UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 0-28724
ORCKIT COMMUNICATIONS LTD.
(Exact name of Registrant as specified in its charter
and translation of Registrant's name into English)
ISRAEL
(Jurisdiction of incorporation or organization)
126 Yigal Allon Street, Tel Aviv 67443, Israel
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
None
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Ordinary Shares, no par value
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report.
As of December 31, 2002, the Registrant had outstanding 4,979,593 Ordinary
Shares, no par value.
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 |_|
Indicate by check mark which financial statement item the Registrant has
elected to follow.
Item 17 |_| Item 18 |X|
PART I
Unless the context otherwise requires, "Orckit," "us," "we" and "our" refer
to Orckit Communications Ltd. and its subsidiaries.
All share and share price information in this Annual Report has been
adjusted to give retroactive effect to (i) an adjustment allocating 44% of our
share price to each share of Orckit and 56% of our share price to each share of
Tioga for all periods prior to our spin-off of Tioga Technologies Ltd. on June
30, 2000 and (ii) a one-for-five reverse split of our ordinary shares that
became effective as of November 27, 2002.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of December 31, 2001
and 2002, and each of the years ended December 31, 2000, 2001 and 2002 are
derived from our audited consolidated financial statements set forth elsewhere
in this Annual Report, which have been prepared in accordance with generally
accepted accounting principles in the United States. The selected consolidated
financial data for the years ended December 31, 1998 and 1999 and as of December
31, 1998, 1999 and 2000 are derived from audited consolidated financial
statements not appearing in this Annual Report. The selected consolidated
financial data set forth below should be read in conjunction with "Item 5.
Operating and Financial Review and Prospects" and the consolidated financial
statements and the notes thereto and the other financial information appearing
elsewhere in this Annual Report.
On June 30, 2000, our business was formally divided into two separate
companies: (i) Tioga Technologies Ltd., an Israeli company, to which we
transferred substantially all of our former semiconductor business, including
the business of Silicon Value Ltd., and (ii) Orckit, which continues to own and
operate our existing telecom equipment and other businesses. As part of the
spin-off, we transferred to Tioga substantially all the assets and liabilities
constituting our semiconductor business in exchange for Tioga ordinary shares,
and distributed all of those Tioga shares as a stock dividend to our
shareholders on a share for share basis. The results of Tioga are included in
our financial statements through June 30, 2000.
1998 1999 2000 2001 2002
Statement of Operations Data: (in thousands, except per share data)
Revenues $45,249 $88,864 $131,867 $141,647 $53,420
Cost of revenues 41,268 84,502 133,671 112,007 32,963
Gross profit (loss) 3,981 4,362 (1,804) 29,640 20,457
Research and development expenses 12,905 18,195 31,970 22,429 22,266
Less grants 2,806 2,409 1,110 3,344 2,975
Research and development expenses,
net 10,099 15,786 30,860 19,085 19,291
Selling, general and
administrative expenses 11,817 16,151 33,561 16,993 14,699
Acquisition of research and
development In-process - - 28,976 - -
Amortization and impairment of
goodwill - - 14,334 26,101 -
Operating loss (17,935) (27,575) (109,535) (32,539) (13,533)
Financial income, net 2,186 2,653 1,975 33,395 17,616
Other income - - 906 - -
---
Net income (loss) $(15,749) $(24,922) $(106,654) $856 $4,083
Net income (loss) per share -
basic $(4.95) $(6.80) $(24.6) $0.18 $0.83
Net income (loss) per share -
diluted $(4.95) $(6.80) $(24.6) $0.18 $0.79
Weighted average number of
ordinary shares outstanding-basic 3,168 3,668 4,332 4,632 4,932
Weighted average number of
ordinary shares
outstanding-diluted 3,168 3,668 4,332 4,875 5,163
_______________________
Year Ended December 31,
------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
Balance Sheet Data: (in thousands)
Cash, cash
equivalents ,
bank deposits,
marketable securities
and long-term
investments $41,774 $51,049 $101,191 $112,924 $116,677
Working capital (1) 54,180 85,399 133,086 103,895 55,193
Total assets 73,031 127,169 243,823 166,300 135,850
Convertible Subordinated Notes -- -- 120,000 66,416 38,179
Share capital and
additional paid -in
capital 78,848 138,023 313,984 318,651 320,204
Shareholders' equity $57,294 $91,547 $71,262 $76,785 $82,421
- --------------------------------
(1) Total current assets net of total current liabilities
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable
D. RISK FACTORS
We believe that the occurrence of any one or some combination of the
following factors could have a material adverse effect on our business,
financial condition and results of operations.
Risks relating to our business and industry
We have a history of substantial losses and might not become profitable on an
operating basis.
Through December 31, 2002, we incurred aggregate net losses of
approximately $238 million. Losses include a charge of approximately $90 million
in 2000 as a result of the spin-off of Tioga and aggregate charges of $69
million in 2000 and 2001 for the amortization and impairment of goodwill and in
process research and development with respect to companies we acquired. Our
operating losses have been larger as we recognized an aggregate of approximately
$51 million of financial income during the past two years, primarily from the
early retirement of our convertible subordinated notes. We incurred an
additional net loss of $5.2 million in the quarter ended March 31, 2003, with an
operating loss for the quarter of approximately $8.8 million. We incurred our
losses primarily because we sold asymmetric digital subscriber line, or ADSL,
products at prices below our manufacturing costs. In addition, we have invested
significant funds in technology projects undertaken by our subsidiaries. As of
December 31, 2002, these projects have not generated any revenues. We may not be
able to achieve profitability on an operating basis. Even if we achieve
operating profitability, we may not be able to sustain it.
Our results of operations in 2002 were highly dependent upon sales to two large
customers. We do not expect to continue making significant sales to these
customers.
Two of our customers, Verizon and Telia, accounted for 95.7% of our
revenues in 2002. Both Verizon and Telia have engaged other vendors for the
wide-scale deployment of ADSL products and have halted the deployment of our
central office equipment. Therefore, we do not expect significant sales to
either of these customers in 2003.
Our legacy DSLAM sales have decreased significantly and are expected to be
insignificant in 2003.
Our revenues declined significantly from $141.6 million in 2001 to $53.4
million in 2002 and are expected to be insignificant in 2003. In the quarter
ended March 31, 2003, our revenues were $515,000 compared to $19.9 million in
the prior year. We do not expect to introduce new products or technology that
will generate any significant revenue in 2003 that could offset this decline.
Unless we are able to develop new and innovative products that are accepted in
the marketplace, it will be difficult for us to attract new customers and
generate significant revenues that would be necessary to compensate for this
reduction in our sales. We cannot be sure that we will be able to do this.
The slow down in capital expenditures by telecommunications service providers
has had and could continue to have a material adverse effect on our results of
operations.
The continuing deterioration of economies around the world and economic
uncertainty in the telecommunications market has resulted in a sharp curtailment
of capital investment by telecommunications carriers and service providers. This
decline in capital expenditures has had a material adverse effect on our
operating results, has reduced our sales and has placed pressure on the price of
our existing products and products that we are developing. We expect the slow
down and significant reduction in telecom capital expenditures to continue
through 2003 and into 2004 as well.
We plan to continue to invest substantial capital and other resources in our
Corrigent Systems subsidiary, as well as other technology projects, including
our Spediant Systems subsidiary.
We continue to fund Corrigent Systems which is developing solutions capable
of supporting high bandwidth services in telecommunications networks located in
metropolitan areas, as well as Spediant Systems, which is developing solutions
addressing the needs of service providers for fiber-speed broadband services
over copper wires. We provided our technology projects with approximately $18
million and $25 million of working capital in 2001 and 2002, respectively, the
substantial majority of which was invested in Corrigent Systems. We expect that
our technology projects will not begin to generate commercial revenues in 2003
and will have a negative cash flow for at least 2003 and 2004. The curtailment
of capital investment by telecommunications carriers and service providers could
have a material adverse effect on the commercial deployment of these technology
projects and our ability to secure third party funding. As a result, for these
projects to continue, we will likely have to continue to finance them. Our
financing of these projects will reduce our cash balances.
The future growth of Corrigent Systems, as well as other technology projects,
including Spediant Systems, will depend upon on the acceptance of their
technologies and the development of markets for their products.
The markets for products under development by Corrigent Systems are
dependant on resilient packet ring, or RPR, technology. Industry standards for
RPR technology have not yet been formally adopted. The market for products based
on RPR technology may not fully develop, whether as a result of competition,
alternative technologies, such as Ethernet in the metro area, changes in
technology, product standards or otherwise. The markets for products under
development by Spediant Systems are dependant on multi-copper pair and inverse
multiplexing technology. Industry standards for the bonding of copper pair
technology are in early stage of discussions, and have not yet been adopted. The
market for products based on this technology may not fully develop, whether as a
result of competition, alternative technologies, such as long-reach digital
subscriber line technology, known also as DSL technology, in the access area,
changes in technology, product standards or otherwise. The success of Corrigent
and other technology projects, including Spediant, will ultimately depend on the
acceptance of their products and technologies. We have no control over the
development of their target markets. Even if they develop technologies that are
accepted, each must develop relationships with providers of telecommunications
services in order to be successful. Furthermore, competing technologies in the
targeted areas may be utilized in the majority of such target market. This would
leave Corrigent and our other technology projects with a small market to
address.
We may not be able to keep pace with emerging industry standards for products we
are developing. This could make these products unacceptable to potential
customers.
Industry-wide standards for the products being developed by our
subsidiaries have not yet been adopted. The failure to comply with evolving
standards could limit acceptance of our products by market participants. Since
these products will be integrated into networks consisting of elements
manufactured by various companies, they must comply with a number of current and
future industry standards and practices established by various international
bodies and industry forums. Standards may be adopted by various industry groups
or may be proprietary and nonetheless accepted broadly in the industry. It may
take us a significant amount of time to develop and design products
incorporating these new standards. We may also have to pay licensing fees to the
developers of the technologies that constitute newly adopted standards.
Because telephone companies must obtain in-house and regulatory approvals before
they can order our products, expected sales of new products in development are
likely to be subject to delays, which may harm our business.
Before telephone companies can purchase our products that are being
developed, these products must undergo a lengthy approval process. Evaluation
can take several years. Accordingly, we may be required to submit enhanced
versions of products in development for approval.
The following factors, among others, affect the length of the approval
process:
o the time required for telephone companies to determine and publish
specifications;
o the complexity of the products involved;
o the technological priorities and budgets of telephone companies; and
o the regulatory requirements applicable to telephone companies.
Delays in the product approval process could seriously harm our business
and results of operation.
Because of rapid technological and other changes in the market for
telecommunications products, we must continually develop and market new products
and product enhancements while reducing production costs.
The market for our products is characterized by:
o rapid technological change;
o frequent product introductions and enhancements;
o evolving industry standards;
o changes in end-user requirements; and
o changes in services offered by telephone companies.
Technologies or standards applicable to our products could become obsolete
or fail to gain widespread, commercial acceptance, resulting in losses and
inventory write-offs. Rapid technological change and evolving technological
standards are resulting in shorter life cycles for our products. Shorter life
cycles for our products could cause decreases in product prices at the end of
the product life cycle, inventory write-offs and a lower rate of return on our
research and development expenditures. We may not be able to respond effectively
to technological changes or new product announcements by others or successfully
develop or market new products.
Our quarterly results of operations have fluctuated significantly and we expect
these fluctuations to continue if our products in development begin to generate
revenues.
The following factors can affect our quarterly results of operations:
o size and timing of orders, including order deferrals and delayed
shipments;
o launching of new product generations;
o length of approval processes or market testing;
o technological changes in the telecommunications industry;
o accuracy of telephone company, distributor and original equipment
manufacturer forecasts of their customers' demands;
o changes in our operating expenses;
o the timing of approval of government research and development
grants;
o disruption in our sources of supply;
o funding required for the operations of Corrigent, Spediant and any
other technology projects;
o early retirement or settlement of debt; and
o general economic conditions.
Telephone companies typically require prompt delivery of products. Sales
are typically booked and shipped in the same quarter pursuant to purchase
orders. As a result, we expect that once sales of our new products commence, we
will be required to maintain or have available sufficient raw and finished goods
inventory levels to satisfy anticipated demand on a timely basis. This increases
the risk of inventory obsolescence and associated write-offs. A shift in demand
could also result in inventory write-offs.
The market for the products being developed by Corrigent, as well as by our
other technology projects, including Spediant, is intensely competitive. Because
many of the competitors of our technology projects have much greater resources
than we have, it may be difficult for us to achieve sustained operating
profitability.
The market for the products being developed by Corrigent and our other
technology projects is intensely competitive and we expect competition to
increase in the future. Many of our competitors and potential competitors are
large and established companies, and have better name recognition and greater
financial, technical, manufacturing, marketing and personnel resources than us.
Increased competition could adversely affect our future revenues and ability to
become profitable on an operating basis through pricing pressure, loss of market
share and other factors.
The competitors are numerous and we expect competition to increase in the
future. Our principal competitors for the products being developed by our major
technology projects are expected to include Alcatel, Cisco Systems, Inc., ECI
Telecom Ltd., Fujitsu, Lucent Technologies Inc., Nortel Networks and Siemens AG.
Government regulation of telephone companies could adversely affect the demand
for our products.
United States federal and state regulatory agencies, including the FCC and
various state public utility and service commissions, regulate United States
telephone companies. FCC regulatory policies affecting the availability of
telephone companies' services, and other terms on which telephone companies
conduct their business, may impede our penetration of certain markets. Telephone
companies in the markets in other countries in which we operate are also subject
to evolving governmental regulation or state monopolies. Changes in laws or
regulations in the U.S. or elsewhere, could materially adversely affect our
ability, and the ability of our customers, to penetrate certain markets or
purchase our products currently in development once they are available for
commercial sale.
Because a limited number of subcontractors are expected to manufacture and
assemble our products currently in development and supply components, our
business could suffer if we cannot retain or replace them.
We have used third-party subcontractors to assemble our products and expect
to continue to use third party subcontractors to assemble products currently in
development once they are available for commercial sale. For certain of our
products currently in development, manufacturing and delivery are expected to be
performed on a full turnkey basis. We do not expect to enter into multi-year
agreements with assurances of supply with any of our suppliers or
subcontractors.
Our expected reliance on third-party subcontractors involves several risks,
including:
o the potential absence of adequate capacity if we expand;
o the unavailability of, or interruption in access to, certain process
technologies; and
o reduced control over product quality, delivery, schedules, manufacturing
yields and costs.
We expect to obtain certain key semiconductor components used in our
products from a number of single source providers. Shortages of raw materials or
production capacity constraints at our subcontractors could negatively affect
our ability to meet our product delivery obligations and result in increased
prices for affected products. Use of subcontractors also involves the risk of
reduced control over product quality, delivery schedules and manufacturing
yields, as well as limited negotiating power to reduce costs.
A shortage in the supply of key semiconductor and other components could
affect our ability to manufacture and deliver our products and result in lower
revenues. We may be unable to find alternative sources in a timely manner, if at
all, if any of our suppliers were unwilling or unable to provide us with key
components. If we cannot obtain sufficient key components as required, or
develop alternative sources if and as required in the future, product shipments
may be delayed or reduced. This could adversely affect our end-user
relationships, business and results of operations.
We could incur substantial costs if customers assert warranty claims or request
product recalls.
We offer complex products that may contain errors, defects or failures when
introduced or as new versions are released. If we deliver products with defects,
errors or bugs or if we undergo a product recall as a result of errors or
failures, market acceptance of our products could be lost or delayed and we
could be the subject of substantial negative publicity. This could have a
material adverse effect on our business and results of operations. We have
agreed to indemnify our customers in some circumstances against liability from
defects in our products. In some cases our indemnity also covers indirect
damages. A product liability claim could seriously harm our business, financial
condition and results of operations. We have received claims from certain of our
carrier customers for compensation based on warranty claims related to our DSLAM
product. We are in discussions with respect to the settlement of these claims,
but are unable to estimate our potential liability in connection with these
claims.
We are subject to international business risks.
To date, we have sold our systems primarily in the U.S. and Europe.
Products from our technology projects are also expected to target international
telecommunication carriers. We are subject to the risks inherent in
international business, including:
o compliance with foreign laws and regulations;
o import or currency control restrictions;
o tariffs and other trade barriers;
o local taxation;
o transportation delays; and
o seasonal reduction of business activities.
These factors, as well as different technical standards or product
requirements for our systems in different markets, may limit our ability to
penetrate some foreign markets.
We depend on a limited number of key personnel who would be difficult to
replace. If we lose the service of these individuals, our business will be
harmed.
Orckit's growth and success largely depends on the managerial and technical
skills of members of senior management. If any of them is unable or unwilling to
continue with us, our results of operations could be materially and adversely
affected.
Our proprietary technology is difficult to protect and unauthorized use of our
proprietary technology by third parties may impair our ability to compete
effectively.
We may not be able to prevent the misappropriation of our technology, and
our competitors may independently develop technologies that are substantially
equivalent or superior to ours. We have filed patent applications covering
certain of our technologies. To protect our unpatented proprietary know-how, we
rely on technical leadership, trade secrets and confidentiality and
non-disclosure agreements. These agreements and measures may not adequately
protect our technology and it may be possible for a third party to copy or
otherwise obtain and use our technology without authorization or to develop
similar technology.
There is a risk that we may violate the proprietary rights of others.
We are subject to the risk of adverse claims and litigation alleging
infringement of the intellectual property rights of other companies. Many
participants in the telecommunications industry have an increasing number of
patents and patent applications and have frequently commenced litigation based
on alleged infringement. We have agreed to indemnify our marketing partners and
customers with respect to infringement of the proprietary rights of third
parties by our DSLAM products. We also expect to be required to indemnify our
customers with respect to infringement of third party proprietary rights by our
products that are currently being developed. We have, in the past, received
notices from other parties regarding alleged violations of their proprietary
rights. Third parties may assert infringement claims in the future and these
claims may require us to enter into license arrangements or result in costly
litigation, regardless of the merits of these claims. Licensing may be
unavailable or may not be obtainable on commercially reasonable terms.
We may need additional financing to continue our growth.
To the extent that we cannot fund our activities through our existing
resources, we may need to raise funds through public or private financing. We
may be unable to obtain additional financing on acceptable terms or at all and
we may have to significantly curtail our operations, including the technology
projects being developed by our subsidiaries. To obtain funds through
arrangements with strategic partners or others, we may need to relinquish rights
to certain of our technologies or potential markets.
We might lose money from our investments.
We plan to invest the majority of our cash on hand in a variety of financial
instruments, including different types of corporate and government bonds, and
other financial structures. Some of these bonds and structures may be rated
below investment grade or not rated. If the obligor of any of the bonds or
structures we hold defaults or undergoes a reorganization in bankruptcy, we may
lose all or a portion of our investment in such obligor. This will harm our
financial condition. For information on the types of our investments as of
December 31, 2002, see Item 11 - "Quantitative and Qualitative Disclosures About
Market Risk-Interest Rate Risk Management."
Risks relating to our operations in Israel.
Potential political, economic or military instability in Israel may adversely
affect our results of operations.
Our principal offices and many of our subcontractors and suppliers are
located in Israel. Accordingly, political, economic and military conditions in
Israel affect our operations. Since the establishment of the State of Israel in
1948, a number of armed conflicts have taken place between Israel and its Arab
neighbors. A state of hostility, varying in degree and intensity, has led to
security and economic problems for Israel. Since October 2000, there has been a
marked increase in hostilities between Israel and the Palestinians, which has
led to a crisis in the entire peace process and adversely affected Israel's
relationship with several Arab countries. Any armed conflicts or political
instability in the region could negatively affect local business conditions and
harm our results of operations. We cannot predict the effect on Orckit of the
increase in the degree of violence by Palestinians against Israel or the effect
of military action elsewhere in the Middle East, including Iraq. Furthermore,
several countries restrict doing business with Israel and Israeli companies, and
additional companies may restrict doing business with Israel and Israeli
companies as a result of the increase in hostilities. This may also seriously
harm our operating results, financial condition and the expansion of our
business.
Our results of operations may be negatively affected by the obligation of our
personnel to perform military service.
Most of our executive officers and employees in Israel are obligated to
perform annual military reserve duty. There are proposals to increase this
annual commitment. In addition, in the event of a military conflict or other
attack on Israel, including the ongoing conflict with the Palestinians, these
persons could be required to serve in the military for extended periods of time.
The absence of a number of officers and employees for significant periods could
disrupt our operations and harm our business.
Because most of our revenues are generated in non-Israeli currencies and a
substantial portion of our expenses are incurred in NIS, our results of
operations may be adversely affected by inflation and currency fluctuations.
We generate most of our revenues in U.S. dollars but incur the majority of
our payroll expenses and a portion of our other expenses in New Israeli Shekels.
As a result, we are exposed to risk that the rate of inflation in Israel may
exceed the rate of devaluation of the New Israel Shekel in relation to the
dollar or that the timing of such devaluation may lag behind inflation in
Israel. In that event, the dollar cost of our operations in Israel would
increase and our dollar-measured results of operations would be adversely
affected.
We benefit from government programs and tax benefits that may in the future be
reduced or otherwise unavailable to us; our participation in government grant
programs limits our ability to freely transfer manufacturing rights and
technology out of Israel.
Since our inception, we have relied on Israeli government grants for the
financing of a significant portion of our product development expenditures. We
have received and continue to receive grants and participate in programs
sponsored by the Government of Israel. We have applied to Israel's Office of the
Chief Scientist for grants for our contemplated 2003 research and development
projects.
In addition, we benefit from certain government programs and tax benefits,
particularly as a result of the "Approved Enterprise" status of most of our
existing facilities. If we fail to meet eligibility conditions in the future,
the tax benefits could be canceled and we may be required to refund the tax
benefits already received. These programs and tax benefits may not be continued
in the future at their current levels or at any level, or our requests for
continued participation in these programs may be denied. Israeli authorities
have indicated that the government may reduce or eliminate these benefits in the
future. The termination or reduction of these programs and tax benefits could
have a material adverse effect on our business, financial condition and results
of operations.
The terms of the grants we received from the Office of Chief Scientist
require that we manufacture products developed with government grants in Israel,
unless prior approval is received from the Office of the Chief Scientist for the
transfer of manufacturing rights out of Israel. If we fail to comply with these
conditions in the future, we could be subject to penalties and may be required,
among other things, to refund any payments previously received together with
interest, with adjustment to the Israeli consumer price index (CPI) and may be
denied receipt of grants thereafter. If any of our manufacturing rights were
approved by Israel's Office of the Chief Scientist for transfer out of Israel,
we would ordinarily be obligated to pay royalties at a higher rate and the total
amount to be repaid would be increased. Under certain circumstances, this could
require that we repay three times the amount of our original grant. An amendment
to this government program allows the Office of Chief Scientist to provide
grants for 20%, 30%, 40% or 50% of certain approved expenditures of a research
and development plan. The program prior to the amendment only allowed for grants
covering 50% of such expenditures. This amendment and the available budget of
the Office of the Chief Scientist is likely to reduce the grant amounts
available to us in the future.
See "Item 5 - Operating and Financial Review and Prospects - Liquidity and
Capital Resources - Government and Other Grants" for additional information and
discussion regarding the amendment to the R&D Law (as hereinafter defined) which
came into effect as of April 1, 2003 and may affect our eligibility for grants.
It may be difficult to enforce a U.S. judgment against us, our officers and
directors and our Israeli auditors or to assert U.S. securities law claims in
Israel.
Service of process upon our directors and officers and our Israeli auditors
may be difficult to effect in the United States because almost all these parties
reside outside the United States. Any judgment obtained in the United States
against such parties may be unenforceable outside the United States.
It is not clear whether civil liabilities under the Securities Act and the
Securities Exchange Act can be enforced in Israel. However, subject to time
limitations, Israeli courts may enforce a U.S. judgment in a civil matter, if:
o adequate service of process has been effected and the defendant has had a
reasonable opportunity to be heard;
o the judgment and its enforcement are not contrary to the law, public
policy, security or sovereignty of the State of Israel;
o the judgment was rendered by a court of competent jurisdiction, in
compliance with due process and the rules of private international law
prevailing in Israel;
o the judgment was not obtained by fraudulent means and does not conflict
with any other valid judgment in the same matter between the same parties;
o no action between the same parties in the same matter is pending in any
Israeli court at the time the lawsuit is instituted in a U.S. court; and
o the U.S. courts are not prohibited from enforcing judgments of the
Israeli courts.
Foreign money judgments enforced in Israel, are generally awarded in New
Israeli Shekels, based on the U.S. Dollar/NIS exchange rate in effect on the
date of payment. The NIS can be converted into non-Israeli currency and
transferred out of Israel. Pending collection, the amount of the NIS-denominated
judgment is linked to the Israeli CPI and accrues interest at the annual
statutory rate set by Israeli law. Judgment creditors bear the risk of
unfavorable exchange rates.
Provisions of Israeli law may delay, prevent or make more difficult an
acquisition of Orckit, which could depress our share price.
The Israeli Companies Law generally requires that a merger be approved by
the board of directors and a majority of the shares voting on the proposed
merger. Unless a court rules otherwise, the statutory merger will not be deemed
approved if a majority of the shares present that are held by parties other than
the other party to the merger (or by any person who holds 25% or more of the
shares or the right to appoint 25% or more of the directors of the other party)
vote against the merger. Upon the request of any creditor of a party to the
proposed merger, a court may delay or prevent the merger if it concludes that
there is a reasonable concern that, as a result of the merger, the surviving
company will be unable to satisfy its obligations. In addition, a merger may not
be completed unless at least 70 days have passed since the filing of the
requisite merger proposal with the Israeli Registrar of Companies.
Also, in certain circumstances an acquisition of shares in a public company
must be made by means of a tender offer if as a result of the acquisition the
purchaser would become a 25% or greater or 45% or greater shareholder of the
company (unless there is already a 25% or greater or a majority shareholder of
the company, respectively). If, as a result of an acquisition, the acquirer
would hold more than 90% of a company's shares, the acquisition must be made by
means of a tender offer for all of the shares.
Additionally, Israeli tax law treats some acquisitions, such as
stock-for-stock exchanges between an Israeli company and a foreign company, less
favorably than U.S. tax laws. For example, Israeli tax law may, under certain
circumstances, subject a shareholder who exchanges his ordinary shares for
shares in another corporation to taxation prior to the sale of the shares
received in such stock-for-stock swap.
The described restrictions could prevent or make more difficult an
acquisition of Orckit, which could depress our share price.
Risks Relating to our Notes
As a result of the spin-off of Tioga, exchange of our notes for shares will be a
taxable event to U.S. Holders.
In March 2000, we sold $125 million aggregate principal amount of our 5.75%
convertible subordinated notes due on April 1, 2005. In 2000, 2001 and 2002 we
repurchased an aggregate of $86.8 million principal amount of these notes. As of
December 31, 2002, the total principal amount of Notes outstanding was $38.2
million and, as of March 31, 2003, the total principal amount of these notes
outstanding was $18.7 million. Each $1,000 principal amount of the notes is
exchangeable into 2.34962 ordinary shares of Orckit (approximately an aggregate
of 89,800 ordinary shares of Orckit as of December 31, 2002 and 43,900 ordinary
shares of Orckit as of March 31, 2003) plus 11.7481 ordinary shares of Tioga.
The exchange ratio is subject to adjustment in specified circumstances. The
exchange of notes for Orckit ordinary shares and Tioga ordinary shares will be a
taxable event under U.S. federal income tax law and may be a taxable event under
Israeli tax law. A U.S. note holder will have to recognize any gain realized
upon an exchange of a note for Orckit ordinary shares and Tioga shares up to an
amount not in excess of the fair market value of the Tioga shares received in
such exchange.
As a result of the sale of the notes, we have a significant amount of debt and
may have insufficient cash flow to satisfy our debt service obligations. In
addition, the amount of our debt could impede our operations and flexibility.
If we are unable to generate sufficient cash flows or otherwise obtain
funds necessary to make required payments on the notes, we will be in default
under the indenture which could, in turn, cause defaults under our other
existing or future indebtedness.
Even if we are able to meet our payment obligations on the notes, the
amount of debt we have incurred could adversely affect us in a number of ways,
including by:
o limiting our ability to obtain additional financing;
o limiting our flexibility in planning for, or reacting to, changes in our
business;
o placing us at a competitive disadvantage as compared to our competitors
who have less debt;
o making us more vulnerable to the downturn in our business and the economy
generally; and
o requiring us to apply a substantial portion of our cash flows towards
payments on our debt, instead of using those funds for other purposes, such
as working capital or capital expenditures.
We may be unable to repurchase the notes upon the occurrence of a change in
control.
Upon the occurrence of a change in control of Orckit, we will be required
to offer to repurchase all outstanding notes. Although the indenture relating to
the notes allows us to repurchase the notes using ordinary shares, we may not be
able to repurchase the notes with cash if we do not have sufficient funds or if
we do not comply with the terms of any debt which ranks senior to the notes. Our
repurchase of the notes with ordinary shares would substantially dilute the
equity interests of our existing shareholders. Our failure to repurchase notes
upon a change in control would constitute an event of default under the
indenture, which could cause the acceleration of the maturity of the notes and
of all our other outstanding debt. These repurchase requirements may also delay
or make it harder for others to obtain control of Orckit.
Risks relating to the Market for our Ordinary Shares
Holders of our ordinary shares who are United States residents face income tax
risks.
There is a high likelihood that we would be deemed to have been a passive
foreign investment company, or PFIC, for 2001 and 2002. Our treatment as a PFIC
could result in a reduction in the after-tax return to the United States holders
of our ordinary shares and could cause a reduction in the value of our shares.
For U.S. federal income tax purposes, we are treated as a PFIC for any taxable
year in which either:
o 75% or more of our gross income is passive income, or
o at least 50% of the average value of all of our assets for the taxable
year produce, or are held for the production of, passive income.
For this purpose, passive income includes dividends, interest, royalties,
rents, annuities and the excess of gains over losses from the disposition of
assets which produce passive income. As a result of our substantial cash
position and the decline in value of our ordinary shares, there is a high
likelihood that we would be deemed to have been a PFIC in both 2001 and 2002
under the asset test. We could also be deemed a PFIC in 2003. A separate
determination must be made each year as to whether we are a PFIC. As a result,
our PFIC status may change.
Highly complex rules apply to U.S. holders of our ordinary shares if we are
treated as a PFIC for U.S. federal income tax purposes for any year during the
U.S. holder's holding period. Accordingly, U.S. holders are urged to consult
their tax advisors regarding the application of these tax rules.
United States residents should carefully read Item 10.E "Taxation - United
States" for a more complete discussion of the U.S. federal income tax risks
related to owning and disposing of our ordinary shares and the consequences of
PFIC status.
We do not intend to pay cash dividends.
On June 30, 2000, we distributed a stock dividend on a share-for-share
basis of all our shares of Tioga. We have never declared or paid any cash
dividends on our ordinary shares. We currently intend to retain future earnings,
if any, for funding growth and, if considered desirable by our Board of
Directors, for purchase of our convertible subordinated notes or ordinary
shares. Accordingly, we do not expect to pay any cash dividends in the
foreseeable future.
Two shareholders may be able to control Orckit.
As of March 31, 2003, Eric Paneth and Izhak Tamir our largest shareholders,
each beneficially owns an aggregate of 746,771 ordinary shares representing
15.3% of our outstanding ordinary shares, including (i) 13,750 ordinary shares
issuable upon the exercise of options that are currently vested or vest within
the next 60 days and (ii) the right to purchase 140,000 shares from us, at any
time or from time to time in one or more purchases until February 27, 2005. The
purchase price for the ordinary shares under such right to purchase will be
equal to the average closing price of our ordinary shares on Nasdaq over the ten
trading days immediately preceding the purchase date, plus a premium of 10%.
Both are executive officers and members of our Board of Directors. Currently,
Messrs. Paneth and Tamir are not party to a shareholders agreement. However, if
Messrs. Paneth and Tamir act together, they may have the power to control the
outcome of matters submitted for the vote of shareholders, including the
approval of significant change in control transactions. The equity interest in
Orckit of Mr. Paneth and Mr. Tamir may make certain transactions more difficult
and result in delaying or preventing a change in control of Orckit unless
approved by one or both of them.
Our shareholder bonus rights plan and the conversion features of the Corrigent
Option Plan may delay, prevent or make more difficult a hostile acquisition of
Orckit, which could depress our share price.
In November 2001, we adopted a shareholder bonus rights plan pursuant to
which share purchase bonus rights were distributed to our shareholders. These
rights generally will be exercisable and transferable apart from our ordinary
shares only if a person or group acquires beneficial ownership of 15% or more of
our ordinary shares, or commences a tender or exchange offer upon consummation
of which that person or group would hold such a beneficial interest. Once these
rights become exercisable and transferable, the holders of rights, other than
the person or group triggering their transferability, will be generally entitled
to purchase our ordinary shares at a discount from the market price. The rights
will expire on December 31, 2011. While these rights remain outstanding, they
may make an acquisition of us more difficult and result in delaying or
preventing a change in control of Orckit. Subject to the approval of the Board
of Directors of each of Orckit and Corrigent, and based on the relative fair
market value of each of relevant companies, options granted by Corrigent may be
exercised to acquire shares of Orckit. This conversion could also delay or
prevent a change of control of Orckit.
Our stock price has decreased significantly and could continue to fluctuate
significantly.
The market price for our ordinary shares, as well as the prices of shares
of other technology companies, has been volatile. Our share price has decreased
significantly in the last three years. The following factors may cause
significant fluctuations in the market price of our ordinary shares:
o fluctuations in our quarterly revenues and earnings or those of our
competitors;
o shortfalls in our operating results compared to levels forecast by
securities analysts;
o announcements concerning us, our competitors or telephone companies;
o announcements of technological innovations;
o the introduction of new products;
o changes in product price policies involving us or our competitors;
o market conditions in the industry;
o the conditions of the securities markets, particularly in the technology
and Israeli sectors; and
o political, economic and other developments in the State of Israel and
world-wide.
In addition, stock prices of many technology companies fluctuate
significantly for reasons that may be unrelated or disproportionate to operating
results. The factors discussed above may depress or cause volatility of our
share price, regardless of our actual operating results.
Our ordinary shares are listed for trading in more than one market and this may
result in price variations.
Our ordinary shares are listed for trading on the Nasdaq Stock Market, or
Nasdaq, and on The Tel Aviv Stock Exchange, or TASE. Trading in our ordinary
shares on these markets is made in different currencies (U.S. dollars on Nasdaq
and New Israeli Shekels on TASE), and at different times (resulting from
different time zones, different trading days and different public holidays in
the United States and Israel). Actual trading volume on the TASE is
insignificant and as such is subject to volatility. The trading prices of our
ordinary shares on these two markets often differ, resulting from the factors
described above, as well as differences in exchange rates. Any decrease in the
trading price of our ordinary shares on one of these markets could cause a
decrease in the trading price of our ordinary shares on the other market.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Our History
Orckit Communications Ltd. was incorporated in 1990 under the laws of the
State of Israel. Our principal executive offices are located at 126 Yigal Allon
Street, Tel Aviv 67443 Israel and our telephone number is (972-3) 696-2121.Our
agent in the United States, Ann C. Harris, is located at 1901 Camino Vida Roble,
Suite 121, Carlsbad, California 92008
Major Developments Since January 1, 2002
In 2002 we continued to sell the FastInternet digital subscriber line
multiplexing, or DSLAM, product, our legacy product line in the residential
asymmetric digital subscriber line, or ADSL, area. However, we have not invested
in the development or markets of the Fast Internet product and limited our
efforts related with this product to support and maintenance services.
Accordingly, we do not expect significant revenues from this product line going
forward.
We continued to fund technology projects that are addressing the need for
solutions capable of supporting very high bandwidth services. The significant
majority of our expenses through 2002 have been invested in Corrigent Systems.
Corrigent is in the process of developing and commercializing telecommunication
equipment supporting high bandwidth services over fiber networks in
telecommunications networks located in metropolitan areas. We intend to continue
to fund its operations from our existing working capital until either Orckit or
Corrigent is able to raise additional capital from venture capital, strategic
partners or other sources on acceptable terms. We have also provided capital to
other technology projects, including Spediant Systems, which is seeking to
address the needs of service providers for fiber-speed broadband services over
traditional copper wire.
We provided funding for our technology projects in an aggregate amount of
$18 million and $25 million in 2001 and 2002, respectively. The significant
majority of this funding was invested in Corrigent.
Corrigent Systems
Corrigent is developing products and technology that address the need for
telecommunication transport solutions capable of supporting high bandwidth data
and voice services in metro networks. Corrigent's target customers are
telecommunications service providers active in metropolitan areas, with a focus
on incumbent local exchange carriers. Corrigent's solution is being designed to
enable the provision and management of data and voice transport services in an
efficient manner that is expected to reduce the costs of transport service
providers. Supporting fiber-optic infrastructures, Corrigent's system is planned
to include a range of data and voice interfaces. The Corrigent solution is being
designed to comply with telecommunications standards and to support emerging
telecommunications protocols. It is designed for efficient transport of Internet
protocol information, while providing the reliability necessary for the
transport of voice services. As of December 31, 2002, Corrigent had 107
employees in the areas of product planning, business development, marketing and
sales, research and development, system engineering and administration.
Corrigent has offices in Israel and the United States.
Corrigent has granted, and reserved for grant, options under the Corrigent
Stock Option Plan and other employee plans, as applicable, to its employees,
consultants, officers and directors. In addition, in order to attract and retain
highly qualified personnel of Orckit, employees, officers and directors of
Orckit were reserved and granted shares and options to purchase shares of
Corrigent. As of December 31, 2002, Corrigent had granted, or reserved for
future grant, options and shares to the directors, employees, consultants and
contractors of Corrigent and Orckit, at a nominal price, representing
approximately 30% of its share capital on a fully diluted basis. These options
generally vest up to four years from the date of grant and, at the discretion of
Orckit and Corrigent, are convertible into Orckit's ordinary shares. Orckit's
equity interest in Corrigent, which represented approximately 70% of Corrigent's
shares on a fully diluted basis as of December 31, 2002, may be further diluted
by future offerings, depending on the amounts raised and the timing and terms of
any financing.
Spediant Systems
Spediant is developing products and technologies that address the needs of
service providers for fiber-speed broadband services over copper wires.
Spediant's products are expected to primarily address the growing demand for
Ethernet-based services. Spediant products are being designed to allow providers
to increase their broadband services offerings and customer bases, deliver
greater bandwidth to small and medium enterprises, or SMEs, and obviate the need
for capital expenditures associated with deployment of new fiber. As of December
31, 2002, Spediant had 36 employees in the areas of product planning, research
and development and marketing. Spediant has offices in Israel and the United
States.
Spediant has granted, and reserved for grant, options under the Spediant
Stock Option Plan and other employee plans, as applicable, to its employees,
consultants, officers and directors. In addition, in order to attract and retain
highly qualified personnel of Orckit, employees, officers and directors of
Orckit were reserved and granted options to purchase shares of Spediant. As of
December 31, 2002, Spediant had granted, or reserved for future grant, options
and shares to the directors, employees, consultants and contractors of Spediant
and Orckit, at a nominal price, representing approximately 30% of its share
capital on a fully diluted basis. The options generally vest up to four years
from the date of grant. Orckit's equity interest in Spediant, which represented
approximately 70% of Spediant's shares on a fully diluted basis as of December
31, 2002, may be further diluted by future offerings, depending on the amounts
raised and the timing and terms of any financing.
Principal Capital Expenditures
Our principal capital expenditures to date have been the purchase of
equipment and other software tools used in our business. These purchases totaled
$9.3 million in 2000, $2.4 million in 2001 and $1.8 million in 2002. We used
internal resources to finance these capital expenditures.
B. BUSINESS OVERVIEW
General
The market in which we operate targets the incumbent local telephone
companies, such as the US Bell telephone companies, European telecom carriers
and carriers in Asia. We target through Corrigent Systems, the emerging market
for metro transport products addressing the need of high data transmissions.
Industry Background
In recent years telephone companies, commonly called telcos, invested
significant efforts and resources to increase the transmission speed and improve
the reliability of their telephone networks. Growth in the use of personal
computers and modems has created substantial data traffic from a wide variety of
associated services such as e-mail and on-line applications. In particular, use
of the Internet has increased dramatically and expanded beyond traditional data
transmission and file sharing functions to include access to new data sources,
the world wide web and commercial and telecommuting services. Business demand
for telecommunications services is also expected to continue to grow due to the
greater demand for video conferencing and telecommuting applications, as well as
increased deployment of the networks that connect computers and peripheral
equipment in localized and geographically disbursed locations.
Since mid-2000, telephone companies have been subject to a deterioration in
the economies around the world. As a result, a sharp decrease in capital
expenditures has occurred and the market for telecom equipment has been
significantly reduced. It is expected that the market for telecom equipment will
continue to decrease in 2003.
Deregulation of the telecommunications industry has increased the number of
competitors providing communications services. This deregulation has accentuated
the telephone companies' need to upgrade their networks and increase their
service offerings to remain competitive. Internet access providers other than
telephone companies that deploy fiber optic cable and wireless systems are
competing for lucrative business and residential customers. In particular, cable
operator companies are successfully competing for the telephone companies'
customers and the development of cable modems provides these companies with the
ability to offer high-speed Internet access and cable telephony services. These
alternate service providers are creating competitive pressure on telephone
companies by developing new products and services for the telephone companies'
traditional customers as these providers' costs decline and deregulation permits
new market entrants. Due to the deterioration in the market for telecom
equipment and the slowdown in economies, especially in the United States,
alternative carriers have suffered greatly from an inability to raise additional
financing. As a result, the vast majority of alternative wireline carriers have
significantly reduced their capital expenditure plans.
Historically, telephone service has consisted of analog transmission over
copper wire. Digital transmission is typically carried over media such as fiber
optic or coaxial cable. Digital transmission permits greater data capacity and
increased reliability and quality at a lower cost than analog transmission. To
handle the growing demand for digital traffic, telephone companies have deployed
broadband optical fiber in the network infrastructure which interconnects their
geographically dispersed central offices to one another and to high density
telecommunications traffic areas. However, telephone companies have recognized
that it is extremely expensive, time consuming and labor intensive to install
fiber optic or coaxial cable in the local loop, the first mile of copper
telephone wire between the central office and the consumer. Consequently, the
local loop remains primarily twisted copper telephone wire. This twisted copper
telephone wire restricts the ability of telephone companies to increase the
speed and diversity of their service offerings to small business and residential
users.
DSL Product Offerings
DSL Markets
Telephone companies worldwide have recognized that digital subscriber line
technology is one of the technologies that may answer these needs and are
increasingly using DSL technologies to provide digital transmission over the
local loop. DSL technologies enable telephone companies to maintain their
competitive position by offering high-speed Internet access and enhanced
services to customers over the local loop. DSL systems that offer services
directly to the telephone companies' customers' premises generally use a passive
plain old telephone service, commonly known as POTS, splitter on each DSL line,
which can be installed both at the central office and at the customer's
premises. The POTS splitter separates the analog telephone channel from the
digital data channel that is transmitted over the same twisted copper telephone
wire. By isolating the telephone signal from the digital signal, the home
telephone line is not affected by the digital transmission. Telephone service is
unaffected if the DSL system should fail for any reason. The common DSL
technology used for residential applications is based on asymmetric digital
subscriber line, or ADSL, technology.
ADSL Technology
ADSL technology enables transmission rates, at a distance of 10,000 feet
from the central office, of up to 8 megabits per second, commonly known as Mbps
for the downstream, and up to 765 kilobits per second, commonly known as Kbps,
for the upstream, depending on copper quality and physical environment. The term
asymmetric refers to the different data rate in each direction of the
transmission, that is downstream and upstream. Users of digital transmission
often require more capacity, or bandwidth, downstream to them than upstream from
them. For example, downloading a World Wide Web page, a downstream transmission,
requires far more bandwidth than gaining access to a Web site, an upstream
transmission. Asymmetric transmission permits delivery of data at a higher rate
than does symmetric transmission. ADSL technology transmits data at these rates
while simultaneously providing analog telephone service over a standard copper
telephone wire. ADSL-based products enable telephone companies to efficiently
provide high-speed Internet access, telecommuting, video broadcasting and
conferencing, pay-per-view, interactive multimedia, medical imaging and
teleshopping over copper telephone wires.
FastInternet DSLAM Product
We produced our FastInternet brand system based on our ADSL technology
expertise. Our FastInternet products operate on a point-to-multipoint basis
concentrating the traffic of multiple users onto a single high speed interface
to the network infrastructure owned by the local telephone company. FastInternet
addresses the needs of telephone companies by providing fast access to the
Internet and other interactive services over existing copper telephone wires.
FastInternet is a digital subscriber line access multiplexer, commonly
known as DSLAM, system that provides fast access to the Internet and corporate
intranet applications. The FastInternet system concentrates the traffic of
multiple users onto a single high-speed interface to the telephone companies'
network infrastructure using ADSL technology. This concentration at the
telephone companies' central office allows the sharing of equipment and network
resources, reducing the cost per line. The FastInternet system provides a
cost-effective Internet connection to many telephone company customers. The
system's DSLAM design consists of an integrated DSL modem, bridge and POTS,
splitter, all managed by our network management system, as well as various
interfaces at the customer's premises.
Our FastInternet system offers telephone companies a choice of various
network interfaces to concentrate the traffic of multiple DSL users for video,
audio and data, in addition to Internet access and local area network
extensions.
Our FastInternet systems include ADSL modems. Our ADSL modems are primarily
used for Internet access, telecommuting and corporate applications such as
remote local area network access.
Since 2001, sales from our FastInternet products have significantly
decreased. As a result, we have discontinued our FastInternet central office
equipment product. Sales in 2003 of this product line are expected to be
insignificant.
Spediant Systems
Spediant Systems, a subsidiary of ours, was founded as a technology project
to address solutions that support fiber-speed broadband services over
traditional copper wires in telecommunication networks located in access areas.
Spediant Systems is developing access solutions that are being designed to
enable telecom carriers to deploy fiber-speed broadband services over
traditional copper wires. Spediant's products are being designed to address the
growing demand for Ethernet-based services at faster data rates and over longer
distances than provided by current DSL solutions. These products are expected to
allow providers to increase their broadband service offerings and customer
bases, deliver greater bandwidth to small and medium enterprises, or SMEs, and
eliminate the need for capital expenditures to deploy new fiber. Spediant's
solution is being designed to provide an answer to growing bandwidth
requirements of SMEs for Ethernet services on one end and the desire of carriers
to utilize the existing copper infrastructure with attractive services on the
other end.
Spediant's solution is based on Multi Loop DSL, or MLDSL, technology.
Rather than treat each copper pair individually, MLDSL treats multiple copper
pairs as a logical bundle, making intelligent decisions regarding bandwidth
allocation and reactions during changing link conditions. This helps to
eliminate mutual interference in the copper binder. Spediant's solution builds
on standardized technology by binding multiple copper pairs and inversely
multiplexing data across them for greater reach and bandwidth. Inverse
multiplexing is implemented in such a way that mission-critical data traffic is
transparently transported with low latency.
Spediant's first product, which was recently made available for lab trials,
is its EML 8000 multi-Loop DSL solution. Spediant's EML 8000 is designed to
deliver 10 Mbps at a distance of 12,000 feet from the central office. The cost
of installing fiber to serve SMEs is significant for service providers. By
binding several copper wiring pairs in the existing infrastructure, the EML 8000
is intended to satisfy the bandwidth needs of SMEs while increasing revenue
opportunities for service providers. The EML 8000 was made available for trials
in 2003 and is not expected to generate commercial revenues in 2003.
Metro Transport Markets, Technology and Products
Corrigent Metro Transport Products
Corrigent Systems, a subsidiary of ours, was founded as a technology
project to address solutions capable of supporting high bandwidth services in
telecommunication networks located in metropolitan areas, commonly referred to
as metro networks.
The Emerging Metro Transport Market
The fiber optic networks of many telephone companies in metropolitan areas
are experiencing a shift from carrying primarily voice traffic to carrying a
growing mix of data and voice traffic. Data traffic volumes on these
metropolitan area networks are surpassing voice traffic volumes. Data traffic is
forecasted for further growth over the coming years. This increase in data
relative to voice traffic is a result of the rapid growth of the Internet and
local area networks.
Telephone companies have typically managed their data transfer capacity
needs through their existing transport technologies. These technologies were
originally designed for transporting voice services. These traditional
solutions, however, are not optimized to support expected future levels of data
traffic. Traditional networks are also inefficient when transporting data as
they fail to utilize inherent differences in the type of network support that is
required for the transmission of data, as opposed to voice, traffic. Data
traffic is generally less susceptible to corruption resulting from minor time
delays and less time-sensitive than voice traffic. In addition, data traffic
often exhibits a bursty nature, with dynamically varying levels of utilization
of communication channels, as opposed to voice traffic which normally requires
constant levels of channel utilization.
A new set of solutions is being developed by companies such as Corrigent to
address the needs of carriers and service providers to be able to support higher
levels of data traffic within and between metropolitan areas, commonly referred
to as metro transport. These solutions are attempting to take advantage of the
characteristics of data traffic without impairing the ability to support
traditional voice traffic. We expect that the metro transport solution for the
transmission of traditional voice and increased data traffic will combine the
efficient transport of data services based on Ethernet protocol with high
reliability voice services based on SONET/SDH protocol.
Major metro transport technologies include the following voice and/or data
protocols:
SONET / SDH. SONET is the American National Standards Institute, or ANSI,
standard for synchronous voice transmission on optical media. The international
equivalent of SONET is synchronous digital hierarchy, or SDH. Together, these
two voice protocols ensure standards to enable digital networks to interconnect
internationally and existing conventional transmission systems to utilize fiber
with the help of interfaces that connect network end-users, called tributary
attachments.
Ethernet. Ethernet is the most widely-installed local area network, or LAN,
technology. It is often used in college dormitories and office buildings. The
most commonly installed Ethernet systems are called 10BASE-T and provide
transmission speeds up to 10 Mbps.
RPR. Resilient packet ring, or RPR, is an emerging technology that is being
designed to integrate Ethernet data protocols for the efficient transmission of
data with traditional SONET voice protocols. An industry working group has
agreed on a draft standard for RPR. Corrigent has been instrumental in
establishing this draft standard, serving actively as a member of the industry
work group charged with defining the RPR protocol. However, uniform industry
standards for RPR have not yet been adopted and the estimated date for approval
of an industry standard has been delayed to late 2003. RPR is being developed as
an alternative to SONET transport for networks that support high levels of data
traffic, while allowing carriers to maintain traditional SONET attributes such
as resiliency, or the ability to employ a back-up or alternate route in the
event of a system or optical fiber failure, as well as the fast restoration of
service in the event of any other failure. RPR is expected to allow carriers to
conduct performance monitoring of transmission rates, traffic volume, and
failures and alarms, comparable to the monitoring available with traditional
SONET-based networks.
Multiprotocol Label Switching. Multiprotocol label switching, or MPLS, is a
standards-approved technology for speeding up network traffic flow and making it
easier to manage. MPLS involves setting up a specific path for a given sequence
of packets, identified by a label put in each packet, thus saving the time
needed for a router to look up the address to the next node to forward the
packet to. MPLS is called multiprotocol because it works with the Internet
Protocol, or IP, Asynchronous Transport Mode, or ATM, and frame relay network
protocols. In addition to moving traffic faster overall, MPLS makes it easy to
manage a network for quality of service, or QoS. For these reasons, MPLS is
expected to be adopted as networks begin to carry more and different mixtures of
traffic.
RPR's expected advantages over existing data and voice transport protocols
We believe that RPR will be a more efficient voice and data transport
protocol than traditional SONET rings that have been retrofitted to handle data
traffic for the following reasons:
o SONET utilizes only one ring of optical fibers. A second ring is
available in case of a failure in the first ring, but is otherwise not
used. This creates unutilized capacity in SONET, as half of the network
capacity is idle during normal operations. RPR enables the use of this
redundant bandwidth under normal operating conditions, while maintaining
the redundancy capabilities. In addition, RPR supports spatial reuse, which
allows the re-use of the same ring bandwidth over different spans of the
ring.
o With SONET, data transmitted from one specific network element, or node,
to another may be sent only using bandwidth that has been dedicated for
that transmission. RPR increases bandwidth efficiency by allowing data
transmissions to be broken up into packets and inserted in bandwidth that
might have otherwise been dedicated (but not used) for a separate
transmission. This process is called statistical multiplexing. When less
than all network users are actively transmitting or receiving data at the
same time, it results in a more efficient utilization of the total
available bandwidth on a network.
Corrigent's Metro Transport Product and RPR technology
Corrigent's metropolitan area product is designed as a cost-effective
optical transport solution that can handle not only the growing demand for data
services by telephone company customers and small to medium size businesses, but
also support the full range of traditional voice services, in compliance with
SONET technical specifications. Corrigent's product is being designed to provide
the benefits of both Ethernet and SONET protocols. It is also being designed to
avoid integrating costly protocol-dependant routing and switching
functionalities that are generally required in adopting SONET platforms to cover
data traffic, as well as the costs of adopting Ethernet platforms to handle
voice traffic.
Corrigent's product utilizes SONET, RPR, and MPLS technologies to
effectively support a range of Time Division Multiplexer, or TDM, services,
which are commonly used for voice transmissions, as well as SONET, Ethernet, and
data services. This product is being designed to interoperate with both legacy
SONET and emerging MPLS core devices. The product is expected to support 2.5
Gigabits per second, or Gbps, and 10 Gbps ring speeds, and interface with:
o 10 megabits/100 megabits Ethernet;
o 1 Gigabit Ethernet; and
o a range of TDM SONET interfaces including:
o 155 megabits per second SONET interface (known also as OC3);
o 622 megabits per second SONET interface (known also as OC12), and
o 2.5 gigabit per second SONET interface (known also as OC48).
Corrigent's CM-100 metro transport product was made available for testing
in late 2002. The CM-100 is being designed to deliver both Ethernet and
TDM/Sonet -based services over a packet-based network. These services are
carried over MPLS tunnels over an RPR ring in a packetized form that is expected
to enable both bandwidth efficiency and lower cost architecture. The CM-100
allows legacy data services, such as frame relay, asynchronous transfer mode, or
ATM, and packet over SONET, to be carried in their native form allowing a
reduction in the bandwidth used to provide these services. MPLS is used to
provide both end-to-end automatic provisioning capabilities and guarantee
isolation between different users' services, thus providing a preferred method
of traffic engineering. MPLS also aids end-to-end interoperability between the
transport systems of different vendors.
Trials with carriers of the first release of the CM-100 began in late 2002.
The products are being tested by carriers and trials are expected to continue
throughout 2003. The CM-100 is not expected to generate commercial revenues in
2003.
Sales, Marketing and Service
Sales and Marketing. Our marketing efforts to sell our products in
development are expected to be made directly to telephone companies and may also
be made through original equipment manufacturers, strategic alliances and other
distribution arrangements. Existing DSLAM customers receive support from our
support team. We believe that the participation by our subsidiaries in
technology committees involved in the establishment of industry standards is a
strong marketing tool. As of December 31, 2002, overall marketing and sales
efforts were conducted by approximately 17 employees located in Israel and the
United States.
The following is a summary of revenues by geographic area for the last
three years:
Year ended December 31
----------------------------------------------------
2000 2001 2002
----------------- ---------------- -----------------
(In thousands)
Israel $ 10,419 $ 2,268 $ 463
United States 89,504 111,336 44,811
Europe 5,949 23,319 7,601
Other countries 25,995 4,724 545
------ ----- ---
$ 131,867 $ 141,647 $ 53,420
=========== =========== ===========
We had a strategic agreement with Fujitsu Network Communications to market
and sell our legacy DSLAM products in North America. In 2002, our sales to
Verizon, our largest customer, were through Fujitsu Network Communications. This
agreement expired in 2002. We do not expect to make any significant sales of
these products in 2003.
Telco Approval Process. Telephone companies are significantly larger than
us and consequently are able to exert a high degree of influence over us. Prior
to selling our products to telephone companies, we are required to undergo
lengthy approval processes. Evaluation can take up to several months for
enhanced products or products based on newer technologies.
The length of the approval process is affected by a number of factors,
including the complexity of the product involved, technological and budgetary
priorities of the telephone companies and regulatory issues affecting telephone
companies. A telephone company will usually conduct technical trials after
completing a laboratory evaluation that tests a new product's function and
performance against industry standards. After completion of technical trials,
field trials simulate operations to evaluate performance and to assess ease of
installation and operation. In subsequent market trials, a telephone company
will attempt to determine the content requirements, pricing and the estimated
number of subscribers that will purchase the service. During this stage,
telephone companies establish procedures, train employees to install and
maintain the new product and obtain feedback on the product from their customers
and operations personnel. Throughout the approval process, we commit senior
technical and marketing personnel to participate in technology, field and market
trials and to actively support the evaluation efforts.
Commercial deployment of a new product usually involves substantially
greater numbers of systems and locations than the marketing trial stage. In the
first phase of commercial deployment, a telephone company installs the equipment
in selected locations for certain applications. This phase is followed by
general deployment which involves greater numbers of systems and locations.
Telephone companies typically select a few suppliers for general deployment to
ensure that their needs can be met. Subsequent orders, if any, are placed under
single or multi-year supply.
The introduction of successive generations of products is vital to our
business, because it is associated with enhanced functionality and reduced
costs. Our growth substantially depends on commercial acceptance of advanced
products and technology by telephone companies, as well as our ability to
develop new technologies and sell new products.
Telco Services and Support. We generally provide repair services as part of
our warranty services and technical support services for our products. In
special cases, we provide comprehensive on-site field support for our products.
We generally do not provide installation services. In most countries, our local
partner or distributor, provides the first level of service and support. More
extensive repair and technical support is handled at our headquarters in Israel
pursuant to warranty obligations. We also offer telephone support during working
hours and provide product training to our principal end-users on a case-by-case
basis. The majority of our products shipped to date are subject to a three-year
warranty period and we expect that our products in development will offer
similar warranty protection. Our warranty generally covers defects in materials
or workmanship and failure to meet published specifications, but excludes
damages caused by improper use and all other express or implied warranties. In
the event that there are material deficiencies or defects in the design or
manufacture of our products, the affected products could be subject to recall.
Exposure to indirect damages arising from failures covered by warranty could be
significant. We have received claims for compensation from certain of our DSLAM
customers due to warranty related matters. We are unable at this time to
estimate our potential liability in connection with these claims.
Customers and End-users. We have sold our products either directly to
telephone companies or through original equipment manufacturers, distributors or
strategic partners from whom telephone companies then purchase our products.
Therefore, we depend on purchases by telephone companies for substantially all
of our product revenues. In 2002, the principal end-user of our ADSL DSLAM
products was Verizon in the United States. Verizon accounted for 78.5% of our
revenues in 2001 and 82.2% of our revenues in 2002. Telia accounted for 14.8% of
our revenues in 2001 and 13.5% of our revenues in 2002. We expect that revenues
from Verizon, Telia and all other customers of our DSL products will be
insignificant in 2003. Trials with carriers of the first release of Corrigent's
CM-100 began in late 2002. Corrigent's products are being tested by
carriers and commercial revenues from sales of these products are not expected
in 2003.
Manufacturing
Several Israeli and foreign manufacturers manufacture and assemble the
circuit boards of our products on a subcontracting basis. These manufacturing
arrangements have enabled us to produce reliable, high quality products at
competitive prices and to achieve on-time delivery of our products. They also
have enabled us to concentrate our resources on the design, development and
marketing of our products where we believe we have greater competitive
advantages. We also expect to utilize third parties to manufacture the products
currently in development by our subsidiaries.
Telephone company orders are short-term and may involve short delivery time
frames. We expect that the manufacture of products currently in development will
be mainly against purchase orders. We and our manufacturers perform final
quality control and extensive testing prior to shipping. Product quality and
reliability are of prime concern in all phases of the manufacturing process. We
maintain quality control through incoming inspection of components and
subassemblies, auditing of subcontractor testing functions and a final
inspection of products prior to shipping. Our facilities are subject to the
ISO9001 certification process. This certification is required in order to sell
to many of the telephone companies.
In procuring components, we and our subcontractors rely on a number of
suppliers of semiconductor solutions that are the sole source for certain of the
components.
Competition
We compete on the basis of price, technological capability, customer
service, product features, adherence to standards, quality, reliability,
availability and technical support. With respect to products under development,
initial competition will be based primarily on technological capability and the
ability to develop a product that can be manufactured and sold with a cost
structure that will allow for mass deployment to customers of telephone
companies. Many of our competitors and potential competitors have greater
financial, technological, manufacturing, marketing and personnel resources than
we have and have entered into strategic alliances to assist them in
commercialization of their products.
Our competitors in our targeted markets including markets targeted by
Corrigent, as well as by our other technology projects, including Spediant, are
numerous and we expect competition to increase in the future. Our principal
competitors for products currently in development by our major technology
projects are expected to include Alcatel, Cisco Systems, Inc., ECI Telecom Ltd.,
Fujitsu, Lucent Technologies Inc., Nortel Networks and Siemens AG.
Intellectual Property Rights
We regard our technology as proprietary. We have obtained several patents
and have filed a number of patent applications covering certain key areas of our
technologies. In general, we have relied on a combination of technical
leadership, trade secret, copyright and trademark law and nondisclosure
agreements to protect our unpatented proprietary know-how. Our proprietary
technology incorporates algorithms, software, system design and hardware design
that we believe is not easily copied. We believe that, because of the rapid pace
of technological change in the telecommunications industry, patent and copyright
protection are less significant to our competitive position than factors such as
the knowledge, ability and experience of our personnel, new product development,
market recognition and ongoing product maintenance and support.
Legal Proceedings
We are not a party to any material pending legal proceedings, nor is any of
our property the subject of any other material pending legal proceedings.
C. ORGANIZATIONAL STRUCTURE
List of Significant Subsidiaries
Corrigent Systems Inc., a subsidiary, is a Delaware corporation. As of
December 31, 2002, Orckit owned approximately 70% of the shares of Corrigent
Systems on a fully-diluted basis, including shares reserved for grant.
Spediant Systems Ltd., a subsidiary, is an Israeli corporation. As of
December 31, 2002, Orckit owned approximately 70% of the shares of Spediant
Systems on a fully-diluted basis, including shares reserved for grant.
D. PROPERTY, PLANTS AND EQUIPMENT
Our principal offices and production facilities in Tel Aviv occupy
approximately 50,000 square feet of rental space rented through a series of
leases. We reduced our rented space to 50,000 square feet as of December 31,
2002 from 86,000 square feet as of December 31, 2001, primarily because of the
lesser need for space as a result of the reduction in our workforce. Our leases
expire in the years 2003-2006. We have an option to terminate these lease
agreements with six months' prior written notice. Our subsidiaries maintain
offices in San Jose. We believe that these facilities are
adequate for our current needs and that suitable additional or substitute space
will be available when needed.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Statements in this Annual Report concerning our business outlook or future
economic performance; anticipated revenues, expenses or other financial items;
introductions and advancements in development of products, and plans and
objectives related thereto; and statements concerning assumptions made or
expectations as to any future events, conditions, performance or other matters,
are "forward-looking statements" as that term is defined under the United States
Federal Securities Laws. Forward-looking statements are subject to risks,
uncertainties and other factors which could cause actual results to differ
materially from those stated in such statements. Factors that could cause or
contribute to such differences include, but are not limited to, those set forth
under "Risk Factors" in this Annual Report as well as those discussed elsewhere
in this Annual Report and in our other filings with the Securities and Exchange
Commission.
A. OPERATING RESULTS
Our operating and financial review and prospects should be read in
conjunction with our financial statements, accompanying notes thereto and other
financial information appearing elsewhere in this Annual Report.
Overview
Orckit was founded in 1990. We are an Israeli corporation engaged in the
design, development, manufacture and marketing of telecom equipment that enables
transmission of broadband services. To date, the substantial majority of our
revenues were derived from the sale of DSLAM systems and customer premises
modems based on ADSL technology. These DSL-based products allow telephone
companies and private network operators worldwide to provide high-speed digital
transmission of data, voice and video over the existing installed base of
twisted copper wireline. We do not expect to derive significant revenues from
our ADSL-based product line in 2003.
We are engaged in the commercialization of new products and technologies
through our Corrigent Systems subsidiary, as well as other technology projects,
including Spediant Systems. Corrigent Systems is engaged in the design of
telecom equipment targeting metro areas based on emerging resilient packet ring,
or RPR, technology. Corrigent's products are being designed to allow telephone
companies to provide optimized high-speed packet transmission of data and voice
traffic over fiber ring networks in metro areas. Spediant Systems is engaged in
the development of Multi Loop DSL, or MLDSL, platforms that enable telephone
companies to deploy fiber-speed broadband services over copper wires. Spediant's
products are being designed to allow these carriers to increase their broadband
services offerings and customer bases, deliver higher bandwidth services to
small and medium enterprises, or SMEs, and eliminate the need for capital
expenditures associated with deployment of new fiber. We do not expect
commercial sales of the products being developed by Corrigent, Spediant and any
other technology project in 2003.
The end-user base for our products is comprised primarily of large
telephone companies, and has been concentrated among several telcos in each
year. Verizon has been our largest customer since 1999. Our legacy products, as
well as our products currently in development, undergo lengthy approval and
procurement processes prior to their sale due to the quality specifications of
our end-users and the regulated environment in which they operate. Accordingly,
we are making significant expenditures in product and market development prior
to actually commencing sales of new products being developed by Corrigent and
Spediant. In addition, frequently we are required to make significant
expenditures to tailor our products to specific end-user needs during the
initial installation phase. We expect to continue to depend on a limited number
of end-users to generate a significant percentage of total product revenues. Our
product sales to any specific end-user have, and will continue to, fluctuate
significantly from quarter to quarter and year to year.
In the past, bids for large scale deployments and field trials of
ADSL-based products implicitly assumed forward pricing, that is, pricing ADSL
products to reflect the expectation of a large future market and anticipated
reductions in manufacturing costs. From 1998 through the first half of 2000, we
sold our ADSL-based FastInternet product to telcos at prices below our
production costs. This pricing caused us to incur losses on a substantial
portion of our ADSL product sales during those years. We intend to continue to
evaluate new technologies and related product opportunities and engage in
extensive research and development activities related to these new technologies
and to our technology projects. Accordingly, we expect to continue to make
significant expenditures for research and development.
We are currently funding technology projects that are being developed by
Corrigent and other subsidiaries, including Spediant. We provided funding of
approximately $18 million and $25 million in 2001 and 2002 respectively, for
research and development expenses, selling, general and administrative expenses
and capital expenditures for these technology projects. Of this funding, the
significant majority was invested in Corrigent.
Our ability to generate income from operations will primarily depend on our
sales volume and the level of our operating expenses. In 2003, we expect to
experience a significant decline in revenues from DSL products. As a result, we
expect to continue to incur losses from operations. Because of the expected
decline in our revenues from sales of DSL equipment, our results of operations
will depend on our ability to generate significant revenues from Corrigent's
product, other new products and from new customers. We do not expect to generate
commercial revenues from our new product initiatives in 2003.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the United States. These accounting
principles require management to make certain estimates, judgments and
assumptions based upon the information available at the time they are made,
historical experience and various other factors believed to be reasonable under
the circumstances. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods
presented. Management evaluates its estimates and judgments on an on-going
basis. Some of those judgments can be subjective and complex, and consequently
actual results may differ from those estimates.
The Company is also subject to risks and uncertainties that may cause
actual results to differ from estimates and assumptions, such as changes in the
economic environment, competition, foreign exchange, taxation and governmental
programs. Certain of these risks, uncertainties and assumptions are discussed in
Item 3.D - Risk Factors. To facilitate the understanding of our business
activities, described below are certain accounting policies that are relatively
more important to the portrayal of our financial condition and results of
operations and that require management's subjective judgments. We base our
judgments on past experience and various other assumptions that are believed to
be reasonable under the circumstances. Please refer to Note 1 to our
consolidated financial statements included in this Annual Report for a summary
of all of our significant accounting policies.
Revenue Recognition
Revenues from sales of products are recognized when title passes to the
customer (usually title passes upon shipment, but in certain cases title passes
to the customer upon delivery), provided that appropriate signed documentation
of the arrangement, such as a contract, purchase order or letter of agreement,
has been received, the fee is fixed or determinable and collectibility is
reasonably assured.
Prior to the sale of a new product, we deliver products for evaluation by
our customers. Evaluation can take up to several months for complex products or
products based on new technologies. We do not recognize sales revenues from
delivery of a new product to customers for evaluation.
Provision for servicing products under warranty
The majority of our products shipped to date are subject to up to a
three-year warranty period. We have agreed to indemnify our customers in some
circumstances against liability from defects in our products. In some cases our
indemnity also covers indirect damages. The Company provides for such warranty
at the time revenues from the related sales are recognized. The annual provision
is calculated as a percentage of the sales, based on historical experience and
is established based on our best estimate of the amounts necessary to settle
product-related matters existing as of the balance sheet date.
The amount of our estimated warranty liability may change if the costs
incurred due to product failures increase in the future. In the event of any
future problems with our products, we may need to increase the amount of our
reserves.
Other assets and deferred charges
Goodwill and other identifiable intangible assets are stated at cost and
were amortized by the straight-line method over a period of three years. In
2001, we wrote off $23.4 million, which represented the remaining unamortized
goodwill related to our acquisition of E.D.S.L. since E.D.S.L. halted its
operations primarily due to the extreme reduction in capital expenditures of
carriers in the markets it targeted. Effective January 1, 2002, the Company
adopted FAS 142 "Goodwill and Other Intangible Assets". However, the Company had
no goodwill nor other identifiable intangible assets in 2002. Therefore, this
adoption had no effect on the results for the year ended December 31, 2002.
Issuance costs of our convertible subordinated notes are amortized by the
straight-line method over the period from the issuance date in 2000 to the
maturity date in 2005. Upon the retirement of any notes, the unamortized balance
is adjusted accordingly. In 2002, we retired an aggregate of approximately $28
million principal amount of our convertible subordinated notes resulting in the
expensing of approximately $0.5 million of issuance costs in our 2002 financial
statements.
Recently Issued Accounting Pronouncements
In 2002 and 2003 the FASB issued the following accounting rules which apply
to our operations: FAS No. 145, "Revision of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Connections", FAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities", FAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123" (The Company has elected to continue
accounting for employee stock based compensation in accordance with APB 25 and
related interpretations), FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" and FIN No. 46, "Consolidation of Variable
Interest Entities". Please refer to Note 1 to our consolidated financial
statements included in this Annual Report for a summary of such rules and
accounting implications on our financial statements, if any.
Results of Operations
The following table sets forth certain items from Orckit's consolidated
statement of operations as a percentage of total revenues for the periods
indicated:
2000(1) 2001 2002
Revenues 100% 100% 100%
Cost of revenues 101.4 79.1 61.7
---------------- --------------- ---------------
Gross profit (loss) (1.4) 20.9 38.3
Research and development expenses, net 23.4 13.5 36.1
Selling, general and administrative expenses 25.4 12.0 27.5
Acquisition of research and development In-process 22.0 -- --
Amortization and impairment of goodwill 10.9 18.4 --
---------------- --------------- ---------------
Loss from operations (83.1) (23.0) (25.3)
Financial income, net 1.5 23.6 33.0
Other income 0.7 -- --
================ =============== ===============
Net income (loss) (80.9)% 0.6% 7.6%
================ =============== ===============
____________
(1) Includes the results of Tioga for the six-month period ended June 30,
2000.
Revenues. Orckit's revenues consist primarily of ADSL-based product sales.
Revenues from product sales decreased to $53.4 million in 2002 from $131.9
million in 2000 and $141.6 million in 2001. Product revenues in 2001 and 2002
resulted primarily from sales of DSLAM and ADSL-based modem products to Verizon
in the United States. The revenue decline in 2002 was primarily a result of the
selection of competing products by our customers, as well as the slowdown in
telecommunications capital expenditures. ADSL sales were subject to forward
pricing until mid 2000 and, thereafter, we began to generate positive gross
margins on our sales. We do not expect to generate significant revenues from the
sale of ADSL or any other products in 2003.
Gross Profit (Loss). Cost of revenues consists primarily of raw materials,
subcontracting costs and costs for integration, assembly and testing of finished
products. Gross profit was $20.5 million (38.3% of revenues) in 2002 compared to
a gross profit of $29.6 million (20.9% of revenues) in 2001 and a gross loss of
$1.8 million in 2000. The incurrence of a gross profit in 2001 and 2002 was
primarily due to a decrease in the cost of components and assembly for products
sold. In 2000, we had a gross loss of $1.8 million primarily due to forward
pricing of ADSL product sales and an inventory obsolescence charge related to a
previous generation DSLAM components.
Research and Development Expenses, net. Research and development
expenditures consist primarily of materials, depreciation and salaries and
related costs for engineering and technical personnel and subcontracting costs
associated with developing new products and for other technology projects.
Orckit's costs for research and development are expensed as incurred. Gross
research and development expenses were $32.0 million in 2000, $22.4 million in
2001 and $22.3 million in 2002. Grants for research and development are offset
against our gross research and development expenditures. Research and
development expenses in 2000 also included $7.0 million of expenses related to
the operations of Tioga during the six months ended June 30, 2000. The decrease
in research and development expenses in 2001 in comparison to 2000 was primarily
as a result of the reduction in the number of our engineering and technical
personnel. Research grants were $1.1 million in 2000, $3.3 million in 2001 and
$3.0 million in 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of costs relating to promotion, trade
shows, compensation costs for non-technical personnel, warranty provisions and
other general corporate expenses. Selling, general and administrative expenses
were $33.6 million in 2000, $17.0 million in 2001 and $14.7 million in 2002.
Orckit's selling, general and administrative expenses decreased in 2001 and
further decreased in 2002 as a result of the reduction of our marketing and
sales activities. Selling, general and administrative expenses in 2000 include
$6.4 million of expenses related to the operations of Tioga during the six
months ended June 30, 2000. Selling, general and administrative expenses in 2000
also included one-time professional and other expenses of $1.5 million related
to the spin-off of Tioga.
Acquisition of research and development in-process and amortization of
goodwill. In 2000, we recorded a one-time expense in the amount of $24.7 million
relating to the acquisition of Silicon Value and $4.3 million related to the
acquisition of E.D.S.L. These expenses were to write-off the acquisition of
in-process research and development, the technological feasibility of which had
not yet been established and for which there was no alternative use. The excess
of the cost of each acquisition over the fair value of net assets on the
acquisition date that was not attributed to in-process research and development,
equal to $105 million for Silicon Value and $33 million for E.D.S.L.,
represented goodwill and other intangible assets and was to be amortized on the
straight-line basis over a period of three years. Of the goodwill amortized in
2000, $7.5 million related to Silicon Value and $6.9 million related to E.D.S.L.
On June 30, 2000, Silicon Value was transferred to Tioga as part of the spin-off
of our semiconductor business. In 2001, E.D.S.L. halted its operations due to
the extreme reduction in capital expenditures of carriers in the markets it
targeted. As a result, in 2001 we wrote off the $23.4 million that represented
all outstanding unamortized goodwill in connection with our acquisition of
E.D.S.L.
Financial Income, net. Financial income consists primarily of interest on
short term and long term investments and on bank deposits and of gain on early
retirement of our convertible subordinated notes. Financial expense consists
primarily of interest payments in respect of convertible subordinated notes and
amortization of convertible subordinated notes issuance costs. In 2002, we
recognized interest income of $2.9 from a long-term loan we granted to Tioga. Of
this amount, $1.9 million was for interest accrued in previous years.
Due to our adoption of FAS 145, effective January 1, 2002, we reclassified
to financial income gains from the early retirement of our convertible
subordinated notes that were previously recorded as an extraordinary gain.
During 2002, we retired $28.2 million principal amount of our convertible
subordinated notes, resulting in a gain of $13.2 million. During 2001, we
retired $53.6 million principal amount of convertible subordinated notes,
resulting in a gain of $34.1 million. During 2000, we retired $5.0 million
principal amount of convertible subordinated notes, resulting in a gain of
approximately $1.8 million. As of December 31, 2002, the total principal amount
of convertible subordinated notes outstanding was $38.2 million.
Financial income, net was $2.0 million in 2000, $33.4 million in 2001 and
$17.6 million in 2002. These fluctuations primarily reflect the principal amount
of notes retired in the respective years and the prices at which they were
retired.
Net Income (Loss). As a result of the foregoing, Orckit had a net loss of
$106.7 million in 2000 and net income of $856,000 in 2001 and $4.1 million in
2002. The net loss in 2000 includes a net loss of $46.2 million relating to the
operations of Tioga in the six months ended June 30, 2000.
Impact of Inflation, Devaluation and Fluctuation of Currencies on Results of
Operations, Liabilities and Assets
The annual inflation rate in Israel was 0.0% in 2000, 1.4% in 2001 and 6.5%
in 2002, and the U.S. dollar versus the new Israeli shekel devaluation rate in
Israel was (2.7)% in 2000, 9.3% in 2001 and 7.3% in 2002.
A devaluation of the new Israeli shekel in relation to the U.S. dollar
would have the effect of decreasing the dollar value of assets in new Israeli
shekels of Orckit, to the extent the underlying value is new Israeli
shekel-based. Such a devaluation also would have the effect of reducing the U.S.
dollar amount of any liabilities of Orckit, which are payable in new Israeli
shekels (unless such payables are linked to the U.S. dollar).
Most of our sales are denominated in dollars and our expenses in new
Israeli shekels exceed our revenues received in new Israeli shekels. Our
expenses in new Israeli shekels are principally payroll. The results of
operations of Orckit are adversely affected by increases in the rate of
inflation in Israel when such increases are not offset by a corresponding
devaluation of the new Israeli shekel against the U.S. dollar. In 2002, the rate
of inflation in Israel was 6.5% and was lower than the 7.3% rate of devaluation
of the new Israeli shekel against the U.S. dollar. We do not presently engage in
any hedging or other transactions intended to manage risks relating to foreign
currency exchange rate fluctuations. We may, however, enter into foreign
currency derivatives, mainly forward exchange contracts, in order to protect our
cash flows in respect of existing assets.
B. LIQUIDITY AND CAPITAL RESOURCES
Orckit has financed its operations primarily through sales of equity,
issuance of convertible notes and the receipt of grants to fund research and
development. In 2000, we raised net proceeds of $120.5 million through an
issuance of $125 million principal amount of our 5.75% convertible subordinated
notes due April 1, 2005. In 2000, 2001 and 2002 we repurchased an aggregate of
$86.8 million principal amount of our convertible subordinated notes for an
aggregate of $33.6 million. As a result, as of December 31, 2002, the total
principal amount of our convertible subordinated notes outstanding was $38.2
million. During the quarter ended March 31, 2003, we retired an additional $19.5
million principal amount of our convertible subordinated notes and purchased
approximately 689,000 of our ordinary shares. Of these purchased securities,
$12.5 million principal amount of our convertible subordinated notes and 616,590
of our ordinary shares were purchased from Clal Industries for an aggregate
purchase price of $14.7 million.
We received research and development grants in an aggregate amount of
approximately $7.4 million during the three years ended December 31, 2002. In
2002, we generated $10.0 million of cash from operations primarily as a result
of our net income, decreases in inventories and receivables and depreciation and
amortization, offset in part by the non-cash gain from the early retirement of
our convertible subordinated notes and a decrease in payables. In 2001, we
generated $31.0 million of cash from operations primarily as a result of
decreases in inventories and receivables, offset in party by the non-cash gain
from the early retirement of our convertible subordinated notes and a decrease
in payables. As result of certain downsizing steps taken by us, along with the
move toward outsourcing of our manufacturing processes, we significantly
decreased our inventory levels in 2001 and 2002. Our working capital (total
current assets net of total current liabilities) decreased from $103.9 million
as of December 31, 2001 to $55.2 million as of December 31, 2002.
In 2000, we used $67.4 million of cash in operating activities primarily as
a result of our net losses and increased inventory and accounts receivable,
offset in part by the increase in accounts payable and the non-cash charge for
acquisition of research and development in process.
We had cash, cash equivalents, short-term investments and long-term
investments of $112.9 million and $116.7 million as of December 31, 2001 and
2002, respectively. The majority of this amount was held in securities
denominated in U.S. dollars. We believe that we have sufficient working capital
to meet our anticipated capital requirements for 2003 and 2004.
Our principal investing activity relating to our operations has been the
purchase of equipment and other fixed assets used in our business. These
purchases totaled $9.3 million in 2000, $2.4 million in 2001 and $1.8 million in
2002. Our capital expenditures in 2002 were primarily for the procurement of
telecommunications equipment and related software tools. In 2002, our investing
activities also included the purchase of $35.6 million of marketable securities
and the receipt of $13.0 million from Tioga in partial repayment of our loan to
Tioga.
Convertible Subordinated Notes
On March 13, 2000, we raised net proceeds of approximately $120.5 million
in a private placement of $125 million aggregate principal amount of 5.75%
convertible subordinated notes due on April 1, 2005. As a result of repurchases
of our convertible subordinated notes by us, as of March 31, 2003, the total
principal amount of these notes outstanding was $18.7 million. These notes were
issued pursuant to Rule 144A under the Securities Act of 1933. Following
consummation of the spin-off of Tioga, each $1,000 principal amount of the notes
became convertible into 2.34962 of our ordinary shares plus 11.7481 ordinary
shares of Tioga. The conversion rates with respect to Orckit and Tioga are
subject to adjustment in certain circumstances, such as changes in the
applicable company's capital structure or upon the issuance by the applicable
company of stock dividends or certain cash distributions. Commencing in March
2003, these notes may be called by us at any time. We pay interest on the
outstanding principal balance of the notes on a semi-annually basis. The
conversion ratio of our convertible subordinated notes has been adjusted to
reflect our one-for-five reverse share split.
Loan to Tioga
As part of the spin-off of Tioga, we loaned $20 million to Tioga at an
interest rate of approximately 6% per annum. The loan was required to be repaid
by March 1, 2005. In 2001, we agreed to defer interest on this loan in an
aggregate amount of $1.9 million. In 2002, Tioga repaid $13.0 million of the
principal of this loan from the proceeds of a transaction it entered into with
STMicroelectronics. In May 2003, Tioga announced the closing of the sale of its
remaining operating assets to STMicroelectronics. Promptly thereafter, Tioga
repaid the remaining amounts outstanding under this loan.
Government and Other Grants
The Government of Israel encourages research and development projects
through the Office of Chief Scientist of the Israeli Ministry of Industry and
Trade, pursuant to the Law for the Encouragement of Industrial Research and
Development, 1984, commonly referred to as the "R&D Law". Under the R&D Law, a
research and development plan that meets specified criteria is eligible for a
grant of up to 50% of certain approved research and development expenditures.
The plan must be approved by the Office of the Chief Scientist. Since our
inception, we have relied on grants from the Office of the Chief Scientist for
the financing of a portion of our product development expenditures. We have
received or continue to receive grants and we participate in programs sponsored
by the Government of Israel. In 2003, the Office of the Chief Scientist approved
grants to each of Corrigent and Spediant.
Under the terms of the grants we received from the Office of Chief
Scientist, we are obligated to pay royalties of 3% during the first three years
following commencement of royalty payments, and 3% to 5% thereafter. Royalties
are payable up to 100% of the amount of such grants, linked to the U.S. Dollar,
plus annual interest at LIBOR. The payment of royalties is on all revenues
received in connection with the sale of the products developed pursuant to the
funded plans, including revenues from ancillary services. These terms are
applicable to our Office of Chief Scientist grants that have been approved since
January 1, 2000.
The terms of our grants from the Office of Chief Scientist require that the
manufacture of products developed with such grants be performed in Israel,
unless prior approval is received from the Office of Chief Scientist. In the
event that the Office of Chief Scientist would approve the transfer of
manufacturing rights out of Israel, we would ordinarily be required to pay
royalties at a higher rate and an increased aggregate pay back amount in the
range of 120% to 300% of the total grants received. The failure to obtain the
approval of the Office of the Chief Scientist for the transfer of manufacturing
rights out of Israel could have a material adverse effect on strategic alliances
that we may enter into in the future which provide for such a transfer.
The know-how developed pursuant to the funded plan may not be transferred
to third parties without the prior approval of the Office of the Chief
Scientist. This approval is not required for the sale or export from Israel of
any products developed under a funded plan. Approval of the transfer of know-how
may be granted only if the recipient abides by all of the provisions of the
funded plan and the applicable law and regulations, including the restrictions
on the transfer of the funded know-how and the obligation to pay royalties in an
amount that may be increased. There can be no assurance that such consent, if
requested, will be granted. The Office of Chief Scientist typically does not
consent to the transfer out of Israel of the know-how developed under a plan,
except in specific circumstances.
In November 2002, the Israeli government approved an amendment to the R&D
Law. The amendment became effective on April 1, 2003.
The R&D Law prior to the amendment required an undertaking in the
application that all manufacturing would be performed in Israel. The amendment
to the R&D Law allows the approval of grants in cases in which the applicant
declares that part of the manufacturing will not be performed in Israel. This
declaration is required to include details regarding the locations in which the
manufacturing of the product will be performed inside Israel and outside Israel,
the manufacturing activities to be performed in such locations (including the
reasons for performing such manufacturing activities outside Israel) and the
proportionate manufacturing expenditures inside and outside Israel. This
declaration is expected to be a significant factor in the determination of the
Office of Chief Scientist whether to approve a plan and the amount and other
terms of benefits to be granted.
In accordance with the amendment to the R&D Law, a plan will be approved if
the applicant is an Israeli corporation and as a result of the plan the
applicant will develop in Israel using Israeli residents, a new product or a
significant improvement to an existing product, unless the Office of Chief
Scientist is convinced that it is essential for the execution of the plan that a
part of the plan be performed outside Israel or by non-Israeli residents.
The amendment to the R&D Law further allows the Office of Chief Scientist
to provide grants for portions of 20%, 30%, 40% or 50% of certain approved
expenditures of a research and development plan. The R&D Law prior to the
amendment only allowed for grants covering 50% of such expenditures. This
amendment and the available budget of the Office of the Chief Scientist may
reduce the grant amounts approved pursuant to our applications.
The amendment to the R&D Law adds reporting requirements with respect to
certain changes in the ownership of a grant recipient. The amendment requires
the grant recipient and its controlling shareholders and interested parties to
notify the Office of the Chief Scientist of any change in control of the
recipient or a change in the holdings of the means of control of the recipient
that results in a non-Israeli becoming an interested party directly in the
recipient and requires the new interested party to undertake to the Office of
the Chief Scientist to comply with the R&D Law. For this purpose, "control"
is defined as the ability to direct the activities of a company other than any
ability arising solely from serving as an officer or director of the company. A
person is presumed to have control if such person holds 50% or more of the means
of control of a company. "Means of control" refers to voting rights and the
right to appoint directors or the chief executive officer. An "interested party"
of a company includes a holder of 5% or more of its outstanding share capital or
voting rights, its chief executive officer and directors, someone who has the
right to appoint its chief executive officer or at least one director, and a
company with respect to which any of the foregoing interested parties owns 25%
or more of the outstanding share capital or voting rights or has the right to
appoint 25% or more of the directors. Accordingly, any non-Israeli who acquires
5% or more of our ordinary shares will be required to notify the Office of the
Chief Scientist that it has become an interested party and to sign an
undertaking to comply with the R&D Law.
As of December 31, 2002, total contingent liabilities with respect to the
OCS were approximately $7.0 million.
Effective Corporate Tax Rates in Israel
Under the Law for Encouragement of Capital Investments, 1959, by virtue of
the "approved enterprise" status granted to some of our investment programs, we
are entitled to various tax benefits. The period of tax benefits is 7 years,
commencing in the first year in which we earn taxable income from the approved
enterprise, subject to certain limitations. Under this law, the taxable income
of Orckit derived from an investment program designated as an Approved
Enterprise is fully exempt from corporate tax for a period of 2-4 years, after
which the income from these enterprises is taxable at the rate of up to 25% for
the remainder of the period of tax benefits (3-5 years).
After the applicable benefit period expires, income generated from these
Approved Enterprise programs (including income generated from the grant of a
usage right with respect to know-how developed by the Approved Enterprise,
income generated from royalties and income derived from a service which is
auxiliary to such usage right or royalties, provided that such income is
generated within the Approved Enterprise's ordinary course of business) will be
subject to tax at the full corporate tax rate, currently 36%. We may apply for
additional programs or for an extension of our existing programs; however, there
can be no assurance that our application will be approved or that we will
receive future benefits. Part of our income has been generated through our
Approved Enterprises. Should a company that has elected the "alternative
package" distribute to its shareholders a cash dividend from tax-exempt income
attributable to it, it would incur a tax liability on the amount distributed at
the rate (generally 10-25%) which would have been applicable had the company not
elected the alternate package and it will have to withhold tax at the rate of
15% with respect to the dividend distributed. Orckit's taxes outside of Israel,
mainly in the United States, are dependent on our operations in each
jurisdiction as well as relevant laws and treaties. See "Item 18 Financial
Statements". Under Israeli tax law, at December 31, 2002, we had accumulated
losses for tax purposes amounting to approximately $88 million. These losses are
available indefinitely to offset future taxable business income. As of December
31, 2002, our carryforward capital losses for tax purposes were $35 million.
Reform of the Israeli Tax Regime
In 2002, the Israeli government approved an amendment to the Income Tax
Ordinance. The tax reform, effective as of January 1, 2003, reforms certain
parts of the Israeli tax system, including, among others, the reduction of the
tax rate levied on capital gains (other than gains from the sale of listed
securities) derived on or after January 1, 2003, to a general rate of 25% for
both individuals and corporations. See Item 10 below "Additional Information -
Taxation - Israel - Tax Reform" for a discussion of the main aspects of the tax
reform.
Dividend Policy
On June 30, 2000, we distributed a stock dividend on a share-for-share
basis of all our shares of Tioga. We have never declared or paid cash dividends
on our capital stock. In the foreseeable future, we intend to use any future
earnings for the operation and expansion of our business and, if considered
desirable by our Board of Directors, for purchase of our convertible
subordinated notes or ordinary shares. Accordingly, we do not anticipate paying
any cash dividends. Payment of future dividends, if any, will be at the
discretion of our board of directors and the audit committee thereof and will
depend on various factors, such as our statutory retained earnings, financial
condition, operating results and current and anticipated cash needs.
If we declare cash dividends, we will pay those dividends in new Israeli
shekels. Current Israeli law permits holders of our ordinary shares who are
non-residents of Israel and who acquired their shares with a non-Israeli
currency to repatriate all distributions on these shares in that non-Israeli
currency.
Inventory
Inventory consists primarily of raw materials and products in process. Our
inventory as of December 31, 2002 was $100,000 compared to $9.3 million as of
December 31, 2001. The decrease in inventory is due to outsourcing our
manufacturing activity and the expected reduction in our sales.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
Research and Development
We focus our research and development efforts on developing new products
that address the need for solutions capable of supporting very high bandwidth
services in telecommunications networks in metropolitan areas and products that
enable fiber-speed broadband services over copper, mainly targeting business
users. We obtain extensive product development input from potential users and
through participation in industry organizations and standards-setting bodies,
such as the American National Standards Institute and the European
Telecommunications Standards Institute.
As of December 31, 2002, our research and development staff consisted of
103 employees, most of whom are located in Israel and hold engineering or other
advanced technical degrees. Our gross research and development expenses were
approximately $32.0 million in 2000, $22.4 million in 2001 and $22.3 million in
2002. Approximately $7.0 million of these expenses in 2000 related to Tioga's
research and development activities. These expenses were offset by grants from
the Office of the Chief Scientist of the Ministry of Industry and Trade of the
Government of Israel of approximately $1.1 million in 2000, $3.3 million in 2001
and $3.0 million in 2002.
We expect that we will continue to commit substantial resources to research
and development in the future. Our research and development staff consisted of
189 employees as of December 31, 2000, 113 employees as of December 31, 2001 and
103 employees as of December 31, 2002. As of December 31, 2002, the majority of
our research and development employees were employed by Corrigent. The number of
research and development employees is lower compared to December 31, 2000 and
December 31, 2001, primarily as a result of the re-organization of our research
and development staff in light of the slow down in telecom markets and in our
operations related to the DSLAM business.
We believe that a continued commitment to research and development is
required to maintain our technical excellence and launch new innovative products
in the metro transport and access markets. We expect that our research and
development expenses will increase if our applications for Office of Chief
Scientist grants are not approved or if we elect not to receive these grants.
D. TREND INFORMATION
The deterioration beginning in late 2000 of economies around the world was
followed by a significant decline in capital expenditure plans of telecom
carriers in 2001 and in 2002. We expect this trend to continue through 2003.
This decline in capital expenditures has reduced our sales and is expected to
result in pricing pressure on the products being developed by Corrigent and
Spediant. In 2003, we expect our sales of our ADSL-based products to be
insignificant. In response to this trend, we have substantially reduced the
number of our operations, research and development and sales and marketing
employees related to this activity, and have focused our attention and resources
on Corrigent and other technology projects, including Spediant. We will need to
complete the development of new products and attract new customers if we are to
counteract these trends.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth certain information with respect to Orckit's
directors and executive officers.
Name Age Position
Eric Paneth 53 Chairman of the Board and Chief Executive Officer
Izhak Tamir 50 President and Director
Ehud Rokach 39 Chief Executive Officer of Corrigent Systems
Aviv Boim 36 Chief Financial Officer
Eran Tamir 46 Vice President Operations
Yoav Wechsler 48 Vice President, Research and Development of Corrigent Systems
Leon Bruckman 45 Vice President, Chief System Architecture of Corrigent Systems
Eli Magal 37 Vice President, Research and Development of access products
Haim Volinsky 47 Vice President, Sales and Marketing of access products
Yair Shamir 57 Outside Director
Miri Gelbman 51 Outside Director
Moshe Nir 53 Outside Director
Jed M. Arkin 39 Director
Moti Motil 50 Director
The business experience of each of our directors and executive officers is
as follows:
Mr. Paneth has been Chairman of the Board of Directors and Chief Executive
Officer of Orckit since its founding in 1990. From 1975 until 1983, Mr. Paneth
was a senior engineer in the Israeli Government, and from 1985 to 1990, was a
technical department head in the Israeli Government. From 1983 until 1985, he
was employed by Linkabit Inc., in San Diego, California. Mr. Paneth holds an
advanced engineering degree from the Israel Institute of Technology, commonly
known as the Technion. Since January 2000, Mr. Paneth has been a director of
Tioga Technologies Ltd.
Mr. I. Tamir has been President and a Director of Orckit since its founding
in 1990. From 1987 until 1989, Mr. Tamir was employed by Comstream Inc., in San
Diego, California. From 1985 until 1987, he was vice president of A.T.
Communication Channels Ltd., a subsidiary of Bezeq. From 1978 to 1985, he was a
senior engineer in the Israeli Government. Mr. Tamir holds an engineering degree
from the Technion and an M.B.A. from Tel Aviv University. Since January 2000,
Mr. Tamir has been chairman of the board of directors of Tioga Technologies Ltd.
Mr. Rokach joined Orckit in 1992 and has served as Chief Operating Officer
of Orckit since February 2000 and as Chief Executive Officer of Corrigent
Systems since October 2000. From 1998 to 2000, Mr. Rokach served as Vice
President--Network Access Systems. From 1992 to 1998, Mr. Rokach held several
research and development and other positions with Orckit. From 1987 to 1992, he
was a senior engineer with the Israeli Government. Mr. Rokach holds an
engineering degree from the Technion.
Mr. Boim joined Orckit as Chief Financial Officer in February 1998. From
August 1996 until February 1998, he was an associate of BT Alex. Brown
Incorporated, an investment banking firm. From August 1993 until August 1996,
Mr. Boim was a vice president of Giza Ltd., Tel Aviv, an investment banking
firm. Mr. Boim holds a B.A. and an M.A. in economics and management from Tel
Aviv University and a L.L.B. from Tel Aviv University Law School.
Mr. E Tamir joined Orckit as Vice President Operations in April 2000. From
1996 until 2000, Mr. E Tamir who was one of founders of Wizcom Technologies
Ltd., served as vice president operations of Wizcom. From 1990 until 1996, Mr. E
Tamir served as director of worldwide logistics of Indigo Ltd. From 1985 to
1990, Mr. E Tamir served as director of acquisitions of Scitex Corporation Ltd.
Mr. E Tamir holds a BsCEE in machine engineering from Tel Aviv University and is
a business economics graduate of the Israeli Institute for Management.
Mr. Wechsler joined Orckit in October 2000 as Vice President of research
and development of Corrigent Systems. From August 1999 to July 2000, he served
as research and development director at One Path Networks. From September 1997
to August 1999, Mr. Wechsler held engineering management positions at ADC
Teledata. Mr. Wechsler holds a B.Sc. and an M.Sc. in Electrical Engineering from
the Technion.
Mr. Bruckman joined Orckit in 1999 and has served as Vice President of
system engineering since November 1999 and as Vice President and Chief System
Architect of Corrigent Systems since September 2000. From April 1996 to October
1999, Mr. Bruckman was Vice President of research and development and system
engineering at HyNEX, which was acquired by Cisco. From August 1982 to March
1996, Mr. Bruckman held several positions with the access division of Tadiran
Telecommunications, of which the last position was director of research and
development. Mr. Bruckman holds a B.Sc. in Electrical Engineering from the
Technion Institute and an MBA from Bar-Ilan University, Israel.
Mr. Magal joined Orckit in 1995 and held various engineering management
positions until becoming in 2001 Vice President of research and development of
access products. Mr. Magal holds a B.S. in Electrical Engineering from the
Technion and an M.B.A. from Tel Aviv University.
Mr. Volinsky joined Orckit in November 2001 and has served as Vice
President sales and marketing of access products. From September 2000 until
October 2001, Mr. Volinsky served as a marketing director at Cisco Systems. From
1997 until 2000, Mr. Volinsky served as a Co-General manager and VP of marketing
and sales at HyNEX, which was acquired by Cisco. Mr. Volinsky holds a B.Sc.
degree from Tel-Aviv University in electrical and electronics engineering.
Mr. Shamir has been a Director of Orckit since October 1995. Mr. Shamir
serves as the Chairman of the Board and Chief Executive Officer of VCON
Telecommunications Ltd., an Israeli technology company listed on Le Nouveau
Marche in France. Prior to being appointed Chairman of the Board in 2001, Mr.
Shamir served as President and as one of VCON's directors since 1997 and as its
Chief Executive Officer since 1998. Since April 2000, Mr. Shamir has also served
as chairman of Catalyst Investment L.P., an Israeli venture capital firm. From
July 1995 through February 1997, Mr. Shamir served as the Executive Vice
President of The Challenge Fund LLP, the general partner of the Challenge
Fund-Etgar, L.P. From December 1993 to July 1995, he served as the Chief
Executive Officer of Elite Food Industries Ltd. Mr. Shamir served as Executive
Vice President and general manager of Israel operations of Scitex Corporation
Ltd. from February 1988 through December 1994. Mr. Shamir is a director of
Mercury Interactive Corp., DSP Group Corporation and Poalim Capital Markets. Mr.
Shamir holds a B.Sc. in Electrical Engineering from the Technion and has served
on the board of governors of the Technion since 1993.
Ms. Gelbman has served since 1999 as founder and General Manager of Milgal
Ltd., an Israeli privately-owned appliance distribution and service company.
From 1984 to 1998, she was employed by IBM Israel in various positions. Her last
role with IBM was as Manager of Quality and Customer Relationship Management
(CRM).
Mr. Nir has served since 1990 as Founder and CEO of privately-held Business
Directions Ltd., a distributor of analytic management software. From 1985 to
1990, he served as manager of the economics and control department and member of
the Executive Board of Elite Industries Ltd., a publicly traded food
manufacturer in Israel. From 1974 to 1985, he held senior financial and control
positions with Tempo Breweries and Soft Drinks Ltd., Tadiran Electronics
Industries Ltd. and Clal Israel Ltd. He holds a BA in economics from Tel Aviv
University, and an MBA and Post Graduate Diploma in Computer and Information
Sciences from the Recanati School of Management, Tel Aviv University
Mr. Motil has served since 1996 as Vice President Finance and an associate
of Palmot Ltd., an investment company based in Israel. From 1991 until 1996, he
served as Chief Financial Officer of the Israeli subsidiary of Jan-Bell
Marketing Inc., a retail company. Mr. Motil holds a B.A degree in economics and
accounting from Tel-Aviv University and he is a C.P.A.
Mr. Arkin has served as Chairman of PeerPressure, Inc., a company that
provides peer-to-peer content protection systems, since January 2000; as
Chairman of Madah Com Communications Ltd., a spread-spectrum communications
company, since January 2000; and as Chairman of the Advisory Board of E-Base
Ltd., an information retrieval company, since June 2001. From 1999 to 2001, he
served as General Manager of merchant banking for Oscar Gruss & Son, a New
York-based investment bank. From 1995 to 1998, Mr. Arkin served as Vice
President of The Challenge Fund, an Israeli venture capital firm. He holds a
B.A. from St. John's College in Annapolis, Maryland, an M.B.A. from Harvard
Business School and a J.D. from Harvard Law School.
There are no family relationships between any of our directors or executive
officers. There are no arrangements or understandings between any of our
directors or executive officers and any other person pursuant to which our
directors or executive officers were selected.
B. COMPENSATION
The aggregate direct remuneration paid by Orckit to all persons as a group
(14 persons) who served in the capacity of director or executive officer in the
year ended December 31, 2002, was approximately $3.6 million, which includes
$330,000 of pension, retirement or similar benefits, expenses reimbursed
(including professional and other business association dues and expenses) and
other fringe benefits.
Each of our directors is entitled to participation fees under the Israeli
Companies Law. In November 2002 each of Ms. Gelbman, Mr. Motil and Mr. Nir was
granted options to purchase 40,000 of our ordinary shares and each of Mr. Shamir
and Mr. Arkin was granted options to purchase 20,000 of our ordinary shares. The
exercise price is $3.40 per share, which was the market price of our ordinary
shares on date of grant (as adjusted for our one-for-five reverse share split).
The options vest ratably over four years. All options expire at the earlier of
ten years from the date of grant or six month from termination of the
directorship. Directors, who are our officers, have been granted options to
purchase shares of Corrigent and in other subsidiaries engaged in technology
projects, including Spediant, based on various factors, including their
respective equity interests in Orckit. The total amount of options granted to,
and shares reserved for, all directors, including directors who are our
officers, is equal to approximately 12.5% of the share capital of Corrigent and
each of the other technology projects, including Spediant, on a fully diluted
basis, prior to any outside financing. The options granted to our directors have
a nominal exercise price.
C. BOARD PRACTICES
Nasdaq Requirements
Under the listing requirements of the Nasdaq Stock Market, we are currently
required to have at least two independent directors, as defined by Nasdaq rules,
on our board of directors and to establish an audit committee, a majority of
whose members are independent of management. Five out of the seven members of
our board of directors, namely, Messrs. Shamir, Arkin, Gelbman, Nir and Motil,
are independent directors under the Nasdaq requirements. Messrs. Shamir, Gelbman
and Nir serve on our audit committee.
Israeli Companies Law
We are also subject to the provisions of the Israeli Companies Law,
5759-1999, and regulations adopted thereunder.
Board of Directors
According to the Companies Law and our articles of association, the
oversight of the management of our business is vested in our board of directors.
The board of directors may exercise all powers and may take all actions that are
not specifically granted to our shareholders. As part of its powers, our board
of directors may cause us to borrow or secure payment of any sum or sums of
money for our purposes, at times and upon terms and conditions as it thinks fit,
including the grant of security interests in all or any part of our property.
Our board of directors may consist of between three and seven directors and
currently consists of seven directors.
Our directors are elected at annual meetings of shareholders by a vote of
the holders of at least 66-2/3% of the ordinary shares voting thereon. Directors
generally hold office until the next annual meeting of shareholders. Our annual
meeting of shareholders is required to be held at least once during every
calendar year and not more than fifteen months after the last preceding meeting.
The board of directors generally may temporarily fill vacancies in the board.
Directors may be removed earlier from office by a resolution passed at a general
meeting of shareholders by a vote of the holders of at least 75% of the ordinary
shares voting thereon.
A resolution proposed at any meeting of the board of directors is deemed
adopted if approved by a majority of the directors present and voting on the
matter.
Outside Directors
Qualifications of Outside Directors
Under the Israeli Companies Law, companies incorporated under the laws of
Israel whose shares are listed for trading on a stock exchange or have been
offered to the public in or outside of Israel are required to appoint at least
two outside directors. Pursuant to our articles of association, we may appoint
up to three outside directors. The Companies Law provides that a person may not
be appointed as an outside director if the person or the person's relative,
partner, employer or any entity under the person's control has, as of the date
of the person's appointment to serve as an outside director, or had, during the
two years preceding that date, any affiliation with:
o the company;
o any entity controlling the company; or
o any entity controlled by the company or by its controlling entity.
The term affiliation includes:
o an employment relationship;
o a business or professional relationship maintained on a regular basis;
o control; and
o service as an office holder, excluding service as an office holder during
the three-month period in which the company first offers its shares to the
public.
The Companies Law defines the term "office holder" of a company to
include a director, the chief executive officer and any officer of the
company who reports directly to the chief executive officer.
No person can serve as an outside director if the person's position or
other business creates, or may create, a conflict of interest with the
person's responsibilities as an outside director or may otherwise interfere
with the person's ability to serve as an outside director.
Until two years from termination of office, a company may not engage
an outside director to serve as an office holder and cannot employ or
receive services from that person, either directly or indirectly, including
through a corporation controlled by that person.
Election of Outside Directors
Outside directors are elected at meetings of shareholders by a vote of the
holders of at least 66-2/3% of the ordinary shares voting thereon, provided that
either:
o at least one third of the shares of non-controlling shareholders
voted at the meeting vote in favor of the outside director's election;
or
o the total number of shares of non-controlling shareholders that
voted against the election of the outside director does not exceed one
percent of the aggregate voting rights in the company.
The initial term of an outside director is three years and may be extended
for an additional three years. Outside directors may be removed from office only
by a vote of the holders of at least 66-2/3% of the ordinary shares voting
thereon, or by a court, and only if the outside directors cease to meet the
statutory qualifications for their appointment or if they violate their duty of
loyalty to the company. Each committee of a company's board of directors is
required to include at least one outside director, except for the audit
committee which is required to include all the outside directors. Our outside
directors are: Mr. Shamir, who was re-elected to a second three-year term in
2003, and Ms. Gelbman and Mr. Nir, who were elected in 2002.
Committees
Subject to the provisions of the Companies Law, our board of directors may
delegate its powers to committees consisting of board members. Our board has
formed an audit committee and an option committee.
Audit Committee
Israeli Companies Law Requirements
Under the Israeli Companies Law, our board of directors is required to
appoint an audit committee, comprised of at least three directors, including all
of the outside directors, but excluding:
o the chairman of our board of directors;
o a controlling shareholder or a relative of a controlling shareholder; and
o any director employed by us or who provides services to us on a regular
basis.
The role of the audit committee is to identify flaws in our business
management, including in consultation with the internal auditor and our
independent accountants, to suggest appropriate courses of action to correct
such flaws and to approve specified related party transactions. Our audit
committee consists of Mr. Yair Shamir, Mr. Moshe Nir and Ms. Miri Gelbman.
Approval of Related Party Transactions
The approval of the audit committee is required to effect specified actions
and transactions with office holders, controlling shareholders and entities in
which they have a personal interest. An audit committee may not approve an
action or a transaction with related parties or with its office holders unless
at the time of approval at least two outside directors are serving as members of
the audit committee and at least one of whom was present at the meeting in which
any approval was granted.
Option Committee
Our Option Committee administrates our share option plan and is empowered,
among other things, to recommend to our Board of Directors option grants,
optionees, dates of grant and the exercise price of options. Messrs. Eric
Paneth, Izhak Tamir and Yair Shamir are currently the members of our option
committee.
Internal Auditor
Under the Companies Law, our board of directors is required to appoint an
internal auditor proposed by the audit committee. The role of the internal
auditor is to examine, among other things, whether our actions comply with the
law and orderly business procedure. The internal auditor may not be an
interested party, an office holder, or a relative of any of the foregoing, nor
may the internal auditor be our independent accountant or its representative.
The Companies Law defines the term "interested party" to include a person
who:
o holds 5% or more of our outstanding share capital or voting rights;
o has the right to appoint one or more directors or the general manager; or
o who serves as a director or as the general manager.
Approval of Specified Related Party Transactions Under Israeli Law
Fiduciary Duties of Office Holders
The Israeli Companies Law imposes a duty of care and a duty of loyalty on
all office holders of a company. The duty of care requires an office holder to
act with the level of care with which a reasonable office holder in the same
position would have acted under the same circumstances. The duty of care
includes a duty to use reasonable means to obtain:
o information on the advisability of a given action brought for his
approval or performed by him by virtue of his position; and
o all other important information pertaining to these actions.
The duty of loyalty of an office holder includes a duty to:
o refrain from any conflict of interest between the performance of his
duties for the company and the performance of his other duties or his
personal affairs;
o refrain from any activity that is competitive with the company;
o refrain from exploiting any business opportunity of the company to
receive a personal gain for himself or others; and
o disclose to the company any information or documents relating to a
company's affairs which the office holder has received due to his
position as an office holder.
Disclosure of Personal Interest of an Office Holder
The Israeli Companies Law requires that an office holder of a company
disclose to the company any personal interest that he may have and all related
material information known to him, in connection with any existing or proposed
transaction by the company. The disclosure is required to be made promptly and
in any event no later than the board of directors meeting in which the
transaction is first discussed. If the transaction is an extraordinary
transaction, the office holder must also disclose any personal interest held by:
o the office holder's spouse, siblings, parents, grandparents,
descendants, spouse's descendants and the spouses of any of these
people; or
o any corporation in which the office holder is a 5% or greater
shareholder, director or general manager or in which he has the right
to appoint at least one director or the general manager.
Under Israeli law, an extraordinary transaction is a transaction that is:
o not in the ordinary course of business;
o not on market terms; or
o likely to have a material impact of the company's profitability,
assets or liabilities.
Once an office holder complies with the above disclosure requirement, the
board of directors may approve a transaction between the company and an office
holder, or a third party in which an office holder has a personal interest. A
transaction that is adverse to the company's interest may not be approved.
If the transaction is an extraordinary transaction, approval of both the
audit committee and the board of directors is required, in that order. Under
specific circumstances, shareholder approval may also be required. A director
who has a personal interest in a matter which is considered at a meeting of the
board of directors or the audit committee may not be present at this meeting or
vote on this matter, unless a majority of the members of the board of directors
or the audit committee, as the case may be, has a personal interest in the
matter. If a majority of members of the board of directors have a personal
interest therein, shareholder approval is also required.
Disclosure of Personal Interests of a Controlling Shareholder
Under the Israeli Companies Law, the disclosure requirements which apply to
an office holder also apply to a controlling shareholder of a public company. A
controlling shareholder is a shareholder who has the ability to direct the
activities of a company, including a shareholder that owns 25% or more of the
voting rights if no other shareholder owns more than 50% of the voting rights,
but excluding a shareholder whose power derives solely from his or her position
on the board of directors or any other position with the company. Extraordinary
transactions with a controlling shareholder or with a third party in which a
controlling shareholder has a personal interest, and the terms of engagement of
a controlling shareholder as an office holder or employee, require the approval
of the audit committee, the board of directors and the shareholders of the
company, in that order. The shareholder approval must be by a majority of the
shares voted on the matter, provided that either:
o at least one-third of the shares of shareholders who have no
personal interest in the transaction and who vote on the matter vote
in favor thereof; or
o the shareholders who have no personal interest in the transaction
who vote against the transaction do not represent more than one
percent of the voting rights in the company.
For information concerning the direct and indirect personal interests of
our office holders and principal shareholders in specified transactions with us,
see Item 7A of this Annual Report.
D. EMPLOYEES
As of December 31, 2002, we had 183 full-time employees, of whom 103 were
employed in research and development, 17 were employed in sales and marketing,
18 were employed in manufacturing, testing and quality assurance and 45 were
employed in MIS, finance and administration. Of these 183 employees, 107 are
employees of Corrigent and 36 are employees of Spediant. As of December 31,
2001, we had 216 full-time employees, of whom 113 were employed in research and
development, 21 were employed in sales and marketing, 39 were employed in
manufacturing, testing and quality assurance, and 43 were employed in MIS,
finance and administration. As of December 31, 2000, we had 492 full-time
employees, of whom 189 were employed in research and development, 75 were
employed in sales and marketing, 156 were employed in manufacturing, testing and
quality assurance, 42 were employed in finance and administration and 30 were
employed in testing and quality assurance. We had fewer employees as of December
31, 2002 than in prior years as a result of reduction of the number of employees
in operations, R&D and sales and marketing due to the deterioration of economies
around the world and decrease in revenues from our legacy DSLAM business.
We believe that we have been able to attract talented engineering and other
technical personnel. None of our employees is represented by a labor union and
we have not experienced a work stoppage. We believe that our relationship with
our employees is good and that our future success will depend on a continuing
ability to hire, assimilate and retain qualified employees.
Certain provisions of the collective bargaining agreements between the
Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of
Economic Organizations, including the Industrialists Associations, are
applicable to our employees by order of the Israeli Ministry of Labor and
Welfare. These provisions principally concern cost of living increases,
recreation pay and other conditions of employment.
Israeli labor laws and regulations are applicable to all of our employees
in Israel. The laws principally concern matters such as paid annual vacation,
paid sick days, the length of the workday, payment for overtime, insurance for
work-related accidents, severance pay and other conditions of employment.
Israeli law generally requires severance pay, which may be funded, in whole or
in part, by Managers' Insurance described below, in certain circumstances,
including the retirement or death of an employee or termination of employment
without cause, as defined under Israeli law. The payments thereto amount to
approximately 8.3% of wages. Furthermore, Israeli employees are required to pay
predetermined sums to the National Insurance Institute. The payments to the
National Insurance Institute are approximately 16% of wages of which the
employee contributes approximately 66% and the employer contributes
approximately 34%.
A general practice followed by Orckit, although not legally required, is
the contribution of funds on behalf of most of its employees to a fund known as
Managers' Insurance. This fund provides employees with a lump sum payment upon
retirement or with payments on account of severance pay, if legally entitled,
upon termination of employment. Each employee who agrees to participate in the
Managers' Insurance plan contributes an amount equal to 5% of such employee's
base salary and the employer contributes approximately 15% of such salary, which
15% includes the 8.3% for severance pay.
E. SHARE OWNERSHIP
As of March 31, 2003, Messrs. Eric Paneth and Izhak Tamir, each, directly
or through a wholly owned company, beneficially owns 746,771 ordinary shares, or
15.3% of our ordinary shares, including (i) options to purchase 13,750 of our
ordinary shares at no exercise price per share and (ii) the right to purchase
140,000 shares from us, at any time or from time to time in one or more
purchases, until February 2005. The purchase price for the ordinary shares under
such right to purchase will be equal to the average closing price of our
ordinary shares on Nasdaq over the ten trading days immediately preceding the
purchase date, plus a premium of 10%. Except for Messrs. Paneth and Tamir, none
of our executive officers or directors beneficially owns 1% or more of our
outstanding ordinary shares.
At December 31, 2002, outstanding options to purchase a total of 837,723
ordinary shares had been granted by us pursuant to our share incentive plan, of
which options to purchase a total of 329,578 ordinary shares were held by our
directors and officers (14 persons) as a group. Our share incentive plan is
administered by an option committee of our board of directors which is
empowered, among other things, to recommend to our board of directors the
optionees, dates of grant and the exercise price of options. Unless otherwise
decided by our board of directors or the option committee, options granted under
the share incentive plan are non-assignable except by the laws of descent. The
outstanding options are exercisable at purchase prices which range from $0 to
$60 per share, vest mainly over up to periods of five years, and have expiration
dates which range from 2003 to 2012.
In January 2003, our board of directors adopted the "Orckit Communications
Ltd. 2003 Subsidiary Employee Share Incentive Plan". Shares issued pursuant to
this plan are issued to employees, consultants and contractors of our
majority-owned subsidiaries for no consideration and are subject to reverse
vesting. Unvested shares issued pursuant to this plan may be reacquired by us
under certain circumstances or may be exchanged for shares or options of the
applicable subsidiary under certain circumstances at the election of Orckit or
the employees. Our directors are not entitled to participate in this plan. As of
March 31, 2003, out of 600,000 ordinary shares granted under the Plan to
employees of our subsidiaries, approximately 140,000 ordinary shares were
converted to securities of our subsidiaries.
Subject to the approval of the Board of Directors of Orckit and Corrigent,
and based on the relative fair market value of each of the relevant companies,
options granted by Corrigent may be exercised for securities of Orckit.
Corrigent has granted or reserved options representing approximately 30% of its
fully diluted equity. See Item 4.A for further information with respect to the
Corrigent Stock Option Plan.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
To our knowledge, (A) we are not directly or indirectly owned or controlled
(i) by another corporation or (ii) by any foreign government and (B) there are
no arrangements, the operation of which may at a subsequent date result in a
change in control of Orckit.
Eric Paneth and Izhak Tamir, as of March 31, 2003 each beneficially owns
15.3% of our ordinary shares and collectively beneficially own approximately
29.7% of our ordinary shares. Each of Mr. Paneth and Mr. Tamir are major
shareholders of Orckit. Accordingly, Messrs. Paneth and Tamir, if they voted
together, may have the power to control the outcome of matters submitted to a
vote of our shareholders, including the approval of significant change of
control transactions.
The following table sets forth, as of March 31, 2003, the number of our
ordinary shares (as adjusted for our one-for-five reverse share split), which
constitute our only voting securities, beneficially owned by (i) all
shareholders known to us to own more than 5% of our outstanding ordinary shares,
and (ii) all of our directors and executive officers as a group. The voting
rights of all major shareholders are the same. As of March 31, 2003, 4,722,598
of our ordinary shares were issued and outstanding.
Identity of Person or Group Amount Owned Percent of Class
Eric Paneth (1) 746,771 15.3%
Izhak Tamir (2) 746,771 15.3%
All directors and executive officers as a group
(14 persons)
1,783,524(3) 34.7%
(1)(2) Includes, in the case of each of Messrs. Tamir and Paneth: (i)
13,750 ordinary shares issuable upon the exercise of options that are
currently vested or vest within the next 60 days and (ii) the right to
purchase 140,000 shares from us, at any time or from time to time in
one or more purchases until February 2005. Under such right to
purchase, the purchase price for the ordinary shares will be equal to
the average closing price of our ordinary shares on Nasdaq over the
ten trading days immediately preceding the purchase date, plus a
premium of 10%. As discussed in Item 6.E, securities held by Messrs.
Tamir and Paneth of Corrigent may be exercised for shares of Orckit
under certain circumstances.
(3) Includes 102,778 ordinary shares which may be purchased pursuant to
options exercisable within sixty days following March 31, 2003. As
discussed in Item 6.E, securities of Corrigent held by directors and
executive officers of Orckit may be exercised for shares of Orckit.
As of March 31, 2003, there were 75 holders of record of our ordinary
shares in the United States who collectively held approximately 92.3% of our
outstanding ordinary shares. The number of record holders in the United States
is not representative of the number of beneficial holders nor is it
representative of where such beneficial holders are resident since many of these
ordinary shares were held of record by brokers or other nominees.
In January 2003, we repurchased from Clal Electronics Industries Ltd.
616,590 of our ordinary shares and $12.5 million principal amount of our
convertible subordinated notes. Prior thereto, Clal and its affiliates
beneficially owned approximately 12.0% of our ordinary shares. Immediately
following this transaction, we believe that Clal and its affiliates beneficially
own less than 1% of our ordinary shares.
B. RELATED PARTY TRANSACTIONS
Loan Agreement
As part of the plan of separation relating to the spin-off of Tioga, we
loaned to Tioga $20 million. This loan bore interest at a rate of approximately
6% per annum and was required to be repaid by March 1, 2005. In February 2002,
Tioga announced that it had entered into a set of agreements with ST
Microelectronics, pursuant to which it was to receive certain funding. In 2002,
we were repaid $13.0 million of the principal of this loan and accrued interest
due in the amount of $2.9 million. In May 2003, Tioga announced the closing of
an asset purchase agreement pursuant to which ST Microelectronics acquired all
of Tioga's assets. After the closing of that transaction, Tioga paid us the
remaining amount outstanding under the loan.
Clal Electronics Industries Ltd.
In January 2003, we retired $12.5 million principal amount of our
convertible subordinated notes and repurchased 616,590 of our ordinary shares
held by Clal for aggregate consideration of $14.7 million.
Tioga Support Services Agreement
Tioga provides us with certain ADSL chip related support services. Total
payments to Tioga for support services in 2002 were approximately $200,000. We
do not expect to receive support services from Tioga in 2003.
Siliquent Technologies.
In October 2001, one of our technology projects, Siliquent Technologies, a
provider of technology for the storage network applications industry, raised
$10.0 million in equity financing from third parties. Certain of our directors,
officers and employees had previously been granted securities in Siliquent with
a nominal exercise price. Orckit's interest in Siliquent was significantly
reduced by the third party financing and its ownership interest in Siliquent is
immaterial. We believe that any transactions involving affiliated parties were
on terms no less favorable to us than could be obtained with non-affiliated
parties.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable
ITEM 8. FINANCIAL INFORMATION
See Item 18.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
Our ordinary shares are quoted on the Nasdaq Stock Market and The Tel Aviv
Stock Exchange under the symbol ORCT. The following table sets forth, for the
periods indicated, the high and low sales prices of our ordinary shares as
reported on the Nasdaq Stock Market. The price per share of our ordinary shares
has been retroactively adjusted to reflect the one-for-five reverse share split
effective as of November 27, 2002 and the spin-off of Tioga on June 30, 2000,
based on the ratio of our share price to Tioga's share price on that date. This
ratio allocates 44% of the price to Orckit and 56% to Tioga.
Calendar Year Price Per Share
High Low
2002 $21.60 $2.70
2001 $21.25 $5.40
2000 $203.95 $10.00
1999 $85.55 $30.25
1998 $53.35 $20.05
Calendar Period Price Per Share
High Low
2003
First Quarter $7.10 $2.95
2002
First Quarter $21.60 $9.65
Second Quarter $10.25 $4.75
Third Quarter $5.80 $3.10
Fourth Quarter $4.70 $2.70
2001
First Quarter $21.25 $5.65
Second Quarter $15.00 $5.40
Third Quarter $12.40 $5.55
Fourth Quarter $16.25 $6.50
Calendar Month Price Per Share
High Low
2003
May $9.15 $6.60
April $7.50 $6.50
March $7.10 $5.91
February $6.00 $4.28
January $4.69 $2.95
2002
December $4.70 $3.00
Trading of our shares on the TASE is insignificant and typically represents
less than 1% of the volume traded on Nasdaq. Accordingly, we do not believe
sales price information with respect to the limited trading of our ordinary
shares on TASE is meaningful.
B. PLAN OF DISTRIBUTION
Not applicable
C. MARKETS
Our ordinary shares are quoted on the Nasdaq Stock Market under the
symbol ORCT.
D. SELLING SHAREHOLDERS
Not applicable
E. DILUTION
Not applicable
F. EXPENSES OF THE ISSUE
Not applicable
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable
B. MEMORANDUM AND ARTICLES OF ASSOCIATIONS
Objects and Purposes
We were first registered under Israeli law on January 22, 1990 as a private
company, and, on July 22, 1996, became a public company. Our registration number
with the Israeli registrar of companies is 52-004287-0. Our object is to engage,
directly or indirectly, in any lawful undertaking or business whatsoever,
including, without limitation, as stipulated in our memorandum of association,
which was filed with the Israeli registrar of companies.
Transfer of Shares and Notices
Fully paid ordinary shares may be freely transferred pursuant to our
articles of association unless the transfer is restricted or prohibited by
another instrument. Unless otherwise prescribed by law, each shareholder of
record will be provided at least 21 calendar days' prior notice of any general
shareholders meeting.
Dividend and Liquidation Rights
Dividends on our ordinary shares may be paid only out of profits and other
surplus, as defined in the Companies Law, as of the end of the most recent
fiscal year or as accrued over a period of two years, whichever is higher. Our
board of directors, with the approval of our audit committee, is authorized to
declare dividends, provided that there is no reasonable concern that the
dividend will prevent us from satisfying our existing and foreseeable
obligations as they become due. In the event of our liquidation, after
satisfaction of liabilities to creditors, our assets will be distributed to the
holders of ordinary shares in proportion to their respective holdings. This
liquidation right may be affected by the grant of preferential dividends or
distribution rights to the holders of a class of shares with preferential rights
that may be authorized in the future.
Voting, Shareholders' Meetings and Resolutions
Holders of ordinary shares have one vote for each ordinary share held on
all matters submitted to a vote of shareholders. Under the Companies Law and our
articles of association, most resolutions of our shareholders require approval
by a simple majority of the ordinary shares voting thereon. Amendments to our
articles of association and the election of directors require approval of
66-2/3% of our ordinary shares voting thereon, and liquidation and the removal
of directors (other than outside directors) require approval of 75% of our
ordinary shares voting thereon.
These voting rights may be affected by the grant of any special voting
rights to the holders of a class of shares with preferential rights that may be
authorized in the future.
We have two types of general shareholders meetings: the annual general
meetings and extraordinary general meetings. Directors are elected only at
annual general meeting. These meetings may be held either in Israel or in any
other place the board of directors determines. An annual general meeting must be
held in each calendar year, but not more than 15 months after the last annual
general meeting. Our board of directors may convene an extraordinary meeting,
from time to time, at its discretion and is required to do so upon the request
of shareholders holding at least 5% of our ordinary shares.
The quorum required for a meeting of shareholders consists of at least two
shareholders present in person or by proxy who hold or represent between them at
least 25% of the outstanding voting shares unless otherwise required by
applicable rules. A meeting adjourned for lack of a quorum generally is
adjourned to the same day in the following week at the same time and place or
any time and place as the chairman may designate with the consent of a majority
of the voting power represented at the meeting and voting on the matter
adjourned. At such reconvened meeting the required quorum consists of any two
members present in person or by proxy.
Duties of Shareholders
Under the Companies Law, each and every shareholder has a duty to act in
good faith in exercising his rights and fulfilling his obligations towards
Orckit and other shareholders and to refrain from abusing his power in Orckit,
such as in voting in the general meeting of shareholders on the following
matters:
o any amendment to the articles of association;
o an increase of our authorized share capital;
o a merger; or
o approval of certain actions and transactions which require
shareholder approval.
In addition, each and every shareholder has the general duty to refrain
from depriving other shareholders of their rights.
Furthermore, any controlling shareholder, any shareholder who knows that it
possesses the power to determine the outcome of a shareholder vote and any
shareholder that, pursuant to the provisions of the articles of association, has
the power to appoint or to prevent the appointment of an office holder in Orckit
or any other power toward Orckit is under a duty to act in fairness towards
Orckit. The Companies Law does not describe the substance of this duty of
fairness. These various shareholder duties may restrict the ability of a
shareholder to act in what the shareholder perceives to be its own best
interests.
Anti-Takeover Provisions; Mergers and Acquisitions
The Israeli Companies Law includes provisions that allow a merger
transaction and requires that each company that is a party to a merger have the
transaction approved by its board of directors and a vote of the majority of its
shares, at a shareholders' meeting called on at least 21 days' prior notice. For
purposes of the shareholder vote, unless a court rules otherwise, the statutory
merger will not be deemed approved if a majority of the shares present that are
held by parties other than the other party to the merger, or by any person who
holds 25% or more of the shares or the right to appoint 25% or more of the
directors of the other party, vote against the merger. Upon the request of a
creditor of either party of the proposed merger, the court may delay or prevent
the merger if it concludes that there exists a reasonable concern that as a
result of the merger, the surviving company will be unable to satisfy the
obligations of any of the parties to the merger. In addition, a merger may not
be completed unless at least 70 days have passed from the time that the
requisite proposal for the merger has been filed with the Israeli Registrar of
Companies.
The Companies Law also provides that an acquisition of shares of a public
company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% or greater shareholder of the
company and there is no existing 25% or greater shareholder in the company. An
acquisition of shares of a public company must be made by means of a tender
offer if as a result of the acquisition the purchaser would become a 45% or
greater shareholder of the company. This rule does not apply if someone else is
already a majority shareholder in the company. If following any acquisition of
shares, the acquiror will hold 90% or more of the company's shares, the
acquisition may not be made other than through a tender offer to acquire all of
the shares of such class. If more than 95% of the outstanding shares are
tendered in the tender offer, all the shares that the acquiror offered to
purchase will be transferred to it. However, the remaining minority shareholders
may seek to alter the consideration by court order.
Israeli tax law also treats stock-for-stock acquisitions between an Israeli
company and a foreign company less favorably than does U.S. tax law. For
example, Israeli tax law may, under certain circumstances, subject a shareholder
who exchanges his ordinary shares for shares of another corporation to taxation
prior to the sale of the shares received in such stock-for-stock swap.
Our articles of association provide that our board of directors may, at any
time in its sole discretion, adopt protective measures to prevent or delay a
coercive takeover of Orckit, including, without limitation, the adoption of a
shareholder rights plan. In November 2001, our board of directors adopted a
shareholder bonus rights plan pursuant to which share purchase bonus rights were
distributed on December 6, 2001 at the rate of one right for each of our
ordinary shares held by shareholders of record as of the close of business on
that date.
The rights plan is intended to help ensure that all of our shareholders are
able to realize the long-term value of their investment in Orckit in the event
of a potential takeover which does not reflect the full value of Orckit and is
otherwise not in the best interests of Orckit and its shareholders. The rights
plan is also intended to deter unfair or coercive takeover tactics.
Each right initially will entitle shareholders to buy one-half of one of
our ordinary shares for $65.00. The rights generally will be exercisable and
transferable apart from our ordinary shares only if a person or group becomes an
"acquiring person" by acquiring beneficial ownership of 15% or more of our
ordinary shares, subject to certain exceptions set forth in the rights plan, or
commences a tender or exchange offer upon consummation of which such person or
group would become an "acquiring person." Subject to certain conditions
described in the rights plan, once the rights become exercisable, the holders of
rights, other than the acquiring person, will be entitled to purchase ordinary
shares at a discount from the market price.
The rights will expire on December 31, 2011 and are generally redeemable by
our board of directors, at $0.01 per right, at any time until the tenth business
day following public disclosure that a person or group has become an "acquiring
person."
Our articles of association also provide that as long as any of our
securities are publicly traded on a United States market or exchange, all proxy
solicitations by persons other than our board of directors must be undertaken
pursuant to the United States proxy rules, regardless of whether those proxy
rules are legally applicable to us. These provisions of our articles of
association could discourage potential acquisition proposals and could delay or
prevent a change in control of Orckit.
Modification of Class Rights
Our articles of association provide that the rights attached to any class
(unless otherwise provided by the terms of that class), such as voting, rights
to dividends and the like, may be varied by a shareholders resolution, subject
to the sanction of a resolution passed by a majority of the holders of the
shares of that class at a separate class meeting.
Indemnification, Exculpation and Insurance of Office Holders
Exculpation of Office Holders
Under the Companies Law, an Israeli company may not exempt an office holder
from liability for breach of his duty of loyalty, but may exempt in advance an
office holder from liability to the company, in whole or in part, for a breach
of his duty of care provided the articles of association of the company allow it
to do so. Our articles of association allow us to exempt our office holders to
the fullest extent permitted by law.
Insurance of Office Holders
Our articles of association provide that, subject to the provisions of the
Companies Law, we may enter into an insurance contract which would provide
coverage for any monetary liability incurred by any of our office holders, with
respect to an act performed in the capacity of an office holder for:
o a breach of his duty of care to us or to another person;
o a breach of his duty of loyalty to us, provided that the office
holder acted in good faith and had reasonable cause to assume that his
act would not prejudice our interests; or
o a financial liability imposed upon him in favor of another person.
We obtained liability insurance covering our officers and directors.
Indemnification of Office Holders
Our articles of association provide that we may indemnify an office holder
against the following obligations and expenses imposed on the office holder with
respect to an act performed in the capacity of an office holder:
o a financial obligation imposed on him in favor of another person by
a court judgment, including a settlement judgment or an arbitrator's
award approved by the court; and
o reasonable litigation expenses, including attorneys' fees, incurred
by the office holder or which the office holder was ordered to pay by
a court in connection with:
o proceedings we institute against him or that are instituted on
our behalf or by another person;
o a criminal charge from which he is acquitted; or
o a criminal proceeding in which he is convicted of an offense
that does not require proof of criminal intent.
Our articles of association also include provisions:
o authorizing us to undertake in advance to indemnify an office holder
as described above, provided that the undertaking is limited to those
types of events which our board of directors deems to be anticipated
when the undertaking is given and to an amount determined by our board
of directors to be reasonable under the circumstances; and
o authorizing us to retroactively indemnify an officer or director.
Limitations on Exculpation, Insurance and Indemnification
The Israeli Companies Law provides that a company may not exculpate or
indemnify an office holder, or enter into an insurance contract which would
provide coverage for any monetary liability incurred as a result of any of the
following:
o a breach by the office holder of his duty of loyalty unless, with
respect to insurance coverage, the office holder acted in good faith
and had a reasonable basis to believe that the act would not prejudice
the company;
o a breach by the office holder of his duty of care if the breach was
committed intentionally or recklessly;
o any act or omission committed with the intent to derive an illegal
personal benefit; or
o any fine imposed on the office holder.
In addition, under the Companies Law, exculpation of, indemnification of,
and procurement of insurance coverage for our office holders must be approved by
our audit committee and our board of directors and, if the beneficiary is a
director, by our shareholders.
Our articles of associations also provide that, subject to the provisions
of applicable law, we may procure insurance for or indemnify any person who is
not an office holder, including without limitation, any of our employees,
agents, consultants or contractors.
C. MATERIAL CONTRACTS
We entered into the following agreements with Tioga upon consummation of the
plan of separation:
Separation and Intellectual Property Agreement with Tioga Technologies
In connection with the spin-off, we entered into a separation agreement
with Tioga pursuant to which we contributed and transferred to Tioga
substantially all of the assets and liabilities constituting our chip business
in exchange for Tioga ordinary shares, and then distributed those ordinary
shares as a stock dividend to our shareholders, on a share-for-share basis.
Tioga also issued to the holders of options to purchase our ordinary shares,
options to purchase an equivalent number of Tioga ordinary shares.
Under the separation agreement, Tioga has assumed all employment-related
obligations, accrued benefits and severance pay of our employees who have become
Tioga's full-time employees.
We entered into an agreement with Tioga for the (i) assignment to Tioga of
substantially all of our DSL chip intellectual property, including patents and
patent applications, (ii) joint ownership of certain technologies without
accounting to one another, and (iii) irrevocable license from us of other
non-semiconductor patents and patent applications. In connection with this
assignment, Tioga granted us an irrevocable license to use the assigned
intellectual property. This agreement contains cross indemnity provisions
whereby we will indemnify Tioga with respect to any patent or related claims
with respect to the technology retained by us and we will indemnify Tioga with
respect to any work-around costs incurred as a result of any patent or related
claims with respect to the technology transferred to Tioga by us.
For a description of our loan agreement with Tioga, please refer to Item
7.B of this Annual Report.
For a description of our convertible subordinated notes, please refer to
Item 5.B of this Annual Report.
Founding Agreements for Our Technology Projects
In connection with the founding of our technology projects engaged in by
Corrigent Systems, and other subsidiaries, including Spediant Systems, we
entered into founding agreements with these subsidiaries established to
undertake our new technology projects. Pursuant to these founding agreements,
Orckit contributed and transferred to each subsidiary a team of employees and
applicable assets and liabilities related to early stage initiation and
development in the business area of each of the technology projects which were
conducted prior to such founding.
Under the founding agreements, the subsidiaries assumed all
employment-related obligations, accrued benefits and severance pay of our
employees who have become employees of the subsidiaries.
D. EXCHANGE CONTROLS
There are currently no Israeli currency control restrictions on payments of
dividends or other distributions with respect to our ordinary shares or the
proceeds from the sale of the shares, except for the obligation of Israeli
residents to file reports with the Bank of Israel regarding certain
transactions. However, legislation remains in effect pursuant to which currency
controls can be imposed by administrative action at any time.
The ownership or voting of our ordinary shares by non-residents of Israel,
except with respect to citizens of countries which are in a state of war with
Israel, is not restricted in any way by our memorandum of association or
articles of association or by the laws of the State of Israel.
E. TAXATION
The following is a general summary only and should not be considered as
income tax advice or relied upon for tax planning purposes.
United States
The following summary describes the material U.S. federal income tax
consequences to "U.S. Holders" (as defined below) arising from the purchase,
ownership and disposition of our ordinary shares. This summary is based on
current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the final, temporary and proposed U.S. Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change, possibly with retroactive effect. This summary is
addressed only to holders that are U.S. citizens, individuals resident in the
United States for U.S. federal income tax purposes, domestic U.S. corporations,
estates the income of which is subject to U.S. federal income tax regardless of
the source of their income and any trust if either:
o a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the
authority to control all the substantial decisions of the trust, or
o the trust has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a U.S. person (collectively,
"U.S. Holders").
This discussion does not consider all aspects of U.S. federal income
taxation that may be relevant to particular U.S. Holders by reason of their
particular circumstances, including potential application of the alternative
minimum tax, or any aspect of state, local or non-U.S. federal tax laws. In
addition, this summary is directed only to U.S. Holders that hold ordinary
shares as capital assets and does not address the considerations that may be
applicable to particular classes of U.S. Holders, including financial
institutions, insurance companies, broker-dealers, tax-exempt organizations,
holders of ordinary shares as part of a "straddle," "hedge" or "conversion
transaction," holders, directly, indirectly or through attribution, of 10% or
more of our outstanding ordinary shares and persons who own ordinary shares
through a partnership or other pass-through entity.
Each U.S. Holder should consult with his, her or its own tax advisor as to
the particular tax consequences to him, her or it of the purchase, ownership and
sale of ordinary shares, including the effects of applicable state, local,
foreign or other tax laws and possible changes in the tax laws.
Sale or Exchange of Ordinary Shares
Subject to the discussion under the heading "Passive Foreign Investment
Company Status" below, a U.S. Holder's sale or exchange of ordinary shares
generally will result in the recognition by such U.S. Holder of capital gain or
loss in an amount equal to the difference between the amount realized and the
U.S. Holder's tax basis in the ordinary shares sold. This gain or loss will be
long-term capital gain or loss if the ordinary shares sold have been held for
more than one year at the time of the sale or exchange. If the U.S. Holder's
holding period on the date of the sale or exchange is one year or less, such
gain or loss will be a short-term capital gain or loss. See "--Israel--Capital
Gains Tax" for a discussion of taxation by Israel of capital gains realized on
sales of capital assets. Any capital loss realized upon the sale, exchange or
other disposition of ordinary shares generally is deductible only against
capital gains and not against ordinary income, except that in the case of
non-corporate U.S. Holders, a capital loss is deductible to the extent of
capital gains plus ordinary income up to $3,000. In general, any capital gain
recognized by a U.S. Holder upon the sale or exchange of ordinary shares will be
treated as U.S.-source income for U.S. foreign tax credit purposes.
A U.S. Holder's tax basis in his, her or its ordinary shares generally will
be the purchase price paid therefor by such U.S. Holder. The holding period of
each ordinary share owned by a U.S. Holder will commence on the day following
the date of the U.S. Holder's purchase of such ordinary share and will include
the day on which the ordinary share is sold by such U.S. Holder.
Treatment of Dividend Distributions
For U.S. federal income tax purposes, the gross amount of any
distributions, including the amount of any Israeli taxes withheld therefrom,
paid to a U.S. Holder with respect to his, her or its ordinary shares will be
included in his, her or its ordinary income to the extent that the dividends are
paid out of our current or accumulated earnings and profits, as determined based
on U.S. federal tax principles. Such dividends will not be eligible for the
dividends received deduction allowed to U.S. corporations under Section 243 of
the Code. Dividend distributions in excess of our current and accumulated
earnings and profits will be treated first as a non-taxable return of the U.S.
Holder's tax basis in his, her or its ordinary shares to the extent thereof and
then as a gain from the sale of ordinary shares. Dividends paid in new Israeli
shekels may be included in income in a U.S. dollar amount based on the exchange
rate at the time of their receipt. Any gain or loss resulting from currency
fluctuations during the period from the date a dividend is paid to the date such
payment is converted into U.S. dollars generally will be treated as ordinary
income or loss.
Subject to certain conditions and limitations, any Israeli withholding tax
imposed on such dividends generally will be eligible for credit against such
U.S. Holder's U.S. federal income tax liability or, at the U.S. Holder's
election, may be claimed as a deduction against income in determining such tax
liability. The limitations on claiming a foreign tax credit include computation
rules under which foreign tax credits allowable with respect to specific classes
of income cannot exceed the U.S. federal income taxes otherwise payable with
respect to each such class of income. Dividends with respect to the ordinary
shares generally will be classified as "passive income" for purposes of
computing the foreign tax credit limitation. Foreign income taxes exceeding the
credit limitation for the year of payment or accrual may be carried back for two
taxable years and forward for five taxable years in order to reduce U.S. federal
income taxes, subject to the credit limitation applicable in each of those
years. Subject to certain conditions and limitations, any Israeli withholding
tax imposed on such dividends generally will be eligible for credit against such
U.S. Holder's U.S. federal income tax liability or, at the U.S. Holder's
election, may be claimed as a deduction against income in determining such tax
liability. The calculation of allowable foreign tax credits and, in the case of
a U.S. Holder that elects to deduct foreign taxes, the availability of
deductions for foreign taxes paid involve the application of complex rules that
depend on a U.S. Holder's particular circumstances. Accordingly, U.S. Holders
should consult their own tax advisors regarding their eligibility for foreign
tax credits or deductions.
Passive Foreign Investment Company Status
Generally, a foreign corporation is treated as a passive foreign investment
company ("PFIC") for U.S. federal income tax purposes for any tax year if, in
such tax year, either (i) 75% or more of its gross income is passive in nature
(the "Income Test"), or (ii) the average percentage of its assets during such
tax year which produce, or are held for the production of, passive income
(determined by averaging the percentage of the fair market value of its total
assets which are passive assets as of the end of each quarter of such year) is
50% or more (the "Asset Test").
Because less than 75% of our gross income in 2002 and in prior years
constituted passive income, as defined for purposes of the Income Test, we do
not believe that application of the Income Test would have resulted in our
classification as a PFIC for any of such years. Under the Asset Test, however,
while we do not believe that we were a PFIC for any tax year prior to 2001, it
is likely that we would be deemed to have been a PFIC for 2001 and 2002.
There is no definitive method prescribed in the Code, U.S. Treasury
Regulations or administrative or judicial interpretations thereof for
determining the value of a foreign corporation's assets for purposes of the
Asset Test. The legislative history of the U.S. Taxpayer Relief Act of 1997 (the
"1997 Act"), however, indicates that for purposes of the Asset Test, "the total
value of a publicly-traded foreign corporation's assets generally will be
treated as equal to the sum of the aggregate value of its outstanding stock plus
its liabilities." It is unclear under current interpretations of the 1997 Act
whether other valuation methods could be employed to determine the value of our
assets. Under the approach set forth in the legislative history to the 1997 Act,
we would be deemed to have been a PFIC for 2001 and 2002, principally because
(a) a significant portion of our assets continued to consist of cash, cash
equivalents and short- and long-term investments from the remaining proceeds of
our offerings, and (b) the public market value of our ordinary shares declined
significantly during 2001 and 2002.
If we are treated as a PFIC for U.S. federal income tax purposes for any
year during a U.S. Holder's holding period of ordinary shares and the U.S.
Holder does not make a QEF Election or a "mark-to-market " election (both as
described below), any gain recognized by the U.S. Holder upon the sale of
ordinary shares (or the receipt of certain distributions) would be treated as
ordinary income. This income generally would be allocated over a U.S. Holder's
holding period with respect to our ordinary shares. The amount allocated to
prior years will be subject to tax at the highest tax rate in effect for that
year and an interest charge would be imposed on the amount of deferred tax on
the income allocated to prior taxable years.
Although we generally will be treated as a PFIC as to any U.S. Holder if we
are a PFIC for any year during the U.S. Holder's holding period, if we cease to
satisfy the requirements for PFIC classification, the U.S. Holder may avoid the
consequences of PFIC classification for subsequent years if he elects to
recognize gain based on the unrealized appreciation in the ordinary shares
through the close of the tax year in which we cease to be a PFIC. Additionally,
if we are treated as a PFIC, a U.S. Holder who acquires ordinary shares from a
decedent would be denied the normally available step-up in tax basis for these
ordinary shares to fair market value at the date of death and instead would have
a tax basis equal to the decedent's tax basis in these ordinary shares.
A U.S. Holder who beneficially owns shares of a PFIC must file Form 8621
(Return by a Shareholder of a Passive Foreign Investment Company or Qualified
Electing Fund) with the U.S. Internal Revenue Service for each tax year in which
he holds shares in a PFIC. This form describes any distributions received with
respect to these shares and any gain realized upon the disposition of these
shares.
For any tax year in which we are treated as a PFIC, a U.S. Holder may elect
to treat his, her or its ordinary shares as an interest in a qualified electing
fund (a "QEF Election"), in which case the U.S. Holder would be required to
include in income currently his proportionate share of our earnings and profits
in years in which we are a PFIC regardless of whether distributions of our
earnings and profits are actually distributed to the U.S. Holder. Any gain
subsequently recognized upon the sale by the U.S. Holder of his ordinary shares,
however, generally would be taxed as capital gain and the denial of the basis
step-up at death described above would not apply.
A shareholder may make a QEF Election with respect to a PFIC for any
taxable year of the shareholder. A QEF Election is effective for the year in
which the election is made and all subsequent taxable years of the shareholder.
Procedures exist for both retroactive elections and the filing of protective
statements. A U.S. Holder making the QEF Election must make the election on or
before the due date, as extended, for the filing of the shareholder's income tax
return for the first taxable year to which the election will apply.
A U.S. Holder must make a QEF Election by completing Form 8621 and
attaching it to their U.S. federal income tax return, and must satisfy
additional filing requirements each year the election remains in effect. We will
provide to each shareholder, upon request, the tax information required to make
a QEF Election and to make subsequent annual filings.
As an alternative to a QEF Election, a U.S. Holder generally may elect to
mark his ordinary shares to market annually, recognizing ordinary income or loss
(subject to certain limitations) equal to the difference between the fair market
value of his ordinary shares and the adjusted tax basis of his ordinary shares.
Losses would be allowed only to the extent of net mark-to-market gain accrued
under the election. If a mark-to-market election with respect to ordinary shares
is in effect on the date of a U.S. Holder's death, the normally available
step-up in tax basis to fair market value will not be available. Rather, the tax
basis of the ordinary shares in the hands of a U.S. Holder who acquired them
from a decedent will be the lesser of the decedent's tax basis or the fair
market value of the ordinary shares.
The implementation of many aspects of the Code's PFIC rules requires the
issuance of regulations which in many instances have yet to be promulgated and
which may have retroactive effect. We cannot be sure that any of these
regulations will be promulgated or, if so, what form they will take or what
effect they will have on the foregoing discussion.
Accordingly, and due to the complexity of the PFIC rules, U.S. Holders
should consult their own tax advisors regarding our status as a PFIC for 2001,
2002 and any subsequent years and the eligibility, manner and advisability of
making a QEF Election or a mark-to-market election, and the effect of these
elections on the calculation of the amount of foreign tax credit that may be
available to a U.S. Holder. As noted above, for those U.S. Holders who determine
that we were a PFIC for 2001, 2002 and/or any subsequent years and notify us in
writing of their request for the information required in order to effectuate the
QEF Election, we will promptly make this information available to them.
Information Reporting and Backup Withholding
Any dividends paid on the ordinary shares to U.S. Holders may be subject to
U.S. federal tax information reporting requirements and the U.S. backup
withholding tax (currently 30% through 2003, but scheduled for reduction to 29%
for 2004-2005 and 28% for 2006 and later years). In addition, the proceeds of a
U.S. Holder's sale of ordinary shares may be subject to tax information
reporting and the U.S. backup withholding tax. Backup withholding will not apply
if the U.S. Holder (i) is a corporation or other exempt recipient, or (ii) the
U.S. Holder provides a U.S. taxpayer identification number, certifies as to no
loss of exemption from backup withholding and otherwise complies with any
applicable backup withholding requirements. Any amounts withheld under the U.S.
backup withholding tax rules will be allowed as a refund or a credit against the
U.S. Holder's U.S. federal income tax, provided the required information is
furnished to the U.S. Internal Revenue Service.
Israel
The following discussion, which represents a summary of certain Israeli tax
laws affecting our shareholders, including U.S. and other non-Israeli
shareholders, is for general information only and is not intended to substitute
for careful or specific tax planning. To the extent that the discussion is based
on legislation yet to be judicially or administratively interpreted, there can
be no assurance that the views expressed herein will accord with any such
interpretation in the future. This discussion is not intended, and should not be
construed, as legal or professional tax advice, and does not cover all possible
tax considerations. Accordingly, each investor should consult his or her own tax
advisor as to the particular tax consequences of an investment in the ordinary
shares including the effects of applicable Israeli or foreign or other tax laws
and possible changes in the tax laws.
Tax Reform
On January 1, 2003, the Law for Amendment of the Income Tax Ordinance
(Amendment No. 132), 5762-2002, as amended, known as the tax reform, came into
effect.
The tax reform, aimed at broadening the categories of taxable income and
reducing the tax rates imposed on employment income, introduced the following
measures, among other things:
o Reduction of the tax rate levied on capital gains (other than gains
deriving from the sale of listed securities) derived after January 1,
2003 to a general rate of 25% for both individuals and corporations.
Regarding assets acquired prior to January 1, 2003, the reduced tax
rate will apply to a proportionate part of the gain, in accordance
with the holding periods of the asset, before or after January 1,
2003, on a linear basis. In addition, the tax reform enables the carry
forward of capital losses without any time restriction;
o Imposition of Israeli tax on all income of Israeli residents,
individuals and corporations, regardless of the territorial source of
income, including income derived from passive sources such as
interest, dividends and royalties;
o Introduction of controlled foreign corporation (CFC) rules into the
Israeli tax structure. Generally, under such rules, an Israeli
resident who holds, directly or indirectly, 10% or more of the rights
in a foreign corporation whose shares are not publicly traded (or
which has offered less than 30% of its shares or any rights to its
shares to the public), in which more than 50% of the rights are held
directly or indirectly by Israeli residents, and a majority of whose
income in a tax year is considered passive income, will be liable for
tax on the portion of such income attributed to his holdings in such
corporation, as if such income were distributed to him as a dividend;
o Imposition of capital gains tax on capital gains realized by
individuals as of January 1, 2003 from the sale of shares of publicly
traded companies (such gain was previously exempt from capital gains
tax in Israel). For information with respect to the applicability of
Israeli capital gains taxes on the sale of ordinary shares, see
"Capital Gains Tax" below;
o Introduction of a new regime for the taxation of shares and options
issued to employees, officers and directors; and
o Introduction of tax at a rate of 25% on dividends paid by one
Israeli company to another (which are generally not subject to tax),
if the source of such dividends is income that was derived outside of
Israel.
Capital Gains Tax
Israeli law generally imposes a capital gains tax on the sale of capital
assets located in Israel, including shares in Israeli companies, by both
residents and non-residents of Israel, unless a specific exemption is available
or unless a tax treaty between Israel and the shareholder's country of residence
provides otherwise. The law distinguishes between the inflationary surplus and
the real gain. The inflationary surplus is a portion of the total capital gain
which is equivalent to the increase of the relevant asset's purchase price
attributable to the increase in the Israeli consumer price index, or in certain
circumstances, a foreign currency exchange rate, between the date of purchase
and the date of sale. The real gain is the excess of the total capital gain over
the inflationary surplus.
Prior to the tax reform, sales of our ordinary shares by individuals were
generally exempt from Israeli capital gains tax so long as (i) our ordinary
shares were quoted on Nasdaq or listed on a stock exchange in a country
appearing on a list approved by the Controller of Foreign Currency and (ii) we
qualified as an Industrial Company within the definition of the Law for the
Encouragement of Industry (Taxes), 5729-1969. We believe that we currently
qualify as an Industrial Company, but no assurance can be given that we will
continue to qualify as an Industrial Company.
Pursuant to the tax reform, generally, capital gains tax is imposed at a
rate of 15% on real gains derived on or after January 1, 2003 from the sale of
shares in: (i) companies publicly traded on the Tel Aviv Stock Exchange
("TASE"); or (ii) subject to a necessary determination by the Israeli Minister
of Finance, Israeli companies publicly traded on Nasdaq or a recognized stock
exchange or a regulated market outside of Israel; or (iii) companies dually
traded on both the TASE and Nasdaq or a recognized stock exchange or a regulated
market outside of Israel (such as Orckit). This tax rate is contingent upon the
shareholder not claiming a deduction for financing expenses, and does not apply
to: (i) dealers in securities; (ii) shareholders that report in accordance with
the Income Tax Law (Inflationary Adjustments), 5745-1985; or (iii) shareholders
who acquired their shares prior to an initial public offering (that are subject
to a different tax arrangement). The tax basis of shares acquired prior to
January 1, 2003 will be determined in accordance with the average closing share
price in the three trading days preceding January 1, 2003. However, a request
may be made to the tax authorities to consider the actual adjusted cost of the
shares as the tax basis if it is higher than such average price.
Non-Israeli residents are exempt from Israeli capital gains tax on any
gains derived from the sale of shares publicly traded on the TASE, and are
exempt from Israeli capital gains tax on any gains derived from the sale of
shares of Israeli companies publicly traded on Nasdaq or a recognized stock
exchange or a regulated market outside of Israel, provided that such capital
gains are not derived from a permanent establishment in Israel and that such
shareholders did not acquire their shares prior to the issuer's initial public
offering. However, non-Israeli corporations will not be entitled to such
exemption if an Israeli resident (i) has a controlling interest of 25% or more
in such non-Israeli corporation, or (ii) is the beneficiary of or is entitled to
25% or more of the revenues or profits of such non-Israeli corporation, whether
directly or indirectly.
In any event, the provisions of the tax reform shall not affect the
exemption from capital gains tax for gains accrued before January 1, 2003, as
described above.
In some instances where our shareholders may be liable to Israeli tax on
the sale of their ordinary shares, the payment of the consideration may be
subject to the withholding of Israeli tax at the source.
Pursuant to a treaty between the governments of the United States and
Israel, the sale, exchange or disposition of shares by a person who qualifies as
a resident of the United States within the meaning of the treaty and who is
entitled to claim the benefits afforded to a resident by the treaty will
generally not be subject to Israeli capital gains tax. This exemption does not
apply if the person holds, directly or indirectly, shares representing 10% or
more of our voting power during any part of the 12-month period preceding the
applicable sale, exchange or disposition, subject to specified conditions.
However, under the treaty, the person would be permitted to claim a credit for
the capital gains tax paid in Israel against the U.S. federal income tax imposed
with respect to the applicable sale, exchange or disposition, subject to the
limitations in U.S. laws applicable to foreign tax credits. The treaty does not
relate to U.S state or local taxes.
Tax on Dividends
Non-residents of Israel are subject to income tax on income accrued or
derived from sources in Israel. These sources of income include passive income
such as dividends, royalties and interest, as well as non-passive income from
services rendered in Israel. On distributions of dividends other than bonus
shares, or stock dividends, we would be required to withhold income tax at the
rate of up to 25%, unless a different rate is provided in a treaty between
Israel and the shareholder's country of residence. If the income out of which
the dividend is being paid is attributable to an Approved Enterprise, the rate
is 15%. Under the U.S.-Israel tax treaty, if the income out of which the
dividend is being paid is not attributable to an Approved Enterprise, then
income tax with respect to shareholders that are U.S. corporations holding at
least 10% of our voting power is required to be withheld at the rate of 12.5%.
For more information on Approved Enterprises, please refer to Item 5B of this
Annual Report.
F. DIVIDENDS AND PAYING AGENTS
Not applicable
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, applicable to foreign private issuers and fulfill the
obligations with respect to such requirements by filing reports with the
Securities and Exchange Commission, or SEC. You may read and copy any document
we file, including any exhibits, with the SEC without charge at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such
material may be obtained by mail from the Public Reference Branch of the SEC at
such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room. Certain of our SEC filings are
also available to the public at the SEC's website at http://www.sec.gov.
As a foreign private issuer, we are exempt from the rules under the
Exchange Act prescribing the furnishing and content of proxy statements, and our
officers, directors and principal shareholders are exempt from the reporting and
"short-swing" profit recovery provisions contained in Section 16 of the Exchange
Act. In addition, we are not required under the Exchange Act to file periodic
reports and financial statements with the SEC as frequently or as promptly as
United States companies whose securities are registered under the Exchange Act.
I. SUBSIDIARY INFORMATION
Not applicable
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
We are exposed to market risk, including movements in interest rates and
foreign currency exchange rates. Our primary market risk exposure occurs because
we generate most of our revenues in U.S. dollars but incur a majority of our
salaries and related expenses and part of our other expenses in new Israeli
shekels.
We do not generally engage in any hedging or other transactions intended to
manage risks relating to foreign currency exchange rates or interest rate
fluctuations. At December 31, 2002 and as of March 31, 2003, we did not own any
market risk sensitive instruments. However, we may in the future undertake
hedging or other similar transactions or invest in market risk sensitive
instruments if our management determines that it is necessary to offset these
risks.
Our interest rate and foreign exchange exposures are monitored by tracking
actual and projected commitments.
Exchange Rate Risk Management
Our functional currency and that of our subsidiaries is the U.S. dollar.
From time to time, we assess our exposure to exchange rate risks and
endeavor to limit this exposure through natural hedging, or by attempting to
maintain a similar level of assets and liabilities in any given currency.
The table below presents our balance sheet exposure related to market risk
sensitive instruments, mainly short term receivables and payables in currencies
other than U.S. dollars, which bear no interest, expressed in currencies and
geographical terms, as of December 31, 2002 at fair value.
The information is presented in U.S. dollars (in millions), which is
our reporting currency.
Please see also the explanatory notes below the table.
-------------- --------------- --------------- ---------------
Euro New Israeli Total
Shekel
-------------- --------------- --------------- ---------------
Israel (8.5) (8.5)
-------------- --------------- --------------- ---------------
Europe (0.1) (0.1)
-------------- --------------- --------------- ---------------
Total (0.1) (8.5) (8.6)
-------------- --------------- --------------- ---------------
Explanatory notes:
1) Total balance sheet exposure relating to market risk sensitive
instruments is the sum of the absolute figures (excess of liabilities over
assets in the amount of $8.6 million).
2) Due to the high degree of correlation among the European
currencies, we do not differentiate among these currencies when assessing
our exposure. Therefore, the data in the column headed "Euro" in the
foregoing table includes exposures to other European currencies.
3) The data presented in the table reflects the exposure after taking
into account the effect of the "natural" hedging.
Interest Rate Risk Management
As of December 31, 2002, we had $10.2 million of cash and cash equivalents,
$10.6 million of short-term bank deposits, $25.1 million of trading securities,
$18.0 million of short term marketable securities, $6.2 million of long term
deposits and $46.6 million of long-term marketable securities. Our trading and
marketable securities mature as follows: $43.1 million in 2003, and $46.6
million over a period from 2004 to 2006. Due to the relatively short-term
maturities of the Company's cash, deposits and securities portfolio, an
immediate 10% change in the current interest rates (for example, from 5.0% to
5.5%) is not expected to have a material effect on its near-term financial
condition or results of operations.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
For a discussion of our shareholder bonus rights plan, please refer to Item
10.B of this Annual Report. In connection with the grants in 2003 to Eric
Paneth, our Chief Executive Officer and a director, and Izhak Tamir, our
President and a director, of the share purchase rights described in Item 6E,
this plan was amended to provide that the beneficial ownership of our ordinary
shares held by Mr. Paneth or Mr. Tamir will not trigger the rights under this
plan.
At our annual general shareholders meeting held in February 2003, our
shareholders approved the following amendments to our article of association:
o the vote required to amend our articles of association was changed
from a simple majority to 66-2/3% of our outstanding ordinary shares
voting on the matter;
o the vote required to (i) elect a director was changed from a simple
majority to 66-2/3% of our outstanding ordinary shares voting on the
matter and (ii) remove a director was changed from a simple majority
to 75% of our outstanding ordinary shares voting on the matter. Also
it was clarified that directors may be elected by shareholders only at
an annual general meeting and that each director (except outside
directors) will serve until the next annual general meeting at which
one or more directors are elected following his election;
o the number of "outside directors" (as defined in the Companies Law)
was limited to three. The Companies Law requires at least two outside
directors, and we currently have three. This amendment will not limit
the number of "independent directors" (as defined in the rules of
Nasdaq) that we may have;
o the maximum size of our board of directors was changed from 15 to
seven directors and the minimum number of continuing directors that
are entitled to act as the board of directors in the event of
vacancies was changed from a majority of the board of directors to
three directors; and
o a requirement that any dividends be approved by our audit committee
in addition to our board of directors was added, or if we do not have
an audit committee for any reason, by a majority of the "outside
directors" (as defined in the Companies Law) then on the board of
directors.
ITEM 15. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we performed an evaluation
of the effectiveness of the design and operation of our disclosure controls and
procedures. The evaluation was performed with the participation of our key
corporate senior management and under the supervision and with the participation
of our chief executive officer and chief financial officer. Based on this
evaluation, our principal executive officer and principal financial officer have
concluded that our disclosure controls and procedures are effective to alert
them on a timely basis to material information required to be included in our
periodic reports with the Securities and Exchange Commission.
In addition, there have been no significant changes in our internal
controls or in other factors that could significantly affect those controls
subsequent to the date of the evaluation.
ITEM 16. [Reserved]
ITEM 17. FINANCIAL STATEMENTS
See Item 18.
ITEM 18. FINANCIAL STATEMENTS
Attached. See Item 19(a).
ITEM 19.EXHIBITS
(a) The following consolidated financial statements and related auditors'
report are filed as part of this Annual Report:
Page
Table of Contents to 2002 Consolidated Financial Statements F-1
Report of Independent Auditors F-2
Consolidated Financial Statements:
Balance Sheets at December 31, 2001 and 2002 F-3
Statements of Operations for the Years Ended
December 31, 2000, 2001 and 2002 F-4
Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2000, 2001 and 2002 F-5
Statements of Cash Flows for the Years Ended
December 31, 2000, 2001 and 2002 F-6 - F-7
Notes to Financial Statements F-8 - F-27
Report of independent auditors on financial statement schedule F-28
Schedule - valuation and qualifying accounts F-29
(b) Exhibits:
The following exhibits are filed as part of this Annual Report:
Exhibit No. Exhibit
+1.1* Memorandum of Association, as amended.
1.2* Fourth Amended and Restated Articles of Association.
1.3(4) Bonus Rights Agreement, dated as of November 20, 2001, between
Orckit Communications Ltd. and American Stock Transfer & Trust
Company, as Rights Agent.
1.4(6) Amendment No. 1, dated as of February 5, 2003, to Bonus Rights
Plan, dated as of November 20, 2001, between Orckit
Communications Ltd. and American Stock Transfer & Trust Company,
as Rights Agent.
2.1(1) Indenture, dated as of March 13, 2000, between Orckit
Communications Ltd. and State Street Bank and Trust Company.
2.2(1) 5.75% Convertible Subordinated Notes of Orckit Communications
Ltd. due April 1, 2005.
2.3(1) Registration Rights Agreement, dated March 13, 2000, by and among
Orckit Communications Ltd., Tikcro Ltd. and CIBC World Markets
Corp.
4.1(2) Orckit Israeli Share Incentive Plan, as amended (2000).
+4.5(3) Lease Agreement, dated September 28, 1999, between Orckit
Communications Ltd. and Gush 7093 Helka 162 Ltd., private company
# 51-058315-6.
4.6(5) Corrigent Stock Option Plan (2001).
4.10* Orckit Communications Ltd. 2003 Subsidiary Employee Share
Incentive Plan.
8.1* Subsidiaries of Orckit Communications Ltd.
10.3* Consent of Kesselman & Kesselman, independent auditors of Orckit
Communications Ltd.
99.1* Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
99.2* Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
- ------------------------------------------------------------------------------
+ Translated in full or summary version; the original language version
is on file with Orckit Communications Ltd. and is available upon
request.
1 Incorporated by reference to Amendment No. 1 to Orckit Communications
Ltd.'s Annual Report on Form 20-F/A for the fiscal year ended December
31, 1999.
2 Incorporated by reference to Orckit Communications Ltd.'s Registration
Statement (File No. 333-12178) on Form S-8.
3 Incorporated by reference to Orckit Communications Ltd.'s Annual
Report on Form 20-F for the fiscal year ended December 31, 2000.
4 Incorporated by reference to Orckit Communications Ltd.'s Registration
Statement (File No. 000-28724) on Form 8-A.
5 Incorporated by reference to Orckit Communications Ltd.'s Annual Report
on Form 20-F for the fiscal year ended December 31, 2001.
6 Incorporated by reference to Orckit Communications Ltd.'s Registration
Statement (File No. 000-28724) on Form 8-A/A.
* Filed herewith.
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused and authorized the undersigned to sign
this annual report on its behalf.
ORCKIT COMMUNICATIONS LTD.
By: /s/ Izhak Tamir
Name: Izhak Tamir
Title: President
Date: June 23, 2003
CERTIFICATIONS
I, Eric Paneth, certify that:
1. I have reviewed this annual report on Form 20-F of Orckit Communications
Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
i.designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
ii. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
iii. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
i. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
ii. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 23, 2003
By: /s/ Eric Paneth
Name: Eric Paneth
Title: Chief Executive Officer
I, Aviv Boim, certify that:
1. I have reviewed this annual report on Form 20-F of Orckit Communications
Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
i. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
ii. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
iii. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
i. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
ii. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 23, 2003
By: /s/ Aviv Boim
Name: Aviv Boim
Title: Chief Financial Officer
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
2002 CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT AUDITORS ...................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets .................................................. F-3
Statements of operations ........................................ F-4
Statements of changes in shareholders' equity ................... F-5
Statements of cash flows ........................................ F-6-7
Notes to financial statements ................................... F-8-27
The amounts are stated in U.S. dollars ($) in thousands.
F-1
REPORT OF INDEPENDENT AUDITORS
To the shareholders of
ORCKIT COMMUNICATIONS LTD.
We have audited the consolidated balance sheets of Orckit Communications
Ltd. (the "Company") and its subsidiaries as of December 31, 2001 and 2002, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2002. These financial statements are the responsibility of the Company's
Board of Directors and management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Israel and in the United States, including those prescribed by the
Israeli Auditors (Mode of Performance) Regulation, 1973. Those standards require
that we plan and perform the audit 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 the Company's Board of
Directors and 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 aforementioned consolidated financial statements
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2001 and 2002 and the
consolidated results of their operations, the changes in shareholders' equity
and their cash flows for each of the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States.
Kesselman & Kesselman
Certified Public Accountants (Isr.)
Tel Aviv, Israel
January 16, 2003
Kesselman & Kesselman is a member of PricewaterhouseCoopers International
Limited, a company limited by guarantee registered in England and Wales.
F-2
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)
December 31
-----------
2001 2002
--------- ---------
A s s e t s
CURRENT ASSETS:
Cash and cash equivalents ......................................................................... $ 39,091 $ 10,165
Marketable securities (note 12a) ................................................................. 55,527 43,139
Bank deposits (note 12d) .......................................................................... 8,110 10,545
Trade receivables (note 12b) ...................................................................... 7,316 786
Other receivables (note 12b) ...................................................................... 4,493 2,443
Inventories (note 12c) ............................................................................ 9,297 100
_________ _________
T o t a l current assets .................................................................. 123,834 67,178
_________ _________
LONG-TERM INVESTMENTS:
Marketable securities (note 12a) .................................................................. 46,576
Other (note 12d) .................................................................................. 13,104 8,403
_________ _________
13,104 54,979
_________ _________
LONG-TERM LOAN TO A RELATED PARTY (note 4) ............................................................ 20,000 7,000
_________ _________
PROPERTY AND EQUIPMENT - net (note 5): ............................................................... 7,796 6,070
_________ _________
DEFERRED ISSUANCE COSTS, net of accumulated amortization .............................................. 1,566 623
_________ _________
T o t a l assets .......................................................................... $ 166,300 $ 135,850
========= =========
Liabilities and shareholders' equity
CURRENT LIABILITIES:
Trade payables .................................................................................... $ 8,803 $ 4,827
Accrued expenses and other payables (note 12e) .................................................... 11,136 7,158
_________ _________
T o t a l current liabilities ............................................................. 19,939 11,985
_________ _________
LONG-TERM LIABILITIES:
Accrued severance pay (note 6) .................................................................... 3,160 3,265
Convertible subordinated notes (note 7) ........................................................... 66,416 38,179
_________ _________
T o t a l long-term liabilities ............................................................ 69,576 41,444
_________ _________
COMMITMENTS (note 8)
_________ _________
T o t a l liabilities ...................................................................... 89,515 53,429
_________ _________
SHAREHOLDERS' EQUITY (note 9):
Share capital - ordinary shares, in 2001 of NIS 0.10 par value, in 2002 - of no par value
(authorized: December 31,2001 and 2002 - 10,000,000 shares; issued and outstanding:
December 31, 2001 - 4,874,128 shares; December 31, 2002 - 4,979,593 shares) * .................. 710 --
Additional paid-in capital ........................................................................ 321,504 322,227
Deferred compensation ............................................................................. (3,563) (2,023)
Accumulated deficit ** ............................................................................ (241,866) (237,783)
_________ _________
T o t a l shareholders' equity ............................................................ 76,785 82,421
_________ _________
T o t a l liabilities and shareholders' equity ............................................ $ 166,300 $ 135,850
========= =========
* After giving retroactive effect to the one-for-five reverse share split, see
note 9a(2).
** Including $89,592 charged in 2000 as a result of the spin-off of the
semiconductor business, see note 2.
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. dollars in thousands, except per share data)
Year ended December 31
----------------------
*2000 2001 2002
--------- --------- ---------
REVENUES (note 12f) ................................................... $ 131,867 $ 141,647 $ 53,420
COST OF REVENUES (note 12g) ........................................... 133,671 112,007 32,963
_________ _________ _________
GROSS PROFIT (LOSS) ................................................... (1,804) 29,640 20,457
RESEARCH AND DEVELOPMENT EXPENSES - net (note 12h) .................... 30,860 19,085 19,291
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES .......................................................... 33,561 16,993 14,699
ACQUISITION OF RESEARCH AND DEVELOPMENT
IN PROCESS (note 3) ............................................... 28,976
AMORTIZATION AND IMPAIRMENT OF GOODWILL (note 3b) ..................... 14,334 26,101
_________ _________ _________
OPERATING LOSS ........................................................ (109,535) (32,539) (13,533)
FINANCIAL INCOME - net (note 12i) .................................... 1,975 33,395 17,616
OTHER INCOME .......................................................... 906
_________ _________ _________
NET INCOME (LOSS) FOR THE YEAR ........................................ $(106,654) $ 856 $ 4,083
========= ========= =========
INCOME (LOSS) PER SHARE ** (note 1n):
Basic ............................................................. $ (24.60) $ 0.18 $ 0.83
========= ========= =========
Diluted ........................................................... $ (24.60) $ 0.18 $ 0.79
========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING ** (note 1n):
Basic ............................................................. 4,332 4,632 4,932
========= ========= =========
Diluted ........................................................... 4,332 4,875 5,163
========= ========= =========
* Including the results of Tioga Technologies Ltd. for the six month period
ended June 30, 2000, see note 2.
** After giving retroactive effect to the one-for-five reverse share split, see
note 9a(2).
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. dollars in thousands)
Share capital
-------------
Number of
shares * Additional
(in thousands) Amount paid-in capital
-------------- ------ ---------------
BALANCE AT JANUARY 1, 2000 ...................................................... 3,967 $ 599 $ 137,578
CHANGES DURING 2000:
Net loss ....................................................................
Issuance of share capital as consideration for acquisition
of companies (see note 3) ................................................ 435 53 170,261
Spin-off of semiconductor business (see note 2) .............................
Exercise of options granted to employees .................................... 93 11 4,290
Deferred compensation related to employee stock option grants ............... 1,192
Amortization of deferred compensation related to employee stock option grants
_________ _________ _________
BALANCE AT DECEMBER 31, 2000 .................................................... 4,495 663 313,321
CHANGES DURING 2001:
Net income ..................................................................
Conversion of convertible subordinated notes into shares .................... 30 3 246
Exercise of options granted to employees .................................... 350 44 723
Deferred compensation related to employee stock option grants ............... 7,214
Amortization of deferred compensation related to employee stock option grants
_________ _________ _________
BALANCE AT DECEMBER 31, 2001 .................................................... 4,875 710 321,504
CHANGES DURING 2002:
Net income ..................................................................
Exercise of options granted to employees .................................... 105 13
Amortization of deferred compensation related to employee stock option grants
Cancellation of ordinary shares par value ................................... (723) 723
_________ _________ _________
BALANCE AT DECEMBER 31, 2002 .................................................... 4,980 $ -- $ 322,227
========= ========= =========
Total
Deferred Accumulated shareholders'
compensation deficit equity
------------ ------- ------
BALANCE AT JANUARY 1, 2000 ...................................................... $ (154) $ (46,476) $ 91,547
CHANGES DURING 2000:
Net loss .................................................................... (106,654) (106,654)
Issuance of share capital as consideration for acquisition
of companies (see note 3) ................................................ 170,314
Spin-off of semiconductor business (see note 2) ............................. (89,592) (89,592)
Exercise of options granted to employees .................................... 4,301
Deferred compensation related to employee stock option grants ............... (1,192) --
Amortization of deferred compensation related to employee stock option grants 1,346 1,346
_________ _________ _________
BALANCE AT DECEMBER 31, 2000 .................................................... -- (242,722) 71,262
CHANGES DURING 2001:
Net income .................................................................. 856 856
Conversion of convertible subordinated notes into shares .................... 249
Exercise of options granted to employees .................................... 767
Deferred compensation related to employee stock option grants ............... (7,214) --
Amortization of deferred compensation related to employee stock option grants 3,651 3,651
_________ _________ _________
BALANCE AT DECEMBER 31, 2001 .................................................... (3,563) (241,866) 76,785
CHANGES DURING 2002:
Net income .................................................................. 4,083 4,083
Exercise of options granted to employees .................................... 13
Amortization of deferred compensation related to employee stock option grants 1,540 1,540
Cancellation of ordinary shares par value ................................... --
_________ _________ _________
BALANCE AT DECEMBER 31, 2002 .................................................... $ (2,023) $(237,783) $ 82,421
========= ========= =========
* After giving retroactive effect to the one-for-five reverse share split, see
note 9a(2).
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued) - 1
(U.S. dollars in thousands)
Year ended December 31
----------------------
2000 2001 2002
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) for the year ........................................................ $(106,654) $ 856 $ 4,083
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization:
Property and equipment ......................................................... 3,931 4,074 3,568
Other assets and deferred charges .............................................. 16,372 3,411 393
Goodwill and other identifiable intangible assets impairment ...................... 23,400
Acquisition of research and development in process ................................ 28,976
Bank deposits, net ................................................................ (1,874) 33,015 2,565
Trading marketable securities, net ................................................ (26,098) (33,214) 1,596
Gain from early extinguishment of convertible subordinated notes .................. (1,767) (34,108) (13,199)
Interest on long-term investments ................................................. (1,245)
Increase (decrease) in accrued severance pay - net ................................ 1,058 (806) 863
Amortization of deferred compensation related to employee
stock option grants ............................................................ 1,346 3,651 1,540
Changes in certain asset and liability items:
Decrease (increase) in trade receivables and other receivables ................. (7,711) 22,209 8,580
Increase (decrease) in trade payables, accrued expenses
and other payables ......................................................... 32,722 (31,564) (7,954)
Decrease (increase) in inventories ............................................. (7,700) 40,083 9,197
_________ _________ _________
Net cash provided by (used in) operating activities ................................... (67,399) 31,007 9,987
_________ _________ _________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .................................................... (9,308) (2,415) (1,842)
Long-term loan granted ................................................................ (20,000)
Collection of long-term loan granted .................................................. 13,000
Purchase of marketable securities held to maturity .................................... (35,596)
Acquisition of subsidiaries (a) ....................................................... 5,562
_________ _________ _________
Net cash used in investing activities ................................................. (23,746) (2,415) (24,438)
_________ _________ _________
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of options granted to employees .............................................. 4,301 767 13
Issuance of convertible subordinated notes, net of issuance
costs of $ 4,531 .................................................................. 120,469
Spin-off of semiconductor business (b) ................................................ (3,367)
Early extinguishment of convertible subordinated notes ................................ (1,242) (17,825) (14,488)
Net decrease in short-term bank credit ................................................ (3,061)
_________ _________ _________
Net cash provided by (used in) financing activities ................................... 117,100 (17,058) (14,475)
_________ _________ _________
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................................... 25,955 11,534 (28,926)
BALANCE OF CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ..................................................................... 1,602 27,557 39,091
_________ _________ _________
BALANCE OF CASH AND CASH EQUIVALENTS AT
END OF YEAR ........................................................................... $ 27,557 $ 39,091 $ 10,165
========= ========= =========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW
INFORMATION - CASH PAID DURING THE YEAR FOR:
Interest .............................................................................. $ 4,074 $ 6,527 $ 3,152
========= ========= =========
Advances to income tax authorities .................................................... $ 290 $ 40 $ 96
========= ========= =========
F-6
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Concluded) - 2
(U.S. dollars in thousands)
Year ended December 31, 2000
----------------------------
Silicon E.D.S.L.
Value Networks
(S.V.) Ltd. Ltd.
(see note 3a) (see note 3b) Total
--------- --------- ---------
(a) Acquisition of subsidiaries consolidated for the first time:
Assets and liabilities of the subsidiary at date of acquisition:
Working capital (excluding cash and cash equivalents) ......................... $ 5,842 $ 601 $ 6,443
Property and equipment ........................................................ (3,399) (528) (3,927)
Long-term liability ........................................................... 311 142 453
Goodwill and identifiable intangible assets arising on
Acquisition ................................................................... (105,774) (32,971) (138,745)
Acquired research and development in process ..................................... (24,695) (4,281) (28,976)
Issuance of share capital as consideration for the acquisition ................... 132,751 37,563 170,314
_________ _________ _________
$ 5,036 $ 526 $ 5,562
========= ========= =========
(b) Spin-off of semiconductor business (see note 2):
Assets and liabilities of the business at date of disposal:
Working capital (excluding cash and cash equivalents) ......................... $ (16,273)
Property and equipment ........................................................ 6,265
Long-term liability ........................................................... (719)
Goodwill ...................................................................... 96,952
Stock dividend ................................................................... (89,592)
_________
$ (3,367)
=========
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
a. General:
1) Nature of operations
Orckit Communications Ltd. (the "Company" or "Orckit") is an Israeli
corporation that is engaged in one business segment - the design,
development, manufacture and marketing of advanced telecom equipment,
targeting high capacity broadband services. Substantially all of the
Company's revenues were derived from the sale of DSLAM (Digital
Subscriber Line Multiplexer) systems based on Asymmetric DSL ("ADSL")
technology. The Company does not expect to derive significant revenues
from this product line in 2003.
The Company has initiated a number of technology projects, including a
project being developed by Corrigent Systems, a subsidiary of the
Company, that is focused on the development, manufacturing and
marketing of metro telecom equipment (see note 3c), and a project
developed by Spediant Systems, a subsidiary of the Company, that is
focused on the development, manufacturing and marketing of telecom
equipment which enhances speed over copper wires (see note 3d).
The markets for the telecom products being developed by the Company
are characterized by declining demand. In 2002, substantially all of
the Company's sales were to two major customers. As to the principal
markets and customers - see note 12f.
2) Functional currency
The currency of the primary economic environment in which the
operations of the Company and its subsidiaries are conducted is the
U.S. dollar ("dollar" or "$"), since most of their revenues are earned
in dollars, most purchases of materials and components are made in
dollars, most of the financing activities of the Company and its
subsidiaries are in dollars and most of its assets are denominated in
dollars.
Transactions and balances originally denominated in dollars are
presented in their original amounts. Balances in non-dollar currencies
are translated into dollars using historical and current exchange
rates for non-monetary and monetary balances, respectively. For
non-dollar transactions reflected in the statements of operations, the
exchange rates at transaction dates are used. Depreciation and
amortization and changes in inventories derived from non-monetary
items are based on historical exchange rates. The resulting currency
transaction gains or losses are carried to financial income or
expenses, as appropriate.
3) Accounting principles
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles ("GAAP") in the United
States.
4) Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reported years. Actual results could differ from those estimates.
F-8
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
b. Principles of consolidation
The consolidated financial statements include the financial statements
of the Company and its subsidiaries.
Intercompany balances and transactions have been eliminated.
c. Marketable securities
Marketable securities classified as trading securities are recorded at
fair market value, with unrealized gains and losses included in
financial income or expenses.
Debt securities that the Company plans and, to its assessment, has the
ability to hold them to maturity are classified as "held to maturity"
and are recorded at cost. The premium or discount is amortized over
the period to maturity.
Trading securities that are transferred to held to maturity portfolio,
are recorded at market value on the transfer date, and the difference
between the redemption value and the book value is amortized over the
period to maturity.
d. Inventories
Inventories are valued at the lower of cost or market. Cost is
determined as follows:
Raw materials and supplies - on moving average basis - the
average cost of the units on hand is recomputed immediately after
each purchase of additional units.
Products in process and finished products - on basis of
production costs:
Raw materials and supplies - on moving average basis.
Labor and overhead component - on average basis.
e. Property and equipment:
1) These assets are stated at cost.
2) The assets are depreciated by the straight-line method on the basis
of their estimated useful life, as follows:
Years
-----
Computers, software and equipment ................ 3-5
Office furniture and equipment ................... 6-16
Leasehold improvements are amortized by the straight-line method, over
the term of the lease, or over the estimated useful life of the
improvements - whichever is shorter.
F-9
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
f. Impairment in value of property and equipment
The company adopted in 2002 FAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 requires that
long-lived assets, held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. Under FAS 144, if the sum of
the expected future cash flows (undiscounted and without interest charges)
of the long-lived assets is less than the carrying amount of such assets,
an impairment loss would be recognized, and the assets would be written
down to their estimated fair values. The adoption of FAS 144 did not have
any material impact on the financial position and results of operations of
the Company.
g. Goodwill and other identifiable intangible assets
Prior to January 1, 2002, the Company amortized goodwill and other
identifiable intangible assets in equal annual installments, over a period
of 3 years. In addition, the Company accounted for the impairment of
goodwill and other identifiable intangible assets in accordance with FAS
121 "Accounting for the Impairment of Long-Lived Assets and for the
Long-Lived Assets to be Disposed of". As a result, in 2001 the Company
wrote off its remaining goodwill and other identifiable intangible assets.
Effective January 1, 2002, the Company adopted FAS 142 "Goodwill and Other
Intangibles Assets". However, the Company had no goodwill nor other
identifiable intangible assets in 2002, hence this adoption has no effect
on the results for the year ended December 31, 2002.
The following table illustrates the Company's results adjusted to eliminate
the effect of goodwill amortization expense for the following years:
Year ended December 31
----------------------
2000 2001 * 2002
---- ------ ----
In thousands, except for per share data
---------------------------------------
Net income (loss), as reported .......................... $ (106,654) $ 856 $ 4,083
Add back - goodwill amortization ........................ 15,690 2,701 --
___________ ___________ ___________
Adjusted net income (loss) .............................. $ (90,964) $ 3,557 $ 4,083
=========== =========== ===========
Net income (loss) per share:
Basic - as reported ................................. $ (24.60) $ 0.18 $ 0.83
Basic - adjusted .................................... $ (21.00) $ 0.77 $ 0.83
Diluted - as reported ............................... $ (24.60) $ 0.18 $ 0.79
Diluted - adjusted .................................. $ (21.00) $ 0.73 $ 0.79
* The entire unamortized balance of goodwill, in the amount of $23.4
million, was written off in 2001, see also note 3b.
h. Deferred issuance costs:
Issuance costs of convertible subordinated notes, in the original amount of
$ 4,531,000, are amortized by the straight-line method, in proportion to
the balance of notes outstanding, over the period from issuance date to the
maturity date. Upon notes retirement, the unamortized balance is adjusted
respectively. As of December 31, 2002, the balance was $623,000.
F-10
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
i. Revenue recognition
Revenues from sales of products are recognized when title passes to the
customer (usually title passes upon shipment, but in certain cases title
passes to the customer upon delivery), provided that appropriate signed
documentation of the arrangement, such as a contract, purchase order or
letter of agreement, has been received, the fee is fixed or determinable
and collectibility is reasonably assured.
j. Provision for servicing products under warranty
The Company grants warranty servicing after installation of products sold.
The Company provides for such warranty at the time revenues from the
related sales are recognized. The annual provision is calculated as a
percentage of the sales, based on historical experience.
k. Research and development expenses
Research and development expenses are charged to income as incurred. Grants
received for development of projects are recognized as a reduction of
expenses.
l. Allowance for doubtful accounts
The allowance in respect of trade receivables has been determined for
specific debts doubtful of collection, see note 12b(1).
m. Cash equivalents
The Company considers all highly liquid investments, which include
short-term bank deposits (up to 3 months from date of deposit) that are not
restricted as to withdrawal or use, to be cash equivalents.
n. Income (loss) per share
Basic income (loss) per share is computed by dividing the net income (loss)
by the weighted average number of shares outstanding during each year.
In computing diluted income per share, the potential dilutive effect of
outstanding stock options was taken into account using the treasury stock
method. See also note 12j.
Weighted average number of common shares outstanding used in the
computation of the basic and diluted net income (loss) per share has been
calculated after giving retroactive effect in all the reported periods to a
one-for-five reverse share split effective as of November 27, 2002 (see
note 9a(2)).
o. Comprehensive income
The Company has no comprehensive income components other than net income
(loss).
p. Stock based compensation
The Company accounts for employee stock based compensation in accordance
with Accounting Principles Board Opinion ("APB") No. 25 "Accounting for
Stock Issued to Employees ("APB 25") and related interpretations. In
accordance with Statement of Financial Accounting Standards ("FAS") No. 123
of the Financial Accounting Standards Board of the United States ("FASB") -
Accounting for Stock-Based Compensation" the Company discloses pro forma
data assuming the Company had accounted for employee stock option grants
using the fair value-based method defined in FAS 123.
F-11
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
The following table illustrates the effect on net income (loss) and income
(loss) per share assuming the Company had applied the fair value
recognition provisions of FAS 123 to its stock-based employee compensation:
Year ended December 31
----------------------
2000 2001 2002
---- ---- ----
In thousands, except for per share data
---------------------------------------
Net income (loss), as reported ................................ $ (106,654) $ 856 $ 4,083
Add: stock based employee compensation expense, included in
reported net income (loss) .................................. 1,346 3,651 1,540
Deduct: stock based employee compensation expense determined
under fair value method for all awards ...................... (11,712) (10,824) (2,916)
___________ __________ _________
Pro forma net income (loss) ................................... $ (117,020) $ (6,317) $ 2,707
=========== ========== =========
Income (loss) per share:
Basic - as reported ....................................... $ (24.60) $ 0.18 $ 0.83
Basic - pro forma ......................................... $ (27.00) $ (1.15) $ 0.55
Diluted - as reported ..................................... $ (24.60) $ 0.18 $ 0.79
Diluted - pro forma ....................................... $ (27.00) $ (1.15) $ 0.52
q. Deferred income taxes
Deferred taxes are determined utilizing the asset and liability method,
based on the estimated future tax effects differences between the financial
accounting and tax bases of assets and liabilities under the applicable tax
laws. Valuation allowances are included in respect of deferred tax assets
when it is more likely than not that no such assets will be realized (see
also note 10).
r. Shipping and handling fees and costs
Shipping and handling costs are classified as component of cost of
revenues.
s. Recently issued accounting pronouncements
1) FAS 145
In April 2002, the FASB issued FAS No. 145, "Revision of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Connections" ("FAS 145"). Among other amendments and
rescissions, FAS 145 eliminates the requirement that gains and losses
from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income tax
effect, unless such gains and losses meet the criteria in paragraph 20
of APB No. 30, "Reporting the Results of Operation - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". FAS 145
is partially effective for transactions occurring after May 15, 2002
and partially effective for fiscal years beginning after May 15, 2002.
The Company early adopted FAS 145, effective January 1, 2002, and as
such now reports gain associated with debt extinguishments as
financial income rather than as an extraordinary item as in prior
reports. Accordingly, such gains in 2000 and 2001 have been
reclassified (see also note 7b).
F-12
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
2) FAS 146
In June 2002, the FASB issued FAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" ("FAS 146"). FAS 146
addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force
("EITF") Issue No. 94-3. "Liability Recognition for Certain Employee
Termination Benefits and other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". FAS-146 required that a
liability for a cost associated with an exit or disposal activity to
be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost as generally defined in EITF 94-3 was to be
recognized at the date of the commitment to an exit plan. FAS 146
states that a commitment to a plan, by itself, does not create an
obligation that meets the definition of a liability. Therefore, FAS
146 eliminates the definition and requirements for recognition of exit
costs in EITF 94-3. It also establishes that fair value is the
objective for initial measurement of the liability. FAS 146 is to be
applied prospectively to exit or disposal activities initiated after
December 31, 2002. The Company does not expect the adoption of the
abovementioned standard to have a material effect on its consolidated
financial statements.
3) FIN 45
In November 2002, the FASB issued FASB Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
FIN 45 requires the guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken
in issuing the guarantee. It also elaborates on the disclosures to be
made by a guarantor in its financial statements about its obligations
under certain guarantees that it has issued and to be made in regard
of product warranties.
Disclosures required under FIN 45 are already included in these
financial statements, however, the initial recognition and initial
measurement provisions of this FIN are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002.
The Company does not expect the adoption of FIN 45 to have a material
effect on its consolidated financial statements.
5) FIN 46
In January 2003, the FASB issued FASB Interpretation No. 46
"Consolidation of Variable Interest Entities" (FIN 46). Under FIN 46
entities are separated into two categories: (1) those for which voting
interests are used to determine consolidation (this is the most common
situation) and (2) those for which variable interests are used to
determine consolidation. FIN 46 explains how to identify Variable
Interest Entities (VIE) and how to determine when a business
enterprise should include the assets, liabilities, non-controlling
interests, and results of activities of a VIE in its consolidated
financial statements.
FIN 46 is effective as follows: for variable interests in variable
interest entities created after January 31, 2003 it applies
immediately, and for variable interests in variable interest entities
created before that date, it applies as of the beginning of the first
interim or annual reporting period beginning after June 15, 2003.
F-13
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
The Company does not expect the adoption of FIN 46 to have a material
effect on its consolidated financial statements.
6) FAS 148
In December 2002, the FASB issued FAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of
FASB Statement No. 123." FAS No. 148 amends FAS No. 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, FAS No.
148 amends the disclosure requirements of FAS No. 123 to require
prominent disclosures in the financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The transition guidance and annual
disclosure provisions of FAS No. 148 are effective for financial
statements issued for fiscal years ending after December 15, 2002. The
Company has applied the disclosure provisions in FAS No. 148 in these
consolidated financial statements and the accompanying notes. The
Company's adoption of FAS No. 148 in fiscal 2003 is not expected to
have a material impact on its financial position or results of
operations.
t. Reclassifications
Certain comparative figures have been reclassified to conform to the
current year presentation.
NOTE 2 - SPIN-OFF OF SEMICONDUCTOR BUSINESS:
On April 30, 2000, the shareholders of the Company approved a Plan of
Separation (the "Plan"). According to the Plan, the Company's business
was formally divided into two separate companies: (i) Tioga
Technologies Ltd. ("Tioga"), an Israeli corporation, which owns
substantially all of Orckit's former semiconductor business, including
the business of Silicon Value (S.V.) Ltd. (see note 3a) and (ii)
Orckit, which continued to own and operate the Company's telecom
equipment and other business.
The spin-off became effective on June 30, 2000, as the Company
transferred to Tioga substantially all the assets and liabilities
constituting the Company's semiconductor business in exchange for
Tioga ordinary shares, and distributed all of those Tioga shares as a
stock dividend to the Company's shareholders on a share-for-share
basis. Pursuant to the Plan, the shareholders of the Company received
one ordinary share of Tioga for each ordinary share of Orckit held by
them on the record date for the distribution.
In 2000, in connection with the spin-off, the Company and Tioga
entered into various agreements including (1) a separation agreement
pursuant to which the business of Orckit and Tioga were separated; (2)
an intellectual property agreement regarding the assignment by Orckit
to Tioga of DSL semiconductor intellectual property; (3) a 3 year
supply agreement pursuant to which Tioga will sell certain
semiconductor products to the Company; (4) a 2 year support and design
agreement, pursuant to which Tioga will complete the design of certain
chips; (5) a loan agreement (see also note 4) and (6) a one year
administrative service agreement, pursuant to which Orckit provides
certain services to Tioga.
Two out of seven directors of Orckit (the Chairman of the Board of
Directors of Orckit and its President) also serve as directors of
Tioga.
Following consummation of the Plan, holders of Orckit's convertible
subordinated notes (see note 7) are entitled to convert each $ 1,000
principal amount of these notes into 2.34962 ordinary shares of Orckit
plus 11.7481 ordinary shares of Tioga.
F-14
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 3 - CERTAIN TRANSACTIONS:
a. Acquisition of Silicon Value (S.V.) Ltd.
On April 24, 2000, the Company acquired 100% of the share capital of
Silicon Value (S.V.) Ltd. ("Silicon Value"), an Israeli corporation engaged in
the design, development, production and sale of application specific integrated
circuits (ASICs). The customers of Silicon Value included telecom, datacom and
consumer electronic products companies.
In consideration, the Company issued 314,202 of its ordinary shares, to the
shareholders of Silicon Value. In addition, the Company exchanged employee stock
options to purchase ordinary shares of Silicon Value for options to purchase
ordinary shares of the Company.
The acquisition of Silicon Value was accounted for by the purchase method.
The purchase price - $ 135 million - was based on an average market price of the
Company's ordinary shares before and after the announcement of the transaction
and the fair value of the options was determined using the Black-Scholes
option-pricing model.
An amount equal to $ 24.7 million of the purchase price was attributed to
acquisition of in-process research and development, the technological
feasibility of which had not yet been established and for which there was no
alternative use. Such amount was expensed upon acquisition. The amount
attributed to in-process research and development was based on an independent
opinion obtained by management of the Company. The excess of cost of acquisition
over the fair value of net assets on the acquisition date that was not
attributed to in-process research and development - $ 105 million - represented
goodwill and other intangible assets. On June 30, 2000, Silicon Value was
transferred to Tioga as part of the spin-off of the Company's semiconductor
business (see note 2).
b. Acquisition of E.D.S.L. Networks Ltd.
On May 17, 2000, the Company acquired 100% of the share capital of E.D.S.L.
Networks Ltd. ("E.D.S.L."), an Israeli corporation engaged in the development of
the infrastructure for high speed Internet access for commercial multi-tenant
units and residential multi-dwelling buildings.
In consideration, the Company issued 120,713 of its ordinary shares, to the
shareholders of E.D.S.L. In addition, the Company exchanged employee stock
options to purchase ordinary shares of E.D.S.L. for options to purchase ordinary
shares of the Company.
The acquisition of E.D.S.L. was accounted for by the purchase method. The
purchase price - $ 38 million - was based on an average market price of the
Company's ordinary shares before and after the announcement of the transaction
and the fair value of the options was determined using the Black-Scholes
option-pricing model.
An amount equal to $ 4.3 million of the purchase price was attributed to
acquisition of in-process research and development, the technological
feasibility of which had not yet been established and for which there was no
alternative use. Such amount was expensed upon acquisition. The amount
attributed to in-process research and development was based on an independent
opinion obtained by management of the Company. The excess of cost of acquisition
over the value of net assets on the acquisition date that was not attributed to
in-process research and development - $ 33 million - represented goodwill and
other intangible assets.
In 2001, E.D.S.L. halted its operations and filed a request in the Israeli
district court for liquidation of its assets and debts. As a result, the amount
of $ 23.4 million which represented all outstanding unamortized goodwill and
other intangible assets was written off by the Company.
F-15
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 3 - CERTAIN TRANSACTIONS (continued):
c. Establishment of technology projects
The Company has established through subsidiaries a number of technology
projects to engage in the development and commercialization of new technologies.
The Company ordinarily transfers to the new subsidiary, to the extent
applicable, certain assets relating to the new project and, if required, an
appropriate team of employees of the Company. It also grants options to purchase
up to 25% of the fully diluted share capital of the new subsidiary to employees,
officers and directors of the Company. Major subsidiaries of the Company, which
were founded as technology projects, include Corrigent Systems, which addresses
solutions capable of supporting high bandwidth services in telecommunication
networks located in metropolitan areas, commonly referred to as metro networks,
and Spediant Systems, which addresses solutions that enable telecom carriers to
deploy fiber-speed broadband services over copper wires.
NOTE 4 - LONG-TERM LOAN TO A RELATED PARTY
A loan agreement was entered into with Tioga as part of the Plan of
Separation (see note 2). The agreement provides for maximum borrowings in the
amount of $20 million with loans bearing interest at rate of approximately 6%
per annum. Tioga borrowed $20 million under this loan agreement. The loan is
required to be repaid by March 1, 2005 and is secured by a floating charge,
which is second in priority after a pledge in favor of a commercial bank which
extended a credit line to Tioga. Tioga's ability to repay the loan depends on
its raising additional funds or generating positive cash flows from operations
or business combinations in the future. As a result, interest due on the loan
for the years 2000 and 2001, in the aggregate amount of $1.9 million, was not
accrued by the Company in the applicable years.
During 2002, Tioga repaid $ 13.0 million on account of the loan. Interest
accrued in 2002 includes amounts due since grant of the loan, which were not
accrued in previous years.
In January 2003, Tioga announced that an acquiror elected to acquire all of
its assets. Upon closing of this transaction, Tioga will be required to repay
the Company the remaining principal amount of the loan and accrued interest due.
NOTE 5 - PROPERTY AND EQUIPMENT
Composition of assets, grouped by major classification, is as follows:
December 31
-----------
2001 2002
---- ----
In thousands
------------
Cost:
Computers, software and equipment ................................ $14,329 $16,090
Office furniture and equipment ................................... 1,360 1,375
Leasehold improvements ........................................... 2,136 2,175
_______ _______
$17,825 $19,640
_______ _______
Less - accumulated depreciation
and amortization ................................................. 10,029 13,570
_______ _______
7,796 6,070
======= =======
Depreciation expenses totaled $ 3,931,000, $ 4,074,000 and $ 3,568,000 in
the years ended December 31, 2000, 2001 and 2002, respectively.
F-16
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 6 - SEVERANCE PAY:
a. Israeli labor laws and agreements require payment of severance pay upon
dismissal of an employee or upon termination of employment in certain other
circumstances. The Company's severance pay liability to its employees, mainly
based upon length of service and the latest monthly salary (one month's salary
for each year worked) is reflected by the balance sheet accrual under "accrued
severance pay". The Company records the liability as if it were payable at each
balance sheet date on an undiscounted basis. The liability is partly funded by
purchase of insurance policies and the amounts funded are included in the
balance sheet under "long term investments - other". The policies are the
Company's assets and under labor agreements, subject to certain limitations,
they may be transferred to the ownership of the beneficiary employees.
b. The amounts of pension and severance pay expense were $ 1,592,000, $
1,001,000 and $ 844,000 for the years ended December 31, 2000, 2001 and 2002,
respectively.
NOTE 7 - CONVERTIBLE SUBORDINATED NOTES:
a. Under an Offering Memorandum dated March 7, 2000, the Company issued $
125,000,000 principal amount of convertible subordinated notes (the "Notes")
that are due on April 1, 2005. The Notes bear interest at an annual rate of
5.75% payable April 1 and October 1 of each year, commencing October 1, 2000.
Unless previously redeemed, the Notes are convertible by the holder at any time
through maturity into ordinary shares of the Company and Tioga. The conversion
rate is equal to 2.34962 ordinary shares of Orckit plus 11.7481 ordinary shares
of Tioga for each $ 1,000 principal amount of Notes. The Notes are redeemable at
the option of the Company, in whole or in part, at any time on or after April 1,
2003 at the redemption price, plus interest accrued to the redemption date. Each
holder of Notes will have the right to cause the Company to purchase all of such
holder's Notes in the event of a change of control in the Company, for cash or
shares at the election of the Company.
b. Early extinguishment of the Notes
During 2000, 2001 and 2002, the Company retired $ 5 million, $ 53.6 million
and $ 28.2 million principal amount of the Notes. As of December 31, 2002, the
total principal amount of Notes outstanding was $ 38.2 million.
As mentioned in note 1s(1), the Company adopted FAS 145 effective January
1, 2002, and recorded in financial income a gain of $ 13.2 million from the
early extinguishment in the year ended December 31, 2002. The Company also
reclassified to financial income gains of $ 1.8 million and $ 34.1 million from
the early extinguishments of debt that were previously recorded as an
extraordinary gain in 2000 and 2001, respectively.
c. In December 2002, the Company announced a tender offer for the Notes,
offering to purchase up to $ 5 million principal amount of the Notes at a price
not greater than $ 650, nor less than $ 500, for every $ 1,000 principal amount
of Notes. Notes in the principal amount of $95,000 were retired.
d. In January 2003, The Board of Directors authorized the repurchase from
Clal Electronic Industries Ltd. ("Clal"), a related party, of 616,590 of
Orckit's ordinary shares and $12.5 million principal amount of Orckit's
Subordinated Convertible Notes for a total consideration of approximately $14.7
million in cash. Clal will be entitled to receive any cash dividend paid by the
Company on or prior to March 31, 2003. The Board of Directors of Orckit
announced that it does not currently intend to pay a cash dividend on or prior
to March 31, 2003.
F-17
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 8 - COMMITMENTS:
a. Royalty commitment
The Company is committed to pay royalties to the Government of Israel on
proceeds from sales of products funded, in part, by Government grants. At the
time the grants were received, successful development of the related projects
was not assured.
In the case of failure of a project that was partly financed by
royalty-bearing Government participations, the Company is not obligated to pay
any royalties to the Government.
The royalty rate, based on the sales of products or development resulting
from funded research and development project, was fixed at 3% during the first
three years and 3.5% thereafter. Royalties are payable up to 100% of the amount
of such grants, with the addition of annual interest based on LIBOR. The
contingent liability of the Company and its subsidiaries in respect of royalties
to the Government of Israel at December 31, 2002 was approximately $7.0 million.
In the event that any of the manufacturing rights or technology are
transferred out of Israel, subject to the approval of the Government of Israel,
the Company would be required to pay royalties at a higher rate and an increased
aggregate pay back amount in the range of 120% to 300% of the grants received,
per the applicable project.
b. Lease commitments
The Company has entered into several operating lease agreements for the
premises it uses. The Company has an option to terminate a majority of these
agreements by giving a six month notice in advance.
Under the agreements, the rent is linked to the dollar or to the Israeli
consumer price index (the "Israeli CPI").
The projected annual rental payments for 2003, at rates in effect at
December 31, 2002, are approximately $ 300,000.
NOTE 9 - SHAREHOLDERS' EQUITY:
a. Share capital:
1) The Company's ordinary shares are traded in the United States on the
Nasdaq National Market, under the symbol "ORCT". As of April 2002, the Company's
ordinary shares also began to trade on the Tel-Aviv Stock Exchange.
2) Reverse share split
On November 12, 2002, the Company's shareholders approved a one-for-five
reverse share split, pursuant to which every five ordinary shares were combined
into one ordinary share. Prior to the reverse share split, the shareholders of
the Company approved an amendment to the Article of Association of the Company,
changing the Ordinary Shares of NIS 0.10 par value into Ordinary Shares with no
par value. All share and per share data included in these financial statements
have been retroactively adjusted to reflect the one-for-five reverse share split
which was effective as of November 27, 2002. The conversion ratio of the Notes
and the number of options and their exercise price were adjusted as a result of
the reverse share split.
3) As to shares issued in consideration for acquisitions, see note 3.
F-18
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 9 - SHAREHOLDERS' EQUITY - (continued)
4) Under the Employee Share Option Plan (see b. below), options to purchase
93,518, 349,907 and 105,466 ordinary shares were exercised in the years ended
December 31, 2000, 2001 and 2002, respectively.
b. Employee Share Option Plan:
1) On February 18, 1994, the Company's Board of Directors approved an
Employee Share Option Plan (the "Plan"). The total aggregate number of shares
authorized for which options could be granted under the Plan since 1994 was
1,798,047 at December 31, 2002, of which options to purchase 245,767 and 132,007
shares, at December 31, 2001 and 2002, respectively, were available for future
grant (see note 9f. below). As for options outstanding at December 31, 2002, see
(2) below. Each option can be exercised to purchase one ordinary share having
the same rights as the other ordinary shares. The shares underlying these
options were registered with the United States Securities and Exchange
Commission.
The options usually vest linearly over a period of up to 5 years as
determined on the date of grant.
2) A summary of the status of the Plan as of December 31, 2000, 2001 and
2002, and changes during the years ended on those dates, after giving
retroactive effect to the allocation of exercise price due to the spin-off (see
note 2), is presented below.
Year ended December 31
----------------------
2000 2001(1) 2002
---- ------- ----
Weighted Weighted Weighted
average average average
exercise exercise exercise
Number price Number price Number price
------ ----- ------ ----- ------ -----
Options outstanding at beginning
of year ................................ 702,444 $ 27.70 1,257,537 $ 10.25 829,429 $ 6.70
Changes in options during the year:
Granted ................................ 770,637 $ 33.00 255,420 $ 5.00 190,000 $ 3.58
Exercised .............................. (93,518) $ 21.30 (349,907) $ 2.30 (105,466) $ 0.13
Forfeited .............................. (122,026) $ 31.45 (333,621) $ 23.15 (76,240) $ 1.70
_________ ________ ________
Options outstanding at year-end ............ 1,257,537 $ 31.10 829,429 $ 6.70 837,723 $ 7.26
========= ======== ========
Options exercisable at year-end ............ 164,627 $ 21.55 327,355 $ 12.30 431,903 $ 10.82
========= ======== ========
Weighted average fair value of
options granted during the year (2) .... $ 46.45 $ 7.55 $ 3.79
======= ======= =======
(1) In 2001, options to purchase 720,000 shares granted during 2001 and
earlier years, with a weighted average exercise price of $30.50 per share, were
re-priced to the par value of the ordinary shares.
(2) The fair value of each option grant is estimated on the date of grant,
inter alia, using the Black-Scholes option-pricing model with the following
weighted average assumptions: Dividend yield is 0% for all years, expected
volatility: 2000 - 125%; 2001 - 115%; 2002 - 81%. Risk-free interest rate: 2000
- - 5.00%; 2001 - 4.00%; 2002 - 4.00% and average expected life of 3 years.
F-19
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 9 - SHAREHOLDERS' EQUITY (continued):
3) The following table summarizes information about options outstanding at
December 31, 2002:
Options outstanding Options exercisable
------------------- -------------------
Number Number
outstanding at Weighted Weighted exercisable at Weighted
Range of December 31, average remaining average December 31, average
exercise price 2002 (1) contractual life exercise price 2002 exercise price
- -------------- -------- ---------------- -------------- ---- --------------
$ Years $ $
- ----- - -
0 430,570 6.89 0 253,333 0
3-7 195,114 9.79 3.62 4,364 5.00
8-15 36,000 8.71 8.29 10,375 8.28
20-30 84,189 5.44 21.64 82,352 21.67
30-60 91,850 6.65 34.90 81,479 33.75
________ ________
837,723 431,903
======== =======
(1) Including options to purchase 235,500 ordinary shares at a weighted average
exercise price of $3.00 that were granted to directors of the Company.
4) The Company's subsidiaries engaged in technology projects have
established their own employee stock option plans with respect to granting
options. Subject to certain conditions and based on fair market value,
options granted by the Company's subsidiaries may be exercised to purchase
shares of the Company.
c. Dividends
In the event cash dividends are declared by the Company, such dividends
will be declared and paid in Israeli currency.
d. Shareholder Bonus Rights Plan
On November 21, 2001, the Company's Board of Directors adopted a
Shareholder Bonus Rights Plan (the "Rights Plan") pursuant to which share
purchase bonus rights (the "Rights") were distributed on December 6, 2001 at the
rate of one Right for each of the Company's ordinary shares held by shareholders
of record as of the close of business on that date.
The Rights Plan is intended to help ensure that all of the Company's
shareholders are able to realize the long-term value of their investment in the
Company in the event of a potential takeover which does not reflect the full
value of the Company and is otherwise not in the best interests of the Company
and its shareholders. The Rights Plan is also intended to deter unfair or
coercive takeover tactics.
The Rights generally will be exercisable and transferable apart from the
Company's ordinary shares only if a person or group becomes an "Acquiring
Person" by acquiring beneficial ownership of 15% or more of the Company's
ordinary shares, subject to certain exceptions set forth in the Rights Plan, or
commences a tender or exchange offer upon consummation of which such person or
group would become an Acquiring Person. Subject to certain conditions described
in the Rights Plan, once the Rights become exercisable, the holders of Rights,
other than the Acquiring Person, will be entitled to purchase ordinary shares at
a discount from the market price.
F-20
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 9 - SHAREHOLDERS' EQUITY (continued):
e. In January 2003, the Board of Directors authorized the adoption of the
"Orckit Communications Ltd. 2003 Subsidiary Employee Share Incentive Plan" (the
"2003 Plan"). Pursuant to the 2003 Plan and subject to applicable laws and
regulations, the Company will be authorized to issue, for no consideration, up
to 600,000 of its ordinary shares to employees of its subsidiaries. Directors of
the Company will not be entitled to receive shares pursuant to this plan. The
shares will be duly authorized and, upon issuance, will be validly issued, fully
paid and nonassessable. Shares issued pursuant to the 2003 Plan may be exchanged
for shares of the applicable subsidiary under certain circumstances at the
election of Orckit or the employees.
f. In January 2003, the Board of Directors approved an increase of the
total number of options authorized under the Company's plan of 400,000 options.
As a result, the total aggregate amount of options authorized under the
Company's plan since 1994 is 2,198,047.
g. As for transaction with a related party, see note 7d.
NOTE 10 - TAXES ON INCOME:
a. Tax benefits under the Law for the Encouragement of Capital Investments,
1959 (the "law")
Under the law, by virtue of the "approved enterprise"
status granted to its enterprise, the Company is entitled to various tax
benefits, including the following:
1) Reduced tax rates
The period of tax benefits is 7 years, commencing in the first year which
the Company earns taxable income from the approved enterprise, subject to
certain limitations. Income derived from the approved enterprise is tax
exempt for a period of 2-4 years, after which the income from these
enterprises is taxable at the rate of 25% for the remainder of the period
of tax benefits (3-5 years).
2) Conditions for entitlement to the benefits
The entitlement to the above benefits is conditional upon the Company's
fulfilling the conditions stipulated by the law, regulations published
there under and the instruments of approval for the specific investments in
approved enterprises. In the event of failure to comply with these
conditions, the benefits may be cancelled and the Company may be required
to refund the amount of the benefits, in whole or in part, with the
addition of linkage differences to the Israeli CPI and interest.
In the event of distribution of cash dividends out of income which was tax
exempt as above, the Company would have to pay 25% tax in respect of the
amount distributed.
b. Measurement of the results for tax purposes under the Income Tax
(Inflationary Adjustments) Law, 1985
Results for tax purposes are measured on a real basis - adjusted for the
increase in the Israeli CPI. As explained in note 1a(3), the financial
statements are presented in dollars. The difference between the change in the
Israeli CPI and the NIS-dollar exchange rate - both on annual and cumulative
bases - causes a difference between taxable income and income reflected in these
financial statements.
Paragraph 9 (f) of FAS 109, "Accounting for Income Taxes", prohibits the
recognition of deferred tax liabilities or assets that arise from differences
between the financial reporting and tax bases of assets and liabilities that are
measured from the local currency into dollars using historical exchange rates,
and that result from changes in exchange rates or indexing for tax purposes.
Consequently, the abovementioned differences were not reflected in the
computation of deferred tax assets and liabilities.
F-21
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 10 - TAXES ON INCOME (continued):
c. Tax rates applicable to income from other sources
Income not eligible for approved enterprise benefits mentioned in a. above
is taxed at the regular corporate rate of 36%.
d. Deferred income taxes
At December 31, 2002, the Company and it subsidiaries had accumulated tax
losses amounting to approximately $ 88 million (December 31, 2001 -
approximately $96 million) and carryforward capital losses for tax purposes of
approximately $ 35 million (December 31, 2001 - $ 35 million). These losses are
mainly denominated in NIS, linked to the Israeli CPI and are available
indefinitely to offset future taxable business income. The Company and each of
its subsidiaries are assessed on a stand-alone basis, hence accumulated tax
losses in each of the entities can offset future taxable business income in the
entity they were generated.
At December 31, 2002, the Company and its subsidiaries had net deferred tax
asset (mostly in respect of carryforward losses and capital losses), in the
amount of approximately $ 40 million (December 31, 2001 - approximately $27
million; December 31, 2000 - approximately $19 million). A valuation allowance
for the entire amount of such asset was set up, and consequently no deferred tax
asset is recorded in the balance sheet, since it is more likely than not that
the deferred tax assets will not be realized in the foreseeable future.
e. Tax assessments
The Company is in the process of final assessments through the year ended
December 31, 2000.
NOTE 11 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
a. Balances in non-dollar currencies:
1) As follows:
December 31, 2002
-----------------
In thousands
------------
Assets ............................................. 813
=====
Liabilities ........................................ 9,079
=====
The above mainly represents balances in Israeli currency.
2) Data regarding the rate of exchange and the Israeli CPI:
Year ended December 31
----------------------
2000 2001 2002
---- ---- ----
Rate of devaluation of the Israeli
currency against the dollar ........... (2.7)% 9.3% 7.3%
Rate of increase in the Israeli CPI ....... 0.0% 1.4% 6.5%
Exchange rate at end of year - $ 1= ....... NIS 4.041 NIS 4.416 NIS 4.737
b. Fair value of financial instruments
The fair value of financial instruments included in working capital of the
Company is usually identical or close to their carrying value.
As to the fair value of the Company's securities which are held to
maturity, see note 12a(2). The Company does not disclose the fair value of the
outstanding convertible subordinated notes since it is not practicable to
determine their fair value with sufficient reliability.
F-22
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 11 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT - (Continued)
c. Concentrations of credit risks
At December 31, 2001 and 2002, primarily all of the Company's and its
subsidiaries' cash and cash equivalents were held by Israeli and International
bank institutions. Primarily all of the Company's marketable securities were
held by one international bank institution. Such securities represented
debentures issued by a number of corporations.
The Company evaluates on a current basis its financial exposure with any
financial institution or commercial issuer.
The Company's sales are made to a limited number of end customers (mainly
telephone companies), see note 12f. The Company is of the opinion that, the
exposure to credit risk relating to trade receivables is limited. An appropriate
allowance for doubtful accounts is included in the accounts.
NOTE 12 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:
Balance sheets:
a. Marketable securities
1) Trading securities
At December 31, 2002, the Company held trading securities in the
amount of $ 25.1 million (December 31, 2001 - $ 43.1 million). These
securities are classified as short-term investments.
2) Held-to-maturity tradable securities
The securities mature over the following years:
December 31, 2002
-----------------
In thousands
------------
Carrying amounts
----------------
2003 - classified as short-term investments ........ $ 16,856
Due after 1 year up to 4 years ..................... 46,576
________
$ 63,432
========
The fair value of the Company's held-to-maturity tradable securities
is $ 64.1 million. The difference between the carrying amounts and the
fair value is a result of unrealized gains in the amount of
approximately $700,000.
b. Accounts receivable:
December 31
-----------
2001 2002
---- ----
In thousands
------------
1) Trade receivable:
Open accounts ...................................... $ 7,865 $ 869
Less - allowance for doubtful accounts ............ 549 83
________ ________
$ 7,316 $ 786
======== ========
Allowance for doubtful accounts:
Balance at end of year ............................. $ 150 $ 549
Increase (decrease) during the year ................ 399 (466)
________ ________
Balance at end of year ............................. $ 549 $ 83
======== ========
F-23
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 12 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
2) Other receivables:
Employees and employee institutions .............. $ 1,936 $ 133
Government of Israel ............................. 1,539 813
Prepaid expenses ................................. 767 778
Sundry ........................................... 251 719
________ ________
$ 4,493 $ 2,443
======== ========
c. Inventories:
December 31
-----------
2001 2002
---- ----
In thousands
------------
Raw materials and supplies ............................... $ 6,023 $ 100
Products in process ...................................... 2,845 --
Finished products ........................................ 429 --
________ ________
$ 9,297 $ 100
======== ========
d. Bank deposits
At December 31, 2002, the Company had short term bank deposits -
denominated in dollars and bearing annual interest at a fixed rate of 1.53%
- in the amount of $ 5.4 million, and long-term bank deposits - denominated
in dollars and bearing annual interest at a fixed rate of 4.55% - in the
amount of $ 11.4 million. Of the long-term deposits, $ 5.1 million will
mature in 2003 and were accordingly classified as short-term investments.
e. Accrued expenses and other payables:
December 31
-----------
2001 2002
---- ----
In thousands
------------
Employees and employee institutions ...................... $ 2,091 $ 1,375
Provision for vacation pay ............................... 1,680 1,654
Provision for servicing products under warranty * ........ 2,330 1,218
Accrued royalties ........................................ 1,851 772
Accrued interest ......................................... 955 549
Sundry ................................................... 2,229 1,590
________ ________
$ 11,136 $ 7,158
======== ========
December 31, 2002
-----------------
In thousands
------------
* The changes in the balance during the year:
Balance at beginning of year .................................. $ 2,330
Payments made under the warranty .............................. (122)
Product warranties issued for new sales ....................... 658
Changes in accrual in respect of pre-existing warranties ...... (1,648)
________
Balance at end of year ........................................ $ 1,218
========
F-24
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 12 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
Statements of operations:
f. Segment information and revenues from principal customers
As described in note 1a(1), the Company operates in one operating segment.
Disaggregated financial data is provided below as follows: (1) revenues by
geographic area; and (2) revenues from principal customers:
1) Geographic information
Following is a summary of revenues by geographic area. The Company sells
its products mainly to telephone companies. Revenues are attributed to
geographic areas based on the location of the end users as follows:
Year ended December 31
----------------------
2000 2001 2002
---- ---- ----
In thousands
------------
Israel ......................... $ 10,419 $ 2,268 $ 463
United States .................. 89,504 111,336 44,811
Europe ......................... 5,949 23,319 7,601
Other countries ................ 25,995 4,724 545
________ ________ ________
$ 131,867 $ 141,647 $ 53,420
========= ========= ========
Most of the Company's property and equipment are located in Israel.
2) Revenues from principal customers - revenues from single customers each
of which exceeds 10% of total revenues in the relevant year:
Year ended December 31
----------------------
2000 2001 2002
---- ---- ----
In thousands
------------
Customer A ...................................... $ 89,137 $ 111,208 $ 43,912
======== ========= ========
Customer B ...................................... $ 20,973 $ 7,209
======== =======
g. Cost of revenues:
Materials consumed and other
production expenses (c) ............... (a) $ 131,552 $ 75,250 $ 23,488
Subcontracted work ........................ 9,246 8,886 4,214
Payroll and related expenses .............. 6,886 3,517 1,207
Depreciation .............................. 720 631 174
Decrease (increase) in inventories of
products in process and finished
products ........................... (14,733) 23,723 3,274
Other ..................................... - 606
________ ________ ________
(b) $ 133,671 $ 112,007 $ 32,963
========= ========= ========
F-25
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 12 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
h. Research and development expenses - net:
Total expenses ................................... $ 31,970 $ 22,429 $ 22,266
L e s s - grants and participations,
see note 9 ................................... 1,110 3,344 2,975
________ ________ ________
(d) $ 30,860 $ 19,085 $ 19,291
======== ======== ========
(a) Including an inventory obsolescence charge of $ 12.5 million.
(b) Including $ 3,692,000 that relates to Tioga for the six month period
ended June 30, 2000.
(c) Including purchases from Tioga, which amount to $ 1,068,000, $
1,418,000 and $ 200,000 for the years ended December 31, 2000, 2001 and
2002, respectively.
(d) Including $ 6,951,000 that relates to Tioga for the six month period
ended June 30, 2000.
i. Financial income - net:
Year ended December 31
----------------------
2000 2001 2002
---- ---- ----
In thousands
------------
Income:
Interest on bank deposits ................... $ 6,087 $ 3,184 $ 1,207
Gain on marketable securities ............... 2,013 2,567 3,819
Gain from early extinguishment
of notes ................................ 1,767 34,108 13,199
Interest on long-term loan (see note 4) 2,885
Other ....................................... 595 198
________ ________ ________
9,867 40,454 21,308
======== ======== ========
Expenses:
Interest in respect of convertible
subordinated notes ..................... 5,811 5,862 3,086
Amortization of convertible subordinated
notes issuance costs ................... 681 710 393
Other (mainly currency transaction
gains and losses) - net ................ 1,400 487 213
________ ________ ________
7,892 7,059 3,692
________ ________ ________
* $ 1,975 $ 33,395 $ 17,616
======== ======== ========
* Including $ 577,000 that relates to Tioga for the six month period ended June
30, 2000.
F-26
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE 12 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
j. Net income (loss) per share
Year ended December 31
2000 2001 2002
In thousands
Numerator - Basic
Net income (loss) .............................. $ (106,654) $ 856 $ 4,083
======== ======= ========
Denominator - Basic
Weighted average ordinary shares outstanding ... 4,332 4,632 4,932
======== ======= ========
Basic net income (loss) per share .................. $ (24.60) $ 0.18 $ 0.83
======== ======= ========
Numerator - Diluted ................................ $ (106,654) $ 856 $ 4,083
======== ======= ========
Denominator - Diluted
Weighted average ordinary shares outstanding ... 4,332 4,632 4,932
Dilutive potential of ordinary shares equivalents -
options .................................... 3 243 231
________ _______ ________
4,335 4,875 5,163
======== ======= ========
Diluted net income (loss) per share ................ $ (24.60) $ 0.18 $ 0.79
======== ======= ========
The potential effect of the convertible subordinated notes was not taken
into account, since its effect is anti-dilutive.
F-27