<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
March 1, 2000
Date of Report (Date of earliest event reported)
ORTEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 0-22598 95-3494360
(State or other (Commission File Number) (IRS Employer
Jurisdiction Identification Number)
of Incorporation)
2015 West Chestnut Street 91803-1542
Alhambra, California (Zip Code)
(Address of principal
executive offices)
(626) 281-3636
(Registrant's telephone number, including area code)
N/A
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
ORTEL CORPORATION
Item 5. OTHER EVENTS
During the first quarter of fiscal year 2000, Ortel Corporation (the
"Company") implemented its plan to sell its U.S. and international wireless
operations, which detracted from the Company's focus on fiberoptic markets. In
addition to the operating losses incurred during the first quarter, the Company
expected to incur costs directly related to the sale as well as losses on the
sale of the businesses at prices potentially below net book value. In the first
quarter of fiscal 2000, the Company recorded a loss of $4.4 million, before
income tax benefit of $1.1 million, from the disposal of assets related to the
discontinued wireless businesses. Significant costs related to the sale of the
business included brokers fees, severance and expected product warranty costs.
By August 30, 1999, the wireless businesses were sold in two separate
transactions. Losses on the sale and costs associated with the transactions were
commensurate with the $4.4 million estimated. Domestic wireless operations were
sold for cash to an unrelated party. The Company agreed to provide certain
services on a temporary basis to facilitate the operation of the business by the
new owner, CI Wireless, Incorporated, of Fort Worth, Texas. These services
include subletting a portion of a building at the Company's Alhambra facility
and agreeing to sell certain key components which incorporate technology not
included in the sale of the business. The Company's stock in Avitec AB, the
wireless operations headquartered in Sweden, was sold to one of Avitec's
founders. The Company has no continuing obligations with regard to the Avitec
wireless operations but may continue to sell to Avitec certain of the Company's
products, which have been incorporated into Avitec systems designs.
The Company accounted for the sale of its wireless segment as a
discontinued operation in accordance with Accounting Principles Board (APB)
Opinion No. 30, Reporting the Results of Operations, for the fiscal 2000 first
quarter ended August 1, 1999 and, accordingly, prior periods have been restated.
Accordingly, the results of operations of the wireless business have been
segregated from continuing operations and reported as a separate line item on
the Company's accompanying consolidated statements of operations.
On February 7, 2000, the Company entered into an Agreement and Plan of
Merger with Lucent Technologies, Inc. In order to report the financial data
required by the S-4 filing, the financial statements and other information
included in this filing have been restated to reflect the wireless business as a
discontinued operation.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The response to this item is filed as a separate part of this Report
(see page 4).
(b) Pro Forma Financial Information
Not applicable
(c) Exhibits
Exhibit 23.1 Consent of KPMG LLP
Exhibit 27 Financial Data Schedule
2
<PAGE>
ORTEL CORPORATION
Index to Consolidated Financial Statements and Schedules
Covered by Independent Auditors' Report
<TABLE>
<CAPTION>
Page
----
<S> <C>
Selected Financial Data..................................................................................... 4
Consolidated Financial Statements
Independent Auditors' Report................................................................................ 5
Consolidated Balance Sheets as of April 30, 1999 and 1998................................................... 6
Consolidated Statements of Operations for the years ended
April 30, 1999, 1998 and 1997............................................................................. 7
Consolidated Statements of Stockholders' Equity and Comprehensive Income (loss) for the years
ended April 30, 1999, 1998 and 1997........................................................................ 8
Consolidated Statements of Cash Flows for the years ended
April 30, 1999, 1998 and 1997.............................................................................. 9
Notes to Consolidated Financial Statements.................................................................. 10
Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 28
Consolidated Financial Statement Schedule
Schedule II: Valuation and Qualifying Accounts............................................................. 32
Exhibits
Exhibit 23.1 Consent of KPMG LLP........................................................................... Attached
Exhibit 27 Financial Data Schedule......................................................................... Attached
</TABLE>
3
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
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 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues............................................................... $65,027 $64,343 $75,098 $55,440 $49,529
Cost of revenues....................................................... 38,993 36,541 36,948 27,733 24,213
------- ------- ------- ------- -------
Gross profit....................................................... 26,034 27,802 38,150 27,707 25,316
Operating expenses:
Research and development(1)........................................ 10,314 7,617 6,540 7,427 5,831
Sales and marketing................................................ 9,948 8,310 8,612 6,702 5,362
General and administrative......................................... 5,586 5,044 4,609 3,391 2,869
------- ------- ------- ------- -------
Total operating expenses.......................................... 25,848 20,971 19,761 17,520 14,062
------- ------- ------- ------- -------
Operating income................................................... 186 6,831 18,389 10,187 11,254
Other:
Interest income, net............................................... 1,329 1,273 1,461 1,833 1,126
Other income (expense), net........................................ 201 656 691 765 (47)
------- ------- ------- ------- -------
Income from continuing operations before income taxes.................. 1,716 8,760 20,541 12,785 12,333
Provision (benefit) for income taxes................................... (319) 2,298 6,297 3,922 4,825
------- ------- ------- ------- -------
Income from continuing operations.................................. 2,035 6,462 14,244 8,863 7,508
Loss from discontinued operations, net of income tax benefits of
$1,036 in 1999, $1,574 in 1998 and $2,608 in 1997.................. (4,144) (3,725) (5,929) (6,470) (1,205)
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 from continuing operations.................................. $ .17 $ .56 $ 1.24 $ .78 $ .74
Loss from discontinued operations.................................. (.68) (.32) (.51) (.57) (.12)
------- ------- ------- ------- -------
Net income (loss) per common share - Basic......................... $ (.51) $ .24 $ .73 $ .21 $ .62
======= ======= ======= ======= =======
Income (loss) per common share - Diluted
Income from continuing operations.................................. $ .16 $ .51 $ 1.13 $ .71 $ .65
Loss from discontinued operations.................................. (.64) (.29) (.47) (.52) (.10)
------- ------- ------- ------- -------
Net income (loss) per common share - Diluted....................... $ (.48) $ .22 $ .66 $ .19 $ .55
======= ======= ======= ======= =======
Shares used in share computations:
Basic.............................................................. 11,876 11,634 11,463 11,312 10,157
Diluted............................................................ 12,528 12,639 12,609 12,361 11,506
</TABLE>
<TABLE>
<CAPTION>
Year Ended April 30,
-------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and short term investments...................................... $24,181 $28,603 $33,931 $38,261 $43,881
Working capital...................................................... 46,001 49,163 52,937 51,127 54,592
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) Revenues from research and development contracts are netted against research
and development expenses.
4
<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 for Note 12 and the discontinued operations section of
Note 2, which are as of August 30, 1999
5
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
Years Ended April 30,
---------------------
ASSETS 1999 1998
----- ----
<S> <C> <C>
Current assets:
Cash and equivalents............................................................ $ 13,115 $ 12,590
Short term investments.......................................................... 11,066 16,012
Total receivables less allowance for doubtful accounts of $973 and $307 at
April 30, 1999 and April 30, 1998, respectively................................. 12,972 10,762
Billed contract costs and fees and other receivables (net)...................... 432 543
Inventories..................................................................... 9,716 6,224
Income taxes receivable......................................................... 2,900 71
Deferred tax assets............................................................. 2,080 2,190
Prepaid expenses and other current assets....................................... 990 1,157
Current assets related to discontinued operations............................... 5,692 8,908
------------- -------------
Total current assets........................................................ 58,963 58,457
Property, equipment and improvements, at cost:
Property........................................................................ 1,796 1,796
Equipment....................................................................... 27,996 26,030
Office furniture and fixtures................................................... 5,688 4,813
Leasehold improvements.......................................................... 6,484 4,932
------------- -------------
Total property, equipment and improvements...................................... 41,964 37,571
Less accumulated depreciation and amortization.................................. (24,260) (18,845)
------------- -------------
Net property, equipment and improvements........................................ 17,704 18,726
Intangible assets, net............................................................... 1,352 1,593
Other assets......................................................................... 9,717 8,730
Long-term assets of discontinued operations.......................................... 1,492 2,835
------------- -------------
Total assets................................................................ $ 89,228 $ 90,341
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 6,800 $ 3,457
Accrued payroll and related costs............................................... 1,794 2,899
Other accrued liabilities....................................................... 1,824 2,079
Liabilities related to discontinued operations.................................. 2,356 687
Income taxes payable............................................................ 188 172
------------- -------------
Total current liabilities................................................... 12,962 9,294
Deferred income taxes................................................................ 512 1,044
Long-term liabilities related to discontinued operations............................. 305 954
------------- -------------
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, respectively.............. 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 stockholder's equity............................................................. 75,188 78,784
------------- -------------
Commitments and contingencies (note 7)
Total liabilities and stockholders' equity........................................... $ 89,228 $ 90,341
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended April 30,
-------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenues............................................................. $65,027 $64,343 $75,098
Cost of revenues..................................................... 38,993 36,541 36,948
------- ------- -------
Gross profit.................................................... 26,034 27,802 38,150
Operating expenses:
Research and development............................................. 10,314 7,617 6,540
Sales and marketing.................................................. 9,948 8,310 8,612
General and administrative........................................... 5,586 5,044 4,609
------- ------- -------
Total operating expenses ................................... 25,848 20,971 19,761
------- ------- -------
Operating income..................................................... 186 6,831 18,389
Interest and other income (net)...................................... 1,329 1,273 1,461
Other non-operating income (expense)................................. 201 656 691
------- ------- -------
Income from continuing operations before income taxes........... 1,716 8,760 20,541
Provision (benefit) for income taxes................................. (319) 2,298 6,297
------- ------- -------
Income from continuing operations.................................... 2,035 6,462 14,244
Loss from discontinued operations, net of tax benefits of
$1,036 in 1999, $1,574 in 1998 and $2,608 in 1997............... (4,144) (3,725) (5,929)
Loss from disposal of discontinued operations, net of income
tax benefit of $980............................................. (3,919) -- --
--------- --------- ---------
Net income (loss).................................................... $(6,028) $ 2,737 $ 8,315
========= ========= =========
Net income (loss) per common share - Basic
Income from continuing operations................................ $ .17 $ .56 $ 1.24
Loss from discontinued operations................................ (.68) (.32) (.51)
--------- --------- ---------
Net income (loss) per common share - Basic........................... $ (.51) $ .24 $ .73
========= ========= =========
Net income (loss) per common share - Diluted
Income from continuing operations................................ $ .16 $ .51 $ 1.13
Loss from discontinued operations................................ (.64) (.29) (.47)
--------- --------- ---------
Net income (loss) per common share - Diluted......................... $ (.48) $ .22 $ .66
========= ========= =========
Shares used in per share computations:
Basic................................................................ 11,876 11,634 11,463
========= ========= =========
Diluted.............................................................. 12,528 12,639 12,609
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Additional
Common Paid in Retained
Shares Stock Capital Earnings
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at April 30, 1996...................................... 11,359,110 $11 $51,369 $16,397
Net income..................................................... 8,315
Effect of foreign translation..................................
Unrealized losses on investments...............................
Comprehensive income ..........................................
Exercise of stock options for shares of common
stock at $1.10 to $17.25 per share............................ 190,633 873
Tax benefits arising from exercise of non-qualified
stock options................................................. 241
Repurchase of shares of stock at an average price
of $12.08 per share........................................... (50,000) (604)
Compensation expense related to issuance of
stock options to Photon employees............................. 51
Loans from exercise of stock options due
2000-2001 at 6.36%-6.6% per year, net of repayments............
------------ ---------- ----------- ----------
Balance at April 30, 1997...................................... 11,499,743 $11 $51,930 $24,712
Net income..................................................... 2,737
Effect of foreign translation..................................
Unrealized losses on investments...............................
Comprehensive income ..........................................
Exercise of stock options for shares of common
stock at $1.33 to $17.26 per share............................ 238,628 1,226
Tax benefits arising from exercise of non-qualified
stock options................................................. 250
Repurchase of shares of stock at an average price
of $16.52 per share........................................... (25,000) 1 (413)
Compensation expense related to issuance of
stock option to Photon........................................ 108
Loans from exercise of stock options due
2000-2001 at 5.7%-6.85% per year, net of repayments...........
------------ ---------- ----------- ----------
Balance at April 30, 1998...................................... 11,713,371 $12 $53,101 $27,449
Net loss...................................................... (6,028)
Effect of foreign translation..................................
Unrealized losses on investments...............................
Comprehensive income ..........................................
Exercise of stock options for shares of common
stock at $4.00 to $23.25 per share............................ 321,846 2,194
Tax benefits arising from exercise of non-
qualified stock options....................................... 133
Repurchase of shares of stock at an average price
of $7.67 per share............................................ (63,600) (488)
Compensation expense related to remeasurement
of stock options for non-employee directors................... 375
Compensation expense related to issuance of
stock option to Photon........................................ 107
Loans from exercise of stock options due 2000-
2002 at 4.71%-5.69%, net of repayments......................... (1,973)
------------ ---------- ----------- ----------
Balance at April 30, 1999...................................... 11,969,644 $12 $55,422 $21,421
============ ========== =========== ==========
<CAPTION>
Accum
Other Net
Loans Comprehensive Stockholders'
Receivable Inc (loss) Equity
------------ --------------- ---------------
<S> <C> <C> <C>
Balance at April 30, 1996...................................... $(1,506) $ 3 $66,274
Net income..................................................... 8,315
Effect of foreign translation (428) (428)
Unrealized losses on investments (4) (4)
---------------
Comprehensive income .......................................... $ 7,883
Exercise of stock options for shares of common
stock at $1.10 to $17.25 per share............................ 873
Tax benefits arising from exercise of non-qualified
stock options................................................. 241
Repurchase of shares of stock at an average price
of $12.08 per share........................................... (604)
Compensation expense related to issuance of
stock options to Photon employees............................. 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...................................... $(1,341) $ (429) $74,883
Net income..................................................... 2,737
Effect of foreign translation.................................. 83 83
Unrealized losses on investments............................... 28 28
---------------
Comprehensive income .......................................... $ 2,848
Exercise of stock options for shares of common
stock at $1.33 to $17.26 per share............................ 1,226
Tax benefits arising from exercise of non-qualified
stock options................................................. 250
Repurchase of shares of stock at an average price
of $16.52 per share........................................... (412)
Compensation expense related to issuance of
stock option to Photon........................................ 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...................................... $(1,460) $ (318) $78,784
Net loss...................................................... (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............................ 2,194
Tax benefits arising from exercise of non-
qualified stock options....................................... 133
Repurchase of shares of stock at an average price
of $7.67 per share............................................ (488)
Compensation expense related to remeasurement
of stock options for non-employee directors................... 375
Compensation expense related to issuance of
stock option to Photon........................................ 107
Loans from exercise of stock options due 2000-
2002 at 4.71%-5.69%, net of repayments......................... 396 396
----------- -------------- ---------------
Balance at April 30, 1999...................................... $(1,064) $(603) $75,188
=========== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................... $ (6,028) $ 2,737 $ 8,315
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Loss from discontinued operations.............................................. -- 5,300 8,538
Loss from disposal of discontinued operations.................................. 6,697 -- --
Income tax related to discontinued operations.................................. (1,339) (1,574) (2,608)
Stock-based compensation....................................................... 482 108 47
Depreciation and amortization.................................................. 5,871 4,701 4,150
Increase (decrease) in minority interest in subsidiaries....................... (3) 19 69
Other.......................................................................... 83 77 3
Change in assets and liabilities:
Receivables and billed contract costs and fees.................................... (2,099) 907 (3,665)
Inventories....................................................................... (3,492) 3,556 (1,693)
Income tax receivable............................................................. (2,829) (71) --
Deferred tax asset................................................................ 110 (67) (489)
Prepaid expenses and other assets................................................. 556 287 77
Intangible assets................................................................. -- (856) (1,240)
Accounts payable.................................................................. 3,343 (1,790) 2,133
Accrued payroll and related costs................................................. (1,105) (1,390) 637
Accrued liabilities............................................................... (255) (133) 841
Liabilities related to discontinued operations.................................... 1,896 -- --
Net of assets and liabilities related to discontinued operations.................. 1,987 (1,465) (4,787)
Income taxes payable.............................................................. 15 (1,227) 896
Deferred income................................................................... -- (125) 121
Deferred income taxes............................................................. (532) 36 184
---------- ---------- ----------
Net cash provided by continuing operating activities........................... 3,358 9,030 11,529
Net cash used in discontinued operating activities............................. (3,662) (3,726) (5,930)
---------- ---------- ----------
Net cash (used in) provided by provided by operating activities................... (304) 5,304 5,599
Cash flows from investing activities:
Capital expenditures.............................................................. (4,499) (5,674) (8,044)
Investment in subsidiaries and affiliates (net of cash acquired).................. (1,500) (5,752) (2,428)
Short term investments............................................................ 4,946 (315) 7,602
---------- ---------- ----------
Net cash provided by (used in) investing activities............................ (1,053) (11,741) (2,870)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net....................................... 1,346 861 287
Proceeds from repayment of stockholder loans...................................... 760 112 387
Alternative minimum tax related-party loans for stock option exercises............ -- (262) 296
---------- ---------- ----------
Net cash (used in) provided by financing activities............................ 2,106 711 970
Effect of exchange rate changes on cash and cash equivalents...................... (224) 83 (428)
---------- ---------- ----------
Net increase (decrease) in cash and equivalents................................ 525 (5,643) 3,271
Cash and equivalents at beginning of year......................................... 12,590 18,233 14,962
---------- ---------- ----------
Cash and equivalents at end of year............................................... $ 13,115 $ 12,590 $ 18,233
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year by continuing operations for:
Interest....................................................................... $ 2 $ 3 $ 3
Income taxes (net)............................................................. 583 2,611 3,223
Supplemental disclosure of non-cash financing activities:
Loans to related parties for stock option exercises............................... $ 385 $ 231 $ 222
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Operations
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.
During the first quarter of fiscal year 2000, the Company implemented its
plan to sell the U.S. and international wireless operations, which is presented
as discontinued operations in accordance with Accounting Principles (APB)
Opinion No. 30, Reporting the Results of Operations (Note 2).
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 inter-company 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.
10
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies--Continued
The Company purchased 100% of Avitec AB of Sweden on March 14, 1996 for
$6.7 million in cash with an additional amount not to exceed approximately $2.5
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 was expected to be amortized
over a period of five to ten years. Avitec AB is included as part of the
wireless operations which the Company plans to divest in August 1999 (Note 2).
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.
11
<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)
Year Ended April 30
-------------------
1999 1998
-------------------
Raw materials $5,275 $2,552
Work-in-process 3,141 3,013
Finished goods 1,300 659
------ ------
Total inventories $9,716 $6,224
====== ======
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 for both continuing and discontinued
operations. Gains (losses) from foreign currency transactions were $9,000,
$109,000 and ($89,000) for the fiscal years 1999, 1998 and 1997, respectively.
12
<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.
13
<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 from continuing operations................ $ 2,035 $ 6,462 $ 14,244
============ =========== ============
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... 652 1,005 1,146
------------ ----------- ------------
Shares used for diluted per share computations.. 12,528 12,639 12,609
============ =========== ============
Net income (loss) per share:
Net income (loss) per share - Basic:
Income from continuing operations............... $ .17 $ 56 $ 1.24
Loss from discontinued operations............... (.68) (.32) ( .51)
------------ ----------- ------------
Net income (loss) per share - Basic............ $ (.51) $ .24 $ .73
============ =========== ============
Net income (loss) per share - Diluted:
Income from continuing operations ...............$ .16 $ .51 $ 1.13
Loss from discontinued operations .............. (.64) (.29) (.47)
------------ ----------- ------------
Net income(loss) per share diluted .............$ (.48) $ .22 $ .66
============ =========== ============
</TABLE>
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.
14
<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. These operations have been separately
reported as discontinued operations in the accompanying consolidated financial
statements for all periods presented. During fiscal year 1999, the Company
incurred a loss of $4.9 million before income tax benefit of $980,000 from
the disposal of assets related to the discontinued 980 pump laser business.
During the first quarter of fiscal year 2000, the Company implemented its
plan to sell the U.S. and international wireless operations, which detracted
from the Company's focus on fiberoptic markets. In addition to the operating
losses incurred during the first quarter, the Company expected to incur costs
directly related to the sale as well as losses on the sale of the businesses at
prices potentially below net book value. In the first quarter of fiscal 2000,
the Company recorded a loss of $4.4 million, before income tax benefit of $1.1
million, from the disposal of assets related to the discontinued wireless
businesses. Significant costs related to the sale of the business included
brokers fees, severance and expected product warranty costs.
By August 30, 1999, the wireless businesses were sold in two separate
transactions. Losses on the sale and costs associated with the transactions
were commensurate with the $4.4 million estimated. Domestic wireless operations
were sold for cash to an unrelated party. The Company agreed to provide certain
services on a temporary basis to facilitate the operation of the business by the
new owner, CI Wireless, Incorporated, of Fort Worth, Texas. These services
include subletting a portion of a building at the Company's Alhambra facility
and agreeing to sell certain key components which incorporate technology not
included in the sale of the business. The Company's stock in Avitec AB, the
wireless operations headquartered in Sweden, was sold to one of Avitec's
founders. The Company has no continuing obligations with regard to the Avitec
wireless operations but may continue to sell to Avitec certain of the Company's
products, which have been incorporated into Avitec systems designs.
15
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies--Continued
The results of operations of the wireless business segment were previously
reported as one of two business segments of the Company. The Company accounted
for the sale of its wireless segment as a discontinued operation in accordance
with APB Opinion No. 30 and, accordingly, the results of operations have been
segregated from continuing operations and reported as a separate line item on
the Company's accompanying consolidated statements of operations.
The results of the discontinued businesses have has been reported
separately as discontinued operations on the accompanying consolidated
statements of operations. Summarized combined results of the discontinued
wireless and 980nm laser pump businesses for the years ended April 30, 1999,
1998 and 1997, were as follows (in thousands):
Year Ended April 30
-----------------------------
1999 1998 1997
-----------------------------
Revenues......................... $ 7,827 $12,527 $ 7,457
Loss before income taxes......... (5,180) (5,299) (8,537)
Income tax benefit............... (1,036) (1,574) (2,608)
------- ------- -------
Loss after tax benefit.......... $(4,144) $(3,725) $(5,929)
======= ======= =======
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.
16
<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>
<CAPTION>
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 became exercisable on December 15, 1999.
17
<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
Range Options Remaining Number of Weighted-Average
of Outstanding at Contractual Life Weighted-Average Options Price of 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.
Year Ended April 30,
-----------------------
Assumptions 1999 1998 1997
-----------------------
Expected dividend yield --% --% --%
Risk-free interest rate 5.16% 6.19% 6.50%
Expected volatility 50.00% 50.00% 50.00%
Expected life (years) 5.50 5.50 6.20
18
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 per share 1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Income from continuing operations:
As reported.............................. $ 2,035 $ 6,462 $ 14,244
Pro forma................................ $ 1,831 $ 5,035 $ 12,371
Income per share from continuing operations:
As reported:
Basic............................... $ .17 $ .56 $ 1.24
Diluted............................. $ .16 $ .51 $ 1.13
Pro forma:
Basic............................... $ .13 $ .39 $ 1.03
Diluted............................. $ .12 $ .36 $ .94
</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).
Year Ended April 30,
--------------------------
1999 1998 1997
--------------------------
Federal:
Current.............. $ (83) $ 609 $3,877
Deferred............. (632) 782 1,386
----- ------ ------
Total................ (715) 1,391 5,263
State:
Current.............. 279 203 135
Deferred............. (316) 260 441
----- ------ ------
Total................ (37) 463 576
Foreign:
Current.............. 433 444 458
Deferred............. -- -- --
----- ------ ------
Total..................... 433 444 458
----- ------ ------
Total $(319) $2,298 $6,297
===== ====== ======
Total income tax credits related to losses on discontinued operations are
not included in the above table. Such credits were $2,016,000, $1,574,000 and
$2,608,000 in the fiscal years 1999, 1998 and 1997, respectively.
19
<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..................... 200 -- -- --
Other...................................... 271 -- 45 7
----------- ------- --------- ---------
Sub total............................... 4,623 512 2,190 1,044
Less valuation allowance................... (2,543) -- -- --
----------- ------- --------- ---------
Total................................... $ 2,080 $ 512 $ 2,190 $ 1,044
=========== ======= ========= =========
</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.
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.
Year Ended April 30,
---------------------
1999 1998 1997
---------------------
U.S. statutory tax rate............................ 34.0% 34.0% 34.0%
Benefits of tax credits............................ (73.8) -- (1.6)
Tax effect of permanent differences................ (30.0) (2.7) (2.3)
Tax rate differential on foreign earnings.......... 11.5 0.5 (1.6)
State income taxes................................. (47.7) 0.7 3.1
Change in valuation allowance...................... 91.7 -- --
Other.............................................. (4.3) (6.3) (0.9)
------ ---- ----
Effective rate..................................... (18.6)% 26.2% 30.7%
====== ==== ====
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.
20
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Related Party Transactions
Loans to Related Parties
From time to time the Company makes loans to certain officers and key
employees related to the exercise of stock options. These loans are full
recourse and secured by the shares of Common Stock issued upon such exercise.
Interest is payable annually at rates specified below in accordance with
Internal Revenue Service (IRS) guidelines on such loans. In addition, the
Company extends loans related to the alternative minimum tax on the exercise of
these stock options and on similar terms and conditions as the underlying loans
based on the amount exercised. Loans extended for the exercise of incentive
stock options are netted against equity while those loans extended to cover
alternative minimum taxes resulting from such exercises are classified as other
assets (in thousands, except share and option price data.)
<TABLE>
<CAPTION>
No. of
Stock Stock AMT
Option Option Loan Interest Loan Loan
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.
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.
Sumitomo Photon
---------------------------- --------------------------
Purchases Purchases
From Sales To From Sales To
---------------------------- --------------------------
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
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.
21
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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):
---------------------------- --------
Fiscal Year Ending April 30, $ 000
---------------------------- --------
2000 $ 915
2001 $ 985
2002 $1,226
2003 $1,231
2004 $1,117
2005 $1,098
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.
22
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Commitments and Contingencies--Continued
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.
Other Contingencies
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 related to this additional payment was
required at the time the business was sold in August, 1999.
8. Significant Customers and Concentration of Risk
During the fiscal years ended April 30, 1999, 1998 and 1997, revenues from
General Instrument Corporation and Antec Corporation represented 46%, 31% and
50%, 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 Corporation and Antec Corporation total $6.2 million and $5.2
million or 46% of total accounts receivable at both years ended April 30, 1999
and, 1998.
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 1997
------------------------------------------------
<S> <C> <C> <C>
Revenue
Domestic operations................................ $ 60,858 $ 59,753 $ 70,873
International operations........................... 9,394 8,603 8,693
Intercompany eliminations.......................... (5,225) (4,013) (4,468)
------------- ------------- -------------
Total revenues............................... $ 65,027 $ 64,343 $ 75,098
============= ============= =============
Pretax income (loss) from continuing operations
Domestic operations................................ $ 1,704 $ 8,096 $ 19,813
International operations........................... 173 693 763
Intercompany eliminations.......................... (161) (29) (35)
------------- ------------- -------------
Pretax income ............................... $ 1,716 $ 8,760 $ 20,541
============= ============= =============
Net income (loss) from continuing operations
Domestic operations................................ $ 2,457 $ 6,242 $ 13,975
International operations........................... (261) 249 304
Intercompany eliminations.......................... (161) (29) (35)
------------- ------------- -------------
Net income .................................. $ 2,035 $ 6,462 $ 14,244
============= ============= =============
</TABLE>
Identifiable assets attributable to foreign operations, which principally
consist of trade receivables from European customers and inventories, totaled
$3.9 million and, $3.1 million and $8.4 million at April 30, 1999 and, 1998 and
1997, respectively.
23
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 for both continuing and
discontinued operations. 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 Currency Other
Available for Sale Translation Comprehensive
Investments Gain (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 fiberoptics 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 by the Swedish subsidiary, Avitec AB. In June
1999, the Company announced its intention to sell its wireless operations in
order to focus on its fiberoptic business and the sale was completed as of
August 30, 1999. The results of the sale of the wireless operations, in addition
to the discontinuance of the 980nm pump laser business, are presented as
discontinued operations in the accompanying consolidated financial statements.
As a result of discontinuing these businesses, the Company operates in one
business segment, fiberoptics.
24
<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. Amounts
related to the wireless and 980nm pump laser businesses accounted for as
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
(in thousands, except per share amounts)
---------------------------------------------------
Q1 Q2 Q3/(1)/ Q4 Total
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues.................................................................. $16,489 $17,695 $15,149 $15,694 $65,027
Cost of revenues.......................................................... 9,136 10,417 10,143 9,297 38,993
------- ------- ------- ------- -------
Gross profit......................................................... 7,353 7,278 5,006 6,397 26,034
Operating expenses:
Research and development............................................. 2,649 2,415 2,617 2,633 10,314
Sales and marketing.................................................. 2,299 2,900 2,246 2,503 9,948
General and administrative........................................... 1,330 1,414 1,066 1,776 5,586
------- ------- ------- ------- -------
Total operating expenses.......................................... 6,278 6,729 5,929 6,912 25,848
------- ------- ------- ------- -------
Operating income (loss).............................................. 1,075 549 (923) (515) 186
Other:
Interest income, net................................................. 265 440 219 405 1,329
Other income (expense), net.......................................... 31 126 80 (36) 201
------- ------- ------- ------- -------
Income (loss) from continuing operations before income taxes.............. $ 1,371 $ 1,115 $ (624) $ (146) $ 1,716
Provision (credit) for income taxes....................................... 281 223 (132) (691) (319)
------- ------- ------- ------- -------
Income (loss) from continuing operations.................................. $ 1,090 892 $ (492) $ 545 $ 2,035
Loss from discontinued operations, net of
tax benefits......................................................... (884) (1,602) (628) (1,030) (4,144)
Loss from disposal of discontinued operations, net of
tax benefits......................................................... -- (3,919) -- -- (3,919)
------- ------- ------- ------- -------
Net income (loss)......................................................... $ 206 $(4,629) $(1,120) $ (485) $(6,028)
======= ======= ======= ======= =======
Income (loss) per common share - Basic /(2)/
Income (loss) from continuing operations............................. $ .09 $ .08 $ (.04) $ .05 $ .17
Loss from discontinued operations.................................... (.07) (.47) (.05) (.09) (.68)
------- ------- ------- ------- -------
Income (loss) per common share - Basic........................... $ .02 $ (.39) $ (.09) $ (.04) $ (.51)
======= ======= ======= ======= =======
Income (loss) per common share - Diluted
Income (loss) from continuing operations............................. $ .09 $ .07 $ (.04) $ .04 $ .16
Loss from discontinued operations.................................... (.07) (.44) (.05) (.08) (.64)
------- ------- ------- ------- -------
Income (loss) per common share - Diluted......................... $ .02 $ (.37) $ (.09) $ (.04) $ (.48)
======= ======= ======= ======= =======
Shares used in per share computation:
Basic................................................................ 11,751 11,860 11,920 11,976 11,876
Diluted.............................................................. 12,629 12,630 11,920 12,272 12,528
</TABLE>
(1) Computed using basic shares; diluted share computation would be
antidilutive.
(2) Quarterly per share amounts may not aggregate to total per share amounts
for the year.
25
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Quarterly Information (unaudited) (continued)
<TABLE>
<CAPTION>
Year Ended April 30, 1998
(in thousands, except per share amounts)
-----------------------------------------------------
Q1 Q2 Q3 Q4 Total
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues..................................................... $ 16,798 $ 18,878 $ 14,930 $ 13,737 $ 64,343
Cost of revenues............................................. 8,872 10,294 8,787 8,588 36,541
-------- -------- -------- -------- --------
Gross profit.............................................. 7,926 8,584 6,143 5,149 27,802
Operating expenses:
Research and development.................................. 1,834 1,918 1,751 2,114 7,617
Sales and marketing....................................... 1,948 2,074 1,882 2,406 8,310
General and administrative................................ 1,055 1,214 1,342 1,433 5,044
-------- -------- -------- -------- --------
Total operating expenses.............................. 4,837 5,206 4,975 5,953 20,971
-------- -------- -------- -------- --------
Operating income (loss)................................... 3,089 3,378 1,168 (804) 6,831
Other:
Interest income, net...................................... 284 342 363 284 1,273
Other income (expense), net............................... (85) 58 (91) 774 656
-------- -------- -------- -------- --------
Income (loss) from continuing operations before income
taxes..................................................... $ 3,288 $ 3,778 $ 1,440 $ 254 $ 8,760
Provision (credit) for income taxes.......................... 941 956 342 59 2,298
-------- -------- -------- -------- --------
Income (loss) from continuing operations..................... $ 2,347 $ 2,822 $ 1,098 $ 195 $ 6,462
Loss from discontinued operations, net of
Taxes..................................................... (852) (910) (727) (1,236) (3,725)
Loss from disposal of discontinued operations, net of
Tax benefit............................................... -- -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)............................................ $ 1,495 $ 1,912 $ 371 $ (1,041) $ 2,737
======== ======== ======== ======== ========
Income (loss) per common share - Basic /(1)/
Income (loss) from continuing operations.................. $ .20 $ .24 $ .09 $ .02 $ .56
Loss from discontinued operations......................... (.07) (.08) (.06) (.11) (.32)
-------- -------- -------- -------- --------
Income (loss) per common share - Basic................ $ .13 $ .16 $ .03 $ (.09) $ .24
======== ======== ======== ======== ========
Income (loss) per common share - Diluted /(1)/
Income (loss) from continuing operations.................. $ .19 $ .22 $ .09 $ .02 $ .51
Loss from discontinued operations......................... (.07) (.07) (.06) (.10) (.29)
-------- -------- -------- -------- --------
Income (loss) per common share - Diluted.............. $ .12 $ .15 $ .03 $ (.08) $ .22
======== ======== ======== ======== ========
Shares used in per share computation:
Basic..................................................... 11,524 11,624 11,684 11,707 11,634
Diluted................................................... 12,559 12,963 12,654 12,415 12,639
</TABLE>
(1) Quarterly per share amounts may not aggregate to total per share amounts for
the year.
26
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Subsequent Events (unaudited)
The Company previously owned 90% of Ortel SARL and 75% of Ortel
Vertriebs GmbH. During the second quarter of fiscal year 2000, the Company
purchased the minority interests of both of its European subsidiaries for cash
values of approximately $95,000 for Ortel SARL and $185,000 for Ortel Vertriebs.
Minority shareholders were compensated based on values determined at April 30,
1999. There was no goodwill in either transaction.
On February 7, 2000, the Company entered into an Agreement and Plan of
Merger with Lucent Technologies, Inc. Under the terms of the definitive merger
agreement between Lucent and Ortel, each share of Ortel will be converted into
3.135 shares of Lucent upon the closing of the merger transaction. Based on
Lucent's closing stock price of $57 on February 4, 2000 the acquisition would be
valued at approximately $2.95 billion, or $177.125 per Ortel share, on a fully
diluted basis. The completion of the merger is subject to a number of
conditions, including approval of the transaction by the Company's stockholders
which is expected to occur before June 30, 2000.
27
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
Item 7. Financial Statements and Exhibits (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RECENT DEVELOPMENTS
The Company previously owned 90% of Ortel SARL and 75% of Ortel
Vertriebs GmbH. During the second quarter of fiscal year 2000, the Company
purchased the minority interests of both of its European subsidiaries for cash
values of approximately $95,000 for Ortel SARL and $185,000 for Ortel Vertriebs.
Minority shareholders were compensated based on values determined at April 30,
1999. There was no goodwill in either transaction.
During the first quarter of fiscal year 2000, the Company implemented
its plan to sell the U.S. and international wireless operations, which detracted
from the Company's focus on fiberoptic markets. In addition to the operating
losses incurred during the first quarter, the Company expected to incur costs
directly related to the sale as well as losses on the sale of the businesses at
prices potentially below net book value. In the first quarter of fiscal 2000,
the Company recorded a loss of $4.4 million, before income tax benefit of $1.1
million, from the results of operations of the discontinued wireless businesses
and the estimated loss on disposal of assets related to the discontinued
wireless businesses. Significant costs related to the sale of the business
included brokers fees, severance and expected product warranty costs.
On February 7, 2000, the Company entered into an Agreement and Plan of
Merger with Lucent Technologies, Inc. Under the terms of the definitive merger
agreement between Lucent and Ortel, each share of Ortel will be converted into
3.135 shares of Lucent upon the closing of the merger transaction. Based on
Lucent's closing stock price of $57 on February 4, 2000, the acquisition would
be valued at approximately $2.95 billion, or $177.125 per Ortel share, on a
fully diluted basis. The completion of the merger is subject to a number of
conditions, including approval of the transaction by the Company's stockholders
which is expected to occur before June 30, 2000.
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, the Company's Annual Report
on Form 10-K for the fiscal year ended April 30, 1999, as well as those
discussed in this Item. The discussion below excludes the results of the
discontinued wireless business operations.
Comparison of Years Ended April 30, 1999 and 1998
Total revenues for fiscal 1999 were $65 million, a 1% increase from
revenues of $64.3 million in fiscal 1998. Revenues from the fiberoptics
business, consisting of broadband, satellite communications and
telecommunications, increased slightly.
Sales to Antec Corporation and General Instruments Corporation (GI) in
fiscal 1999 were 27% and 19% respectively, compared to 13% and 18% 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 40%, compared to 43% 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.
For fiscal 1999, research and development expenses of $10.3 million, or
16% of revenue, was 35% higher than $7.6 million, or 12% 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.
28
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Comparison of Years Ended April 30, 1999 and 1998 (Continued)
Sales and marketing expense increased 20% from $8.3 million, or 13% of
revenue, in fiscal 1998, to $9.9 million, or 15% 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 11% from $5 million, or
8% of revenue, in fiscal 1998, to $5.6 million, or 9% 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.
Income from continuing operations before income taxes was $1.7 million
in fiscal 1999 compared to $8.8 million last fiscal year.
The effective income tax rate from continuing operations was an 18.6%
tax benefit resulting in an income tax benefit of $319,000. This compared to an
effective income tax rate of 26.2% on profits recorded in fiscal 1998. The
reduction in the effective tax rate in fiscal 1999 reflects primarily tax
benefits from permanent differences as a larger percentage of restated net
income from continuing operations.
The income from continuing operations for fiscal 1999 was $2 million,
or $0.16 per diluted share compared to a net profit of $6.5 million, or $0.51
per diluted 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 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.
Comparison of Years Ended April 30, 1998 and 1997
The Company's revenues 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. For the year, sales to GI accounted for
approximately 18% 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 14% reduction in revenue in fiscal 1998
reflects a continued slowdown in the domestic broadband industry due in part to
a reduction in spending by Tele-Communications, Inc. (TCI) for network upgrades
and a reduction in the average price of forward-path transmitters sold during
the year in response to competitive pressures emanating from an unfavorable
movement in foreign exchange rates.
The decrease in gross margin to 43% in fiscal 1998 as compared to 51%
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 $7.6 million were $1 million
higher in fiscal 1998 compared to fiscal 1997 and increased from 9% percent of
revenue in 1997 to 12% in 1998. 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.
29
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Comparison of Years Ended April 30, 1998 and 1997 (Continued)
Sales and marketing expenses of $8.3 million in fiscal 1998 were
slightly lower than fiscal 1997, but increased from 11% of revenue in 1997 to
13% in 1998.
General and administrative expenses of $5 million in fiscal 1998
increased slightly from $4.6 million in fiscal 1997 and as a percent of revenue
increased to 8% from 6% 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 26.2% in
fiscal 1998 and 30.7% in fiscal 1997.
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 the Company'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 980nm pump laser
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. Fifteen months after the
discontinuance of these operations, the Company did not incur a substantial
portion of the warranty and sale returns it expected. In the third quarter of
fiscal 2000, the Company released approximately $1.1 million (before taxes) of
amounts previously reserved, thereby reducing the total loss on the pump laser
discontinuance to $3.2 million after taxes.
In the first quarter of fiscal 2000, the Company recorded a loss of
$4.4 million, before income tax benefit of $1.1 million, from the results of
operations and estimated loss on the disposal of assets related to the
discontinued wireless businesses. Significant costs related to the sale of the
business included brokers fees, severance and expected product warranty costs.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1999, the Company utilized $304,000 of cash in its operating
activities for both its continuing and discontinued operations. This was
primarily due to increases in accounts receivable, inventory and income tax
receivable partially offset by a higher level of trade accounts payable. The
Company also utilized $1.1 million in investment activities during the year.
This was due to capital equipment purchases of $4.5 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 $1.3 million in cash in fiscal 1999.
30
<PAGE>
ORTEL CORPORATION AND SUBSIDIARIES
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Cash and cash equivalents of $13.1 million increased slightly 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 $24.2 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.
By August 30, 1999, the wireless businesses were sold in two separate
transactions. Losses on the sale and costs associated with the transactions were
commensurate with the $4.4 million estimated. Domestic wireless operations were
sold for cash to an unrelated party. The Company agreed to provide certain
services on a temporary basis to facilitate the operation of the business by the
new owner, CI Wireless, Incorporated, of Fort Worth, Texas. These services
include subletting a portion of a building at the Company's Alhambra facility
and agreeing to sell certain key components which incorporate technology not
included in the sale of the business. The Company's stock in Avitec AB, the
wireless operations headquartered in Sweden, was sold to one of Avitec's
founders.
31
<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
32
<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 20, 2000 ORTEL CORPORATION
(Registrant)
By: /s/ Stephen R. Rizzone
------------------------------
Stephen R. Rizzone,
Chairman, President and
Chief Executive Officer
By: /s/ Roger Hay
------------------------------
Roger Hay,
Vice President, Finance and
Chief Financial Officer
33
<PAGE>
Exhibit 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
Ortel Corporation:
We consent to incorporation by reference in the registration statement (No. 33-
87540) on Form S-8 of Ortel Corporation of our report dated May 26, 1999, except
for Note 12 and the discontinued operations section of Note 2, which are as of
August 20, 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, 1999, and related
schedule, which report appears in the Form 8-K dated March 1, 2000, of Ortel
Corporation.
/s/ KPMG LLP
Los Angeles, California
March 20, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> APR-30-1999 APR-30-1998
<PERIOD-START> MAY-01-1998 MAY-01-1997
<PERIOD-END> APR-30-1999 APR-30-1998
<CASH> 13,115 12,590
<SECURITIES> 11,066 16,012
<RECEIVABLES> 13,945 11,069
<ALLOWANCES> 973 307
<INVENTORY> 9,716 6,224
<CURRENT-ASSETS> 58,963 58,457
<PP&E> 41,964 37,571
<DEPRECIATION> 24,260 18,845
<TOTAL-ASSETS> 89,228 90,341
<CURRENT-LIABILITIES> 12,962 9,294
<BONDS> 0 0
0 0
0 0
<COMMON> 54,333 51,677
<OTHER-SE> 20,855 27,107
<TOTAL-LIABILITY-AND-EQUITY> 89,228 90,341
<SALES> 65,027 64,343
<TOTAL-REVENUES> 65,027 64,343
<CGS> 38,806 36,480
<TOTAL-COSTS> 38,806 36,480
<OTHER-EXPENSES> 10,314<F1> 7,617<F1>
<LOSS-PROVISION> 187<F2> 61<F2>
<INTEREST-EXPENSE> (2) (3)
<INCOME-PRETAX> 1,716 8,760
<INCOME-TAX> (319) 2,298
<INCOME-CONTINUING> 2,035 6,462
<DISCONTINUED> (8,063) (3,725)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,028) (2,737)
<EPS-BASIC> (.51) .24
<EPS-DILUTED> (.48) .22
<FN>
<F1>Research & Development
<F2>Provision for Bad Debt
</FN>
</TABLE>
