<PAGE>
SECURITES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------------------------
FORM 10-Q/A
Amendment no. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission File No. 0-22598
ORTEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-3494360
(State or Other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification No.)
2015 West Chestnut Street, Alhambra, California 91803-1542
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (626) 281-3636
not applicable
--------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
As of January 31, 1999, there were 11,916,119 shares of the registrant's
$.001 par value Common Stock outstanding.
<PAGE>
ORTEL CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page(s)
--------------
Item 1. Financial Statements
<S> <C> <C>
Condensed Consolidated Balance Sheets as of January 31, 1999 and April 30,
1998....................................................................... 3
Condensed Consolidated Statements of Operations for the fiscal quarter and
nine months ended January 31, 1999 and 1998................................ 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
January 31,1999 and 1998................................................... 5
Notes to Condensed Consolidated Financial Statements....................... 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 10-17
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K/A................................................ 18
Signatures..................................................................................... 19
Index to Exhibits.............................................................................. 20-21
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ORTEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
January 31, April 30,
1999 1998
-----------------------------------
ASSETS (unaudited) (audited &
- ------ reclassified)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 9,742 $12,656
Short-term investments.................................................................. 16,618 16,012
Accounts receivable (net)............................................................... 12,807 12,819
Other receivables....................................................................... 1,945 1,415
Inventories............................................................................. 11,862 10,492
Income tax receivables.................................................................. 861 71
Deferred tax assets..................................................................... 2,911 2,775
Prepaid and other current assets........................................................ 1,213 1,281
Current assets, discontinued operations................................................. - 936
------- -------
Total current assets................................................................... 57,959 58,457
Property, equipment and improvements (net)................................................ 18,505 19,492
Intangible assets......................................................................... 2,238 2,581
Other assets.............................................................................. 9,563 8,802
Long-term assets, discontinued operations................................................. - 1,009
------- -------
Total assets........................................................................... $88,265 $90,341
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable........................................................................ 5,044 3,685
Accrued payroll and related costs....................................................... 2,627 2,899
Other accrued liabilities............................................................... 2,578 2,538
Income taxes payable.................................................................... -- 172
Accrued liabilities, discontinued operations............................................ 1,895 -
------- -------
Total current liabilities.............................................................. 12,144 9,294
Deferred income........................................................................... 172 400
Deferred income taxes..................................................................... - 1,598
Minority interest......................................................................... 226 265
Stockholders' equity:
Preferred stock, $.001 par value; authorized 5,000,000 shares, none issued
and outstanding......................................................................... - -
Common stock, $.001 par value; authorized 25,000,000 shares, 11,916,119
And 11,499,743 issued and outstanding at January 31, 1999 and
April 30, 1998, respectively............................................................ 12 12
Additional paid-in capital.............................................................. 54,886 53,101
Retained earnings....................................................................... 21,907 27,449
Loans receivable........................................................................ (702) (1,460)
Accumulated other comprehensive income (loss)........................................... (380) (318)
------- -------
Net stockholders' equity............................................................... 75,723 78,784
------- -------
Total liabilities and stockholders' equity............................................. $88,265 $90,341
======= =======
</TABLE>
Note: Certain amounts related to discontinued operations have been
reclassified to conform to current year presentation. See accompanying notes
to condensed consolidated financial statements.
3
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ORTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
---------------------------
1999 1998 1999 1998
--------- ------------- ------------- -------------
Reclassified Reclassified Reclassified
<S> <C> <C> <C> <C>
Revenues...................................................... $16,915 $18,589 $55,124 $59,910
Cost of revenues.............................................. 11,447 11,378 33,788 34,057
------- ------- ------- -------
Gross profit................................................ 5,468 7,211 21,336 25,853
Operating expenses:...........................................
Research and development.................................... 3,017 2,780 9,137 8,679
Sales and marketing......................................... 2,729 2,290 8,838 7,295
General and administrative.................................. 1,416 1,604 4,729 4,432
------- ------- ------- -------
Total operating expenses.................................. 7,162 6,674 22,704 20,406
------- ------- ------- -------
Operating income (loss)....................................... (1,694) 537 (1,368) 5,447
Interest income (net)......................................... 212 367 901 991
Other non-operating income (expense).......................... 73 (111) 236 (180)
------- ------- ------- -------
Income (loss) from continuing ops before income taxes......... (1,409) 793 (231) 6,258
Provision (credit) for income taxes........................... (289) 188 (46) 1,656
------- ------- ------- -------
Income (loss) from continuing operations...................... $(1,120) $ 605 $ (185) $ 4,602
Loss from discontinued operations, net of tax................. -- (234) (1,438) (825)
Loss from disposal of discontinued operations, net of tax..... -- - (3,919) -
------- ------- ------- -------
Net income (loss)............................................. $(1,120) $ 371 $(5,542) $ 3,777
======= ======= ======= =======
Net Income (loss) per share:
Basic
Income (loss) from continuing operations................... $ (.09) $ .05 $ (.02 $ .40
Loss from discontinued operations.......................... $ -- $ (.02) $ (.45) $ (.07)
------- ------- ------- -------
Net income (loss).......................................... $ (.09) $ .03 $ (.47) $ .33
======= ======= ======= =======
Diluted
Income (loss) from continuing operations................... $ (.09) $ .05 $ (.02) $ .36
Loss from discontinued operations.......................... $ -- $ (.02) $ (.45) $ (.06)
------- ------- ------- -------
Net income (loss).......................................... $ (.09) $ .03 $ (.47) $ .30
======= ======= ======= =======
Shares used in per share computations:
Basic...................................................... 11,920 11,684 11,844 11,611
======= ======= ======= =======
Diluted.................................................... 11,920 12,654 11,844 12,736
======= ======= ======= =======
</TABLE>
Note: Certain amounts related to discontinued operations have been reclassified
to conform to current year presentation. See accompanying notes to condensed
consolidated financial statements.
4
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ORTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------
January 31, January 31,
1999 1998
----------------- -----------------
Cash flows from operating activities: Reclassified
<S> <C> <C>
Net income (loss)................................................................. $(5,542) $ 3,777
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization.................................................. 4,773 4,321
Gain on disposal of equipment.................................................. 12 2
Increase (decrease) in minority interest in subsidiaries....................... (38) (12)
Compensation expense related to Photon stock options........................... 80 81
Anticipated costs of discontinued operations................................... 2,961 -
Changes in operating assets & liabilities (net of effects of acquisitions):
Receivables.................................................................... (716) (1,426)
Inventories.................................................................... (1,687) 2,346
Deferred tax assets............................................................ (136) (57)
Prepaid and other assets....................................................... 736 (169)
Intangible assets.............................................................. - (74)
Accounts payable............................................................... 1,359 (1,375)
Accrued payroll and related costs.............................................. (273) (1,529)
Other accrued liabilities...................................................... 40 (716)
Deferred income................................................................ (401) (14)
Deferred income taxes.......................................................... (446) 27
Income taxes payable........................................................... (503) (1,331)
------- --------
Net cash provided by operating activities............................... 219 3,851
------- --------
Cash flows from investing activities:
Capital expenditures.............................................................. (3,427) (4,845)
Investment in subsidiaries and affiliates (net of cash acquired).................. (1,500) (5,437)
Short-term investments............................................................ (606) (1,770)
------- --------
Net cash (used in) investing activities................................. (5,533) (12,052)
Cash flows from financing activities:
Proceeds from issuance of common stock, net....................................... 1,776 889
Proceeds from repayment of stockholder loans...................................... 775 88
------- --------
Net cash provided by financing activities............................... 2,551 977
Effect of exchange rates.......................................................... (151) (110)
------- --------
Net increase (decrease) in cash and equivalents......................... (2,914) (7,334)
Cash and cash equivalents, beginning of period.................................... 12,656 18,865
------- --------
Cash and cash equivalents, end of period.......................................... $ 9,742 $ 11,531
======= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest........................................................................ $ 36 $ 8
Income taxes.................................................................... $ 780 $ 2,557
Supplemental disclosure of non-cash financing activities:
Loans to related parties for stock option exercises........................ $ --- $ 231
</TABLE>
Note: Certain amounts related to discontinued operations have been
reclassified to conform to current year presentation. See accompanying
notes to condensed consolidated financial statements.
5
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ORTEL CORPORATION
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company without audit (except for the balance sheet
information as of April 30, 1998 which was derived from audited consolidated
financial statements) and, in the opinion of management, contain all adjustments
necessary to present fairly the consolidated financial position at January 31,
1999, and the condensed consolidated results of operations for the nine-month
periods ended January 31, 1999 and January 31, 1998, and the condensed
consolidated cash flows for the nine-month periods ended January 31, 1999, and
January 31, 1998 in accordance with generally accepted accounting principles.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to rules and regulations of
the Securities and Exchange Commission, although the Company believes that the
disclosures in the consolidated financial statements are adequate to ensure the
information presented is not misleading.
The results of operations for the nine-month period ended January 31, 1999
are not necessarily indicative of the results to be expected for the entire
fiscal year and should be read in conjunction with a discussion of risk factors
in the Company's annual report for the fiscal year ended April 30, 1998.
2. Per Share Information
---------------------
Net income (loss) per share is based on the weighted average common and
common equivalent shares outstanding for each period including common shares
issuable upon the exercise of stock options.
Common equivalent shares are excluded from the computation if the effect is
anti-dilutive.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
------------------------------ ----------------------------
1999 1998 1999 1998
---- ---- ---- ----
Shares used in per share computations:
<S> <C> <C> <C> <C>
Basic........................................... 11,920 11,684 11,844 11,611
Stock Options.................................. -- 970 -- 1,125
------ ------ ------ ------
Diluted......................................... 11,920 12,654 11,844 12,736
====== ====== ====== ======
</TABLE>
6
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ORTEL CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
3. Income Taxes
------------
Income taxes for the respective periods were computed using the effective
tax rate estimated to be applicable for the fiscal year, which is subject to
ongoing review and evaluation by management.
4. Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
<TABLE>
<CAPTION>
January 31, 1999 April 30, 1998
------------------------ ---------------------
(unaudited) (audited)
<S> <C> <C>
Raw materials...................................... $ 5,687 $ 4,641
Work-in-process.................................... 4,817 4,886
Finished goods..................................... 1,358 965
------- -------
Total inventories............................. $11,862 $10,492
======= =======
</TABLE>
5. Cash Equivalents
----------------
Cash equivalents (defined as marketable securities with original maturities
of 90 days or less which can be liquidated in a manner that is equivalent to
cash) were $7.6 million and $7.8 million as of January 31, 1999 and April 30,
1998, respectively, and short-term investments (marketable securities with
maturities of more than 90 days) were $16.6 million and $16.0 million as of
January 31, 1999, and April 30, 1998, respectively.
Under Financial Accounting Standards Board Statement 115, the Company has
classified its short-term investments as available-for-sale. Available-for-sale
securities are stated at market value and unrealized holding gains and losses,
net of the related tax effect, are excluded from earnings and are reported as a
separate component of stockholders' equity until realized. A decline in the
market value of the security below cost that is deemed other than temporary is
charged to earnings resulting in the establishment of a new cost basis for the
security. At January 31, 1999 and April 30, 1998, the Company's marketable
investment securities consisted principally of highly liquid investments in tax-
free municipal obligations with various maturity dates through June 15, 2001.
7
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ORTEL CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
6. Other Comprehensive Income
--------------------------
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," as of the first quarter of fiscal
1999. SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components
The components of other comprehensive (loss) income, net of tax, are as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31 January 31
---------------------------------- -------------------------------------
1999 1998 1999 1998
------------- ---------------- ---------------- ----------------
Reclassified Reclassified Reclassified
<S> <C> <C> <C> <C>
Net income (loss)....................... $(1,120) $ 371 $(5,542) $3,777
Change in unrealized gain (loss) on
available-for-sale investments......... (70) -- (70) (28)
Gain (loss) on foreign currency
translation adjustments................
(103) (221) (120) (87)
------- ----- ------- ------
Total other comprehensive income (loss).
$(1,293) $ 150 $(5,732) $3,662
======= ===== ======= ======
</TABLE>
Note: Certain amounts related to discontinued operations have been
reclassified to conform to current year presentation.
Accumulated other comprehensive income (loss) presented on the accompanying
consolidated balance sheets consists of the following (in thousands):
<TABLE>
<CAPTION>
January 31, April 30,
1999 1998
------------------------ ---------------------
(unaudited) (audited)
<S> <C> <C>
Unrealized gains on available-for-
sale investments................... $ 112 $ 24
Foreign currency translation
adjustments (loss)................. (492) (342)
------ -----
Total accumulated other
comprehensive income (loss)........ $(380) $(318)
===== =====
</TABLE>
8
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ORTEL CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
7. Discontinued Operations
-----------------------
The Company discontinued its 980 nm pump laser business in early
November 1998. Certain amounts on the Balance Sheets and Statements of
Operations related to discontinued operations have been reclassified to conform
to current period presentation. See below for further discussion on the
discontinuance.
All assets related to the discontinued business were written off
including accounts receivable, inventory and fixed assets. The remaining
liability of $1.9 million related to discontinued operations includes provisions
for expected product warranty costs, purchase order cancellation charges and
other expenses related to the discontinuance.
9
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the unaudited condensed consolidated
financial statements included herein. The discussion in this section contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in the Company's annual report for the year ended April 30,
1998.
Results of Operations
The following table sets forth the statements of operations as a percentage
of revenues adjusted for the discontinued operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
-------------------------------------------------------------
1999 1998 1999 1998
------- ------------- -------------- -------------
Reclassified Reclassified Reclassified
<S> <C> <C> <C> <C>
Revenues.......................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................................. 67.7 61.2 61.3 56.8
----- ----- ----- -----
Gross profit.................................... 32.3 38.8 38.7 43.2
Operating expenses:
Research and development........................ 17.8 15.0 16.6 14.5
Sales and marketing............................. 16.1 12.3 16.0 12.2
General and administrative...................... 8.4 8.6 8.6 7.4
----- ----- ----- -----
Total operating expenses........................ 42.3 35.9 41.2 34.1
----- ----- ----- -----
Operating income (loss)........................... (10.0) 2.9 (2.5) 9.1
Interest income................................... 1.3 2.0 1.6 1.7
Other income, net................................. .4 (.6) .5 (.3)
----- ----- ----- -----
Income (loss) from continuing operations before
income taxes..................................... (8.3) 4.3 (.4) 10.5
Provision (credit) for income taxes............... (1.7) 1.0 .1 2.8
----- ----- ----- -----
Income (loss) from continuing operations.......... (6.6) 3.3 (.3) 7.7
Loss from discontinued operations, net of tax..... -- (1.3) (2.6) (1.4)
Loss from disposal of discontinued operations,
net of tax....................................... -- - (7.1) -
----- ----- ----- -----
Net income (loss)................................. (6.6%) 2.0% (10.0%) 6.3%
===== ===== ===== =====
</TABLE>
10
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations (continued)
The following table highlights certain aspects of the Company's revenues for
the three-month and nine-month periods ended January 31, 1999 and 1998 adjusted
for the discontinued operation:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, 1999, January 31,
-------------------------------------- -------------------------------------
1999 1998 1999 1998
---------------- ----------------- ---------------- ----------------
Reclassified Reclassified Reclassified
Revenues (thousands):
<S> <C> <C> <C> <C>
Broadband products..................... $11,968 $11,262 $37,085 $36,588
Other products......................... 4,947 7,327 18,039 23,322
------- ------- ------- -------
Total.......................... $16,915 $18,589 $55,124 $59,910
======= ======= ======= =======
Geographic coverage (thousands):
Domestic............................... $10,203 $10,052 $35,562 $29,419
International.......................... 6,712 8,537 19,562 30,491
------- ------- ------- -------
Total.......................... $16,915 $18,589 $55,124 $59,910
======= ======= ======= =======
As a percent of revenues:
Broadband products..................... 70.8% 60.6% 67.3% 61.1%
Other products......................... 29.2 39.4 32.7 38.9
------- ------- ------- -------
Total.......................... 100.0% 100.0% 100.0% 100.0%
======= ======= ======= =======
Geographic coverage:
Domestic............................... 60.3% 54.1% 64.5% 49.1%
International.......................... 39.7 45.9 35.5 50.9
------- ------- ------- -------
Total.......................... 100.0% 100.0% 100.0% 100.0%
======= ======= ======= =======
</TABLE>
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 1998 and totaled $1.4 million. 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.
11
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Discontinued Operations (continued)
For selected periods, the table below is a summary of the financial
performance of this product line when segregated from continuing operations.
Consolidated financial statements for the Company have been reclassified to
remove the impact of the discontinued operation (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31 January 31
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues.............................. $ --- $ 180 $ 795 $ 658
Cost of revenues...................... --- 153 1,248 654
------------ ------- ------- -------
Gross profit....................... --- 27 (453) 4
Operating expenses:
Research and development............ --- 510 917 1,143
Sales and marketing................. --- 40 428 128
General and administrative.......... - - - -
------------ ------- ------- -------
Total operating expenses............ --- 550 1,345 1,271
------------ ------- ------- -------
Operating loss on discontinued --- (523) (1,798) (1,267)
operations...........................
Income tax on discontinued operations. --- (289) (360) (442)
------------ ------- ------- -------
Net loss on discontinued operations.. --- (234) (1,438) (825)
Loss from disposal of discontinued
operations, net of tax............... --- - (3,919) -
------------ ------- ------- -------
Combined net loss on discontinued
operations and loss from disposal of
discontinued operations, net of tax.. $ --- $ (234) $(5,357) $ (825)
============ ======= ======= =======
Combined net loss per share on
discontinued operations and loss
from disposal of discontinued
operations:
Basic.............................. $ --- $(.02) $(.45) $( .07)
============ ======= ======= =======
Diluted............................ $ --- $(.02) $(.45) $( .06)
============ ======= ======= =======
Shares used in per share computation:
Basic.............................. 11,920 11,684 11,844 11,611
Diluted............................ 11,920 12,654 11,844 12,736
</TABLE>
12
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Discontinued Operations (continued)
In addition to the operating losses shown above, the Company has incurred or
expects it will incur 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.
Continuing Operations
Third Quarter ended January 31, 1999
The discussion that follows is based on continuing operations and is based
on the reclassified Balance Sheets and Statements of Operations presented in
this report.
Revenues
Revenues of $16.9 million for the third quarter ended January 31, 1999,
decreased by 9.1% from $18.6 million in the comparable quarter of the previous
year. This decrease was the result of total revenues from broadband products
increasing 6.2% from $11.3 million in the prior year to $12.0 million in the
current period while total revenues from all other products decreasing 32.5%
from $7.3 million in the prior year to $4.9 million in the current period. The
increase in broadband product sales is the result of a 20% increase in demand
from international customers. The reduction in other product revenues compared
to the prior year, reflects lower sales of the Company's wireless and satellite
communications products. Wireless revenues continue to reflect the slow pace of
deployment of repeater products by wireless PCS operators while the Company's
satellite communications business is subject to quarterly fluctuations.
Sales to international customers totaled $6.7 million or 40% of revenues for
the third quarter of fiscal 1999 compared to $8.5 million or 46% of revenues for
the comparable quarter last year. The 21% decrease in sales to international
customers was primarily the result of a large one-time wireless opportunity in
Korea in the prior fiscal year
Gross Profit
Gross profit of $5.5 million for the third quarter ended January 31, 1999,
was 32.3% of revenues compared to 38.8% in the prior year period. The lower
gross margins in the current period reflect lower average pricing and a greater
mix of products with lower margins.
13
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Third Quarter ended January 31, 1999 (continued)
Research and Development
Research and development expense of $3.0 million for the third quarter ended
January 31, 1999, increased $200,000 or 9% from $2.8 million in the comparable
quarter last year and is in line with the Company's on-going investment in its
fiber optics and wireless businesses. With lower total revenues compared to
last year, research and development expense as a percent of revenue was 17.8%
compared to 15.0% in the third quarter of the prior year.
Sales and Marketing
Sales and marketing expense of $2.7 million in the third quarter ended
January 31, 1999, increased 19% or $400,000 from $2.3 million in the comparable
quarter last year. The increase was primarily due to the addition of sales
personnel in the U.S. and Asia. With lower revenues, sales and marketing
expense as a percent of revenue was 16.1% compared to 12.3% in the third quarter
of the prior year.
General and Administrative
General and administrative expenses of $1.4 million for the third quarter of
fiscal 1999 decreased by $200,000 or 12% from $1.6 million in the comparable
period last year and decreased as a percentage of revenues to 8.4% compared to
8.6% for the same quarter of fiscal 1998. The decrease compared to the prior
year is the result of intentional cost reductions in discretionary spending.
Other Non-Operating Income (Expense)
Interest income, net of interest expense, of $212,000 for the third quarter
of fiscal 1999 decreased by $155,000 from the comparable period last year
primarily due to lower average cash balances. Other net income of $73,000 for
the third quarter compares to a loss of $111,000 in the comparable quarter last
year and represents a more favorable impact of foreign currency translation.
14
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Nine Months ended January 31, 1999
Revenues
Revenues of $55.1 million for the nine months ended January 31, 1999
decreased by $4.8 million or 8% from $59.9 million in the comparable period of
the previous year. Total revenues from broadband products at $37.1 million were
equivalent to the comparable period of the previous year. Revenues of $18.0
million from the sale of wireless, satellite communications and other product
applications decreased by $5.3 million or 23% compared to the prior year period.
Sales to international customers totaled $19.6 million or 36% of revenues
for the nine months of fiscal 1999 compared to $30.5 million or approximately
51% of revenues for the comparable period last year. As in the third quarter,
the 36% decrease in sales to international customers was primarily concentrated
in Asia as various countries in that region continue to suffer from the effects
of a down turn in their economy. Almost half of the decrease relates to a one-
time multi-million dollar wireless sale in the prior fiscal year.
Gross Profit
Gross profit of $21.3 million for the nine months of fiscal 1999 represented
38.7% of revenues compared to 43.2% in the comparable period last year. The
decrease in gross margin compared to the prior year is primarily the result of
lower sales volume in conjunction with lower average prices.
Research and Development
Research and development expenses of $9.1 million for the nine months of
fiscal 1999 increased by $400,000 or 5% from $8.7 million in the comparable
period last year and is in line with the Company's on-going investments in its
fiber optics and wireless businesses. With lower revenues compared to the prior
year period, Research and Development expense as a percent of revenue increased
to 16.6% compared to 14.5% in the comparable period last year.
Sales and Marketing
Sales and marketing expenses of $8.8 million for the nine months of fiscal
1999 increased by $1.5 million or 21% from $7.3 million for the comparable
period last year. With an 8% reduction in revenues, sales and marketing
expenses as a percentage of revenues increased to 16% from 12.2% for the
comparable period of fiscal 1998. The increase in spending compared to the
prior year is primarily additional hiring and relocation costs associated with
enhancing the Company's worldwide sales organization, including opening sales
offices in Singapore and Beijing.
15
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Nine Months ended January 31, 1999 (continued)
General and Administrative
General and administrative expenses of $4.7 million for the nine months of
fiscal 1999 increased by $300,000 or 7% compared to $4.4 million for the
comparable period last year and increased as a percentage of revenues to 8.6%
from 7.4% for the same period. The increase is primarily third-party
administrative expenses in support of expanding business in Asia.
Other Non-Operating Income (Expense)
Interest income, net of interest expense, of $901,000 for the nine months of
1999 decreased by $90,000 from the comparable period last year primarily due to
lower average cash balances. Other non-operating income of $236,000 for the
nine months compares to a loss of $180,000 in the comparable period last year
and is primarily due to favorable changes in foreign currency during this period
of time.
Liquidity and Capital Resources
At January 31, 1999, the Company had working capital of $45.8 million,
including $9.7 million in cash and cash equivalents and $16.6 million in short-
term investments. For the nine-month period ended January 31, 1999, the
Company's operating activities generated $219,000 in cash. Cash from operating
activities includes net loss of $5.5 million partially offset by non-funded
future costs related to discontinued operations of almost $3.0 million.
Depreciation and amortization of $4.8 million offset the operating loss
significantly. Trade accounts receivable and inventory increased by $716,000
and $1.7 million, respectively, which was partially offset by a decrease in
prepaid and other assets of $736,000. Increases in accounts payable of $1.4
million were offset by decreases in deferred income and income taxes payable.
The Company increased its investment in Tellium, Inc. by $1.5 million in the
current quarter to a total of $6.5 million. Net proceeds from issuance of common
stock of $1.8 million includes the repurchase of 28,600 shares of its common
stock at a cost of $249,000 during the third quarter.
The Company considers cash flow from operations and available sources of
liquidity to be adequate to meet business requirements in the foreseeable
future, including planned capital expenditure programs, working capital
requirements, and any Year 2000 remediation plans.
16
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Year 2000
Assessment
The Company engaged outside consultants to perform an initial assessment and
provide the Company with guidance in the assessment phase. An internal
committee was formed to specifically address all Y2K issues.
All hardware and software connected to the Company's primary computer
network (information technology) has been inventoried and remediation is in
process. A small number of older model personal computers will be replaced
because they cannot be made Y2K compliant. An upgrade of the Company's primary
business software is scheduled to be implemented before June 30, 1999.
The committee also conducted an inventory covering approximately 95% all
non-infomation technology systems used in the U.S. operations and remediation
has begun. The balance of the U.S. inventory and all international locations
are expected to be inventoried and in remediation by March 31, 1999. It may be
necessary to continue to contract with third parties during remediation.
The Company's products have been reviewed for Y2K compliance. Most of the
Company's products do not contain any reference to a date nor do the products
access or manipulate dates which may be available elsewhere in the customer's
system. Approximately 85% of the Company's revenue are products with no Y2K
implications. However, some products, primarily repeater products, do contain a
date or reference a date. Such products serve a niche aspect of the Wireless
marketplace and have represented less than 15% of the Company's revenues in the
past two fiscal years. Remediation is in process and is expected to be complete
by August 31, 1999.
The Company contacted key suppliers and has received responses from many of
them indicating compliance. Key suppliers who have not yet responded and all
other vendors will be contacted by April 30, 1999, and asked to provide
compliance certificates
Costs
The Company's cost estimate for becoming Year 2000 compliant is not yet
complete. Incremental spending for the nine-month period ended January 31,
1999, has been less than $150,000.
Risks
If all Year 2000 issues are not properly identified, or assessment,
remediation and testing are not affected in a timely manner with respect to
problems that are identified, there can be no assurance that the Year 2000 issue
will not have a material adverse impact on the Company's results of operations
or adversely affect the Company's relationships with customers, vendors or
others. Additionally, there can be no assurance that the Year 2000 issues of
other entities will not have a material adverse impact on the Company's systems
or results of operations.
Contingency Plan
The Company has not yet completed a comprehensive analysis of the
operational problems and costs that would be reasonably likely to result from
the failure by the Company and certain third parties
17
<PAGE>
to complete efforts necessary to achieve Year 2000 compliance on a timely basis.
As a result, the Company has not developed a plan for dealing with the most
reasonably likely worst case scenario.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
Reference is hereby made to the Exhibit Index commencing on page 20.
b. Shortly after the end of the second fiscal quarter, the Company
announced the discontinuance of its 980 nm pump laser business. A
report on Form 8-K discussing this fact was filed on November 12,
1998. A report on Form 8-K/A was filed on January 25, 1999 reporting
pro forma Statements of Operations segregating discontinued
operations for the six-months ended October 31, 1998 and fiscal year
ended April 30, 1998. Also reported was a Balance Sheet for April
30, 1998 which segregated and reclassified amounts related to
discontinued operations.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: March 25, 1999 ORTEL CORPORATION
(Registrant)
By: /s/Wim H.J. Selders
------------------------------------
Wim H.J. Selders,
President and Chief Executive Officer
By: /s/Roger Hay
------------------------------------
Roger Hay
Vice President, Finance and Chief
Financial Officer
19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document Description Page No.
----------- -------------------- --------
<C> <S> <C>
3.1 Certificate of Incorporation. (Note 1)
3.2 Bylaws of Ortel Corporation. (Note 1)
4.1 Common Stock Purchase Agreement, dated March 26, 1990, between Sumitomo (Note 1)
Cement Co., Ltd. and Ortel Corporation.
4.2 Modification Agreement, dated 1985, between Ortel Corporation and certain (Note 1)
investors.
10.1 Lease, dated September 23, 1991, between Ortel Corporation and Rim (Note 1)
Development Co.
10.2 Lease, dated May 20, 1994, between Ortel Corporation and (Note 1)
Wai Fong Un.
10.3 Employment Agreement, dated September 14, 1990, between Ortel Corporation (Note 1)
and Wim H.J. Selders.
10.4 Employment Agreement, dated September 14, 1990, between Ortel Corporation (Note 1)
and Israel Ury.
10.5 Employment Agreement, dated September 14, 1990, between Ortel Corporation (Note 1)
and Nadav Bar-Chaim.
10.6 1981 Incentive Stock Option Plan of Ortel Corporation. (Note 1)
10.7 1990 Stock Option Plan of Ortel Corporation. (Note 1)
10.8 Form of Indemnification Agreement. (Note 1)
10.9 Key Shareholders Agreement, dated as of March 26, 1990, among Wim H.J. (Note 1)
Selders, Dr. Ury, Dr. Yariv, Dr. Bar-Chaim, Sumitomo Cement Co., Ltd., The
Ury Family Trust and Ortel Corporation.
10.10 Agreement Concerning Certain Financial and Business Arrangements, dated as (Note 1)
of March 26, 1990 between Sumitomo Cement Co., Ltd. And Ortel Corporation.
10.11 1994 Equity Participation Plan of Ortel Corporation. (Note 1)
10.12 Severance Agreement, dated as of August 26, 1994, between Ortel (Note 1)
Corporation and Stephen K. Workman.
10.13 Stock Purchase Agreement dated March 12, 1996 between Hakan Samuelsson and (Note 2)
Ortel Corporation.
10.14 Loan Agreement, dated June 2, 1995 between Ortel Corporation and Bank of (Note 3)
America.
10.15 Amendment No. 2 dated September 9, 1997 to Loan Agreement dated June 2, (Note 5)
1995 between Ortel Corporation and Bank of America.
10.16 Severance Agreement, dated December 1, 1997, between Ortel Corporation and (Note 6)
Douglas H. Morais.
10.17 Severance Agreement, dated March 6, 1998, between Ortel Corporation and (Note 7)
Lyle B. Boarts
10.18 Amendment No. 3 dated August 20, 1998 to Loan Agreement dated June 2, 1995 (Note 8)
between Ortel Corporation and Bank of America NT & SA
10.19 Severance Agreement dated November 6, 1998, between Ortel Corporation and (Note 8)
William J. Moore
10.20 Severance Agreement, dated November 9, 1998, between Ortel Corporation and (Note 8)
George B. Holmes
10.21 Amendment dated November 9, 1998 to Severance Agreement, dated August 26, (Note 8)
1994, between Ortel Corporation and Stephen K. Workman
10.22 Amendment dated November 9, 1998 to Severance Agreement, dated March 6, (Note 8)
1998, between Ortel Corporation and Lyle B. Boarts.
10.23 Severance Agreement dated March 5, 1999, between Ortel Corporation and
Roger Hay.
21.1 Subsidiaries of Ortel Corporation. (Note 7)
23.1 Consent of KPMG Peat Marwick LLP. (Note 7)
27.0 Financial Data Schedule
</TABLE>
20
<PAGE>
<TABLE>
EXHIBIT INDEX (continued)
<S> <C>
Note 1 Previously filed by the Registrant in Registration No. 33-79188 and
incorporated by reference herein pursuant to Rule 12b-32 of the Exchange
Act.
Note 2 Previously filed by the Registrant in its 8K filing dated March 26, 1996
Note 3 Previously filed by the Registrant in its 10-K filing for the year ended
April 30, 1996
Note 4 Previously filed by the Registrant in its 10-K filing for the year-ended
April 30, 1997.
Note 5 Previously filed by the Registrant in its 10-Q filing for the quarter
ended October 31, 1997.
Note 6 Previously filed by the Registrant in its 10-Q filing for the quarter
ended January 31, 1998.
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.
</TABLE>
21
<PAGE>
Exhibit 10.23
--------------------------------------------------------
CHANGE IN CONTROL AGREEMENT
---------------------------
This Change in Control Agreement (the "Agreement") is made and entered
into as of March 5, 1999 by and between ORTEL CORPORATION, a Delaware
corporation ("Ortel"), and ROGER HAY, an individual ("Executive").
RECITALS
--------
A. Executive is employed by Ortel as its Chief Financial Officer,
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.
22
<PAGE>
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
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.
23
<PAGE>
(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. 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 5. Arbitration
- ---------- -----------
Except as provided in Section 6 hereof, any controversy or claim
arising out of or relating to this Agreement, or breach thereof, shall be
settled by arbitration in accordance with the Rules of the American Arbitration
Association, and judgment upon any proper award rendered by the arbitrators may
be entered in any court having jurisdiction thereof.There shall be three
arbitrators, one to be chosen directly by each party at will, and the third
arbitrator to be selected by the two arbitrators so chosen. To the extent
permitted by the Rules of the American Arbitration Association and not limited
by Section 6 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 6. Choice of Law
- ---------- -------------
The formation, construction and performance of this Agreement shall be
in accordance with the laws of the State of California.
24
<PAGE>
Section 7. 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 8. 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 9. 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 10. 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.
<TABLE>
<CAPTION>
<S> <C>
ORTEL CORPORATION
/s/ Roger Hay /s/ Lyle B. Boarts
By:
- ---------------------------------------------- --------------------------------------------------
Roger Hay Lyle B. Boarts
Vice President - Administration
</TABLE>
25
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 26,360
<SECURITIES> 0
<RECEIVABLES> 13,214
<ALLOWANCES> (407)
<INVENTORY> 11,862
<CURRENT-ASSETS> 57,958
<PP&E> 42,288
<DEPRECIATION> 23,783
<TOTAL-ASSETS> 88,265
<CURRENT-LIABILITIES> 12,144
<BONDS> 0
0
0
<COMMON> 54,308
<OTHER-SE> 75,723
<TOTAL-LIABILITY-AND-EQUITY> 88,265
<SALES> 55,124
<TOTAL-REVENUES> 55,124
<CGS> 33,683
<TOTAL-COSTS> 33,683
<OTHER-EXPENSES> 9,137
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<INCOME-PRETAX> (230)
<INCOME-TAX> (46)
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<CHANGES> 0
<NET-INCOME> (5,542)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> (.47)
</TABLE>
