SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-22598
ORTEL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-3494360
(State or Other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification No.)
2015 WEST CHESTNUT STREET, ALHAMBRA, CALIFORNIA 91803-1542
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (626) 281-3636
not applicable
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
----
As of July 31, 1998, there were 11,841,182 shares of the registrant's $.001
par value Common Stock outstanding.
Page 1 of 14 Pages
Exhibit Index of Page 13
ORTEL CORPORATION
INDEX
Page(s)
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of July 31, 1998 (unaudited)
and April 30, 1998 (audited)..................................................... 3
Condensed Consolidated Statements of Income (unaudited) for the fiscal
quarter and three months ended July 31, 1998 and 1997............................ 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the
three months ended July 31,1998 and 1997......................................... 5
Notes to Condensed Consolidated Financial Statements............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................................... 11
Signatures...................................................................................... 12
Index to Exhibits............................................................................... 13
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ORTEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
July 31, April 30,
1998 1998
------------------------------------
(unaudited) (audited)
ASSETS
- ------
Current assets:
Cash and cash equivalents.............................................. $13,751 $12,656
Short-term investments................................................. 14,364 16,012
Accounts receivable (net).............................................. 15,940 13,049
Other receivables...................................................... 1,953 1,415
Inventories............................................................ 11,840 11,198
Income tax receivables................................................. 530 530
Deferred tax assets.................................................... 2,849 2,775
Prepaid and other current assets....................................... 927 1,281
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Total current assets................................................ 62,154 58,916
Property, equipment and improvements (net)............................... 19,478 20,042
Intangible assets........................................................ 2,467 2,581
Other assets............................................................. 8,511 8,802
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Total assets........................................................ $92,610 $90,341
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable....................................................... $ 5,068 $ 3,685
Accrued payroll and related costs...................................... 2,210 2,899
Other accrued liabilities.............................................. 2,536 2,538
Income taxes payable................................................... 19 172
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Total current liabilities........................................... 9,833 9,294
Deferred income.......................................................... 390 400
Deferred income taxes.................................................... 1,658 1,598
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Total liabilities........................................................ 11,881 11,292
Minority interest........................................................ 296 265
Stockholders' equity:
Preferred stock, $.001 par value; authorized 5,000,000 shares, none
issued and outstanding................................................. - -
Common stock, $.001 par value; authorized 25,000,000 shares,
11,841,182 and 11,713,371 issued and outstanding at July 31, 1998
and April 30, 1998, respectively.... ................................. 12 12
Additional paid-in capital.............................................. 54,502 53,101
Retained earnings....................................................... 27,656 27,449
Loans receivable........................................................ (1,370) (1,460)
Unrealized losses on investments........................................ 24 24
Cumulative effect of foreign currency translation....................... (391) (342)
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Net stockholders' equity............................................ 80,433 78,784
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Commitments and contingencies )
Total liabilities and stockholders' equity.......................... $92,610 $90,341
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See accompanying notes to consolidated financial statements.
3
ORTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
Three Months Ended
July 31,
-----------------------------------
1998 1997
---- ----
Revenues...................................................... $18,808 $19,710
Cost of revenues.............................................. 10,929 10,954
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Gross profit................................................ 7,879 8,756
Operating expenses:
Research and development.................................... 3,562 2,998
Sales and marketing......................................... 2,811 2,469
General and administrative.................................. 1,541 1,337
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Total operating expenses.................................. 7,914 6,804
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Operating (loss) income....................................... (35) 1,952
Interest income (net)......................................... 259 284
Other income (expense)........................................ 44 (97)
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Income before income taxes.................................... 268 2,139
Provision for income taxes.................................... 61 644
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Net income.................................................... $ 207 $ 1,495
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Net income per share
Basic................................................... $.02 $.13
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Diluted................................................. $.02 $.12
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Shares used in per share computations ........................
Basic................................................... 11,751 11,524
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Diluted................................................. 12,629 12,559
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See accompanying notes to condensed consolidated financial statements.
4
ORTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended
---------------------------------------
July 31, July 31,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 207 $ 1,495
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................ 1,558 1,418
Increase (decrease) in minority interest in subsidiaries................. 32 20
Gain on disposal of equipment............................................ 12 1
Net effect of foreign currency translation............................... (77) (83)
Compensation expense related to Photon stock options..................... 27 28
Changes in operating assets & liabilities (net of effects of acquired co.)
Receivables and billed contract costs and fees........................... (3,430) (1,039)
Inventories.............................................................. (641) 1,400
Deferred tax assets...................................................... (74) 129
Prepaid and other assets................................................. 610 (120)
Intangible assets........................................................ - (74)
Accounts payable......................................................... 1,384 (2,735)
Accrued payroll and related costs........................................ (689) (2,100)
Other accrued liabilities................................................ (2) (618)
Deferred income.......................................................... (11) (8)
Deferred income taxes.................................................... 61 (58)
Income taxes payable..................................................... (153) (370)
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Net cash used in operating activities........................ (1,186) (2,714)
Cash flows from investing activities:
Capital expenditures........................................................ (857) (1,177)
Investment in subsidiaries and affiliates (net of cash acquired)............ - (5,437)
Short-term investments...................................................... 1,647 (580)
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Net cash provided by (used in) investing activities.......... 790 (7,194)
Cash flows from financing activities:
Proceeds from issuance of common stock, net................................. 1,357 221
Proceeds from repayment of stockholder loans................................ 106 --
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Net cash provided by financing activities.................... 1,463 221
Effect of exchange rate changes on cash..................................... 28 (41)
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Net increase (decrease) in cash and equivalents.............. 1,095 (9,728)
Cash and cash equivalents, beginning of period.............................. 12,656 18,865
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Cash and cash equivalents, end of period.................................... $13,751 $ 9,137
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for
Interest ................................................................. $ 9 $ 3
Income taxes ............................................................. $ 227 $ 917
Supplemental disclosure of non-cash financing activities:
Loans to related parties for stock option exercises $ 17 $ -
See accompanying notes to condensed consolidated financial statements.
5
ORTEL CORPORATION
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company without audit (except for the balance sheet
information as of April 30, 1998, which was derived from audited consolidated
financial statements) and, in the opinion of management, contain all adjustments
necessary to present fairly the consolidated financial position at July 31,
1998, and the condensed consolidated results of operations for the three-month
periods ended July 31, 1998, and July 31, 1997, and the condensed consolidated
cash flows for the three-month periods ended July 31, 1998, and July 31, 1997,
in accordance with generally accepted accounting principles. Certain information
and footnote disclosures normally included in financial statements have been
condensed or omitted pursuant to rules and regulations of the Securities and
Exchange Commission, although the Company believes that the disclosures in the
consolidated financial statements are adequate to ensure the information
presented is not misleading.
The results of operations for the three-month period ended July 31, 1998,
are not necessarily indicative of the results to be expected for the entire
fiscal year and should be read in conjunction with a discussion of risk factors
in the Company's annual report for the fiscal year ended April 30, 1998.
2. Per Share Information
---------------------
Net income per share is based on the weighted average common and common
equivalent shares outstanding for each period including common shares issuable
upon the exercise of stock options.
Net income per share for all periods presented is summarized as follows (in
thousands, except per share data):
Three Months Ended
July 31
------------------------------
1998 1997
---- ----
Net income................................ $ 207 $ 1,495
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Shares used in per share computations:
Basic................................... 11,751 11,524
Stock options........................... 878 1,035
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Diluted................................... 12,629 12,559
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Net income per share......................
Basic................................... $ .02 $ .13
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Diluted................................. $ .02 $ .12
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6
ORTEL CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
3. Income taxes
------------
Income taxes for the respective periods were computed using the effective
tax rate estimated to be applicable for the fiscal year, which is subject to
ongoing review and evaluation by management.
4. Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
July 31, 1998 April 30, 1998
------------------------ ---------------------
(unaudited) (audited)
Raw materials...................................... $ 5,282 $ 4,998
Work-in-process.................................... 5,017 5,199
Finished goods..................................... 1,541 1,001
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Total inventories............................. $11,840 $11,198
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5. Cash Equivalents
----------------
Cash equivalents (defined as marketable securities with maturities of 90
days or less which can be liquidated in a manner that is equivalent to cash)
totaled $9.0 million and $7.8 million as of July 31, 1998 and April 30, 1998
respectively, and short-term investments (marketable securities with maturities
of more than 90 days) totaled $14.4 million and $16.0 million as of July 31,
1998, and April 30, 1998, respectively.
Under Financial Accounting Standards Board Statement 115, the Company has
classified its short-term investments as available-for-sale. Available-for-sale
securities are stated at market value and unrealized holding gains and losses,
net of the related tax effect, are excluded from earnings and are reported as a
separate component of stockholders' equity until realized. A decline in the
market value of the security below cost that is deemed other than temporary is
charged to earnings resulting in the establishment of a new cost basis for the
security. At July 31, 1998 and April 30, 1998 the Company's marketable
investment securities consisted principally of highly liquid investments in tax
free municipal obligations with various maturity dates through June 15, 2001.
The difference between market value and cost of these securities at July 31,
1998 and April 30, 1998 was immaterial.
7
ORTEL CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the unaudited condensed consolidated
financial statements included herein. The discussion in this section contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in the Company's annual report for the year ended April 30,
1998.
RESULTS OF OPERATIONS
The following table sets forth the statements of income as a percentage of
revenues.
Three Months Ended
July 31,
-------------------------------
1998 1997
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Revenues...................................................... 100.0% 100.0%
Cost of revenues.............................................. 58.1 55.6
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Gross profit................................................ 41.9 44.4
Operating expenses:
Research and development.................................... 18.9 15.2
Sales and marketing......................................... 15.0 12.5
General and administrative.................................. 8.2 6.8
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Total operating expenses.................................... 42.1 34.5
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Operating (loss) income....................................... ( .2) 9.9
Interest Income, net 1.4 1.4
Other income (expense) ................................... .2 (.4)
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Income before income taxes.................................. 1.4 10.9
Provision for income taxes.................................... .3 3.3
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Net income.................................................. 1.1% 7.6%
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8
ORTEL CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (continued)
The following table highlights certain aspects of the Company's revenues
for the three-month periods ended July 31, 1998 and 1997.
Three Months Ended
July 31,
--------------------------
1998 1997
---- ----
Revenues (thousands):
Broadband products.......................... $12,064 $12,841
Other products.............................. 6,744 6,869
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Total.................. $18,808 $19,710
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Geographic coverage (thousands):
Domestic.................................... $12,210 $ 8,761
International............................... 6,598 10,949
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Total.................. $18,808 $19,710
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As a percent of revenues:
Broadband products.......................... 64.1% 65.1%
Other products.............................. 35.9 34.9
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Total............................... 100.0% 100.0%
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Geographic coverage:
Domestic.................................... 64.9% 44.4%
International............................... 35.1% 55.6
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Total............................... 100.0% 100.0%
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FIRST QUARTER
Revenues
Revenues of $18.8 million for the first quarter ended July 31, 1998,
decreased by $902,000 or 4.5% from $19.7 million in the comparable quarter of
the previous year. Total revenues from broadband products were $12.1 million in
the first quarter, which were $777,000 or 6.1% lower than prior year period.
The decrease is primarily related to broadband international revenues which were
$3.1 million compared to $7.0 million for the quarter ended July 31, 1997. The
reduction in international broadband revenues was offset in part by increased
domestic revenues as cable operators increased spending to upgrade their CATV
networks.
9
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (continued)
Revenues (continued)
Total international revenues were $6.6 million in the first quarter of
fiscal 1999 have continued to soften since the second quarter of fiscal 1998
(ended October 31, 1998) when they totaled $11.4 million. This decrease has been
primarily related to the effects of the Asian economic crisis.
Revenues for wireless, satellite communications and other product
applications were slightly lower than the first quarter a year ago.
Gross Profit
Gross profit of $7.9 million for the first quarter of fiscal 1999
represented 41.9% of revenues compared to 44.4% in the comparable period last
year. The decrease in gross margin compared to the prior year is a result of
lower average pricing for the Company's broadband products. In response to
these lower average prices, the Company introduced a new more cost-effective
laser transmitter in the fourth fiscal quarter ended April 30, 1998. Most of the
Company's broadband customers will have transitioned to this new product by the
second quarter ended October 31, 1998.
Research and Development
Research and development expenses of $3.6 million for the first quarter of
fiscal 1999 increased by $564,000 or 18.8% from the comparable quarter last
year. As a percent of revenues, R&D increased from 15.2% to 18.9% in the quarter
ended July 31, 1998. The Company continues to invest heavily in new product
development.
Sales and Marketing
Sales and marketing expenses of $2.2 million for the first quarter of fiscal
1999 increased by $342,000 or 13.9% from $2.5 million for the comparable quarter
last year and as a percent of revenues increased from 12.5% to 15.0%. In
addition to an expansion of the domestic sales force, a sales office was opened
in Singapore and a liaison office in Beijing, China.
General and Administrative
General and administrative expenses of $1.5 million for the first quarter of
fiscal 1999 increased by $204,000 or 15.0% from $1.3 million for the comparable
period last year and increased as a percentage of revenues to 8.2% compared to
6.8% for the same quarter of fiscal 1998. Most of the increase in G&A as a
percent of revenues is a result of lower revenues.
10
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (continued)
Other Non-Operating Income (Expense
Interest income, net of interest expense, of $259,000 for the first quarter
of fiscal 1999 decreased slightly from $284,000 in the comparable period last
year primarily due to lower average cash balances. Other net income was $44,000
for the first quarter compared to a loss of $97,000 in the comparable quarter
last year. This favorable comparison in other net income primarily relates to
foreign currency changes.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1998, the Company had working capital of $52.3 million,
including $13.8 million in cash and cash equivalents and $14.4 million in short-
term investments.
For the three-month period ended July 31, 1998, the Company's operating
activities used $1.2 million in cash. Cash from operating activities includes
net income of $207,000 plus depreciation and amortization of $1.6 million
primarily offset by an increase in trade receivables and billed contract costs
of $3.4. Since year end, accounts receivable has increased 22.2% compared to a
revenue increase of 15.4% (when comparing first quarter of fiscal 1999 to fourth
quarter of fiscal 1998).
Cash flow from investing activities of $790,000 includes a decrease of $1.7
million in short-term investments partially offset by an increase of $910,000 in
equipment and leasehold improvements.
The Company has a $5 million unsecured revolving line of credit which
carries an interest rate of 7.06% and expires September 30, 1998. The revolving
line of credit is renewable at the Company's option. There were no borrowings
outstanding as of July 31, 1998.
YEAR 2000
The Company is assessing the impact which the year 2000 issue will have on
its products and internal information systems and has begun corrective efforts
in these areas. The Company does not anticipate that addressing the year 2000
problem for its internal information systems and current and future products
will have a material impact on its operations or financial results.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits.
Reference is hereby made to the Exhibit Index commencing on page 13.
b. No reports were filed on Form 8-K during the quarter ended July 31,
1998.
11
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: September 14, 1998 ORTEL CORPORATION
(Registrant)
By: /s/Wim H.J. Selders
-------------------
Wim H.J. Selders,
President and Chief Executive Officer
By: /s/Stephen K. Workman
---------------------
Stephen K. Workman,
Vice President, Finance and Chief Financial
Officer
12
EXHIBIT INDEX
Exhibit No. Document Description Page No.
- ----------- -------------------- --------
3.1 Certificate of Incorporation. (Note 1)
3.2 Bylaws of Ortel Corporation. (Note 1)
4.1 Common Stock Purchase Agreement, dated March 26, 1990, between (Note 1)
Sumitomo Cement Co., Ltd. and Ortel Corporation.
4.2 Modification Agreement, dated 1985, between Ortel Corporation and (Note 1)
certain investors.
10.1 Lease, dated September 23, 1991, between Ortel Corporation and Rim (Note 1)
Development Co.
10.2 Lease, dated May 20, 1994, between Ortel Corporation and (Note 1)
Wai Fong Un.
10.3 Employment Agreement, dated September 14, 1990, between Ortel (Note 1)
Corporation and Wim H.J. Selders.
10.4 Employment Agreement, dated September 14, 1990, between Ortel (Note 1)
Corporation and Israel Ury.
10.5 Employment Agreement, dated September 14, 1990, between Ortel (Note 1)
Corporation and Nadav Bar-Chaim.
10.6 1981 Incentive Stock Option Plan of Ortel Corporation. (Note 1)
10.7 1990 Stock Option Plan of Ortel Corporation. (Note 1)
10.8 Form of Indemnification Agreement. (Note 1)
10.9 Key Shareholders Agreement, dated as of March 26, 1990, among Wim (Note 1)
H.J. Selders, Dr. Ury, Dr. Yariv, Dr. Bar-Chaim, Sumitomo Cement
Co., Ltd., The Ury Family Trust and Ortel Corporation.
10.10 Agreement Concerning Certain Financial and Business Arrangements, (Note 1)
dated as of March 26, 1990 between Sumitomo Cement Co., Ltd. and
Ortel Corporation.
10.11 1994 Equity Participation Plan of Ortel Corporation. (Note 1)
10.12 Severance Agreement, dated as of August 26, 1994, between Ortel (Note 1)
Corporation and Stephen K. Workman.
10.13 Stock Purchase Agreement dated March 12, 1996 between Hakan (Note 2)
Samuelsson and Ortel Corporation.
10.14 Loan Agreement, dated June 2, 1995 between Ortel Corporation and (Note 3)
Bank of America.
10.15 Amendment No. 2 dated September 9, 1997 to Loan Agreement dated (Note 5)
June 2, 1995 between Ortel Corporation and Bank of America.
10.16 Severance Agreement, dated December 1, 1997, between Ortel (Note 6)
Corporation and Douglas H. Morais.
10.17 Severance Agreement, dated March 6, 1998, between Ortel Corporation (Note 7)
and Lyle B. Boarts
21.1 Subsidiaries of Ortel Corporation. (Note 7)
23.1 Consent of KPMG Peat Marwick LLP. (Note 7)
27.0 Financial Data Schedule
13
EXHIBIT INDEX (Continued)
Note 1 Previously filed by the Registrant in Registration No. 33-79188 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 2 Previously filed by the Registrant in its 8K filing dated March 26,
1996
Note 3 Previously filed by the Registrant in its 10-K filing for the year
ended April 30, 1996
Note 4 Previously filed by the Registrant in its 10-K filing for the
year-ended April 30, 1997.
Note 5 Previously filed by the Registrant in its 10-Q filing for the
quarter ended October 31, 1997.
Note 6 Previously filed by the Registrant in its 10-Q filing for the
quarter ended January 31, 1998.
Note 7 Previously filed by the Registrant in its 10-K filing for the year
ended April 30, 1998.
14