return Path Laser 5-200 MHz Hub June 1996 June 1996
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1310nm Photodiode CATV Optical
Receiver 40-860 MHz Node January 1989 May 1994
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1550nm OEM Transmitter CATV
Engine 40-860 MHz Headend April 1996 May 1996
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1550nm Optical Amplifier CATV Signal
Engine (EDFA) Amplification Between
Headend and Secondary
25-150 mW Headends/Hubs April 1996 April 1998
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1550nm OEM CATV 1550nm
Laser Module 40 mW Transmitter Systems October 1996 May 1998
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1550nm Cooled OEM
AWDM Return Path Laser CATV
Module 6 mW hub June 1998 June 1998
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1550nm OEM
AWDM Forward Path CATV 1550nm
Laser Module 10 mW Transmitter Systems June 1998 June 1998
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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.
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 "LightLinks" which enables
satellite-delivered services including TV and internet access to be distributed
from one antenna to hundreds of receivers in medium and large office buildings
with 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 Earth Station November 1993 March 1998
Transmission Link 140 MHz VSAT Hub
1 transponder
- --------------------------------------------------------------------------------------------------------------------------
Fiberoptic 950 - 2050 MHz Teleport TV Broadcast November 1990 March 1998
Transmission Link 12 transponders CATV Headend
- --------------------------------------------------------------------------------------------------------------------------
Fiberoptic 3.6 - 4.2 GHz Satellite Earth Station November 1993 April 1998
Transmission Link 5.8 - 6.5 GHz TV Broadcast
7.25 - 8.4 GHz
10.95 - 12.75 GHz
14.0 - 14.5 GHz
12 transponders
- --------------------------------------------------------------------------------------------------------------------------
Fiberoptic Transmission Link 950-2050 MHz Multi-Dwelling Units (MDUs) and July 1998 June 1999
45-860 MHz Office Buildings
- --------------------------------------------------------------------------------------------------------------------------
</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 Company introduced an OC-192 (industry classification for optical devices
operating at 10 gigabits per second ["Gbps"]) receiver module which can be used
in both TDM and WDM applications. In June 1999 the Company announced that a
major telecommunications equipment provider had awarded Ortel a contract to
purchase its Model 2860 10 Gbps receivers. The Company also announced that it
was sampling several other major telecom equipment providers who were in the
process of qualifying the 2860 for potential high volume applications. Ortel is
applying its experience in high speed linear fiberoptics to develop 10 Gbps
laser modules as well. These high value components are being designed into next
generation high speed transmission equipment including routers, switches, and
SONET/SDH rings.
8
<PAGE>
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>
980 Pump Laser 90 150 mW Optical Amplifiers Discontinued 1998
- ---------------------------------------------------------------------------------------------------------------------
OC-192 Receiver Module 10.0 Gbps Telecom Networks Using TDM and WDM February 1999 February 1999
Equipment
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
In June 1999, the Company announced its intention to sell its wireless
operations in order to focus on its fiber optic business.
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 Frequency Version Version
Description (MHz) Where Used Introduced Introduced
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DFB Laser Transmitter 800 - 1000 MHz Cellular Base Station for Analog, August 1992 April 1994
Photodiode Receiver Digital and Dual-mode
Microcell Antenna
- -----------------------------------------------------------------------------------------------------------------------------
DFB Laser Transmitter 1.7 - 2.2 GHz Personal Communications Networks April 1994 April 1994
and Photodiode Receiver
- -----------------------------------------------------------------------------------------------------------------------------
DFB Laser 175 - 1000 MHz For UHF, VHF and Cellular April 1994 April 1994
Transmitter Links Applications
- -----------------------------------------------------------------------------------------------------------------------------
Fiberoptic Antenna 800 - 1000 MHz In-building Cellular, PCS, and February 1995 September 1995
System 1.7 - 2.2 GHz Wireless PBX
- -----------------------------------------------------------------------------------------------------------------------------
Medium Power CDMA Repeaters 1850-1990MHz Remote Off-air and Fiber Feed from September 1996 September 1996
Base Station
- -----------------------------------------------------------------------------------------------------------------------------
Medium Power 890 - 960 MHz Remote Off-air and Fiber Feed from March 1996 March 1996
GSM Repeaters Base Station
- -----------------------------------------------------------------------------------------------------------------------------
Medium Power DCS1800/PCS1900 1750 - 1990MHz Remote Off-air and Fiber Feed from November 1994 March 1996
Repeaters Base Station
- -----------------------------------------------------------------------------------------------------------------------------
High Power 890 - 960 MHz Remote Off-air Fed from Base March 1996 March 1996
GSM Repeaters Station
- -----------------------------------------------------------------------------------------------------------------------------
Repeaters for 75 - 1000 MHz Remote Off-air Feed from Main RF January 1986 March 1999
Underground Emergency Source for Tunnels, Subways and
Communications Systems Underground Facilities
- -----------------------------------------------------------------------------------------------------------------------------
High Power CDMA Repeaters 1850 - 1990 MHz Remote Off-air & Fiber Feed from September 1998 September 1998
Base station
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
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 is 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, high speed 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. Certain applications are supported by high output
power and high speed transmitters and receivers.
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 provide 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. 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.
10
<PAGE>
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 1999 despite a reduction in revenues compared to
prior years. 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, high speed digital electronics, and RF
circuits and systems. In fiscal years 1999, 1998 and 1997 research and
development expenses were approximately $12.4 million, $11.7 million and $12.9
million, respectively.
From time to time, the Company enters into select contract research and
development programs. The Company's strategy is to choose 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 $195,000, $730,000 and $1,489,000 in fiscal years 1999, 1998 and 1997,
respectively, are netted against research and development expenses.
MARKETING AND SALES
Ortel markets and sells its products worldwide to OEM manufacturers and
system integrators that serve the broadband, satellite, and telephony and
datacom sectors of the communication market.
During fiscal 1999, Ortel expanded its direct sales force which now includes
direct sales teams in Asia and Europe to compliment the sales team in the United
States. Ortel's Asia Pacific headquarters are in Singapore (Ortel Asia Private,
Ltd.), with satellite offices in Beijing and our European headquarters are in
Munich (Ortel Vertriebs GmbH) with satellite offices in Stockholm, Berlin, and
Paris (Ortel SARL). Ortel utilizes both direct and indirect (representatives
and distributors) channels to reach its customers.
Ortel also sells its wireless products through a dedicated sales force to
both OEMs and end users from both the U.S. and Avitec AB in Sweden. Sales to
customers outside of the United States represented 38%, 49% and 34% of the
Company's total revenues in fiscal years 1999, 1998 and 1997, 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 is actively involved
in the sales process.
CUSTOMERS
Ortel has strategic long-term relationships with its major OEM customers. In
fiscal 1999 two of these CATV OEMs represented 42% of the company's revenues.
Ortel began selling to Antec Corporation in May 1996 and in fiscal 1999, Antec
became Ortel's largest customer, due to a strategic partnership that has allowed
Ortel to sell its entire product portfolio to this customer. Sales to this
customer were 10% or more of total revenues in fiscal years 1999, 1998 and 1997.
Prior to fiscal 1999, General Instrument Corporation ("GI") was Ortel's largest
customer and in the fiscal year ended April 30, 1999, maintained the number two
position procuring 1310nm products from Ortel. Sales to GI were more than 10%
of total revenues in fiscal years 1999, 1998 and 1997. While the Company has
enjoyed a long-term relationship with these customers, there can be no assurance
that these customers 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 customers
other than Antec and GI represented 29%, 36% and 31% of total revenues in fiscal
years 1999, 1998 and 1997, respectively.
11
<PAGE>
Approximately 51%, 36% and 54% of the Company's revenues in fiscal years
1999, 1998 and 1997, respectively, were derived from sales of products to the
Company's top five largest customers.
In fiscal 1999 with the introduction of the 10 Gb product family of lasers
and receivers, the Company announced that it received an award of a multi-year
contract for the supply of 10 Gb receivers from a major telecom equipment
manufacturer. This award represents more than $1 million dollars scheduled for
delivery in fiscal 2000.
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.
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 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 twenty-six 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, and 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
12
<PAGE>
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) is applied to products involving the transmission
of radio signals using linear fiberoptic technology and MICROWAVES ON FIBER(R)
is applied to products that have the 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 and THE INFINITE POSSIBILITIES OF LIGHT for all of its laser and
fiber optic products. The Company also has registered the 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.
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, 1999, the Company employed 480 worldwide including 437
persons in the U.S. On a worldwide basis, 348 were in manufacturing, 45 in
research and development, 52 in sales and marketing, and 35 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,
1999, there were 7 consultants and 53 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:
13
<PAGE>
Dependence on Large Customers
Approximately 42%, 26% and 46% of the Company's total revenues in fiscal
years 1999, 1998 and 1997, respectively, were derived from sales to Antec
Corporation and General Instrument Corporation. 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. The decrease in sales of the
Company's products in fiscal year 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 51%, 36% and 54% of the
Company's total revenues in fiscal year 1999, 1998 and 1997, respectively. A
substantial portion of revenues from each of these customers during this period
was attributable to our 1310nm and 1550nm product lines. 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.
Dependence on CATV Industry Capital Spending
Approximately 71%, 62% and 77% of the Company's total revenues in fiscal
years 1999, 1998 and 1997, 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
14
<PAGE>
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 42% in fiscal 1998 to 39% in fiscal 1999. 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 adequate supplies of new products can be
delivered to meet customer demand. There can be no assurance 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.
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) Ortel's 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 and Uniphase
Corporation. As the market for linear fiberoptic products grows, new
competitors are likely to emerge.
There are also several alternative network technologies which could directly
or indirectly affect demand for the Company's products. For example, certain
telephone companies are experimenting with a network known as "digital fiber to
the curb" offered by Broadband Technologies and Nextlevel, a division of General
Instrument Corporation. This network uses PCM digital fiberoptic technology
rather than linear fiberoptics. If telephone companies were to widely deploy
such a network and were successful in gaining market share at the expense of the
CATV industry, 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, thus reducing 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
15
<PAGE>
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 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 7% 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
guarantee 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 such
as Foxcom, IRT and Uniphase also offer a fiberoptic solution to these operators.
Telecommunications. Currently, the Company offers a variety of products for
telecommunications applications including 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, Nortel, Fujitsu,
Hitachi, Uniphase and Toshiba.
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, Repeater Technologies, Watkins-Johnson
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 whom 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.
16
<PAGE>
Need to Effectively Manage Manufacturing Processes
The Company's success will depend in part on whether it will be able to
effectively manage its various manufacturing processes, including wafer
fabrication and device packaging. No assurance can be given that the Company
will be able to effectively manage its various manufacturing processes. The
failure to effectively manage manufacturing processes in a timely fashion would
have a material adverse effect on the Company's results of operations and
financial condition.
Risks of Lengthy Sales Cycles
The typical sales cycle for Ortel's products requires a substantial
investment of time and effort. Initial leads are investigated to determine if
the customer's needs can be met. Engineering and applications support is
usually required during this stage. Often, a lengthy product evaluation phase
follows, which may lead to the modification of the physical or electrical
specifications of the product. Finally, negotiations regarding volume, delivery
and price take place. For this reason, the Company's products typically have a
lengthy sales cycle. Lengthy sales cycles subject the Company to a number of
significant risks, including fluctuations in operating results and inventory
obsolescence, over which the Company has little or no control.
Dependence on Key Personnel
The Company's future success depends in large part on the continued service
of its key management and technical personnel and on whether or not the Company
will be able to continue to attract and retain highly skilled engineering,
manufacturing, marketing and managerial personnel. The competition for such
personnel is intense, and the loss of key employees could have a material
adverse effect on the results of operations or financial condition of the
Company.
Dependence on New Product Development
The broadband, telecom, and wireless 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 38%, 49% and 36%
of the Company's total revenues in fiscal years 1999, 1998, and 1997,
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.
17
<PAGE>
The Company's sales to Asia decreased to $8.8 million in fiscal 1999 compared
to $16.9 million in fiscal 1998. 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.
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 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
18
<PAGE>
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 has assessed the impact the year 2000 issue will have on its
products and internal information systems and took corrective action to ensure
that its operations will not be adversely impacted. Steps have been taken to
reduce the risk to the availability and integrity of financial systems and the
reliability of operational systems. The Company has established processes for
evaluating and managing the risks and costs associated with this issue and 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 as promised, this could have a
material adverse impact on the Company's operations and financial results. This
item is discussed in greater detail in Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations.
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 aware of only one claim which are being actively pursued (See Item 3 Legal
Proceedings and Patents in Note 7, Commitments and Contingencies). 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 or 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 36% of the outstanding shares of the Company's Common Stock. As a
result, such persons, acting together, would have the ability to exercise
significant influence over all matters requiring stockholder approval. The
concentration of ownership could have the effect of delaying or preventing a
change in control of the Company and could have a material adverse effect on the
market value of the Company's Common Stock.
Potential Issuance of Preferred Stock and Other Anti-Takeover Provisions
The Board of Directors have the authority to issue up to 5,000,000 shares of
undesignated Preferred Stock, to determine the powers, preferences and rights
and the qualifications, limitations or restrictions granted to or imposed upon
any unissued series of undesignated Preferred Stock and to fix the number of
shares constituting any series and the designation of such series, without any
further vote or action by the Company's stockholders. The Preferred Stock could
be issued with voting, liquidation, dividend and other rights superior to the
rights of the Common Stock. Furthermore, such Preferred Stock may have other
rights, including economic rights, senior to the Common Stock, and as a result,
the issuance of such stock could have a material adverse effect on the market
value of the Common Stock. In addition, the Company's Certificate of
Incorporation eliminates the right of
19
<PAGE>
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.
20
<PAGE>
Item 2. PROPERTIES
The Company leases its principal manufacturing, engineering, sales and
administrative facilities consisting of approximately 114,300 square feet in
Alhambra, California. Total monthly cost of these leased facilities is
approximately $75,000. Significant leases are as follows:
<TABLE>
<CAPTION>
Square Footage
Building No(s). (Approx.) Current Lease Period Option Period 1 Option Period 2
- --------------------------------------------------------------------------------------------------------
<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 9,300 7/98 - 6/2000 7/2000 - 6/2003 None
- --------------------------------------------------------------------------------------------------------
7 8,000 10/98 - 9/2000 10/2000 - 9/2005 None
- --------------------------------------------------------------------------------------------------------
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 14,000 Owned or rented month-to-month
- --------------------------------------------------------------------------------------------------------
Total 114,300
- -------------------------------------------
</TABLE>
During fiscal 1999, the Company entered into a two-year lease for building
six combining the space it previously leased in two separate increments. The
Company also exercised an option period for building seven extending the lease
term for two years.
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, Philadelphia, Pennsylvania and Santa Clara, California.
Sales offices in France, Germany, Beijing and Singapore are also leased. The
facility lease for Avitec AB in Sweden has been reduced in size to approximately
11,000 square feet with an approximate monthly cost of $10,000. This lease
expires on June 30, 2000 and there is no renewal option.
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 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. See Note 7 of Notes to Consolidated Financial Statements.
Item 3. LEGAL PROCEEDINGS
As early as January 1990, 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 its patent rights with respect to the contracts the U.S. government has had
with at least 15 companies, including Ortel. During fiscal 1997, this patent
was held invalid in a court action brought by Rockwell. A subsequent ruling of
the Court of Appeals for the federal circuit sent the case back to trial court.
The U.S. government settled the lawsuit and in April 1999, Rockwell once again
approached the Company asserting its rights to the patent. The Company has
requested information regarding terms of a possible license.
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.
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 approximately $1 million in each year
fiscal 1998, 1997 and 1996 less related litigation expenses.
21
<PAGE>
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 10-Q for the quarter ended October 31, 1998.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed on the Nasdaq National Market under the symbol
"ORTL." The following table sets forth, for the calendar periods indicated, the
range of high and low closing sales prices for the Common Stock, as reported by
Nasdaq:
<TABLE>
<CAPTION>
Fiscal Fiscal
1999 1998
---------- ----------
High Low High Low
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1st Quarter ended July 31....................................... $19.94 $12.88 $22.00 $12.00
2nd Quarter ended October 31.................................... 19.69 10.44 25.00 18.88
3rd Quarter ended January 31.................................... 13.13 7.81 23.88 12.75
4th Quarter ended April 30...................................... 10.75 6.00 15.38 10.69
</TABLE>
The closing sales price of the Company's Common Stock on June 30, 1999 was
$10.625. The approximate number of stockholders of record on June 30, 1999 was
144.
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, 1999. This data should be read in conjunction
with the consolidated financial statements and notes thereto set forth elsewhere
herein. See accompanying notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
Year Ended April 30,
(in thousands, except per share amounts)
------------------------------------------------------------
1999 1998 (1) 1997 (1) 1996 1995
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues............................................................. $72,059 $75,927 $82,363 $57,666 $50,090
Cost of revenues..................................................... 44,091 44,065 42,746 29,477 25,311
------- ------- ------- ------- -------
Gross profit....................................................... 27,968 31,862 39,617 28,189 24,779
Operating expenses:
Research and development(2)........................................ 12,374 11,662 12,875 8,878 6,328
Sales and marketing................................................ 11,840 10,251 10,605 7,969 6,306
General and administrative......................................... 6,889 6,157 5,968 3,454 2,869
Acquired research and development in-process....................... - - - 4,800 -
------- ------- ------- ------- -------
Total operating expenses.......................................... 31,103 28,070 29,448 25,101 15,503
------- ------- ------- ------- -------
Operating income (loss)............................................ (3,135) 3,792 10,169 3,088 9,276
Other:
Interest income, net............................................... 1,291 1,278 1,458 1,842 1,126
Other income (expense), net........................................ 179 584 743 765 (48)
------- ------- ------- ------- -------
Income (loss) from continuing operations before income taxes......... (1,665) 5,654 12,370 5,695 10,354
Provision (credit) for income taxes.................................. (995) 1,517 3,801 3,302 4,051
------- ------- ------- ------- -------
Income (loss) from continuing operation............................ (670) 4,137 8,569 2,393 6,303
Loss from discontinued operation, net of income tax benefits of
$360 in 1999, $794 in 1998 and $113 in 1997........................ (1,439) (1,400) (254) - -
Loss from disposal of discontinued operations, net of income tax
benefits of $980.................................................... (3,919) - - - -
------- ------- ------- ------- -------
Net income (loss)................................................... $(6,028) $ 2,737 $ 8,315 $ 2,393 $ 6,303
======= ======= ======= ======= =======
Income (loss) per common share - Basic
Income (loss) from continuing operations........................... $ (.06) $ .36 $ .75 $ .21 $ .62
Discontinued operations............................................ (.45) (.12) (.02) - -
------- ------- ------- ------- -------
Income (loss) per share - Basic.................................... $ (.51) $ .24 $ .73 $ .21 $ .62
======= ======= ======= ======= =======
Income (loss) per common share - Diluted (3)
Income (loss) from continuing operations (3)....................... $ (.06) $ .33 $ .68 $ .19 $ .55
Discontinued operations (3)........................................ (.45) (.11) (.02) - -
------- ------- ------- ------- -------
Income (loss) per share - Diluted (3).............................. $ (.51) $ .22 $ .66 $ .19 $ .55
======= ======= ======= ======= =======
Shares used in share computation:
Basic.............................................................. 11,876 11,634 11,463 11,312 10,157
Diluted............................................................ 11,876 12,639 12,609 12,361 11,506
</TABLE>
<TABLE>
<CAPTION>
Year Ended April 30,
-----------------------------------------------------------
1999 1998 (1) 1997 (1) 1996 1995
--------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and short term investments.................................... $23,771 $28,668 $34,562 $38,872 $43,881
Working capital.................................................... 46,001 49,163 52,937 51,127 54,980
Total assets....................................................... 89,228 90,341 90,996 77,457 74,323
Long-term debt..................................................... - - - 6 -
Stockholders' equity............................................... 75,188 78,784 74,883 66,274 64,144
</TABLE>
(1) Certain amounts related to discontinued operations have been reclassified to
conform to current year presentation.
(2) Revenues from research and development contracts are netted against research
and development expenses.
(3) Options to purchase 652,000 shares at or below the average price of the
common shares were outstanding at April 30, 1999, but were excluded from the
computation of diluted earnings per share as the Company reported a loss
position and the effect would be antidilutive.
23
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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.
Comparison of Years Ended April 30, 1999 and 1998
Total revenues for fiscal 1999 were $72.1 million, a 5% decrease from
revenues of $75.9 million in fiscal 1998. Revenues from the fiber optics
business, consisting of broadband, satellite communications and
telecommunications, increased 2% year to year while revenues from the wireless
business decreased 43%, a reflection of the continued slow pace of deployment of
repeater products by wireless PCS operators.
International business made up 38% of total revenue in fiscal 1999, a
decrease of 26% from fiscal 1998. This decrease was primarily due to the
completion of a multi-million dollar contract from our Wireless business in Asia
in fiscal 1998. European revenues increased 6% while U.S. revenues rose 16% year
to year.
Sales to Antec and GI in fiscal 1999 were 24% and 18% respectively, compared
to 10% and 16% respectively in fiscal 1998. While the Company has enjoyed a
long-term relationship with these customers, there can be no assurance that they
will not secure a second source or continue buying products from the company.
Gross margin for fiscal 1999 was 39% compared to 42% in fiscal 1998. The
reduction was due in part to reduced revenue, lower average prices for certain
broadband products and also from a mix of some lower margin products. The
Company anticipates that gross margins in the near term may trend lower as a
result of lower prices on its broadband products offset by on-going cost
reduction efforts associated with the introduction of a number of new products.
The allowance for doubtful accounts receivable was increased by a net of
$666,000 as a precautionary measure related to certain older receivables
currently in dispute.
For fiscal 1999, research and development expenses of $12.4 million, or 17%
of revenue, was 6% higher than $11.7 million, or 15% of revenue, in fiscal 1998.
This increase is in line with the Company's ongoing commitment to invest in its
core linear and high-speed fiber optics business.
Sales and marketing expense increased 16% from $10.3 million, or 14% of
revenue, in fiscal 1998, to $11.8 million, or 16% of revenue in fiscal 1999.
This increase was primarily due to costs associated with the opening of offices
in Asia during the year.
General and administrative expenses increased 12% from $6.2 million, or 8% of
revenue, in fiscal 1998, to $6.9 million, or 10% of revenue, in fiscal 1999.
This increase is primarily due to certain costs related to changes in senior
management and a charge related to the board of directors stock option plan.
There was an operating loss of $3.1 million from continuing operations in
fiscal 1999 compared to an operating profit of $3.8 million last year.
The effective income tax rate from continuing operations was a 59.7% tax
benefit on losses resulting in an income tax benefit of $995,000. This compared
to an effective income tax rate of 26.8% on profits recorded in fiscal 1998.
The loss from continuing operations for fiscal 1999 was $670,000, or $0.06
per basic share compared to a net profit of $4.1 million, or $0.36 per basic
share in fiscal 1998. Net income for fiscal 1999 includes an adjustment of
$590,000 to the tax accrual which is primarily the current tax benefit from the
carryback of unused
24
<PAGE>
research and development credits. Net income for fiscal 1998 includes a gain of
$915,000, or an after-tax impact of $0.05 per basic share, as the Company
received the final installment of three equal annual payments related to an
intellectual property dispute.
After giving effect to losses from discontinuing our 980nm pump laser product
in the second quarter of fiscal 1999 of $5.4 million, or $0.45 per basic share,
and $1.4 million, or $0.12 per basic share, in fiscal 1998, the Company
reported a net loss for fiscal 1999 of $6.0 million, or $0.51 per basic share,
compared to net income in fiscal 1998 of $2.7 million, or $0.24 per basic share.
Comparison of Years Ended April 30, 1998 and 1997
The Company's results for the fiscal year ended April 30, 1998, were, in
large part, dependent upon the level of capital spending on fiberoptic
technologies within the CATV industry. Approximately 84% of the Company's
revenues during fiscal year 1998 was derived from its fiber optics business,
mainly for CATV. For the year, sales to GI accounted for approximately 16% of
total revenues. 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.
Compared to the prior year, the 8% reduction in revenue in fiscal 1998 is the
result of a 14% reduction in fiber optics revenues partially offset by a 47%
increase in revenue for wireless applications. The reduction in fiber optics
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.
On a geographic basis, domestic revenues decreased by 27% in fiscal 1998
reflecting a significant decrease in sales to GI and Antec, while international
revenues increased by 26% during the same period. Sales to customers outside the
U.S. represented 49% of the Company's total revenues in fiscal year 1998.
The decrease in gross margin to 42% in fiscal 1998 as compared to 48% 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.
Research and development expenses of $11.7 million were $1.2 million lower in
fiscal 1998 compared to fiscal 1997 and was unchanged as a percent of revenue at
approximately 15% in both years. Research and development costs are expensed as
incurred and are net of contract revenues. Revenues from such contracts totaled
approximately $730,000 in 1998. 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.
Sales and marketing expenses of $10.3 million in fiscal 1998 were slightly
lower than fiscal 1997 but unchanged as a percent of revenue at approximately
14% in both years.
General and administrative expenses of $6.2 million in fiscal 1998 increased
slightly from $6.0 million in fiscal 1997 and as a percent of revenue increased
to 8% from 7% in the previous year.
Interest and other income, net of interest expense of $1.9 million in fiscal
1998 was down from $2.2 million in fiscal 1997 primarily due to lower average
cash balances. Other income for fiscal 1998 includes a gain of $915,000 as the
Company received the final installment of three equal annual payments related to
an intellectual property dispute. No further payments are expected related to
this dispute.
The effective income tax rate from continuing operations was 26.8% in fiscal
1998 and 30.7% in fiscal 1997. The fiscal 1998 rate has been adjusted to
reflect the effective tax rate from continuing operations.
25
<PAGE>
DISCONTINUED OPERATIONS
In early November 1998, the Company announced it would discontinue its 980 nm
pump laser business. Sales of the 980 nm product began in the first quarter of
fiscal year 1997 and totaled $1.9 million over three fiscal years. Such revenue
was below the Company's expectations due largely to rapid and continual price
reductions in the marketplace. The necessary research and development costs,
which would further differentiate Ortel's product, were not merited under these
market conditions.
In addition to the operating losses incurred, the Company expects it will
incur further costs as a result of its exit from the market. These costs were
recognized in the second quarter of this fiscal year and totaled $4.9 million
before income tax and $3.9 million after tax. Significant items included in
this write-off were expected product warranty costs, write-off of inventory,
equipment and accounts receivable plus severance costs of the associated
reduction in workforce.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1999, the Company utilized $400,000 of cash in its operating
activities for both its continuing and discontinued operations. This was
primarily due to increases in accounts receivable and inventory, partially
offset by a higher level of trade accounts payable. The Company also utilized
$1.8 million in investment activities during the year. This was due to capital
equipment purchases of $5.2 million and a further investment of $1.5 million in
the Tellium joint venture, offset by $4.9 million of proceeds from the sale of
short-term investments. The exercise of stock options generated $1.4 million in
cash in fiscal 1999.
Cash and cash equivalents of $12.7 million remained unchanged from the prior
year ended April 30, 1998. As of April 30, 1999, the Company's principal
sources of liquidity included cash and short-term investments of $23.8 million.
The Company also had a credit facility for $5 million consisting of an unsecured
revolving line of credit that expired on September 30, 1998. The revolving line
of credit is renewable at the Company's option.
The Company believes that cash, short-term investments and funds generated
from operations will be sufficient to satisfy its projected working capital and
capital expenditure requirements over the next twelve months.
YEAR 2000
State of Readiness
The Company's Year 2000 (Y2K) initiatives are focusing primarily on four
areas of potential impact: internal information technology (IT) systems;
internal non-IT systems and processes, including services and embedded chips
(controllers); the Company's products and services and the readiness of
significant third parties with whom the Company has material business
relationships. The Company established a Y2K project committee to coordinate
these programs across the enterprise. The committee reports the results of
these activities directly to senior management and the board of directors.
Remediation is currently in process for all addressed areas with an expected
completion date of September 30, 1999.
The Company has approached its Y2K IT internal readiness program in the
following four phases: (1) assessment, (2) planning, (3) preparation and (4)
implementation. The Company has targeted its efforts to ensure that its
critical IT applications were Y2K compliant by June 30, 1999. The assessment,
planning and preparation phases have been completed. As of June 30, 1999, the
implementation phase is approximately 50 percent complete.
Non-IT systems include, but are not limited to, those systems that are not
commonly thought of as IT systems, such as telephone/PBX systems; fax machines;
facilities systems regulating alarms, building access and sprinklers;
manufacturing, assembly and test equipment; and other miscellaneous systems and
processes. The
26
<PAGE>
Company's Y2K dedicated project manager has developed a comprehensive process to
assure a structured and standardized methodology to organize, plan and implement
the Y2K readiness.
The Company's newly introduced products are Y2K compliant and most of the
Company's existing products do not contain any reference to a date nor do they
access or manipulate a date. However, certain hardware products, specifically
Repeater products, currently installed at customer sites will require upgrade or
other remediation. Approximately 85 percent of the Company's revenue are
products with no Y2K implications. The Y2K project manager has been charged with
the development and implementation of plans to identify, test, develop
remediation methods and the communication of the status and necessary customer
actions for all non-compliant products delivered since January 1, 1997. Where
applicable, Y2K compliance of individual software applications is contingent on
the use of Y2K compliant hardware platforms. The Company is aware of the
potential for legal claims against it and other companies for damages arising
from products that are not Y2K compliant. Management believes that reasonable
communication and customer satisfaction steps are under way so that any such
claims against the Company would be without merit or would not otherwise result
in material liability for the Company.
The Company has developed a Y2K process for dealing with its key suppliers,
contract manufacturers, distributors, vendors and partners. The process
generally involves the following steps: (1) initial supplier survey, (2) risk
assessment and contingency planning, (3) follow-up supplier reviews and
escalation, if necessary, and where relevant, (4) testing. To date, the Company
has received formal responses from all of its critical suppliers. Most of them
have responded that they expect to address all their significant Y2K issues on a
timely basis.
The Company, however, continues to review and monitor the suppliers' Y2K
readiness plans and performance to identify and analyze the most reasonably
likely worst-case scenarios for third-party relationships affected by Y2K.
These scenarios could include possible infrastructure collapse, the failure of
power and water supplies, major transportation disruptions, unforeseen product
shortages due to hoarding of products and sub-assemblies and failures of
communications and financial systems. Any one of these scenarios could have a
major and material effect on the Company's ability to build its products and
deliver services to its customers. While the Company is developing contingency
plans to address most issues under its control, an infrastructure problem
outside of its control or some combination of several of these problems could
result in a delay in product shipments depending on the nature and severity of
the problems.
Costs
The costs associated with the Company's readiness actions are a combination
of incremental external spending and use of existing internal resources. The
Company estimates spending to date has been less than $300,000 which includes
the cost of replacement hardware and software as well as internal labor costs.
Based upon current estimates, the Company does not believe that additional costs
associated with the remaining actions to be taken will have a material effect on
the results of operations or financial condition. However, the costs of such
actions may vary from quarter to quarter. There can be no assurance that there
will not be a delay in, or increased costs associated with the implementation of
such changes.
Although the Company is dedicating substantial resources towards attaining
Y2K readiness, there is no assurance it will be successful in its efforts to
identify and address all Y2K issues. Even if the Company acts in a timely
manner to complete all of its assessments, identifies, develops and implements
remediation plans believed to be adequate, and develops contingency plans
believed to be adequate, some problems may not be identified or corrected in
time to prevent material adverse consequences to the Company.
The discussion above regarding estimated completion dates, costs, risks and
other forward-looking statements regarding Y2K is based on the Company's best
estimates given information that is currently available and is subject to
change. As the Company continues to progress with its Y2K initiatives, it may
discover that actual results will differ materially from these estimates.
27
<PAGE>
CHANGE IN MANAGEMENT
In February 1999, the Company announced that Wim H. J. Selders, President and
Chief Executive Officer, intended to retire from the Company after thirteen
years of service and that the board of directors began a search for his
replacement. In June 1999, Stephen R. Rizzone was hired as President, Chief
Executive Officer and Chairman of the Board. In the latter position Mr. Rizzone
replaces Amnon Yariv, who continues as a member of the board of directors. Mr.
Rizzone's most recent position was with NetVantage, Inc., as President and Chief
Executive Officer. NetVantage merged with Cabletron Systems in September 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company is
required to adopt SFAS No. 133 for all fiscal quarters of fiscal years beginning
after June 15, 2000. Based on the information currently available, management
has determined that the disclosure requirements from this statement will not
impact the financial statements of the Company.
In March 1998, the AICPA Accounting Standard Executive Committee issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP requires
capitalization of certain costs related to computer software developed or
obtained for internal use. The Company will adopt SOP 98-1 effective in fiscal
2000. Based on the information currently available, the Company does not expect
the adoption of SOP 98-1 to have a significant impact on its financial position
or results of operations.
In April 1998, the AICPA Accounting Standard Executive Committee issued
Statement of Position 98-5, (SOP 98-5) "Reporting on the Cost of Start-up
Activities." SOP 98-5 requires that costs incurred during start-up activities,
including organization costs, be expensed as incurred. SOP 98-5 is effective
for financial statements for fiscal years beginning after December 15, 1998.
Initial application of SOP 98-5 should be as of the beginning of the fiscal year
in which SOP 98-5 is first adopted and should be reported as a cumulative effect
of a change in accounting principle. SOP 98-5 will be adopted in the first
quarter of fiscal 2000 at which time the Company will record a cumulative effect
of a change in accounting principle of approximately $1 million in the
consolidated statement of operations for the period ending July 31, 1999.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and changes in
the market values of its investments. The Company's exposure to market rate risk
for changes in interest rates relates primarily to its investment portfolio. The
Company has not used derivative financial instruments in its investment
portfolio. The Company invests its excess cash in debt instruments of the U.S.
Government and its agencies, and in high-quality corporate issuers and, by
policy, limits the amount of credit exposure to any one issuer. The Company
protects and preserves its invested funds by limiting default, market and
reinvestment risk. Investments in both fixed rate and floating rate interest
earning instruments carry a degree of interest rate risk. Fixed rate securities
may have their fair market value adversely impacted due to a rise in interest
rates, while floating rate securities may produce less income than expected if
interest rates fall. Due in part to these factors, the Company's future
investment income may fall short of expectations due to changes in interest
rates or the Company may suffer losses in principal if forced to sell securities
which have declined in market value due to changes in interest rates.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is filed as a separate part of this Report (see
page 31).
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated herein by reference the information appearing
under the caption "Proposal 1--Election of Directors" and under the caption
"Executive Officers of the Company" of the registrant's definitive Proxy
Statement for its 1999 Annual Meeting to be filed with the Securities and
Exchange Commission on or before August 27, 1999.
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 1999 Annual Meeting to be filed with the Securities and
Exchange Commission on or before August 27, 1999.
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 1999 Annual Meeting to be filed
with the Securities and Exchange Commission on or before August 27, 1999.
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 1999 Annual Meeting to be filed with the Securities and
Exchange Commission on or before August 27, 1999.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
1. The list of financial statements contained in the accompanying Index to
Consolidated Financial Statements covered by Independent Auditors' Report are
filed as part of this Report (see page 31).
2. Financial Statement 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 31).
3. Exhibits
The list of exhibits contained in the Index to Exhibits are filed as part of
this Report (see page 56).
(b) Reports on Form 8-K
A Form 8-K report was filed during the third quarter of fiscal year 1999
which reported the discontinuance of the 980nm pump laser product.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on July 28, 1999.
Ortel Corporation,
a Delaware corporation
By:/s/Stephen R. Rizzone
---------------------
Stephen R. Rizzone
President, Chief Executive Officer and Chairman of the
Board
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/Stephen R. Rizzone Director, President, Chief Executive July 28, 1999
- -------------------------------------------------- Officer and Chairman of the Board
Stephen R. Rizzone (Principal Executive Officer)
------------------
/s/Roger Hay Vice President, Finance and Chief July 28, 1999
- -------------------------------------------------- Financial Officer (Principal
Roger Hay Financial and Accounting Officer)
---------
/s/Israel Ury Director and Chief Technology Officer July 28, 1999
- --------------------------------------------------
Israel Ury
/s/Nadav Bar-Chaim Director, Senior Vice President and July 28, 1999
- -------------------------------------------------- Secretary
Nadav Bar-Chaim
/s/John Gaulding Director July 28, 1999
- --------------------------------------------------
John Gaulding
/s/Tatsutoku Honda Director July 28, 1999
- --------------------------------------------------
Tatsutoku Honda
/s/Anthony J. Iorillo Director July 28, 1999
- --------------------------------------------------
Anthony J. Iorillo
/s/Luther Nussbaum Director July 28, 1999
- --------------------------------------------------
Luther Nussbaum
/s/Wayne L. Tyler Director July 28, 1999
- --------------------------------------------------
Wayne L. Tyler
/s/Ronald L. Young Director July 28, 1999
- --------------------------------------------------
Ronald L. Young
</TABLE>
30
<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..................................................................... 32
Consolidated Balance Sheets as of April 30, 1999 and 1998........................................ 33
Consolidated Statements of Operations for the years ended
April 30, 1999, 1998 and 1997.................................................................. 34
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years
ended April 30, 1999, 1998 and 1997............................................................. 35
Consolidated Statements of Cash Flows for the years ended
April 30, 1999, 1998 and 1997................................................................... 36
Notes to Consolidated Financial Statements....................................................... 37
Consolidated Financial Statement Schedule
Schedule II: Valuation and Qualifying Accounts.................................................. 55
</TABLE>
All other schedules are omitted because the required information is not
applicable or the information is presented in the consolidated financial
statements or notes thereto.
31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ortel Corporation:
We have audited the consolidated financial statements of Ortel Corporation and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the consolidated
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and consolidated financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and consolidated
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ortel Corporation
and subsidiaries as of April 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended April 30, 1999, 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.
/s/ KPMG LLP
Los Angeles, California
May 26, 1999, except Note 12 which is as of June 2, 1999
32
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
April 30,
-------------------------------
1999 1998 (1)
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents....................................................................... $ 12,705 $ 12,656
Short term investments..................................................................... 11,066 16,012
Trade receivables less allowance for doubtful accounts of $973 and $307 at
April 30, 1999 and 1998, respectively.................................................... 14,549 12,819
Billed contract costs and fees and other receivables (net)................................. 684 1,415
Inventories................................................................................ 13,443 10,492
Income taxes receivable.................................................................... 2,900 71
Deferred tax assets........................................................................ 2,574 2,775
Prepaid expenses and other current assets.................................................. 1,042 1,281
Current assets, discontinued operations.................................................... -- 936
-------- --------
Total current assets..................................................................... 58,963 58,457
Property, equipment and improvements, at cost:
Property................................................................................... 1,796 1,796
Equipment.................................................................................. 29,615 27,511
Office furniture and fixtures.............................................................. 5,688 4,813
Leasehold improvements..................................................................... 6,484 4,932
-------- --------
Total property, equipment and improvements................................................. 43,583 39,052
Less accumulated depreciation and amortization............................................. (25,159) (19,560)
-------- --------
Net property, equipment and improvements................................................. 18,424 19,492
Intangible assets, net....................................................................... 2,123 2,581
Other assets................................................................................. 9,718 8,802
Long-term assets, discontinued operations.................................................... -- 1,009
-------- --------
Total assets............................................................................. $ 89,228 $ 90,341
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................... $ 7,168 $ 3,685
Accrued payroll and related costs.......................................................... 1,794 2,899
Other accrued liabilities.................................................................. 2,166 2,538
Discontinued operations reserve............................................................ 1,646 --
Income taxes payable....................................................................... 188 172
-------- --------
Total current liabilities................................................................ 12,962 9,294
Deferred income.............................................................................. -- 400
Deferred income taxes........................................................................ 817 1,598
-------- --------
Total liabilities............................................................................ 13,779 11,292
Minority interest in subsidiaries............................................................ 261 265
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: 11,969,644 and 11,713,371 in 1999 and 1998.............................. 12 12
Additional paid in capital................................................................. 55,422 53,101
Retained earnings.......................................................................... 21,421 27,449
Loans receivable........................................................................... (1,064) (1,460)
Accumulated other comprehensive loss....................................................... (603) (318)
-------- --------
Net stockholders' equity................................................................. 75,188 78,784
-------- --------
Commitments and contingencies (note 7)
Total liabilities and stockholders' equity............................................... $ 89,228 $ 90,341
======== ========
</TABLE>
(1) Certain amounts related to discontinued operations have been reclassified to
conform to current year presentation.
See accompanying notes to consolidated financial statements.
33
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended April 30,
------------------------------------------------------------
1999 1998 (1) 1997 (1)
---------------- --------------- ---------------
<S> <C> <C> <C>
Revenues.......................................................... $72,059 $75,927 $82,363
Cost of revenues.................................................. 44,091 44,065 42,746
------- ------- -------
Gross profit.................................................... 27,968 31,862 39,617
Operating expenses:
Research and development........................................ 12,374 11,662 12,875
Sales and marketing............................................. 11,840 10,251 10,605
General and administrative...................................... 6,889 6,157 5,968
------- ------- -------
Total operating expenses.................................... 31,103 28,070 29,448
------- ------- -------
Operating income (loss)......................................... (3,135) 3,792 10,169
Other:
Interest income, net............................................ 1,291 1,278 1,458
Other income (expense), net..................................... 179 584 743
------- ------- -------
Income (loss) from continuing operations before income taxes...... (1,665) 5,654 12,370
Provision (credit) for income taxes............................... (995) 1,517 3,801
------- ------- -------
Income (loss) from continuing operations.......................... (670) 4,137 8,569
Loss from discontinued operations, net of tax benefits of
$360 in 1999, $794 in 1998 and $113 in 1997...................... (1,439) (1,400) (254)
Loss from disposal of discontinued operations, net of income tax
benefit of $980.................................................. (3,919) -- --
------- ------- -------
Net income (loss)................................................. $(6,028) $ 2,737 $ 8,315
======= ======= =======
Income (loss) per common share - Basic
Income (loss ) from continuing operations....................... $ (.06) $ .36 $ .75
Discontinued operations......................................... (.45) (.12) (.02)
------- ------- -------
Net income (loss) per share - Basic............................. $ (.51) $ .24 $ .73
======= ======= =======
Income (loss) per common share - Diluted (2)
Income (loss ) from continuing operations (2)................... $ (.06) $ .33 $ .68
Discontinued operations (2)..................................... (.45) (.11) (.02)
------- ------- -------
Net income (loss) per share - Diluted (2)....................... $ (.51) $ .22 $ .66
======= ======= =======
Shares used in per share computation:
Basic........................................................... 11,876 11,634 11,463
Diluted (2)..................................................... 11,876 12,639 12,609
</TABLE>
(1) Certain amounts related to discontinued operations have been reclassified
to conform to current year presentation.
(2) Options to purchase 652,000 shares at or below the average price of the
common shares were outstanding at April 30, 1999, but were excluded from
the computation of diluted earnings per share as the Company reported a
loss position and the effect would be antidilutive.
See accompanying notes to consolidated financial statements.
34
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Accum
Additional Compre- Stock-
Common Paid in Retained Loans hensive holders'
Shares Stock Capital Earnings Receivable Inc (loss) Equity
---------- ---------- ------------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1996.................. 11,359,110 $11 $51,369 $16,397 $(1,506) $ 3 $66,274
Net income................................. 8,315 8,315
Effect of foreign translation.............. (428) (428)
Unrealized losses on investments........... (4) (4)
-------
Comprehensive income (loss)................ $ 7,883
Exercise of stock options for shares of
common stock at $1.10 to $17.25 per share. 190,633 873 873
Tax benefits arising from exercise of
non-qualified stock options............... 241 241
Repurchase of shares of stock at an
average price of $12.08 per share......... (50,000) (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
---------- --- ------- ------- ------- ----- -------
Balance at April 30, 1997.................. 11,499,743 $11 $51,930 $24,712 $(1,341) $(429) $74,883
Net income................................. 2,737 2,737
Effect of foreign translation.............. 83 83
Unrealized losses on investments........... 28 28
-------
Comprehensive income (loss)................ 2,848
Exercise of stock options for shares of
common stock at $1.33 to $17.26 per share. 238,628 1,226 1,226
Tax benefits arising from exercise of
non-qualified stock options............... 250 250
Repurchase of shares of stock at an
average price of $16.52 per share......... (25,000) 1 (413) (412)
Compensation expense related to issuance
of stock option to Photon................. 108 108
Loans from exercise of stock options due
2000-2001 at 5.7%-6.85% per year, net of
repayments................................ (119) (119)
---------- --- ------- ------- ------- ----- -------
Balance at April 30, 1998.................. 11,713,371 $12 $53,101 $27,449 $(1,460) $(318) $78,784
Net loss.................................. (6,028) (6,028)
Effect of foreign translation.............. (224) (224)
Unrealized losses on investments........... (61) (61)
-------
Comprehensive income (loss)................ (6,313)
Exercise of stock options for shares of
common stock at $4.00 to $23.25 per share. 321,846 2,194 2,194
Tax benefits arising from exercise of
non-qualified stock options.............. 133 133
Repurchase of shares of stock at an
average price of $7.67 per share.......... (63,600) (488) (488)
Compensation expense related to
remeasurement of stock options for
non-employee directors.................... 375 375
Compensation expense related to issuance
of stock option to Photon................. 107 107
Loans from exercise of stock options due
2000-2002 at 4.71%-5.69%, net of
repayments................................ (1,973) 396 396
---------- --- ------- ------- ------- ----- -------
Balance at April 30, 1999.................. 11,969,644 $12 $55,422 $21,421 $(1,064) $(603) $75,188
========== === ======= ======= ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended April 30,
---------------------------------------
1999 1998 (1) 1997 (1)
---------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................................... $(6,028) $ 2,737 $ 8,315
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations net of income taxes.............................. 1,439 1,400 254
Loss from disposal of discontinued operations net of income taxes.................. 3,919 -- --
Stock compensation expense on remeasurement........................................ 375 -- --
Depreciation and amortization...................................................... 6,265 5,480 4,117
Increase (decrease) in minority interest in subsidiaries........................... (4) 20 68
Gain/loss on disposal of equipment................................................. 21 77 --
Other.............................................................................. 128 -- --
Compensation expense related to Photon stock options............................... 107 108 51
Change in assets and liabilities (net of effects of acquired company):
Receivables and billed contract costs and fees....................................... (999) 638 (5,180)
Inventories.......................................................................... (2,951) 3,115 (3,871)
Income tax receivable................................................................ (1,490) (72) --
Prepaid expenses and other assets.................................................... 700 (621) (255)
Intangible assets.................................................................... -- 311 (779)
Accounts payable..................................................................... 3,483 (1,889) 2,104
Accrued payroll and related costs.................................................... (1,105) (1,391) 638
Increase (decrease) in discontinued operations reserve............................... (1,208) -- --
Other accrued liabilities............................................................ (372) (264) 914
Deferred income...................................................................... (400) 5 (61)
Deferred income taxes................................................................ (580) (132) (435)
Income taxes payable................................................................. 15 (1,456) 1,125
------- -------- -------
Net cash provided by continuing operating activities............................ 1,315 8,066 7,005
Net cash used by discontinued operating activities.............................. (1,308) (2,322) (1,278)
------- -------- -------
Net cash provided by operating activities............................................ 7 5,744 5,727
Cash flows from investing activities:
Capital expenditures................................................................. (5,225) (6,680) (8,142)
Investment in subsidiaries and affiliates (net of cash acquired)..................... (1,500) (5,753) (2,428)
Short term investments............................................................... 4,885 (315) 7,598
------- -------- -------
Net cash used in investing activities................................................ (1,840) (12,748) (2,972)
------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net.......................................... 1,346 861 288
Proceeds from repayment of stockholder loans......................................... 760 112 387
Alternative minimum tax related-party loans for stock option exercises............... -- (262) 296
Notes payable........................................................................ -- -- (6)
------- -------- -------
Net cash (used in) provided by financing activities............................. 2,106 711 965
Effect of exchange rate changes on cash and cash equivalents............................ (224) 84 (428)
------- -------- -------
Net increase (decrease) in cash and equivalents................................. 49 (6,209) 3,292
Cash and equivalents at beginning of year............................................... 12,656 18,865 15,573
------- -------- -------
Cash and equivalents at end of year..................................................... $12,705 $ 12,656 $18,865
======= ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest........................................................................... $ 48 $ 11 $ 4
Income taxes....................................................................... 574 2,611 3,227
Supplemental disclosure of non-cash financing activities:
Loans to related parties for stock option exercises.................................. $ 385 $ 231 $ 222
</TABLE>
(1) Certain amounts related to discontinued operations have been reclassified
to conform to current year presentation.
See accompanying notes to consolidated financial statements.
36
<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.
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.
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
During fiscal 1999 the Company increased its investment in Tellium, Inc. by
$1.5 million to a total of $6.7 million. This investment is accounted for by
the cost method and, accordingly, there is no recognition of the losses to date
incurred by Tellium in the Company's financial results. As of April 30, 1999 the
Company owns approximately 18% 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.
The Company has a $3.6 million investment in Photon Technology Co., Ltd.
based in Shenzhen, China. The investment includes the Company's share of net
assets valued at $2.4 million. The balance of the investment represents goodwill
and organization costs amortized on a straight line basis over ten years. As of
April 30, 1999, the Company owns approximately 38% of Photon. During fiscal
year 1999, the Company recognized its equity interest in earnings of Photon of
$304,000 which has been included in other income. There were no amounts
recognized in fiscal years 1998 and 1997.
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 $2.5
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
37
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies--Continued
is being amortized over a period of five to ten years. Avitec AB is included as
part of the wireless operations which the Company announced is for sale.
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 $195,000, $730,000 and $1,489,000 in fiscal
years 1999, 1998 and 1997, 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 approximately $900,000 and $1.2 million at April 30, 1999 and
April 30, 1998, 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.
Concentration of 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.
38
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies--Continued
Research and Development
Company-sponsored research and development costs are expensed as incurred.
Inventories
Inventories are shown below and are stated at the lower of cost (first-in,
first-out method) or market and for continuing operations are summarized below.
Prior years amounts have been reclassified to conform to current year
presentation. (in thousands)
<TABLE>
<CAPTION>
Year Ended April 30
-------------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Raw materials......................................................... $ 6,618 $ 4,498
Work-in-process....................................................... 5,066 4,993
Finished goods........................................................ 1,759 1,001
------- -------
Total inventories............................................... $13,443 $10,492
======= =======
</TABLE>
Cash Equivalents
Cash equivalents include short-term commercial paper, money market funds and
municipal securities managed by banking institutions totaling $10.3 million and
$7.8 million as of April 30, 1999 and 1998, 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 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, 1999 and 1998, the Company's marketable investment securities consisted
principally of highly liquid investments in tax free municipal obligations with
various maturity dates through February 1, 2022. The difference between market
value and cost of these securities at April 30, 1999 and 1998 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. The effects of 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 $9,000, $109,000 and ($89,000) for the fiscal years
1999, 1998 and 1997, respectively.
39
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies--Continued
Impairment of Long-lived Assets and Long-lived Assets to be Disposed Of
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, on May 1, 1996. This statement requires
that long-lived assets and certain identifiable intangibles including goodwill
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future operating cash flows (undiscounted and without interest)
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. Adoption of this statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
Accounting for Stock Options
Prior to May 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
Under APB Opinion No. 25, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeded the exercise
price. On May 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"),
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per share disclosure
for employee stock option grants made in fiscal year 1996 and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
40
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies--Continued
Net Income (Loss) Per Share
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 (loss) per share from continuing operations for
all years presented is summarized as shown below: (in thousands, except per
share data)
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------------------------
Basic and diluted computations 1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
Income (loss) from continuing operations..................................... $ (670) $ 4,137 $ 8,569
======= ======= =======
Net income (loss)............................................................ $(6,028) $ 2,737 $ 8,315
======= ======= =======
Shares used for basic per share computations:
Weighted average shares outstanding........................................ 11,876 11,634 11,463
Effect of dilutive securities - stock options.............................. -- 1,005 1,146
------- ------- -------
Shares used for diluted per share computations............................. 11,876 12,639 12,609
======= ======= =======
Net income (loss) per share:
Net income (loss) per share - Basic:
Income (loss) from continuing operations................................... $ (.06) $ .36 $ .75
Discontinued operations.................................................... (.45) (.12) (.02)
------- ------- -------
Net income (loss) per share - Basic.......................................... $ (.51) $ .24 $ .73
======= ======= =======
Net income (loss) per share - Diluted (1):
Income (loss) from continuing operations (1)............................... $ (.06) $ .33 $ .68
Discontinued operations (1)................................................ (.45) (.11) (.02)
------- ------- -------
Net income(loss) per share diluted (1)...................................... $ (.51) $ .22 $ .66
======= ======= =======
</TABLE>
(1) Options to purchase 652,000 shares at or below the average price of the
common shares were outstanding at April 30, 1999, but were excluded from the
computation of diluted earnings per share for fiscal 1999 as the Company
reported a loss position and the effect would be antidilutive.
Options to purchase 1,813,876, 824,349 and 622,505 shares at weighted average
exercise price of $15.26, $20.28 and $23.75 were outstanding at April 30, 1999,
1998 and 1997 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 for all periods presented..
41
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies--Continued
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company is
required to adopt SFAS No. 133 for all fiscal quarters of fiscal years beginning
after June 15, 2000. Based on the information currently available, management
has determined that the disclosure requirements from this statement will not
impact the financial statements of the Company.
In March 1998, the AICPA Accounting Standard Executive Committee issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP requires
capitalization of certain costs related to computer software developed or
obtained for internal use. The Company will adopt SOP 98-1 effective in fiscal
2000. Based on the information currently available, the Company does not expect
the adoption of SOP 98-1 to have a significant impact on its financial position
or results of operations.
In April 1998, the AICPA Accounting Standard Executive Committee issued
Statement of Position 98-5, (SOP 98-5) "Reporting on the Cost of Start-up
Activities." SOP 98-5 requires that costs incurred during start-up activities,
including organization costs, be expensed as incurred. SOP 98-5 is effective
for financial statements for fiscal years beginning after December 15, 1998.
Initial application of SOP 98-5 should be as of the beginning of the fiscal year
in which SOP 98-5 is first adopted and should be reported as a cumulative effect
of a change in accounting principle. SOP 98-5 will be adopted in the first
quarter of fiscal 2000 at which time the Company will record a cumulative effect
of a change in accounting principle of approximately $1 million in the
consolidated statement of operations for the period ending July 31, 1999.
Discontinued Operations
In the second quarter of fiscal 1999, the Company adopted a plan of disposal
for its 980nm pump laser product. In light of the dependence of this business
on a common proprietary technology and its dissimilarity to the continuing
operations of the Company, these operations have been separately reported as
discontinued operations in the accompanying consolidated financial statements
for all periods presented.
The results of the discontinued business has been reported separately as a
component of discontinued operations on the accompanying consolidated statements
of operations. Summarized results of the discontinued business for the years
ended April 30, 1999, 1998 and 1997, were as follows (in thousands):
<TABLE>
<CAPTION>
----------------------------------------------------
Year Ended April 30
----------------------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Revenues.............................................................. $ 795 $ 943 $ 191
Loss before income taxes.............................................. (1,799) (2,194) (367)
Income tax benefit.................................................... (360) ( 794) (113)
------- ------- -----
Loss after tax benefit............................................... $(1,439) $(1,400) $(254)
======= ======= =====
</TABLE>
During fiscal year 1999, the Company incurred a loss of $3,919,000, net of
income tax benefit of $980,000 from the disposal of assets related to the
discontinued business.
42
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies--Continued
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 had an unsecured revolving line of credit for $5 million which
carried an interest rate of 7.06%. The line of credit was never used and the
Company allowed it to expire in September 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 63,600, 25,000 and 50,000 shares were made at a total cost of
$488,000, $413,000 and $604,000 in the fiscal years 1999, 1998 and 1997
respectively.
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.
43
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Stockholders' Equity--Continued
Stock Option Plans
During calendar year 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. Upon completion of the
Company's initial public offering in October 1994 no further options were
granted under the 1990 Plan.
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.
On December 14, 1998 the board of directors determined that in order to
incentivize the Company's employees, it would be in the best interest of the
Company and its stockholders to reprice approximately 1,332,000 options then
outstanding with an exercise price in excess of $13.00 per share. The repricing
was accomplished through the exchange of old options for new options granted at
the fair market value of the Company's stock on the date of grant, December 14,
1998 of $9.625. The vesting schedule for the repriced options is delayed one
year from the original vesting schedule, provided, however, that no options may
be exercised prior to December 14, 1999, except in the case of death, disability
or retirement.
In June 1999, the Company approved a modification to the vesting period of
stock options held by non-employee directors and certain options held by
employee directors whereby such options would become fully vested and have
extended exercise periods under certain conditions such as retirement from the
board and a change in control. Related to this remeasurement, compensation
expense of $375,000 was recorded in fiscal 1999.
This table summarizes all activity under the stock option plans for the
fiscal years 1997, 1998 and 1999.
<TABLE>
Wtd. Avg.
1981 1990 1994 Non- Total Exercise Price
Plan Plan Plan(1) Qualified Shares per Share Exercisable
-------- ---------- ----------- ------------ ---------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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) (177,600) (4,925) (1,750) (190,633) $ 4.56
Canceled..................... (--) (27,000) (30,466) (--) (57,466) $11.10
------ --------- ---------- ------- ----------
Outstanding at April 30, 1997 -- 1,368,800 1,430,058 19,700 2,818,558 $12.40 1,180,690
Granted...................... -- -- 1,301,276 -- 1,301,276 $14.65
Exercised.................... -- (197,175) (21,753) (19,700) (238,628) $ 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
Granted...................... -- -- 2,407,225 -- 2,407,225 $10.28
Exercised.................... -- (257,325) (64,521) -- (321,846) $ 6.88
Canceled..................... (--) (19,200) (1,866,867) (--) (1,886,067) $16.21
------ --------- ---------- ------- ----------
Outstanding at April 30, 1999 -- 871,450 2,510,705 -- 3,382,155 $ 9.12 1,003,340
====== ========= ========== ======= ==========
Total authorized................ -- 871,450 2,887,133 -- 3,758,583
Options available for grant..... -- -- 376,428 -- 376,428
Exercisable (2)................. -- 842,350 160,990 -- 1,003,340 $ 6.24
</TABLE>
(1) Effective May 1, 1999, the number of options authorized to be granted
increased to 3,696,511
(2) As a result of the December 14, 1998 option repricing, shares totaling
451,388 become exercisable on December 15, 1999.
44
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Stockholders' Equity--Continued
The weighted average fair market value of options granted in fiscal years
1999, 1998 and 1997 was $10.28, $7.86 and $12.27 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, 1999.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Number of Weighted-Average Weighted-
Range Options Remaining Weighted- Number of Average Price of
of Outstanding at Contractual Life Average Options Exercisable
Exercise Prices April 30, 1999 (years) Exercise Price Exercisable Options
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4.00 - $ 4.00 657,850 3.22 $ 4.00 657,850 $ 4.00
$ 7.00 - $ 7.75 421,962 9.83 $ 7.28 -- $ --
$ 8.00 - $ 8.50 296,390 6.43 $ 8.06 184,500 $ 8.00
$ 9.63 - $ 9.63 1,022,030 9.62 $ 9.63 1,428 $ 9.63
$10.44 - $12.88 708,497 8.84 $12.59 90,535 $12.19
$13.25 - $17.50 258,176 8.03 $13.95 62,567 $14.09
$23.13 - $23.25 17,250 7.91 $23.19 6,460 $23.21
--------- ---- ------ --------- ------
$ 4.00 - $23.25 3,382,155 7.83 $ 9.12 1,003,340 $ 6.24
========= ==== ====== ========= ======
</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 years, 1998 and 1997, approximately $108,000 and $51,000,
respectively was recorded as expense related to these options. No expense was
recorded in fiscal year 1999. 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 $133,000, $250,000 and $241,000 were credited to
additional paid in capital in 1999, 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 and certain modifications made to options
to non-employee directors. 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 income (loss) from continuing operations would have been reduced
to the pro forma amounts indicated below and the next page. Prior years amounts
have been reclassified to conform to current year presentation.
<TABLE>
<CAPTION>
Year Ended April 30,
---------------------------
Assumptions 1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Expected dividend yield..................... --% --% --%
Risk-free interest rate..................... 5.16% 6.19% 6.50%
Expected volatility......................... 50% 50% 50%
Expected life (years)....................... 5.5 5.5 6.2
</TABLE>
45
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Stockholders' Equity--Continued
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended April 30
---------------------------------------------------------
Pro forma net income (loss) per share 1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Income (loss) from continuing operations:
As reported.................................................... $(670) $4,137 $8,569
Pro forma...................................................... $(874) $2,710 $6,695
Income (loss) per share
As reported:
Basic....................................................... $(.06) $ .36 $ .75
Diluted..................................................... $(.06) $ .33 $ .68
Pro forma:
Basic....................................................... $(.06) $ .21 $ .56
Diluted..................................................... $(.06) $ .20 $ .51
</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
costs 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 (credit) for income taxes for continuing operations is
comprised of the following. Prior years amounts have been reclassified to
conform to current year presentation. (in thousands).
<TABLE>
<CAPTION>
Year Ended April 30
---------------------------------------------------------
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Federal:
Current........................................................ $(1,241) $ 915 $3,386
Deferred....................................................... (66) (35) (79)
------- ------ ------
Total.......................................................... (1,307) 880 3,307
State:
Current........................................................ 79 305 52
Deferred....................................................... (33) (12) 178
------- ------ ------
Total.......................................................... 46 293 230
Foreign:
Current........................................................ 413 456 520
Deferred....................................................... (147) (112) (256)
------- ------ ------
Total.......................................................... 266 344 264
------- ------ ------
Total............................................................. $ (995) $1,517 $3,801
======= ====== ======
</TABLE>
Total income tax credits related to losses on discontinued operations are
not included in the above table. Such credits were $360,000, $794,000 and
$113,000 in the fiscal years 1999, 1998 and 1997, respectively.
46
<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 shown in the table below. Prior year amounts have been
reclassified to conform to current year presentation (in thousands).
<TABLE>
<CAPTION>
Year Ended April 30,
-------------------------------------------------------------------------------
1999 1998
----------------------------------------- --------------------------------
Asset Liability Asset Liability
------------------ ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
Inventory reserves................................... $ 854 -- $1,141 --
Accrued vacation..................................... 395 -- 387 --
Warranty accrual..................................... 361 -- 494 --
Bad debt reserve..................................... 199 -- 123 --
Goodwill, net of amortization........................ -- $156 -- $ 216
Depreciation......................................... -- 356 -- 821
Tax credits.......................................... 2,343 -- -- --
Tax loss carryforwards............................... 694 -- -- --
Other................................................ 271 305 630 561
------- ---- ------ ------
Sub total......................................... 5,117 817 2,775 1,598
Less valuation allowance............................. (2,543) -- -- --
------- ---- ------ ------
Total............................................. $ 2,574 $817 $2,775 $1,598
======= ==== ====== ======
</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. The Company has
recorded a valuation allowance of $2,543,000 to reflect the estimated amount of
deferred tax assets which may not be realized.
At April 30, 1999, the Company had a federal research and development
credit carryforward of $518,000 that will expire in the fiscal year ending April
30, 2019. The Company also had a federal minimum tax carryforward of $914,000
that does not expire. In addition, the Company had a California research and
development credit carryforward of $971,000 and a minimum tax credit
carryforward of $45,000 neither of which expires. The Company also had a
California manufacturers' investment credit of $189,000 that will begin to
expire in the fiscal year ending April 30, 2006. At April 30, 1999, the Company
had a California net operating loss carryforward of $3.5 million which expires
in the fiscal year ending April 30, 2004.
47
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Income Taxes--Continued
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 table below. The tax rate shown is for taxes paid on income or
loss from continuing operations. Fiscal 1999 includes the effective use of tax
credits which it was previously unable to apply.
<TABLE>
<CAPTION>
Year Ended April 30,
-------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
U.S. statutory tax rate.............................................. 34.0% 34.0% 34.0%
Benefits of tax credits.............................................. 76.1 (10.2) (2.8)
Tax effect of permanent differences.................................. 7.3 (2.3) (2.7)
Tax rate differential on foreign earnings............................ (10.6) 2.4 1.0
State income taxes................................................... 46.5 3.8 2.3
Change in valuation allowance........................................ (95.8) -- --
Other................................................................ 2.2 (.9) (1.1)
----- ----- ----
Effective rate....................................................... 59.7% 26.8% 30.7%
===== ===== ====
</TABLE>
During fiscal year 1999, the U.S. Internal Revenue Service completed its
audit of the Company's income tax return for the fiscal year ended April 30,
1996. The resolution of the audit did not result in a material effect on the
Company's financial condition or results of operations.
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 (in thousands, except share and option price data.)
<TABLE>
<CAPTION>
No. of
Stock Stock AMT
Loan Total Option Option Loan Interest Loan Amount
Shares Price Amount Maturity Dates Rates Amount Total
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
New Loans......................... 85,500 $4.00-4.53 385 9/05/2000-7/01/2002 4.71-5.69% -- 385
Payments.......................... (781) (854) (1,635)
------ ------ -------
Balance at April 30, 1999........... $1,064 $ 386 $ 1,450
====== ====== =======
</TABLE>
Subsequent to year end, the Board of Directors approved a two-year
extension of all pre-existing loans to all officers and key personnel employed
as of June 5, 1999.
48
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Related Party Transactions--Continued
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 38%. 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>
1997 $ 828,000 $2,156,000 $ -- $ --
1998 $ 650,000 $1,860,000 $ 823,000 $ 622,000
1999 $1,003,000 $2,721,000 $1,480,000 $2,266,000
</TABLE>
At April 30, 1999 accounts payable to Sumitomo and Photon were
approximately $172,000 and $500,000, respectively. At April 30, 1999 accounts
receivable from Sumitomo and Photon were approximately $309,000 and $955,000,
respectively.
7. Commitments and Contingencies
Leases
As of April 30, 1999, the Company leased its operating facilities
consisting of nine buildings, numerous trailers and parking space 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 these leases was approximately $1,010,000, $910,000
and $725,000 in the fiscal years 1999, 1998 and 1997, respectively.
During fiscal 1999, the Company entered into a two-year lease for building
six combining the space it previously leased in two separate increments. The
Company also exercised an option period for building seven extending the lease
term for two years.
Summarized below are total future minimum lease commitments for the
Alhambra, California facilities, parking, field sales offices and other
equipment (including the next option to renew under all leases but excluding
adjustments for CPI increases):
<TABLE>
-------------------------------------- ------------
Fiscal Year Ending April 30 $ 000
-------------------------------------- ------------
<S> <C>
2000 $ 915
2001 $ 985
2002 $1,226
2003 $1,231
2004 $1,117
2005 $1,098
</TABLE>
49
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Commitments and Contingencies--Continued
Patents
As early as January, 1990, the Company received notices from Rockwell
International Corporation ("Rockwell") alleging that a process used by Ortel for
growing epitaxial layers infringes certain broad patent rights that Rockwell
holds. In August 1993, Rockwell sued the U.S. government alleging infringement
of these patent rights with respect to the contracts the U.S. government has had
with at least 15 companies, including Ortel. During fiscal 1997, this patent was
held invalid in a court action brought by Rockwell. A subsequent ruling of the
Court of Appeals for the federal circuit sent the case back to trial. The U.S.
government settled the lawsuit and in April 1999, Rockwell once again approached
the Company asserting its rights to the patent. The Company has requested
information regarding terms of a possible license.
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.
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 $2.5
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 Risk
During the fiscal years ended April 30, 1999, 1998 and 1997, revenues from
General Instrument and Antec Corporation represented 46%, 26% and 42%,
respectively. 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 General
Instruments and Antec Corporation total $6.2 million, $5.2 million and $4.1
million or 42%, 39% and 30% of total accounts receivable at April 30, 1999, 1998
and 1997, respectively.
50
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Supplemental Information and International Operations
For continuing operations, revenues, pretax income/(loss) and net
income/(loss) from foreign and domestic operations reflect results on the basis
of the country in which operations are conducted. These results are summarized
as shown below. Prior years amounts have been reclassified to conform to
current year presentation. (in thousands)
<TABLE>
<CAPTION>
Year Ended April 30
-------------------------------------------------------------
1999 1998(1) 1997(1)
----------------- ---------------- ----------------
<S> <C> <C> <C>
Revenue
Domestic operations................................................... $63,333 $67,459 $74,323
International operations.............................................. 14,194 13,437 15,474
Intercompany eliminations............................................. (5,468) (4,969) (7,434)
------- ------- -------
Total revenues.................................................. $72,059 $75,927 $82,363
======= ======= =======
Pretax income (loss) from continuing operations
Domestic operations................................................... $ (720) $ 4,559 $13,549
International operations.............................................. (761) 55 (67)
Intercompany eliminations............................................. (184) 1,040 (1,112)
------- ------- -------
Pretax income (loss)............................................ $(1,665) $ 5,654 $12,370
======= ======= =======
Net income (loss) from continuing operations
Domestic operations................................................... $ 541 $ 3,385 $10,011
International operations.............................................. (1,028) (288) (330)
Intercompany eliminations............................................. (183) 1,040 (1,112)
------- ------- -------
Net income (loss)............................................... $ (670) $ 4,137 $ 8,569
======= ======= =======
</TABLE>
(1) Certain amounts related to discontinued operations have been reclassified
to conform to current year presentation.
Identifiable assets attributable to foreign operations, which principally
consist of trade receivables from European customers and inventories, totaled
$7.5 million, $7.7 million and $8.4 million at April 30, 1999, 1998 and 1997,
respectively.
10. 401(k) Plan
The Company has a 401(k) benefit plan ("401(k) Plan") allowing each
employee to contribute up to a maximum of 17% of gross salary or $10,000,
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 $386,000,
$445,000 and $407,000 to the 401(k) Plan during the years ended April 30, 1999,
1998 and 1997, respectively.
51
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Comprehensive Income
In fiscal 1999, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. The statement required that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. Accumulated other comprehensive income of the Company
consists of net unrealized gains (losses) on available for sale investment and
cumulative effect of foreign currency translation.
The change in the components of other accumulated comprehensive income
(losses) net of taxes are as follows: (in thousands)
<TABLE>
<CAPTION>
Cumulative
Unrealized Gain Effect of Foreign Accumulated
(Loss) on Available Currency Other
for Sale Translation Gain Comprehensive
Investments (Loss) Income/(Loss)
------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance..................................... $ 24 $(342) $(318)
Current period change................................. (61) (224) (285)
----- ----- -----
Ending balance........................................ $ (37) $(566) $(603)
===== ===== =====
</TABLE>
The related tax effects allocated to each component of other comprehensive
income.
<TABLE>
<CAPTION>
Tax
Before Tax (Expense) Net-of-Tax
Amount Or Benefit Amount
-----------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains (losses) on securities............... (61) $ 36 $ (25)
Foreign currency translation adjustments.............. (224) 134 (90)
----- ----- -----
Other comprehensive income............................ $(285) $ 170 $(115)
===== ===== =====
</TABLE>
12. Segment Reporting
On April 30, 1999 the Company adopted FASB Statement No. 131, "Disclosures
About Segments of an Enterprise and Related Information" (SFAS 131). The new
rules establish revised standards for public companies relating to the reporting
of financial and descriptive information about their operating segments in
financial statements. The adoption of SFAS 131 did not have a material effect
on the Company's primary financial statements and did not effect the disclosure
of segment information contained herein. The method of determining what
information to report is based on the way management organizes the operating
segments within the Company for making operational decisions and assessments of
financial performance. The Company's chief operating decision maker is
considered to be the Company's Chief Executive Officer ("CEO"). The CEO reviews
financial information presented on a consolidated basis accompanied by
disaggregated information about revenues by product lines for purposes of making
operating decisions and assessing financial performance.
The fiber optics segment consists of broadband, satellite communications
and telecommunications products. The wireless segment is comprised of products
for cellular telephone systems and includes repeater products designed and
manufactured both in the U.S. and in the Swedish subsidiary, Avitec AB. In June
1999, the Company announced its intention to sell its wireless operations in
order to focus on its fiber optic business.
52
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Segment Reporting--Continued
Information about the Company's operations by business segments for the
fiscal years ended April 30, 1999, 1998 and 1997 is presented below:
Revenues of the fiber optics segment increased 2% in 1999 compared to 1998.
Fiber optics revenues decreased 14% in 1998 compared to 1997 and reflected a
dramatic slowdown in domestic broadband industry offset somewhat by an increase
in revenues from satellite communications products. Wireless segment revenues
for fiscal 1999 decreased 43% when compared to fiscal 1998 which included a
multi-million dollar single sale of in-building product to an Asian customer.
<TABLE>
<CAPTION>
REVENUE BY SEGMENT
Year Ended April 30
----------------------- ----------------------- -----------------------
1999 1998 (1) 1997 (1)
----------------------- ----------------------- -----------------------
Percent Percent Percent
$ (000) of Total $ (000) of Total $ (000) of Total
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Segments
Fiber Optics...................... $65,028 90% $63,558 84% $73,943 90%
Wireless.......................... 7,031 10% 12,369 16% 8,420 10%
------- --- ------- --- ------- ---
Total Sales......................... $72,059 100% $75,927 100% $82,363 100%
======= === ======= === ======= ===
</TABLE>
(1) Certain amounts related to discontinued operations have been reclassified
to conform to current year presentation.
Gross margins in fiber optics have decreased each year. Losses in the
wireless segment reflect substantial research and development spending in
repeater products. Increased G&A spending negatively impacted both segments.
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS) BY SEGMENT
Year Ended April 30,
-------------------- ----------------------- -----------------------
1999 1998 (1) 1997 (1)
-------------------- ----------------------- -----------------------
Percent Percent Percent
$ (000) of Revenue $ (000) of Revenue $ (000) of Revenue
------- ---------- ---------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Segments
Fiber Optics...................... $ 186 -- $ 8,044 13% $18,357 25%
Wireless.......................... (3,321) (47%) (4,252) (34%) (8,188) (97%)
------- --- ------- --- ------- ---
Total Operating Income (Loss)....... $(3,135) (4%) $ 3,792 5% $10,169 12%
======= === ======= === ======= ===
</TABLE>
(1) Certain amounts related to discontinued operations have been reclassified
to conform to current year presentation.
In addition to evaluating the segments on the basis of their profit or
loss, two significant assets are tracked and measured: accounts receivable and
inventory. Identification of accounts receivable to a specific segment is
generally on the basis of the customer. Inventory can also be linked to a
specific segment; however, there are cases where components are shared across
segments and a reasonable method of allocating such inventory was adopted.
Reserves for accounts receivable and inventory are not separated by segments.
The following tables compare accounts receivable and inventory levels at the
past two fiscal years ended April 30, (in thousands):
<TABLE>
<CAPTION>
Accounts Receivable Inventory
------------------------------- ------------------------------
Year ended April 30, Year ended April 30,
------------------------------- ------------------------------
1999 1998 1999 1998
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
$13,382 $11,007 Fiber Optics $12,196 $ 8,985
2,140 2,119 Wireless 3,727 4,276
------- ------- ------- -------
$15,522 $13,126 Total Gross $15,923 $13,261
(973) (307) Reserves (2,480) (2,769)
------- ------- ------- -------
$14,549 $12,819 Total Net $13,443 $10,492
======= ======= ======= =======
</TABLE>
53
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Quarterly Information (unaudited)
Set forth below is selected quarterly consolidated financial data with
respect to the Company for the two years ended April 30, 1999 and 1998. Certain
amounts related to discontinued operations have been reclassified to conform to
current year presentation. 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, 1999 Year Ended April 30, 1998
(in thousands, except per share amounts)
---------------------------------- ----------------------------------
Q1 (1) Q2 (1) Q3 (1) Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues................ $18,444 $19,765 $16,915 $16,935 $19,620 $21,701 $18,589 $16,017
Cost of revenues........ 10,511 11,830 11,447 10,303 10,771 11,908 11,378 10,008
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........... 7,933 7,935 5,468 6,632 8,849 9,793 7,211 6,009
Operating expenses:
Research and
development........... 3,116 3,004 3,017 3,237 2,710 3,189 2,780 2,983
Sales and marketing.... 2,665 3,444 2,729 3,002 2,434 2,571 2,290 2,956
General and
administrative........ 1,541 1,772 1,416 2,160 1,337 1,491 1,604 1,725
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 7,322 8,220 7,162 8,399 6,481 7,251 6,674 7,664
------- ------- ------- ------- ------- ------- ------- -------
Operating Income
(loss)................ 611 (285) (1,694) (1,767) 2,368 2,542 537 (1,655)
Other:
Interest income, net... 259 430 212 390 284 340 367 287
Other income
(expense), net........ 44 119 73 (57) (97) 28 (111) 764
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
continuing operations
before income taxes.... $ 914 $ 264 $(1,409) $(1,434) $ 2,555 $ 2,910 $ 793 $ (604)
Provision (credit) for
income taxes........... 190 53 (289) (949) 731 737 188 (139)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
continuing operations
before income taxes.... $ 724 $ 211 $(1,120) $ (485) $ 1,824 $ 2,173 $ 605 $ (465)
Loss from disposal of
discontinued
operations, net of
taxes.................. (518) (4,840) -- -- (329) (262) (234) (575)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 206 $(4,629) $(1,120) $ (485) $ 1,495 $ 1,911 $ 371 $(1,040)
======= ======= ======= ======= ======= ======= ======= =======
Income (loss) per common
share - Basic (3)
Income (loss) from
continuing
operations............ $ .06 $ .02 $ (.09) $ (.04) $ .16 $ .18 $ .05 $ (.04)
Discontinued
operations............ (.04) (.41) -- -- (.03) (.02) (.02) (.05)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) per
share - Basic....... $ .02 $ (.39) $ (.09) $ (.04) $ .13 $ .16 $ .03 $ (.09)
======= ======= ======= ======= ======= ======= ======= =======
Income (loss) per common
share - Diluted (2,3)..
Income (loss) from
continuing
operations............ $ .06 $ .02 $ (.09) $ (.04) $ .15 $ .17 $ .05 $ (.04)
Discontinued
operations............ (.04) (.41) -- -- (.03) (.02) (.02) (.05)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) per
share - Diluted..... $ .02 $ (.39) $ (.09) $ (.04) $ .12 $ .15 $ .03 $ (.09)
======= ======= ======= ======= ======= ======= ======= =======
Shares used in per share
computation:
Basic.................. 11,751 11,860 11,920 11,976 11,524 11,624 11,684 11,707
Diluted................ 12,629 11,860 11,920 11,976 12,559 12,963 12,654 11,707
</TABLE>
(1)Certain amounts related to discontinued operations have been reclassified to
conform to current year presentation.
(2)Computed using basic shares; diluted share computation would be
antidilutive.
(3)Quarterly per share amounts may not aggregate to total per share amounts for
the year.
54
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended April 30, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Balance at
Beginning of Balance at
Description Year Additions Deductions End of Year
- ---------------------------------------------------------- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Year ended April 30, 1999
Allowance for doubtful accounts......................... $ 307 $ 671 $ 5 (1) $ 973
Inventory reserve....................................... $2,769 $1,882 $2,171 (2) $2,480
</TABLE>
(1) Write-off of uncollectible accounts
(2) Write-off of obsolete materials
55
<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 Rights Agreement between Ortel Corporation and First Interstate (Note 2)
Bank of California dated March 3, 1995
10.1 Employment Agreement, dated September 14, 1990, between Ortel (Note 1)
Corporation and Israel Ury.
10.2 Employment Agreement, dated September 14, 1990, between Ortel (Note 1)
Corporation and Nadav Bar-Chaim.
10.3 1990 Stock Option Plan of Ortel Corporation. (Note 1)
10.4 Form of Indemnification Agreement. (Note 1)
10.5 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.
10.6 Agreement Concerning Certain Financial and Business Arrangements, (Note 1)
dated as of March 26, 1990 between Sumitomo Cement Co., Ltd. and
Ortel Corporation.
10.7 1994 Equity Participation Plan of Ortel Corporation. (Note 1)
10.8 Stock Purchase Agreement dated March 12, 1996 between Hakan (Note 3)
Samuelsson and Ortel Corporation.
10.9 Loan Agreement, dated June 2, 1995 between Ortel Corporation and (Note 4)
Bank of America.
10.10 Amendment No. 2 dated September 9, 1997 to Loan Agreement dated (Note 5)
June 2, 1995 between Ortel Corporation and Bank of America.
10.11 Severance Agreement, dated December 1, 1997, between Ortel (Note 6)
Corporation and Douglas H. Morais.
10.12 Severance Agreement, dated March 6, 1998, between Ortel (Note 7)
Corporation and Lyle B. Boarts.
10.13 Amendment No. 3 dated August 20, 1998, to Loan Agreement dated (Note 8)
June 2, 1995, between Ortel Corporation and Bank of America NT &
SA
10.14 Severance Agreement dated November 6, 1998, between Ortel (Note 8)
Corporation and William J. Moore.
10.15 Severance Agreement, dated November 9, 1998, between Ortel (Note 8)
Corporation and George B. Holmes.
10.16 Amendment dated November 9, 1998, to Severance Agreement, dated (Note 8)
March 6, 1998, between Ortel Corporation and Lyle B. Boarts.
10.17 Severance Agreement dated March 5, 1999, between Ortel (Note 9)
Corporation and Roger Hay.
10.18 Amendment No. 1 dated September 19, 1997, and Amendment No. 2 to Page 59
the 1994 Equity Participation Plan of Ortel Corporation
10.19 Severance Agreement dated March 2, 1999, between Ortel Page 62
Corporation and Stephen K. Workman
10.20 Employment Agreement dated June 18, 1999, between Ortel Page 67
Corporation and Stephen R. Rizzone
10.21 Severance Agreement dated June 19, 1999, between Ortel Page 72
Corporation and George Pontiakos
10.22 Agreement dated June 25, 1999, between Ortel Corporation and Wim Page 75
J. H. Selders
21.1 Subsidiaries of Ortel Corporation. Exhibit 21
23.1 Consent of KPMG LLP. Exhibit 23
27.0 Financial Data Schedule
</TABLE>
56
<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 10-Q filing for the
quarter ended January 21, 1995.
Note 3 Previously filed by the Registrant in its 8K filing dated March
26, 1996.
Note 4 Previously filed by the Registrant in its 10-K filing for the
year ended April 30, 1996.
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.
Note 7 Previously filed by the Registrant in its 10-K filing for the
year ended April 30, 1998.
Note 8 Previously filed by the Registrant in its 10-Q filing for the
quarter ended October 31, 1998.
Note 9 Previously filed by the Registrant in its 10-Q filing for the
quarter ended January 31, 1999.
57
<PAGE>
EXHIBIT 10.18
-------------
AMENDMENT TO THE
1994 EQUITY PARTICIPATION PLAN
OF ORTEL CORPORATION
This Amendment to the 1994 Equity Participation Plan of Ortel Corporation
(the "Amendment") is adopted by Ortel Corporation, a Delaware corporation (the
"Company"), effective as of September 19, 1997.
RECITALS
--------
A. The Company's 1994 Equity Participation Plan (the "Plan") was adopted
by the Board of Directors on August 26, 1994 and approved by the stockholders of
the Company by Written Consent of the Common and Preferred Stockholders of the
Company in October 1994.
B. The Plan currently provides that the Compensation Committee of the
Board of Directors of the Company (the "Committee") may from time to time, in
its absolute discretion but subject to the limitations of the Plan, grant stock
options (both incentive and non-qualified) to key employees and consultants of
the Company, and otherwise administer and interpret the Plan.
C. The Company seeks to enhance the value of the Plan to further the
growth, development, and financial success of the Company by providing a
mechanism by which stock options can be more expediently granted to key
employees and consultants of the Company, other than persons subject to Section
16 of the Securities Exchange Act of 1934, as amended.
D. Section 10.2 of the Plan provides that the Board may amend the Plan,
subject in certain instances to receipt of approval of the stockholders of the
Company.
E. The Board of Directors of the Company desires to permit the delegation
by the Committee to the Chief Executive Officer of the Company of any or all of
the Committee's rights, duties and authority under the Plan as pertains to the
participation in the Plan by key employees and consultants, other than persons
subject to Section 16 of the Securities Exchange Act of 1934, as amended.
58
<PAGE>
EXHIBIT 10.18
-------------
AMENDMENT
The Plan is amended as provided herein and except as so amended the Plan
remains in full force and effect. Terms used herein that are not otherwise
defined shall have the meaning ascribed to them in the Plan.
1. Section 1.4 of the Plan is amended to read in its entirety as follows:
1.4 Committee. "Committee" shall mean the Compensation Committee of
---------
the Board, or a subcommittee of the Board, appointed as provided in Section
9.1, or the Chief Executive Officer to the extent so delegated to the Chief
Executive Officer by the Committee as provided in Section 9.2.
2. Section 9.2 is amended to read in its entirety as follows:
9.2 Duties and Powers of Committee. It shall be the duty of the
------------------------------
Committee to conduct the general administration of this Plan in accordance
with its provisions. The Committee shall have the power to interpret this
Plan and the agreements pursuant to which Options, awards of Restricted
Stock or Deferred Stock, Performance Awards, Stock Appreciation Rights,
Dividend Equivalents or Stock Payments are granted or awarded, and to adopt
such rules for the administration, interpretation, and application of this
Plan as are consistent therewith and to interpret, amend or revoke any such
rules. Any such grant or award under this Plan need not be the same with
respect to each Optionee, Grantee or Restricted Stockholder. Any such
interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the Code. In its absolute
discretion, the Board may at any time and from time to time exercise any
and all rights and duties of the Committee under this Plan, except with
respect to matters which under Rule 16b-3 or Section 162(m) of the Code, or
any regulations or rules issued thereunder, are required to be determined
in the sole discretion of the Committee. The Committee may at any time and
from time to time by resolution delegate the exercise of any or all of the
rights, duties or authority of the Committee under this Plan to the Chief
Executive Officer of the Company, except with respect to matters which
under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules
issued thereunder, are required to be determined in the sole discretion of
the Committee.
The undersigned, Nadav Bar-Chaim, secretary of the Company, hereby
certifies that the Board of Directors of the Company adopted the foregoing
Amendment to the Plan effective as of September 19, 1997.
Executed at Alhambra, California.
/s/ Nadav Bar-Chaim
- ----------------------------------
Nadav Bar-Chaim, Secretary
59
<PAGE>
EXHIBIT 10.18
-------------
AMENDMENT TO THE
1994 EQUITY PARTICIPATION PLAN OF ORTEL CORPORATION
This Amendment to The 1994 Equity Participation Plan of Ortel Corporation,
as amended (the "Plan") is adopted by Ortel Corporation, a Delaware corporation
(the "Company").
RECITALS
--------
A. The Plan was adopted by the Board of Directors of the Company on August
26, 1994, was approved by the stockholders of the Company in October 1994, and
became effective as of October 20, 1994 (the "Plan's Effective Date").
B. The Plan was previously amended (without shareholder approval required)
on October 26, 1994, September 27, 1996 and September 19, 1997.
C. The Committee authorized to administer, interpret and amend the Plan
desires to clarify that, since the Company's Common Stock is quoted on the
NASDAQ National Market, the appropriate measure for determining the exercise
price for stock options granted or to be granted under the Plan is the closing
sales price of the Common Stock and not the "mean between the closing
representative bid and asked price" as provided by the Plan.
AMENDMENT
---------
1. Effective as of the Plan's Effective Date, Section 1.13 of the Plan
shall be amended and read in its entirety as follows:
"Section 1.13 Fair Market Value. "Fair Market Value" of a share of the
Common Stock as of a given date shall be: (i) the closing price of a share of
Common Stock on the principal exchange on which shares of the Common Stock are
then trading, if any (or as reported on any composite index which includes such
principal exchange), on such date, or if shares were not traded on such date,
then on the next preceding date on which a trade occurred; or (ii) if the Common
Stock is not traded on an exchange but is (A) a NASDAQ National Market Security
quoted on NASDAQ, the closing price of a share of the Common Stock on such date
as quoted on NASDAQ, or (B) otherwise quoted on NASDAQ or a successor quotation
system, the mean between the closing representative bid and asked prices for the
Common Stock on such date as reported by NASDAQ or such successor quotation
system; or (iii) if the Common Stock is not publicly traded on an exchange and
not quoted on NASDAQ or a successor quotation system, the Fair Market Value of a
share of Common Stock as established by the Committee acting in good faith.
The undersigned, Nadav Bar-Chaim, Secretary of the Company, hereby
certifies that the Compensation Committee of the Board of Directors of the
Company approved the foregoing Amendment to the Plan on July, 29, 1998.
ORTEL CORPORATION,
a Delaware corporation
By: /s/ Nadav Bar-Chaim
-------------------
Nadav Bar-Chaim,
Secretary
60
<PAGE>
EXHIBIT 10.19
-------------
CONFIDENTIAL SEPARATION AGREEMENT AND RELEASE
THIS SEPARATION AGREEMENT AND RELEASE ("Agreement") is entered into as of
this 2nd day of March 1999, ("Agreement Date") by and between Ortel Corporation
(the "Company") and Stephen K. Workman (the "Employee").
WHEREAS, the Employee employment relationship between the Company and
Employee is being terminated;
WHEREAS, Employee and the Company desire to specify the terms of the
separation.
For and in consideration of the foregoing recitals and the mutual covenants
and agreements set forth herein, the Company and the Employee agree as follows:
Employment Status. Employee hereby resigns from his employment with the
------------------
Company and any affiliates effective March 5, 1999. Employee acknowledges that
he has been paid all wages due through the Agreement Date. On or before March
5, 1999, Employee will be paid all wages due for the period of February 22, 1999
through March 5, 1999, and any accrued, unused vacation pay. Employee
understands and agrees that he has given up any right to future wages or
benefits from the Company except as specifically set forth herein.
Return of Company Property. Employee shall return to the Company, all
---------------------------
files, records, reports, data, correspondence, memoranda and other documents
(including handwritten notes regarding, and drafts of same), computer equipment,
pager, keys and all other physical or personal property which Employee received
from the Company and which are the property of the Company.
Payment to Employee. In consideration of the release of all claims, the
--------------------
Company agrees to provide Employee with the following additional payment and
benefits:
The Company shall pay Employee severance in the amount of $64,500 (less
applicable withholding) in a single lump sum on the eighth (8th) day following
the Agreement Date.
The Company will amend the Agreements between Employee and the Company
dated December 14, 1998 (the "Option Agreements"), with respect to those options
to purchase 11,825 shares of Company stock at a price of $9.63 which have vested
in accordance with the terms of the Option Agreements through March 5, 1999.
The amended Option Agreements will allow such options to continue to be
exercised until the end of their full term, and that they need not be exercised
within ninety (90) days of March 5, 1999. All other options shall be
exercisable only in accordance with the current terms of the Option Agreements.
Any unvested options will be cancelled. In the event that the Company fails to
amend the Option Agreements in accordance with the terms of this paragraph, this
Agreement will be null and void in its entirety.
If Employee timely exercises his rights under COBRA for continued health
insurance in accordance with the terms of such the Company's health insurance
plans, the Company will pay the premiums necessary to continue such insurance
coverage for a period of six months immediately following the Agreement Date,
provided; however, that if Employee obtains new employment before the expiration
of the six month period, and is eligible for health benefits from the new
employer, Employee shall promptly notify the Company, and the Company shall not
be required to continue to reimburse COBRA payments thereafter.
Those certain Promissory Notes in the aggregate amount of $582,934 as
described on Exhibit A (collectively, the "Notes") are hereby modified so that
they become due and payable on September 5, 2000.
This represents the Company's sole financial obligation to Employee under
this Agreement.
Consulting. For the three-month period following March 5, 1999, Employee
----------
shall be available up to 8 hours per week to consult with the Company. Employee
shall work as an independent contractor, and not as an
61
<PAGE>
EXHIBIT 10.19
-------------
employee of the Company. As such, he shall not be eligible for any benefits of
employment. Employee shall be paid $125 per hour for his services as requested
by the Company, and shall be reimbursed for such actual out-of-pocket expenses
as Employee incurs with the prior approval of the Company. Employee shall
invoice the Company not later than 15 days after the last day of the month in
which the services are performed, and will be paid within 15 days of receipt of
the invoices by the Company.
Release of the Company by Employee.
- -----------------------------------
General Release. Employee hereby releases and forever discharges the
------------------
Company, its parents, subsidiaries, predecessors, successors and each of it
their associates, owners, stockholders, members, assigns, employees, agents,
directors, officers, partners, representatives, lawyers, donors or contributors
and all persons acting by, through, under, or in concert with them, or any of
them, (collectively the "Releases") of and from any and all manner of action or
actions, causes or causes of action, in law or in equity, suits, debts, liens,
contracts, agreements, promises, liabilities, claims, demands, damages, losses,
costs or expenses, of any nature whatsoever, known or unknown, fixed or
contingent (hereinafter called "Claims"), which they now have or may hereafter
have against the Releases by reason of any and all acts, omissions, events or
facts occurring or existing prior to the date hereof, except as expressly
provided herein. The Claims released hereunder include, without limitation, any
alleged breach of any employment agreement; any alleged breach of any covenant
of good faith and fair dealing, express or implied; any alleged torts or other
alleged legal restrictions relating to the Employee's employment and the
termination thereof; and any alleged violation of any federal, state or local
statute or ordinance including, without limitation, Title VII of the Civil
Rights Act of 1964, as amended, the Federal Age Discrimination in Employment
Act, the Americans With Disabilities Act, and the California Fair Employment and
Housing Act. This Release shall not apply to Employee's right to receive the
benefits provided for in the Agreement, or to retirement and/or employee welfare
benefits that have vested and accrued prior to his separation from employment
with the Company; nor shall this Release waive or release any unknown claims
that Employee may have arising exclusively in his capacity as a member of the
Company, rather than as an employee or otherwise.
Release of Unknown Claims.
- --------------------------
EMPLOYEE ACKNOWLEDGES THAT HE IS FAMILIAR WITH THE PROVISIONS OF CALIFORNIA
CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW
OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH, IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
EMPLOYEE BEING AWARE OF SAID CODE SECTION, HEREBY EXPRESSLY WAIVES ANY
RIGHTS HE MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON LAW
PRINCIPLES OF SIMILAR EFFECT.
Release of Age Discrimination Claims.
- -------------------------------------
Employee agrees and expressly acknowledges that this General Release
includes a waiver and release of all claims which Employee has or may have under
the Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C. (S) 621,
et seq. ("ADEA"). The following terms and conditions apply to and are part of
the waiver and release of the ADEA claims under this Agreement:
That this paragraph and this General Release are written in a manner
calculated to be understood by Employee.
The waiver and release of claims under the ADEA contained in this General
Release do not cover rights or claims that may arise after the date on which
Employee signs this General Release.
62
<PAGE>
EXHIBIT 10.19
-------------
This General Release provides for consideration in addition to anything of
value to which Employee is already entitled.
Employee is advised to consult an attorney before signing this General
Release.
Employee is granted twenty-one (21) days after Employee is presented with
this General Release to decide whether or not to sign this General Release. If
Employee executes this General Release prior to the expiration of such period,
Employee does so voluntarily and after having had the opportunity to consult
with an attorney.
Employee will have the right to revoke this General Release under the ADEA
within seven (7) days of signing this Release. In the event this Release is
revoked, the General Release and the Separation Agreement executed concurrently
herewith will be null and void in their entirety.
Manner of Revocation. In the event that Employee elects to revoke this
--------------------
Mutual General Release, he shall deliver within the time period prescribed above
to the Chairperson of the Compensation Committee of the Company's Board of
Directors, a writing stating that he is revoking this Mutual General Release and
subscribed by the Employee.
Consequences of Revocation. In the event that Employee should elect to
---------------------------
revoke this Mutual General Release as described in the paragraph above, this
Agreement shall be null and void in its entirety.
No Assignment of Claims. Employee represents and warrants to the Releases
------------------------
that there has been no assignment or other transfer of any interest in any Claim
which Employee may have against the Releases, or any of them, and Employee
agrees to indemnify and hold the Releases harmless from any liability, claims,
demands, damages, costs, expenses and attorneys' fees incurred as a result of
any person asserting any such assignment or transfer of any rights or Claims
under any such assignment or transfer from such Party.
No Suits or Actions. Employee agrees that if he hereafter commences, joins
--------------------
in, or in any manner seeks relief through any suit arising out of, based upon,
or relating to any of the Claims released hereunder or in any manner asserts
against the Releases any of the Claims released hereunder, then he will pay to
the Releases against whom such claim(s) is asserted, in addition to any other
damages caused thereby, all attorneys' fees incurred by such Releases in
defending or otherwise responding to said suit or Claim.
No Admission. The Parties further understand and agree that neither the
-------------
payment of money nor the execution of this Release shall constitute or be
construed as an admission of any liability whatsoever by the Releases.
Confidential Information and Trade secrets/Non-solicitation
- -----------------------------------------------------------
Non-competition. Employee acknowledges that he has had access to and
----------------
actual knowledge of confidential trade secret information, which was entrusted
to him in his fiduciary capacity as an employee, officer and director of the
Company, and that he has a duty not to disclose or use, for his or any other
person's benefit, such information. Employee agrees that such information
includes, without limitation, the identity of the Company's actual and targeted
customers, suppliers, business partners, and contacts; the business plans and
finances of the Company; technical processes and information developed by the
Company; and business processes developed by the Company.
Non-solicitation.
- -----------------
No Solicitation of Customers. To ensure that no trade secret information
----------------------------
is misused, for a period of one (1) year from the date of execution of this
Agreement, Employee shall not directly or indirectly, either individually or
acting in concert, call upon or solicit any significant customer of the Company
or its subsidiaries with whom the Company or its subsidiaries has or have had
any dealings during the five-year period prior to the date hereof or may have
any dealings at any time during such period for the purpose of soliciting
business to sell
63
<PAGE>
EXHIBIT 10.19
-------------
or otherwise provide to such customer or any other customer of the Company or
its subsidiaries any product or service included in the alternative long
distance carrier business, except for the benefit of or on behalf of the Company
and, in furtherance thereof, Employee, individually or acting in concert, shall
not attempt in any manner to solicit and/or otherwise persuade or induce any
such customer of the Company or its subsidiaries to cease to do business, reduce
the amount of business which any such customer has customarily done or
contemplated doing or refrain from increasing the amount of business with the
Company or its subsidiaries.
No Solicitation of Distributor, Supplier and Employees. To ensure that no
------------------------------------------------------
trade secret is misused, for a period of one (1) year from the date of execution
of this Agreement, Employee shall not directly or indirectly, either
individually or acting in concert, (i) request, induce or attempt to influence
any distributor or supplier of goods or services to the Company or its
subsidiaries to curtail, cancel or refrain from maintaining or increasing the
amount or type of business such distributor or supplier of goods or services is
then transacting with the Company or its subsidiaries; (ii) solicit for
employment or retention or hire, employ or retain any individual who is an
employee, agent or representative of the Company or its subsidiaries as of the
date hereof, except that he may solicit, hire or retain non-exclusive agents or
representatives of the Company provided that he does not use trade secret
information to do so, and such agent or representative would not be required to
curtail or cease performance of services for the Company; or (iii) influence or
attempt to influence any employee of the Company or its subsidiaries to
terminate his or her employment with the Company.
In the event of a breach of Paragraph 6 by Employee, the Company shall be
entitled to injunctive relief, as well as to damages sustained and the recovery
of reasonable attorneys' fees. Employee represents that he has complied with the
terms of Paragraph 5 prior to the execution of this Agreement & Release.
Confidentiality of Terms; No Disparagement.
- -------------------------------------------
Employee expressly acknowledges that this Agreement and all matters
relating to or leading up to the negotiation and effectuation of this Agreement,
are confidential and shall be accorded the utmost confidentiality and shall not
be disclosed to any third party except to Employee's wife, his legal, actuarial,
pension, accounting and tax advisors to the extent necessary to perform services
or as required by law, rule or regulation. In addition, Employee may disclose
the provisions of paragraph 6 to any prospective employer. Employee agrees that
if any disclosure is made as permitted under this paragraph, then such persons
or entities shall be cautioned about the confidentiality obligations imposed by
this Agreement and required to abide by the terms of this confidential
undertaking.
Employee agrees that he will conduct himself in a professional manner and
not make any disparaging, negative or other statements regarding the Company,
its affiliates or any of the Company's or its affiliates' officers, directors or
employees which could reasonably be believed in any way to have an adverse
effect on the business or affairs of the Company or its affiliates or otherwise
be injurious to or not be in the best interests of the Company, its affiliates
or any such other persons. The Company agrees that will not make any
disparaging, negative or other unfavorable statements regarding the Employee.
The Company does not provide references. If the Human Resources Department of
the Company is contacted concerning Employee's employment, it will follow its
usual practice and confirm dates of employment, salary and position held if
requested to do so.
Advice of Counsel. Employee represents and warrants that he has read this
------------------
Agreement, that he has had adequate time to consider it, that he had been
advised by the Company to consult with an attorney and has consulted with an
attorney prior to executing this Agreement, that he understands the meaning and
application of this Agreement and that he has signed this Agreement knowingly,
voluntarily and of his own free will with the intent of being bound by it.
Severability; Modification of Agreement. If any provision of this
---------------------------------------
Agreement shall be found invalid or unenforceable in whole or in part, then such
provisions shall be deemed to be modified or restricted to the extent and in the
manner necessary to render the same valid and enforceable or shall be deemed
excised from this Agreement as such circumstances may require, and this
Agreement shall be construed and enforced to the maximum extent permitted by law
as if such provision had been originally incorporated herein as so modified or
restricted or as if such provision had not been originally incorporated herein,
as the case may be.
64
<PAGE>
EXHIBIT 10.19
-------------
Arbitration. Except for claims for emergency equitable or injunctive
-----------
relief which cannot be timely addressed through arbitration, the parties hereby
agree to submit any claim or dispute arising out of the terms of this Agreement
(including exhibits) and/or any dispute arising out of or relating to Employee's
employment with the Company in any way, to private and confidential arbitration
by a single neutral arbitrator through JAMS/Endispute. Subject to the terms of
this paragraph, the arbitration proceedings shall be governed by the then
current JAMS/Endispute rules governing employment disputes, and shall take place
in Los Angeles, California. The decision of the arbitrator shall be final and
binding on all parties to this Agreement, and judgment thereon may be entered in
any court having jurisdiction. The Parties shall share equally the arbitrator's
fee and all costs of services provided by the arbitrator and arbitration
organization; however, all costs of the arbitration proceeding or litigation to
enforce this Agreement, including attorneys' fees and witness expenses, shall be
paid as the arbitrator or court awards in accordance with applicable law.
Except for claims for emergency equitable or injunctive relief which cannot be
timely addressed through arbitration, this arbitration procedure is intended to
be the exclusive method of resolving any claim relating to the obligations set
forth in this Agreement.
Successors and Assigns. This Agreement shall be binding upon and inure to
----------------------
the benefit of and be enforceable by the parties hereto and their respective
successors and assigns. Notwithstanding the foregoing, neither this Agreement
nor any rights hereunder may be assigned to any party by the Company or Employee
without the prior written consent of the other party hereto.
Miscellaneous. Employee agrees not to aid in, assist in, or encourage the
--------------
pursuit of, litigation against the Company by any other person or entity.
Entire Agreement. Employee and the Company each represent and warrant that
----------------
no promise or inducement has been offered or made except as set forth herein and
that the consideration stated herein is the sole consideration for this
Agreement, provided, however, that (1) any agreements relating to the
confidentiality of trade-secret information and inventions and assignment of
trade-secret information and inventions are not superseded by this Agreement,
(2) the Option Agreements are not superseded or discharged by this Agreement;
and (3) the Notes are not superseded or discharged by this Agreement, except to
the extent the Notes are expressly modified by this Agreement. The parties
agree that this Agreement shall be construed and enforced in accordance with the
laws of the State of California.
Stephen K. Workman Ortel Corporation
/S/ Stephen K. Workman By: /S/ Wim H. J. Selders
- ------------------------------ ------------------------------------------
Date: March 2, 1999 Title: President, Chief Executive Officer
- ------------------------------ Date: March 2, 1999
65
<PAGE>
EXHIBIT 10.20
-------------
EMPLOYMENT AGREEMENT
--------------------
I. PARTIES
This Employment Agreement ("Agreement") entered into as of June 18, 1999 by
and between Ortel Corporation, 2015 West Chestnut Street, Alhambra, CA 91803-
1552 ("ORTEL") and Stephen R. Rizzone residing at 1101 Ebbtide Road, Corona del
Mar, CA 92656 ("Executive").
II.RECITALS
1. ORTEL desires to retain the services of Executive and Executive desires
to provide such services as provided herein.
III. TERMS
1. Effective Date: This Employment Agreement shall become effective on
June 18, 1999.
2. Positions: Executive shall be employed by ORTEL as Chairman of the
Board of Directors, President and Chief Executive Officer.
3. Employment Duties: As Chairman of the Board of Directors, President
and Chief Executive Officer, Executive will have total overall responsibility
for all business activities of ORTEL. Including, without limitation, the
tactical operation and strategic direction of ORTEL. In conjunction with this
responsibility, all personnel will report either to the Executive or to persons
reporting to him. Executive will report only to the Board. Executive will be
allowed to vote on all matters before the Board concerning ORTEL, excluding only
matters directly and solely related to Executive's compensation and employment
and such other matters with respect to which Executive would be deemed to be an
"interested director" under the Delaware General Corporation Law.
Notwithstanding the foregoing the Chief Financial Officer shall also report to
the Board of Directors with respect to the books, records, financial condition
and financial report of the Company.
4. Term: The term of this Agreement is five (5) years, commencing June
18, 1999, and terminating June 18, 2004. Unless terminated by either Party as
provided hereinunder, this Agreement shall automatically be extended annually
for one additional year beginning June 18, 2004. However, either party may
terminate Executive's employment, with or without cause, upon giving at least
thirty (30) days prior written notice. Termination of Executive's employment by
ORTEL shall also require a majority vote of the Board.
5. Salary: Executive shall be paid $300,000.00 per year, paid according
to ORTEL's standard payroll schedule. Usual and customary expenses will be
reimbursed to Executive by ORTEL according to its policy regarding business
expenses. The Board shall review Executive's salary, incentive compensation and
stock/stock option position annually, on June 18, of each year, with the next
review to be on or before June 18, 2000. ORTEL shall provide annual salary
increases, incentive compensation and stock/stock options consistent with the
custom and practice in the industry for equivalent-sized companies with
equivalent executive responsibilities, taking into account the performance of
ORTEL and Executive relative to the industry. No such annual review shall
reduce Executive's annual salary, incentive compensation, stock/stock options,
nor shall it terminate or modify any economic compensation, options, or other
rights or benefits granted herein.
6. Incentive Compensation Bonus: For the year 1999, in addition to
Executive's base salary, Executive shall have the opportunity to earn an
additional $185,000.00 based on mutually agreed upon Corporate objectives. In
the first year, $150,000 of the total bonus is guaranteed, the remaining $35,000
based on performance.
7. Stock Options: As an incentive to join ORTEL, Executive is hereby
granted the option to purchase 600,000 shares of ORTEL stock under the following
conditions:
66
<PAGE>
EXHIBIT 10.20
-------------
a. The stock options provided for herein shall be subject to the
terms and conditions of that certain stock option agreement of even date
herewith a copy of which is attached hereto (the "Stock Option Agreement").
b. Options granted under this Agreement shall have a purchase price
equal to the fair market value of the stock as of the close of market on June
17, 1999, the day preceding the date of employment.
c. All options granted to Executive in this Agreement and all
subsequent Agreements will have a four (4) year vesting period; 12/48th will be
vested on the one (1) year anniversary of the award, and 1/48th will be vested
on the first day of each full month thereafter, so that all options shall be
vested on the first day of the 48th month after the date of this Agreement.
Vesting shall cease upon the termination of employment.
d. Executive may exercise vested stock options granted in this
Agreement and all subsequent Agreements, until the earliest of (a) ten years
from the date of the grant of such options, (b) two (2) years after Executive's
termination of employment other than by ORTEL for Cause and (c) Executive's
termination of employment by ORTEL for Cause. Notwithstanding the foregoing,
all vested stock options shall cease to be exercisable if Executive enters into
a Competing Relationship with the Company (as defined in the Stock Option
Agreement).
e. Except as otherwise provided, the stock options referred to herein
will be for class A common stock.
8. Signing Bonus: On or before July 7, 1999, ORTEL shall pay to Executive
a one-time signing bonus of $250,000. One twenty-fourth (1/24) of this bonus
will vest each month until fully vested on June 18, 2001. Should Executive
resign voluntarily or be terminated for Cause as defined in Section 11b,
Executive shall repay any unvested portion. In the event Executive's employment
is terminated for any other reason, the unvested portion of the sign on bonus
will vest and all terms of Sections 11 and 12 will apply.
9. Health Benefits: ORTEL will provide Executive with the same health,
disability and life insurance benefits as are made available to other Executives
of ORTEL.
10. Driver: ORTEL agrees to provide Executive with a driver and a Lincoln
Town Car or equivalent for transportation to and from his principal residence in
Corona del Mar, California and ORTEL's offices and for other business purposes.
ORTEL acknowledges that Executive has relinquished certain other consideration
in order to receive this benefit.
11. Rights on Termination of Employment
a. Executive shall have the rights and benefits described below
(hereinafter "Termination Benefits"), in the event Executive's employment is
terminated as follows:
(1) ORTEL terminates Executive's employment without Cause (as defined
below) at anytime;
(2) Executive terminates his employment for any of the following
reasons: (a) a change of job duties, title or responsibility from those
described in paragraph 3; (b) Executive is removed from, or not re-elected to
the Board of Directors, or is removed as Chairman of the Board of Directors; (c)
there is a change in the organizational structure of ORTEL, i.e., who Executive
reports to or who reports to him; (d) ORTEL for any reason decreases the salary,
benefits or compensation to Executive; (e) Executive is required to travel more
than fifty (50) miles from his principal residence to the principal offices of
ORTEL as a result of the relocation of the principal offices of ORTEL; or (f)
there is a Reorganization (as defined below); or
(3) Executive's death or disability; for the purposes of this Section
11(a)(3), Executive shall be deemed to be disabled if in the opinion of the
Board of Directors, as confirmed by competent medical advice, Executive is
physically or mentally incapacitated to such a degree as to be unable to perform
his duties for an
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EXHIBIT 10.20
-------------
extended period of time.
b. Executive shall not have Termination Benefits if he voluntarily
terminates his employment for any reason other than set forth above or if he is
terminated for Cause. Termination of Executive's employment shall be for
"Cause" in the event of the occurrence of any of the following: (a) any
intentional action or intentional failure to act by Executive which was
performed in bad faith and to the material detriment of the Company; (b)
Executive intentionally refuses or intentionally fails to act in accordance with
any lawful and proper direction or order of the Board; (c) Executive willfully
and habitually neglects the duties of employment; or (d) Executive is convicted
of a felony crime involving moral turpitude. All other terminations by ORTEL
shall be treated as not for Cause.
c. Executive's Termination Benefits are as follows:
(1) ORTEL shall continue to pay Executive his compensation for a
period of twenty-four (24) months from the date of termination of employment.
Compensation shall be defined as his then current base salary plus annual
incentive bonus. Annual incentive bonus shall be defined the average of the
prior two (2) years annual bonus actually awarded.
(2) ORTEL shall continue to pay and/or provide to Executive all
health, medical, disability, life insurance, and other benefits described in
paragraph 9, for a period of twenty-four (24) months from the date of
termination of employment.
(3) ORTEL shall pay to Executive for accrued but unused vacation time
vested as of the date of termination of his employment.
d. The parties acknowledge that any public discussion of the
circumstances pertaining to the parties' termination of their relationship would
be counterproductive to the interests of either party. The parties therefore
agree to refrain from making any negative, disparaging or defamatory remarks
about the other party, or to interfere with the other party's prospective
economic gain.
e. If Executive's employment is terminated other than as described in
Section 11(a)(1), (2) or (3), Executive shall receive all compensation and
benefits earned and accrued under this Agreement prior to such termination of
employment and shall have no further rights to any other compensation or
benefits hereunder on or after such termination of employment.
f. If Executive's employment is terminated as a result of death or
disability (as described in Section 11(a)(3)), ORTEL obligation's hereunder
shall be reduced by any amount of any benefit paid to Executive under any life
or disability insurance or other benefit plan of ORTEL relating to such death or
disability. If Executive's employment is terminated as a result of death, the
benefits of this Agreement shall inure to the estate of Executive.
g. ORTEL's obligation to make any payments to Executive upon a
termination of employment shall be contingent upon Executive's execution of a
release of claims in a form reasonably acceptable to ORTEL.
12. ORTEL Reorganization:
a. For purposes of this Agreement, the term "Reorganization" means
any Change of Control (as defined in the Stock Option Agreement). A
Reorganization shall be deemed to have occurred on the date of such Change of
Control.
b. Upon Reorganization, all unvested stock options shall immediately
vest.
c. ORTEL agrees to gross-up Executive's compensation to compensate
Executive for any possible 280G tax consequences that may arise as a result of
any acceleration provided in subsection 12(b) or any
68
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EXHIBIT 10.20
-------------
other payment made by ORTEL in connection with a Reorganization. Such gross-up
payment will be made within fourteen (14) days of the earlier to occur of (i)
assessment or ruling by IRS or any other tax authority or (ii) payments of such
amounts by Executive in conjunction with the filing of the personal income
return for the year in which the payment was made or options accelerated. For
calculation purposes, all gross ups will take into account the combined tax
effect at the highest applicable federal, state and local tax. ORTEL agrees to
gross up such payments to Executive to result in a tax burden to Executive not
in excess of the highest marginal married combined federal and state tax rates.
ORTEL shall also be responsible for and gross up any excise or penalty taxes
applied by state or federal tax authorities by recommendation of such payments.
13. Proprietary Information:
a. Executive recognizes that his position with ORTEL requires
substantial trust and confidence because of his access to trade secrets and
other proprietary information of ORTEL (collectively "Proprietary Information").
At all times, during the term of this Agreement, and for a period of three (3)
years after the termination of this Agreement for any reason, Executive shall
use his best efforts and exercise utmost diligence to protect the unauthorized
disclosure of any Proprietary Information. Said Proprietary Information
includes but is not limited to ORTEL's hardware, software, marketing,
manufacturing and design processes, and operating procedures. Executive will
not be required to incur personnel expense to protect the unauthorized
disclosure of any Propriety Information.
b. Except as may be required in the performance of his duties
hereinunder, Executive shall not use ORTEL's Proprietary Information for his own
benefit, or disclose ORTEL's Proprietary Information to another, without ORTEL's
prior written consent.
c. The provisions of this Section 13 are in addition to those set
forth in ORTEL Employee Proprietary Information and Invention Agreement
previously executed by Executive.
14. Covenant Not To Compete: During the term of Executive's employment,
Executive shall not engage in any act in competition with the business or best
interests of ORTEL. During the term of this Agreement, Executive shall not be
an agent, employee, or consultant for any competitor of ORTEL. Following any
notification of termination, voluntarily or involuntarily, of his employment,
Executive may pursue and accept any employment or occupation whether or not it
competes with ORTEL.
a. Executive may, at his option, sit on non-competing Boards of
Directors, advisory groups and partnership and may derive compensation for these
services. Executive agrees to notify ORTEL of all such associations and
maintain a current status of these associations.
15. No Oral Modification: This Agreement is not subject to oral
modification in any fashion. The terms of this Agreement may be modified only
by an agreement in writing executed by the Parties hereto. No subsequent
attempt to an oral novation will be effective to modify or change this
agreement.
16. Notice: Any notice required by this Agreement shall be in writing and
shall be mailed or delivered to the other party at the addresses set forth
above. If said notice is mailed, it shall be deemed effective five (5) days
after the date of mailing.
17. Covenants Independent: The covenants set forth herein are independent
of one another, and a breach by one party of any promise or covenant set forth
herein, shall not terminate the Agreement or excuse performance by the other
party of his or its obligations set forth herein.
18. Entire Agreement: Except as provided herein, this Agreement
constitutes the entire agreement between the parties and supersedes all prior
written or oral agreements. There are no promises, warranties, or
representations other than as contained herein. This Agreement may be only be
modified by an Agreement in writing executed by the Parties hereto.
19. Governing Law: This agreement shall be governed by the laws of the
State of California. Any
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EXHIBIT 10.20
-------------
action or mediation dispute arising out of this Agreement shall be conducted in
Orange County, California.
20. Mediation: In the event of a dispute between the parties arising out
of this Agreement, the parties agree to submit the dispute to mediation prior to
the commencement of litigation. Mediation shall be conducted by any neutral
mediator selected by both parties. If the parties cannot agree on the selection
of a mediator, then either party may seek an order of the court of competent
jurisdiction to appoint a mediator. The party requesting the court to appoint a
mediator shall be entitled to reasonable attorney's fees and costs incurred in
obtaining the order. In the event mediation does not resolve the parties
dispute, then either party may commence an action against the other party.
21. Attorney's Fees: In the event of any action arising out of this
Agreement, the prevailing party will be entitled to reasonable attorney's fees
and costs, including pre-litigation attorney's fees and costs.
22. Further Assurances: Each party shall execute such documents and
perform such acts as may be reasonably necessary or appropriate to carry out the
terms of this Agreement.
23. Review By Counsel: Each party has had the opportunity to review this
Agreement with an attorney of his or its choice, and each party acknowledges
this Agreement is entered into voluntarily.
AGREED AGREED
/s/ Stephen R. Rizzone /s/ Anthony J. Iorilla /June 18, 1999
- ------------------------ -----------------------------
Stephen R. Rizzone Authorized Agent Date
ORTEL Corporation
Date: June 18, 1999
-------------
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EXHIBIT 10.21
-------------
CHANGE IN CONTROL AGREEMENT
---------------------------
This Change in Control Agreement (the "Agreement") is made and entered into as
of June 19, 1999 by and between ORTEL CORPORATION, a Delaware corporation
("Ortel"), and GEORGE M. PONTIAKOS, an individual ("Executive").
RECITALS
--------
Whereas, Executive is employed by Ortel as its Senior Vice President,
Operations, and in such other executive capacity or capacities as the board of
directors of Ortel may from time to time prescribe.
AGREEMENT
---------
NOW THEREFORE, in consideration of the above Recitals and the covenants
contained herein, 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 that Executive's employment with Ortel is terminated by Ortel
within six months following a "Change in Control":
(i) Ortel shall continue to pay Executive, on a monthly basis, his basic
salary 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.
(iii) Notwithstanding any provisions of Ortel's 1994 Equity Participation
Plan or other similar plans (collectively, "Option Plans"), all outstanding
unvested stock options, if any, granted to Executive under any of the Option
Plans (or options substituted therefor covering for stock of a successor
corporation) shall be and become fully vested and exercisable as to all shares
of stock covered thereby effective as of the date of such
71
<PAGE>
EXHIBIT 10.21
-------------
termination.
(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 remaining payment to Executive
thereunder. Ortel shall pay such lump sum severance allowance to Executive
within thirty (30) days following such election by Executive.
(c) For the purposes of Section 2(a), termination of Executive's employment by
Ortel shall include termination of Executive's employment by Executive for Good
Reason where "Good Reason" means the occurrence of any of the following
circumstances:
(i) a substantial reduction in the responsibilities of Executive but not
(x) a reduction based solely upon a change in reporting structure within Ortel,
(y) reduction in Executive's title, (z) a transfer to another position which
does not adversely affect Executive's responsibilities, or (w) a change in the
Executive's status, position or duties within Ortel which change results solely
by virtue of Ortel ceasing to be a public company or becoming a subsidiary or
division of a larger corporation.
(ii) the relocation by Ortel of Executive's offices to a location outside
of Los Angeles County or Orange County, California.
(iii) a reduction by Ortel in Executive's annual base salary as in effect
on the date hereof or as the same being increased from time to time.
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.
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,
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EXHIBIT 10.21
-------------
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. Any arbitration shall be conducted in the
County of either Orange or Los Angeles, State of California.
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, duly 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.
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/ George M. Pontiakos By: /s/ Stephen R. Rizzone
- -------------------------- ----------------------------------
George M. Pontiakos Stephen R. Rizzone
President and Chief Executive Officer
73
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EXHIBIT 10.22
-------------
AGREEMENT
THIS AGREEMENT ("Agreement") is made effective as of the 25th day of June
1999 (the "Effective Date") and is entered into by and between Ortel Corporation
(the "Company") and Wim H. J. Selders ("Executive").
WHEREAS, as a result of his announcement in early 1999, Executive is
retiring from his employment with the Company and from his position as a
director of the Company;
WHEREAS, as a result of such announcement, a new chief executive officer of
the Company has been identified and hired and has commenced employment with the
Company;
WHEREAS, Executive and the Company desire to specify the terms of
Executive's retirement.
For and in consideration of the foregoing recitals and the mutual covenants
and agreements set forth herein, the Company and Executive agree as follows:
1. TERMINATION OF EMPLOYMENT AND DIRECTORSHIP STATUS. On July 16, 1999
-------------------------------------------------
(representing a three (3) week transition period after the Effective Date),
Executive's employment with the Company and all Company affiliates shall
terminate, and Executive shall retire as a member in good standing of the Board
of Directors of the Company. Effective as of July 16, 1999, Executive's
Employment Agreement with the Company dated as of September 14, 1990 and that
certain letter dated February 5, 1999 from Amnon Yariv on behalf of the Company
to Executive shall terminate and be of no further force or effect.
2. PAYMENTS TO AND BENEFITS FOR EXECUTIVE. The Company agrees to provide
--------------------------------------
Executive with the following payments and benefits:
a. Severance Payment. On or before August 25, 1999, the Company
------------------
shall pay Executive severance in the amount of $530,025 (less applicable
withholding), representing Executive's annual salary as of the Effective
Date of $265,012 per year for two years following the Effective Date.
b. Automobile Allowance. On or before August 25, 1999, the Company
--------------------
shall pay Executive the amount of $28,800 (less applicable withholding),
representing a car allowance of $1200 per month for two years following the
Effective Date.
c. Accrued Vacation. On or before August 25, 1999, the Company shall
----------------
pay Executive for 12 weeks of accrued vacation time (less applicable
withholding).
d. 401(k) Plan Matching Contributions. On or before August 25, 1999,
----------------------------------
the Company will pay Executive $8,000 representing Company matching
contributions for Executive for the two years following the Effective Date
under the Company's 401(k) Plan, as if Executive had participated in the
401(k) Plan during such two years at the maximum level of participation
permitted for Executive under such plan. The Company shall pay Executive
additional amounts equal to (i) Executive's actual federal and state tax
liability arising out of payment to Executive of such matching
contributions and (ii) Executive's federal and state tax liability on such
tax payment (and additional tax payments).
e. Insurance. For two years following the Effective Date, the
---------
Company shall provide Executive (and his eligible family members
participating in such plans as of the Effective Date) with continued
health, dental and vision insurance, on substantially the same terms
(including scope of coverage and reimbursement) as provided on the
Effective Date. The Company shall convert the disability insurance and
life insurance policies benefiting Executive as of the Effective Date into
individual policies, and the Company shall pay the premiums on such
policies for two years following the Effective Date.
f. Acceleration and Extension of Certain Options. All options
---------------------------------------------
granted to Executive after
74
<PAGE>
EXHIBIT 10.22
-------------
November 1994 and specified on Exhibit A attached hereto shall be and become
fully vested as of the Effective Date and shall be exercisable for their
respective entire terms. This Agreement shall be deemed to automatically amend
all contrary provisions of any stock option agreements relating to the options
set forth on Exhibit A.
g. Option Exercise Loan and Reimbursement of Taxes. On or before
-----------------------------------------------
August 25, 1999, the Company shall provide Executive with a full-recourse,
interest-free loan for Executive to use to exercise the incentive stock options
and non-qualified options specified on Exhibit B attached hereto. Such loan
shall have a maturity date of five years after the date of the loan, shall be
secured by all of the shares of Company Common Stock issued to Executive upon
his exercise of the options specified on Exhibit B, and shall be evidenced by a
promissory note and pledge agreement substantially in form and substance
attached hereto as Exhibits C and D, respectively. The Company shall pay
Executive additional amounts equal to (i) Executive's actual federal and state
tax liability arising out of Executive's exercise of the options set forth on
Exhibit B (including, without limitation, any alternative minimum tax) and in
connection with any imputed income arising as a result of such loan being
interest-free, and (ii) Executive's actual federal and state tax liability on
such tax payment (and additional tax payments).
h. Cancellation of Indebtedness. On or before August 25, 1999, the
----------------------------
Company shall return to Executive, marked "Canceled", the original Promissory
Note of Executive dated December 4, 1992, in the original (and currently
outstanding) principal amount of $150,000. The 31,756 shares of Company Stock
held as collateral for this note shall be returned to Executive. The Company
shall pay Executive additional amounts equal to (i) Executive's actual federal
and state tax liability arising out of any income Executive may recognize as a
result of the forgiveness of the loan evidenced by the December 4, 1992
promissory note and (ii) Executive's actual federal and state tax liability on
such tax payment (and additional tax payments).
i. Sale of Automobile. Upon the request of Executive on or before
------------------
August 25, 1999, the Company shall sell to Executive the Cadillac STS used by
Executive as of the Effective Date, and the price for such car shall be the
Kelly Blue Book wholesale value thereof. If Executive does not so request,
Executive shall return such automobile to the Company on or before August 25,
1999.
j. The foregoing provisions of this Section 2 represent the Company's
sole obligations to Executive following termination of employment and
directorship of Executive with the Company.
3. MUTUAL GENERAL RELEASE.
----------------------
a. General Release by Executive. For valuable consideration, the
----------------------------
receipt and adequacy of which are hereby acknowledged, Executive, acting on
behalf of himself and all Executive Releasees, does hereby release and forever
discharge the "Company Releasees" herein, consisting of the Company and each of
its respective subsidiaries, affiliates, successors, agents, directors,
officers, representatives, and all persons acting by, through, under, or in
concert with them, or any of them, of and from any and all manner of action or
actions, causes or causes of action, in law or in equity, suits, debts, liens,
contracts, agreements, promises, liabilities, claims, demands, damages, losses,
costs or expenses, of any nature whatsoever, known or unknown, fixed or
contingent (hereinafter called "Claims"), which they now have or may hereafter
have against the Company Releasees by reason of any and all acts, omissions,
events or facts occurring or existing prior to the date hereof, except as
expressly provided herein. The Claims released hereunder include, without
limitation, any alleged breach of any employment agreement; any alleged breach
of any covenant of good faith and fair dealing, express or implied; any alleged
torts or other alleged legal restrictions relating to the Executive's employment
and the termination thereof; and any alleged violation of any federal, state or
local statute or ordinance including, without limitation, Title VII of the Civil
Rights Act of 1964, as amended, the Federal Age Discrimination in Employment Act
of 1967, as amended, and the California Fair Employment and Housing Act. This
Release shall not apply to (i) Executive's rights to indemnification under
Section 2802 of the California Labor Code, Section 317 of the California
Corporations Code and the Company's Bylaws, or (ii) Executive's rights under
this Agreement, or (iii) Executive's rights as a stockholder of the Company.
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EXHIBIT 10.22
-------------
b. General Release by the Company. For valuable consideration, the
------------------------------
receipt and adequacy of which are hereby acknowledged, the Company, acting on
behalf of itself and all Company Releasees, does hereby release and forever
discharge the "Executive Releasees" herein, consisting of Executive and his
estate and heirs and lawyers, or any of them, of and from any and all manner of
action or actions, causes or causes of action, in law or in equity, suits,
debts, liens, contracts, agreements, promises, liabilities, claims, demands,
damages, losses, costs or expenses, of any nature whatsoever, known or unknown,
fixed or contingent (hereinafter called "Claims"), which they now have or may
hereafter have against the Executive Releasees by reason of any and all acts,
omissions, events or facts occurring or existing prior to the date hereof,
except as expressly provided herein. The Claims released hereunder include,
without limitation, any alleged breach of any employment agreement; any alleged
breach of any covenant of good faith and fair dealing, express or implied; any
alleged torts or other alleged legal restrictions relating to the Executive's
employment and the termination thereof; and any alleged violation of any
federal, state or local statute or ordinance. This Release shall not apply to
the Company's rights under this Agreement.
c. RELEASE OF UNKNOWN CLAIMS. EXECUTIVE AND THE COMPANY
-------------------------
(COLLECTIVELY THE "PARTIES") ACKNOWLEDGE THAT HE AND IT ARE FAMILIAR WITH THE
PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH, IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
EXECUTIVE AND THE COMPANY BEING AWARE OF SAID CODE SECTION, HEREBY
EXPRESSLY WAIVE ANY RIGHTS EITHER OF THE PARTIES MAY HAVE THEREUNDER, AS WELL AS
UNDER ANY OTHER STATUTES OR COMMON LAW PRINCIPLES OF SIMILAR EFFECT.
d. Release of Age Discrimination Claims and Rights under the Older
---------------------------------------------------------------
Workers' Benefit Protection Act. Executive agrees and expressly acknowledges
- -------------------------------
that this Agreement includes a waiver and release of all claims which Executive
or any Executive Releasee has or may have under the Age Discrimination in
Employment Act of 1967, as amended, 29 U.S.C. (S) 621, et seq. ("ADEA"). The
following terms and conditions apply to and are part of the waiver and release
of the ADEA claims under this Agreement:
(i) That this paragraph and this Agreement are written in a manner
calculated to be understood by Executive.
(ii) The waiver and release of claims under the ADEA contained in this
Agreement do not cover rights or claims that may arise after the date on which
Executive signs this Agreement.
(iii) This Agreement provides for consideration in addition to anything of
value to which Executive is already entitled.
(iv) Executive is advised to consult an attorney before signing this
Agreement.
(v) Executive is granted twenty-one (21) days after Executive is
presented with this Agreement to decide whether or not to sign this Agreement.
If Executive executes this Agreement prior to the expiration of such period,
Executive does so voluntarily and after having had the opportunity to consult
with an attorney.
(vi) Executive will have the right to revoke the waiver and release of
claims under the ADEA within seven (7) days of signing this Agreement. In the
event this waiver and release of claims is revoked, this Agreement shall be null
and void in its entirety.
e. Manner of Revocation. In the event that Executive elects to
--------------------
revoke this Mutual General Release, he shall deliver within the time period
prescribed above to the Chairman of the Company's Board of Directors, a writing
stating that he is revoking this Mutual General Release and subscribed by the
Executive.
f. Consequences of Revocation. In the event that Executive should
--------------------------
elect to revoke this Mutual General Release as described in the paragraph above,
this Agreement shall be null and void in its entirety.
76
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EXHIBIT 10.22
-------------
g. No Claims. Each of the Parties represent and warrant to the
---------
Company Releasees and the Executive Releasees (collectively, the "Releasees")
that there has been no assignment or other transfer of any interest in any Claim
which such Party may have against the Releasees, or any of them. The Company
agrees to indemnify and hold the Executive Releasees harmless from any
liability, claims, demands, damages, costs, expenses and attorneys' fees
incurred as a result of any person asserting any such assignment or other
transfer of any interest in any Claims under any such assignment or transfer
from the Company or any Company Releasee. Executive agrees to indemnify and hold
harmless the Company Releasees from any liability, claims, demands, damages,
costs, expenses and attorneys' fees incurred as a result of any person asserting
such assignment or other transfer of any interest in any Claims under any such
assignment or transfer from Executive or any Executive Releasee.
h. Indemnification. Each of the Parties agrees that if he or it
---------------
hereafter commences, joins in, or in any manner seeks relief through any suit
arising out of, based upon, or relating to any of the Claims released hereunder
or in any manner asserts against the Releasees any of the Claims released
hereunder, then the Party asserting such Claim(s) will pay to the Releasees
against whom such Claim(s) is asserted, in addition to any other damages caused
thereby, all attorneys' fees incurred by such Releasees in defending or
otherwise responding to said suit or Claim.
i. No Admission of Liability. The Parties understand and agree
-------------------------
that neither the payment of money nor the execution of this Agreement shall
constitute or be construed as an admission of any liability whatsoever by the
Releasees.
4. CONFIDENTIAL INFORMATION AND TRADE SECRETS. Executive acknowledges
------------------------------------------
that he has had access to and actual knowledge of confidential information and
trade secrets, which were entrusted to him in his fiduciary capacity as an
employee, officer and director of the Company, and that for a period of two
years following the Effective Date he has a duty not to disclose or use, for his
or any other person's benefit, such information, except for information that is
or becomes part of the public domain or is disclosed to Executive by a third
party under no obligation of confidentiality to the Company. Executive agrees
that such information includes, without limitation, the identity of the
Company's actual and targeted customers, suppliers, business partners, and
contacts; the business plans and finances of the Company; technical processes
and information developed by the Company; and business processes developed by
the Company.
5. NO DISPARAGEMENT. Executive agrees that he will not make any
----------------
disparaging, negative or other statements regarding the Company, its affiliates
or any of the Company's or its affiliates' officers, directors or Executives
which could reasonably be believed in any way to have an adverse effect on the
business or affairs of the Company or its affiliates or otherwise be injurious
to or not be in the best interests of the Company, its affiliates or any such
other persons. Executive also agrees not to aid in, assist in, or encourage the
pursuit of, litigation against the Company by any other person or entity
relating to any events, circumstances, acts or omissions occurring while
Executive was an officer of the Company. The Company agrees that will not make
any disparaging, negative or other unfavorable statements regarding Executive.
6. ADVICE OF COUNSEL. Executive represents and warrants that he has read
-----------------
this Agreement, that he has had adequate time to consider it, that he had been
advised by the Company to consult with an attorney and has consulted with an
attorney prior to executing this Agreement, that he understands the meaning and
application of this Agreement and that he has signed this Agreement knowingly,
voluntarily and of his own free will with the intent of being bound by it.
7. SEVERABILITY; MODIFICATION OF AGREEMENT. If any provision of this
---------------------------------------
Agreement shall be found invalid or unenforceable in whole or in part, then such
provisions shall be deemed to be modified or restricted to the extent and in the
manner necessary to render the same valid and enforceable or shall be deemed
excised from this Agreement as such circumstances may require, and this
Agreement shall be construed and enforced to the maximum extent permitted by law
as if such provision had been originally incorporated herein as so modified or
restricted or as if such provision had not been originally incorporated herein,
as the case may be.
77
<PAGE>
EXHIBIT 10.22
-------------
8. ARBITRATION. Except for claims for emergency equitable or injunctive
------------
relief which cannot be timely addressed through arbitration, the parties hereby
agree to submit any claim or dispute arising out of the terms of this Agreement
(including exhibits) and/or any dispute arising out of or relating to
Executive's employment with the Company in any way, to private and confidential
arbitration by a single neutral arbitrator through JAMS/Endispute. Subject to
the terms of this paragraph, the arbitration proceedings shall be governed by
the then current JAMS/Endispute rules governing employment disputes, and shall
take place in Los Angeles, California. The decision of the arbitrator shall be
final and binding on all parties to this Agreement, and judgment thereon may be
entered in any court having jurisdiction. The Parties shall share equally the
arbitrator's fee and all costs of services provided by the arbitrator and
arbitration organization; however, all costs of the arbitration proceeding or
litigation to enforce this Agreement, including attorneys' fees and witness
expenses, shall be paid as the arbitrator or court awards in accordance with
applicable law. Except for claims for emergency equitable or injunctive relief
which cannot be timely addressed through arbitration, this arbitration procedure
is intended to be the exclusive method of resolving any claim relating to the
obligations set forth in this Agreement.
9. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
----------------------
to the benefit of and be enforceable by the parties hereto and their respective
successors and assigns. Notwithstanding the foregoing, neither this Agreement
nor any rights hereunder may be assigned to any party by Executive without the
prior written consent of the Company, except that all or a part of the options
referenced on Exhibit A may be transferred pursuant to a qualified domestic
relations order.
10. ENTIRE AGREEMENT. Executive and the Company each represent and
----------------
warrant that no promise or inducement has been offered or made except as set
forth herein and that the consideration stated herein is the sole consideration
for this Agreement, provided, however, that any agreements relating to any
outstanding options of Executive are not superseded or discharged by this
Agreement, except to the extent expressly modified by this Agreement. The
parties agree that this Agreement shall be construed and enforced in accordance
with the laws of the State of California.
Wim H. J. Selders Ortel Corporation
/s/ Wim H. J. Selders By: /s/ Anthony J. Iorillo
- -------------------------- -----------------------------
78
<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.
79
<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 Form S-8 of Ortel Corporation of our report dated May 26,
1999, relating to the consolidated balance sheets of Ortel Corporation and
subsidiaries as of April 30, 1999 and 1998, 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, 1999, Annual Report on Form 10-K of Ortel
Corporation.
/s/ KPMG LLP
Los Angeles, California
July 28, 1999
80
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