ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
2003 CONSOLIDATED FINANCIAL STATEMENTS
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
2003 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
Notes to financial statements F-7 - F-26
The amounts are stated in U.S. dollars ($) in thousands.
---------------
-------------------------------
---------------
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, 2002 and 2003, 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,
2003. 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) Regulations, 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, 2002 and 2003 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, 2003, in conformity with accounting principles generally accepted in the
United States.
Tel Aviv, Israel /S/ Kesselman & Kesselman
February 22, 2004 Certified Public Accountants (Isr.)
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
----------------------
2002 2003
--------- ---------
A S S E T S
CURRENT ASSETS:
Cash and cash equivalents $ 10,165 $ 10,048
Marketable securities (note 10a) 43,139 31,302
Bank deposits (note 10d) 10,545 273
Trade receivables (note 10b) 786 147
Other receivables (note 10c) 2,443 1,596
Inventories 100 100
--------- ---------
T o t a l current assets 67,178 43,466
--------- ---------
LONG-TERM INVESTMENTS:
Marketable securities (note 10a) 46,576 31,160
Other (note 10d) 8,403 9,465
--------- ---------
54,979 40,625
--------- ---------
LONG-TERM LOAN TO A RELATED PARTY (note 2) 7,000
---------
PROPERTY AND EQUIPMENT - net (note 3): 6,070 2,093
--------- ---------
DEFERRED ISSUANCE COSTS, net of accumulated amortization (note 1g) 623 147
--------- ---------
T o t a l assets $ 135,850 $ 86,331
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 4,827 $ 3,108
Accrued expenses and other payables (note 10e) 7,158 5,878
--------- ---------
T o t a l current liabilities 11,985 8,986
--------- ---------
LONG-TERM LIABILITIES:
Accrued severance pay (note 4) 3,265 3,435
Convertible subordinated notes (note 5) 38,179 16,238
--------- ---------
T o t a l long-term liabilities 41,444 19,673
--------- ---------
COMMITMENTS (note 6)
--------- ---------
T o t a l liabilities 53,429 28,659
--------- ---------
SHAREHOLDERS' EQUITY (note 7):
Share capital - ordinary shares of no par value and paid-in capital
(authorized 10,000,000 shares; issued: December 31, 2002 - 4,979,593 shares;
December 31, 2003 - 5,216,593 shares; outstanding: December 31, 2002 - 4,979,593
shares; December 31, 2003 - 4,334,980 shares) 322,227 325,512
Deferred compensation (2,023) (2,797)
Accumulated deficit (237,783) (259,399)
Treasury shares, at cost (881,613 ordinary shares) (5,644)
--------- ---------
T o t a l shareholders' equity 82,421 57,672
--------- ---------
T o t a l liabilities and shareholders' equity $ 135,850 $ 86,331
========= =========
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
-----------------------------------
2001 2002 2003
--------- --------- ---------
REVENUES (note 10f) $ 141,647 $ 53,420 $ 1,683
COST OF REVENUES (note 10g) 112,007 32,963 748
--------- --------- ---------
GROSS PROFIT 29,640 20,457 935
RESEARCH AND DEVELOPMENT EXPENSES - net (note 10h) 19,085 19,291 15,003
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 16,993 14,699 12,656
AMORTIZATION AND IMPAIRMENT OF GOODWILL (note 10i) 26,101
--------- --------- ---------
OPERATING LOSS (32,539) (13,533) (26,724)
FINANCIAL INCOME - net (note 10j) 33,395 17,616 5,108
--------- --------- ---------
NET INCOME (LOSS) FOR THE YEAR $ 856 $ 4,083 $ (21,616)
========= ========= =========
EARNINGS (LOSS) PER SHARE ("EPS") (note 10k):
Basic $ *0.18 $ 0.83 $ (4.99)
========= ========= =========
Diluted $ *0.18 $ 0.79 $ (4.99)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN COMPUTATION OF EPS:
Basic *4,632 4,932 4,332
========= ========= =========
Diluted *4,875 5,163 4,332
========= ========= =========
* After giving retroactive effect to the one-for-five reverse share split, see
note 7a(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 Additional
Shares * Paid-in Deferred
(In Thousands) Amount Capital Compensation
--------- ----- --------- ----------
BALANCE AT JANUARY 1, 2001 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 (7,214)
Amortization of deferred compensation related to employee
stock option grants 3,651
--------- ----- --------- ----------
BALANCE AT DECEMBER 31, 2001 4,875 710 321,504 (3,563)
CHANGES DURING 2002:
Net income
Exercise of options granted to employees 105 13
Amortization of deferred compensation related to employee
stock option grants 1,540
Cancellation of ordinary shares par value (723) 723
--------- ----- --------- ----------
BALANCE AT DECEMBER 31, 2002 4,980 -,- 322,227 (2,023)
CHANGES DURING 2003:
Net loss
Issuance of shares to employees, exchangeable to options, see note 7a(5) 600 2,496 (2,496)
Exercise of options granted to employees 237 112
Acquisition of treasury stock (882)
Exchange of shares into options, see note 7a(5) (600) 1,284 (1,284)
Amortization of deferred compensation related to employee
stock option grants, net of elimination of paid-in capital in respect of
employee stock option grants due to forfeiture (607) 3,006
--------- ----- --------- ----------
BALANCE AT DECEMBER 31, 2003 4,335 $ -,- $ 325,512 $ (2,797)
========= ===== ========= ==========
TOTAL
ACCUMULATED TREASURY SHAREHOLDERS'
DEFICIT SHARES EQUITY
------------ ---------- ---------
BALANCE AT JANUARY 1, 2001 $ (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 -,-
Amortization of deferred compensation related to employee
stock option grants 3,651
------------ ---------- ---------
BALANCE AT DECEMBER 31, 2001 (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
Cancellation of ordinary shares par value -,-
------------ ---------- ---------
BALANCE AT DECEMBER 31, 2002 (237,783) 82,421
CHANGES DURING 2003:
Net loss (21,616) (21,616)
Issuance of shares to employees, exchangeable to options, see note 7a(5) -,-
Exercise of options granted to employees 112
Acquisition of treasury stock (5,644) (5,644)
Exchange of shares into options, see note 7a(5) -,-
Amortization of deferred compensation related to employee
stock option grants, net of elimination of paid-in capital in respect of
employee stock option grants due to forfeiture 2,399
------------ ---------- ---------
BALANCE AT DECEMBER 31, 2003 $ (259,399) $ (5,644) $ 57,672
============ ========== =========
* The figures for 2001 are after giving retroactive effect to the one-for-five
reverse share split, see note 7a(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
(U.S. dollars in thousands)
Year Ended December 31
--------------------------------
2001 2002 2003
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) for the year $ 856 $ 4,083 $(21,616)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization:
Property and equipment 4,074 3,568 3,039
Deferred charges 3,411 393 139
Impairment of property and equipment 1,800
Goodwill and other identifiable intangible assets impairment 23,400
Trading marketable securities, net (33,214) 1,596 4,623
Gain from early extinguishment of convertible subordinated notes (34,108) (13,199) (3,125)
Interest on long-term investments (1,245) (2,019)
Increase (decrease) in accrued severance pay (798) 105 170
Amortization of deferred compensation related to employee
stock option grants, net 3,651 1,540 2,399
Changes in operating assets and liabilities:
Decrease in trade receivables and other receivables 22,209 8,580 1,486
Decrease in trade payables, accrued expenses
and other payables (31,564) (7,954) (2,999)
Decrease in inventories 40,083 9,197 -,-
-------- -------- --------
Net cash provided by (used in) operating activities (2,000) 6,664 (16,103)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,415) (1,842) (862)
Bank deposits, net 33,015 2,565 10,272
Funds in respect of accrued severance pay (8) 758 (557)
Long term investments (499)
Collection of long-term loan granted 13,000 7,000
Maturities of marketable securities held to maturity 26,310
Purchase of marketable securities held to maturity (35,596) (1,667)
-------- -------- --------
Net cash provided by (used in) investing activities 30,592 (21,115) 39,997
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cost of acquisition of treasury shares (5,644)
Exercise of options granted to employees 767 13 112
Early extinguishment of convertible subordinated notes (17,825) (14,488) (18,479)
-------- -------- --------
Net cash used in financing activities (17,058) (14,475) (24,011)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,534 (28,926) (117)
BALANCE OF CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 27,557 39,091 10,165
-------- -------- --------
BALANCE OF CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 39,091 $ 10,165 $ 10,048
======== ======== ========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW
INFORMATION - CASH PAID DURING THE YEAR FOR:
Interest $ 6,527 $ 3,152 $ 1,077
======== ======== ========
Advances to income tax authorities $ 40 $ 96 $ 95
======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
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. ("Orckit") and its subsidiaries
(together - the "Company") is an Israeli corporation that is
engaged in the design, development, manufacture and marketing of
advanced telecom equipment, targeting high capacity broadband
services. In the reported years, substantially all of the
Company's revenues were derived from the sale of ADSL (Asymmetric
Digital Subscriber Line) broadband equipment. Revenues from this
product line have decreased significantly and the Company does
not expect to derive significant revenues from this product line.
Orckit has initiated and funded a number of technology projects
that are being developed by subsidiaries of Orckit, including the
development, manufacturing and marketing of RPR-based telecom
equipment by Corrigent Systems, and DSL-based telecom equipment
by Spediant Systems.
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
were and are expected to be earned in dollars, most purchases of
materials and components are made in dollars, most of the
financing activities of the Company 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 dates of the financial
statements and the reported amounts of revenues and expenses
during the reported years. Actual results could differ from those
estimates.
F-7
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 to and based on its assessment
has the ability to, hold to maturity, are classified as "held to
maturity" and are recorded at amortized cost. The premium or discount
is amortized over the period to maturity and included in financial
income.
D. 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.
E. IMPAIRMENT IN VALUE OF PROPERTY AND EQUIPMENT
Effective January 1, 2002, the Company adopted FAS 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144
require 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.
F. 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.
F-8
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
Effective January 1, 2002, the Company adopted FAS 142 "Goodwill and
Other Intangibles Assets". However, the Company had neither goodwill
nor other identifiable intangible assets in 2002. Accordingly, this
adoption has no effect on the results of operations for 2002 and 2003.
The following table illustrates the Company's net income adjusted to
eliminate the effect of goodwill amortization expense for 2001:
Year Ended December 31
----------------------------------
2001 * 2002 2003
--------- --------- ----------
In Thousands, Except for Per Share Data
----------------------------------
Net income (loss), as reported $ 856 $ 4,083 $ (21,616)
Add back - goodwill amortization 2,701 -,- -,-
--------- --------- ----------
Adjusted net income (loss) $ 3,557 $ 4,083 $ (21,616)
========= ========= ==========
Earnings (loss) per share:
Basic - as reported $ 0.18 $ 0.83 $ (4.99)
Basic - adjusted $ 0.77 $ 0.83 $ (4.99)
Diluted - as reported $ 0.18 $ 0.79 $ (4.99)
Diluted - adjusted $ 0.73 $ 0.79 $ (4.99)
* The entire unamortized balance of goodwill, in the amount of
$23.4 million, was written off in 2001, see also note 10i.
G. 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 the retirement of any notes,
the unamortized balance is adjusted proportionately.
H. TREASURY SHARES
Company shares purchased by the Company are presented as a reduction
of shareholders' equity, at their cost to the Company.
I. REVENUE RECOGNITION
Revenues from sales of products are recognized when title passes to
the customer, 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 for 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.
F-9
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
K. RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are charged to income as incurred.
Governments grants received for development of projects are recognized
as a reduction of the expenses.
L. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance in respect of trade receivables has been determined for
specific debts doubtful of collection, see note 10b.
M. CASH EQUIVALENTS
The Company considers all highly liquid investments, which include
short-term bank deposits (up to three months from date of deposit)
that are not restricted as to withdrawal or use, to be cash
equivalents.
N. EARNINGS (LOSS) PER SHARE
Basic earning per share is computed by dividing the net income (loss)
by the weighted average number of shares outstanding during each year,
net of treasury and restricted shares.
In computing diluted earning per share, the potential dilutive effect
of outstanding stock options was taken into account using the treasury
stock method. See also note 10k.
Weighted average number of ordinary 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 7a(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. Under APB 25, compensation cost for employee stock
option plans is measured using the intrinsic value based method of
accounting (see also note 7a(5)). 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-10
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
earnings (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
-----------------------------------
2001 2002 2003
-------- --------- ----------
In Thousands, Except for Per Share Data
-----------------------------------
Net income (loss), as reported $ 856 $ 4,083 $ (21,616)
Add: stock based employee
Compensation expense,
included in reported net income
(loss) 3,651 1,540 2,399
Deduct: stock based employee
Compensation expense
determined under fair value
method for all awards (10,824) (2,916) (3,177)
-------- --------- ----------
Pro forma net income (loss) $ (6,317) $ 2,707 $ (22,394)
======== ========= ==========
Earnings (loss) per share:
Basic - as reported $ 0.18 $ 0.83 $ (4.99)
Basic - pro forma $ (1.15) $ 0.55 $ (5.17)
Diluted - as reported $ 0.18 $ 0.79 $ (4.99)
Diluted - pro forma $ (1.15) $ 0.52 $ (5.17)
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 8).
R. SHIPPING AND HANDLING FEES AND COSTS
Shipping and handling costs are classified as a component of cost of
revenues.
S. ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF
BOTH LIABILITIES AND EQUITY
In May 2003, the FASB issued FAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity" (FAS 150). FAS 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. FAS 150 is effective
for financial instruments entered into or modified after May 31, 2003,
and otherwise (except for certain instruments) is effective at the
beginning of the first interim period beginning after June 15, 2003.
Effective July 1, 2003, the Company adopted FAS 150. The adoption of
FAS 150 did not have a material effect on the company's financial
position or results of operations.
F-11
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
T. GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES
In November 2002, the FASB issued Interpretation No. 45, " Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others " ("FIN 45"). FIN 45
requires that a liability be recorded on the guarantor's balance sheet
upon issuance of a guarantee. In addition, FIN 45 requires disclosures
about the guarantees that an entity has issued.
For U.S. GAAP purposes, the company has applied the recognition
provisions of FIN 45 prospectively to guarantees issued or modified
after December 31, 2002 as required by the interpretation. The
recognition provisions of FIN 45 did not have a material effect on the
company's consolidated financial statements. See note 10e for
additional disclosures required under FIN 45.
U. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
1) FIN 46 AND FIN 46 (REVISED)
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 populations: (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 (VIEs) 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. Since issuing
FIN 46, the FASB has proposed various amendments to the
Interpretation and has deferred its effective dates. Most
recently, in December 2003, the FASB issued a revised version of
FIN 46 (FIN 46-R), which also provides for a partial deferral of
FIN 46. This partial deferral established the effective dates for
public entities to apply FIN 46 and FIN 46-R based on the nature
of the variable interest entity and the date upon which the
public company became involved with the variable interest entity.
In general, the deferral provides that (i) for variable interest
entities created before February 1, 2003, a public entity must
apply FIN 46-R at the end of the first interim or annual period
ending after March 15, 2004, and may be required to apply FIN 46
at the end of the first interim or annual period ending after
December 15, 2003, if the variable interest entity is a special
purpose entity, and (ii) for variable interest entities created
after January 31, 2003, a public company must apply FIN 46 at the
end of the first interim or annual period ending after December
15, 2003, as previously required, and then apply FIN 46-R at the
end of the first interim or annual reporting period ending after
March 15, 2004.
The Company has currently no variable interests in any VIE.
Accordingly, the Company believes that the adoption of FIN 46 and
FIN 46-R will not have material impact on its financial position,
results of operations and cash flows.
F-12
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
2) FAS 132 (REVISED)
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement
Benefits, an amendment of FASB Statements No. 87, 88 and 106, and
a revision of FASB Statement No. 132 ("FAS 132 (revised 2003)")
". This Statement revises employers' disclosures about pension
plans and other postretirement benefit plans. It does not change
the measurement or recognition of those plans. The new rules
require additional disclosures about the assets, obligations,
cash flows, and net periodic benefit cost of defined benefit
pension plans and other postretirement benefit plans.
Part of the new disclosures provisions are effective for 2003
calendar year-end financial statements, and accordingly have been
applied by the company in these consolidated financial
statements. The rest of the provisions of this Statement, which
have a later effective date, are currently being evaluated by the
Company.
V. RECLASSIFICATIONS
Certain comparative figures have been reclassified to conform to the
current year presentation.
NOTE 2 - LONG-TERM LOAN TO A RELATED PARTY
In 2000, a loan agreement was entered into with Tikcro Technologies Ltd.
("Tikcro", previously known as Tioga Technologies Ltd.) as part of the
spin-off of the Company's semiconductor business to Tikcro. The agreement
provided for borrowings in the amount of up to $20 million with loans
bearing interest at rate of approximately 6% per annum. Tikcro borrowed $20
million under this loan agreement.
During 2002, Tikcro repaid $ 13.0 million in principal amount of the loan.
In 2003, Tikcro paid the remaining principal balance outstanding on the
loan plus accrued interest.
NOTE 3 - PROPERTY AND EQUIPMENT
Composition of assets, grouped by major classification, is as follows:
December 31
-----------------
2002 2003
------- -------
In Thousands
-----------------
Cost:
Computers, software and equipment $16,090 $16,931
Office furniture and equipment 1,375 1,380
Leasehold improvements 2,175 2,190
------- -------
$19,640 $20,501
------- -------
Less - accumulated depreciation
and amortization 13,570 18,408
------- -------
$ 6,070 $ 2,093
======= =======
F-13
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 - PROPERTY AND EQUIPMENT (continued):
Depreciation expenses totaled $ 4,074,000, $ 3,568,000 and $ 3,039,000 in
the years ended December 31, 2001, 2002 and 2003, respectively.
In addition, the Company recorded an impairment of property and equipment
in the amount of approximately $1.8 million, representing write-off of
property and equipment relating to the ADSL product line (see also note 1a)
NOTE 4 - 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 or
pension funds 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.
The amounts funded as of December 31, 2002 and 2003 are approximately
$ 2,150,000 and $ 2,707,000, respectively.
In several of the Company's agreements, the Company makes regular
deposits with the insurance companies for securing the employee rights
upon retirement. Thus, in accordance with these agreements, the
Company is fully relieved from any severance pay liability. The
liability accrued in respect of these employees and the amounts
funded, as of the agreement date, are not reflected in the balance
sheets, since the amounts funded are not under the control and
management of the Company.
B. The amounts of pension and severance pay expense were $ 1,001,000, $
844,000 and $ 776,000 for the years ended December 31, 2001, 2002 and
2003, respectively, of which $ 15,000 in 2003 was in respect of the
insurance policies that were expensed but not reflected in the balance
sheet as described above.
C. The Company expects to contribute in 2004, $ 900,000 to the insurance
companies and pension funds, in respect of its severance pay
liabilities expected for 2004 operations.
NOTE 5 - 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.
Unless previously redeemed, the Notes are convertible by the holder at
any time through maturity into ordinary shares of the Company and
Tikcro. The conversion rate is equal to 2.34962 ordinary shares of
Orckit plus 11.7481 ordinary shares of Tikcro 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.
F-14
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - CONVERTIBLE SUBORDINATED NOTES (continued):
B. EARLY EXTINGUISHMENT OF THE NOTES
During 2001, 2002 and 2003, the Company retired $ 53.6 million, $ 28.2
million and $ 22.0 principal amount of the Notes. As of December 31,
2003, the total principal amount of Notes outstanding was $ 16.2
million.
The Company has recorded in financial income gains of $ 34.1 million,
$ 13.2 million and $ 3.1 million from early extinguishments of Notes
in the years ended December 31, 2001, 2002 and 2003, respectively.
C. In January 2003, the Company repurchased from Clal Electronic
Industries Ltd. ("Clal"), at the time a related party, 616,590 of
Orckit's ordinary shares and $12.5 million principal amount of
Orckit's Notes for a total consideration of approximately $14.7
million in cash. The Company attributed $11 million of the
consideration to the principal amount of the Notes and accrued
interest and $ 3.7 million of the consideration to the repurchase of
the shares.
D. On January 15, 2004, Orckit announced that its Board of Directors had
approved the redemption of all of the outstanding Notes. The
redemption price is equal to the principal amount of the Notes plus
accrued and unpaid interest to the redemption date. The Notes are
expected to be redeemed in full on April 1, 2004.
NOTE 6 - 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 projects, was fixed at
3% during the first three years and 4-5% thereafter. Royalties are
payable up to 100% of the amount of such grants, with the addition of
annual interest based on LIBOR. The total aggregate contingent
liability of the Company and its subsidiaries in respect of royalties
to the Government of Israel at December 31, 2003 was approximately $12
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, based on the applicable project.
B. LEASE COMMITMENTS
The Company has entered into one main operating lease agreement for
the premises it uses. The Company has an option to terminate this
agreement by giving a six month notice in advance.
The projected annual rental payments for 2004, at rates in effect at
December 31, 2003, are approximately $ 500,000.
F-15
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - 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) TREASURY SHARES
During 2003, the Company acquired 881,613 ordinary shares of the
Company at a cost of $ 5,644,000 (see also note 5c).
4) EXERCISE OF OPTIONS
Under the Employee Share Option Plan (see b. below), options to
purchase 349,907, 105,466, and 237,368 ordinary shares were
exercised in the years ended December 31, 2001, 2002 and 2003,
respectively.
5) In January 2003, the Company adopted 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 issued, for no consideration,
600,000 of its ordinary shares to employees of its subsidiaries,
excluding directors of the Company. The shares were duly
authorized and validly issued, fully paid and nonassessable. The
shares were deposited with a trustee and were to vest after a
period of 3 years. According to the 2003 Plan, the shares issued
may be exchanged at any time by the Company, in its discretion,
for a number of options to purchase shares of the applicable
subsidiary.
During 2003, 60,000 shares were forfeited and 540,000 shares were
exchanged to options to purchase shares of subsidiaries. The
accounting treatment applied in respect of the plan is variable
accounting until the exchange occurred. Accordingly, compensation
in respect of the grant of the shares was measured according to
the share price of Orckit and updated to reflect the changes in
the share price through the date of the exchange. The
compensation measured totaled approximately $ 3.8 million, which
is to be amortized over the vesting period of the options
granted, of which in 2003 approximately $1.3 was amortized. Upon
the exchange, the plan became a fixed plan and the compensation
was fixed according to the share price of Orckit on that date. At
the date of exchange, the intrinsic value of options to purchase
shares of subsidiaries that employees received was zero.
F-16
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - SHAREHOLDERS' EQUITY (continued):
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 (as amended in 2003) was 2,198,047 at December 31,
2003, of which options to purchase 132,007 and 457,723 shares, at
December 31, 2002 and 2003, respectively, were available for
future grant. With respect to options
outstanding at December 31, 2003, 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, 2001, 2002
and 2003, and changes during the years ended on those dates is
presented below.
Year Ended December 31
---------------------------------------------------------------------
2001(1) 2002 2003
------------------- ------------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
---------- ----- ---------- ---------- ---------- -----
Options outstanding at beginning
of year 1,257,537 $10.2 829,429 $ 6.7 837,723 $ 7.2
Changes in options during the year:
Granted, at market value 255,420 $ 5.0 190,000 $ 3.6 232,500 $ 3.5
Exercised (349,907) $ 2.3 (105,466) (237,368) $ 0.5
Forfeited (333,621) $23.2 (76,240) $ 1.7 (158,216) $ 4.2
---------- ---------- ----------
Options outstanding at year-end 829,429 $ 6.7 837,723 $ 7.2 674,639 $ 9.0
========== ========== ==========
Options exercisable at year-end 327,355 $12.3 431,903 $ 10.8 399,411 $12.9
========== ========== ==========
Weighted average fair value of
options granted during the year (2) $ 7.5 $ 3.8 $ 4.0
===== ========== =====
(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:
2001 - 115%; 2002 - 81%; 2003 - 59%. Risk-free interest
rate: 2001 - 4.00%; 2002 - 4.00%; 2003 1.5% and average
expected life of approximately 3 years.
F-17
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - SHAREHOLDERS' EQUITY (continued):
3) The following table summarizes information about options
outstanding at December 31, 2003:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------- ------------------------------------
Number Weighted Number
Outstanding At Average Weighted Exercisable At Weighted
Range of December 31, Remaining Average December 31, Average
Exercise Price 2003 (1) Contractual Life Exercise Price 2003 Exercise Price
- -------------- -------- ---------------- -------------- ---- --------------
$ YEARS $ $
- ----- - -
0 200,318 6.2 0 158,493 0
3-7 265,840 9.4 3.5 49,570 3.5
8-15 36,000 8.3 8.3 19,375 8.3
20-30 83,759 4.4 21.6 83,760 21.6
30-60 88,722 5.6 34.1 88,213 34.1
------- -------
674,639 9.0 399,411 12.9
======= =======
(1) Including options to purchase 200,000 ordinary shares at a
weighted average exercise price of $3.1 that were granted to
directors of the Company.
C. GRANT OF STOCK AND OPTION PLANS OF SUBSIDIARIES
The Board of Directors of the Company's subsidiaries, Corrigent
Systems and Spediant Systems, approved employee share option plans
(the "Corrigent Subsidiary Plan", the "Spediant Subsidiary Plan", and
together, the "Subsidiaries Plans"). Each of Corrigent Systems and
Spediant Systems has granted, and reserved for grant, shares and
options under its respective Subsidiary Plan and other plans, as
applicable, to its employees, officers and directors and to personnel
of Orckit, including employees, officers and directors of Orckit. As
determined by the respective stock option committee, the exercise
price of options granted is zero which represents the value of the
shares on grant day. The vesting period of options granted is up to
four years from the date of grant. As of December 31, 2003, on a fully
diluted basis, Orckit `s holding in each of Corrigent and Spediant was
approximately 70%.
The intrinsic value and the weighted fair value of options granted by
the subsidiaries is $ 0. Accordingly, no compensation expense in
respect of the options granted was recorded other than $ 1.3 million
amortization of compensation measured upon exchange of Orckit shares,
see a(5) above.
D. DIVIDENDS
In the event cash dividends are declared by the Company, such
dividends will be declared and paid in Israeli currency.
F-18
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - SHAREHOLDERS' EQUITY (continued):
E. 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.
NOTE 8 - 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 years,
after which the income from these enterprises is taxable at the
rate of 25% for 5 years, the remainder of the period of tax
benefits.
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 thereunder 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 consumer price index (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.
F-19
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - TAXES ON INCOME (continued):
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.
C. TAX RATES APPLICABLE TO INCOME FROM OTHER SOURCES:
1) INCOME FROM OTHER SOURCES IN ISRAEL
Income not eligible for approved enterprise benefits mentioned in
a. above is taxed at the statutory corporate rate of 36%.
2) INCOME OF NON-ISRAELI SUBSIDIARIES
Non-Israeli subsidiaries are taxed according to the tax laws in
their countries of residence.
D. DEFERRED INCOME TAXES
At December 31, 2003, the Company and it subsidiaries had accumulated
tax losses amounting to approximately $ 130 million (December 31, 2002
- approximately $88 million) and carryforward capital losses for tax
purposes of approximately $ 40 million (December 31, 2002 - $ 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, 2003, the Company and its subsidiaries had net
deferred tax asset (mostly in respect of carryforward losses and
capital losses), in the amount of approximately $ 44 million (December
31, 2002 - approximately $40 million; December 31, 2001 -
approximately $36 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.
F-20
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - TAXES ON INCOME (continued):
E. TAX RATE RECONCILIATION
In 2003, the main reconciling item from the statutory tax rate of the
Company (36%, representing a theoretical tax benefit of approximately
$ 8 million) to the effective tax rate (0%) is the non-recognition of
tax benefits in respect of tax losses incurred in the reported year.
In 2002 and 2001, the main reconciling item from the statutory tax
rate of the Company (36%, representing theoretical tax expenses of
approximately $ 1.5 million and $300,000 respectively) to the
effective tax rate (0%) is the utilization of carryforward tax losses
for which deferred taxes were not created in previous years.
F. TAX ASSESSMENTS
The Company has received final assessments through the year ended
December 31, 2000.
NOTE 9 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
A. BALANCES IN NON-DOLLAR CURRENCIES:
1) As follows:
December 31, 2003
-----------------
in Thousands
------------
Assets 4,979
-----
Liabilities 8,290
=====
The above mainly represents balances in Israeli currency.
2) Data regarding the rate of exchange and the Israeli CPI:
Year Ended December 31
----------------------------
2001 2002 2003
----- ----- -----
Rate of devaluation (evaluation) of the Israeli
Currency against the dollar 9.3% 7.3% (7.6)%
Rate of increase (decrease) in the Israeli CPI 1.4% 6.5% (1.9)%
Exchange rate at end of year - $ 1= NIS 4.416 NIS 4.737 NIS 4.379
B. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments included in working capital
and of the Notes is usually identical or close to their carrying
value.
As to the fair value of the Company's securities that are held to
maturity, see note 10a(2).
F-21
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued):
C. CONCENTRATIONS OF CREDIT RISKS
At December 31, 2002 and 2003, 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 international bank institutions.
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 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 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:
BALANCE SHEETS:
A. MARKETABLE SECURITIES:
1) TRADING SECURITIES
At December 31, 2003, the Company held trading securities in the
amount of $ 20.5 million (December 31, 2002 - $ 25.1 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 2003
------- -------
in Thousands
-----------------
Carrying Amounts
-----------------
Classified as short-term investments $16,856 $10,054
Due after 1 year up to 4 years 46,576 31,160
------- -------
$63,432 $41,214
======= =======
At December 31, 2003, the fair value of the Company's
held-to-maturity tradable securities is $ 42.2 million (December
31, 2002 - $ 64.1 million). The difference between the carrying
amounts and the fair value is a result of unrealized gains in the
amount of approximately $1 million (December 31, 2002 -
$700,000).
F-22
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
December 31
------------------
2002 2003
------- -------
in Thousands
------------------
B. TRADE RECEIVABLES:
Open accounts $ 869 $ 230
Less - allowance for doubtful accounts 83 83
------- -------
$ 786 $ 147
======= =======
Allowance for doubtful accounts:
Balance at beginning of year $ 549 $ 83
Increase (decrease) during the year (466)
------- -------
Balance at end of year $ 83 $ 83
======= =======
C. OTHER RECEIVABLES
Employees and employee institutions $ 133 $ 63
Government of Israel 813 996
Prepaid expenses 778 493
Sundry 719 44
------- -------
$ 2,443 $ 1,596
======= =======
D. BANK DEPOSITS
At December 31, 2003, the Company had short-term bank deposits -
denominated in dollars in the amount of $ 300,000, and long-term
bank deposits - denominated in dollars and bearing annual
interest at a fixed rate of 4.42% - in the amount of $ 6.3
million.
E. ACCRUED EXPENSES AND OTHER PAYABLES:
December 31
---------------
2002 2003
------ ------
in Thousands
---------------
Employees and employee institutions $1,375 $2,088
Provision for vacation pay 1,654 2,162
Provision for servicing products under warranty * 1,218 434
Accrued royalties 772 122
Accrued interest 549 233
Sundry 1,590 839
------ ------
$7,158 $5,878
====== ======
F-23
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
December 31
------------------
2002 2003
------- -------
in Thousands
------------------
* The changes in the balance during the year:
Balance at beginning of year $ 2,330 $ 1,218
Payments made under the warranty (122) (98)
Product warranties issued for new sales 658 34
Changes in accrual in respect of pre-existing warranties (1,648) (720)
------- -------
Balance at end of year $ 1,218 $ 434
======= =======
STATEMENTS OF OPERATIONS:
F. SEGMENT INFORMATION AND REVENUES FROM PRINCIPAL CUSTOMERS
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 telecommunications carriers.
Revenues are attributed to geographic areas based on the location
of the end users as follows:
Year Ended December 31
------------------------------
2001 2002 2003
-------- -------- --------
in Thousands
------------------------------
Israel $ 2,268 $ 463 $ 35
United States 111,336 44,811
Europe 23,319 7,601 1,510
Other countries 4,724 545 138
-------- -------- --------
$141,647 $ 53,420 $ 1,683
======== ======== ========
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
------------------------------
2001 2002 2003
-------- -------- --------
in Thousands
------------------------------
Customer A $ 111,208 $ 43,912
======= ======
Customer B $ 20,973 $ 7,209 $ 530
======= ====== =====
F-24
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
G. COST OF REVENUES:
Year Ended December 31
------------------------------
2001 2002 2003
-------- -------- --------
in Thousands
------------------------------
Materials consumed, subcontractors
and other production expenses (*) $ 84,136 $ 27,702 $ 533
Payroll and related expenses 3,517 1,207
Depreciation 631 174 199
Decrease in inventories of products
in process and finished products 23,723 3,274
Other 606 16
-------- -------- --------
$112,007 $ 32,963 $ 748
======== ======== ========
H. RESEARCH AND DEVELOPMENT EXPENSES - NET:
Total expenses $ 22,429 $ 22,266 $ 20,803
L e s s - grants and participations,
see note 7 3,344 2,975 5,800
-------- -------- --------
$ 19,085 $ 19,291 $ 15,003
======== ======== ========
(*) Including purchases from Tikcro, which amount to $ 1,418,000 and
$ 200,000 for the years ended December 31, 2001 and 2002,
respectively.
I. AMORTIZATION AND IMPAIRMENT OF GOODWILL
In 2001, the Company elected to halt operations of an acquired
subsidiary and filed a request in the Israeli district court for
liquidation of its assets and debts. As a result, an amount of $23.4
million which represented all outstanding unamortized goodwill and
other intangible assets was written off by the Company.
J. FINANCIAL INCOME - NET:
Year Ended December 31
----------------------------
2001 2002 2003
------- ------- -------
in Thousands
----------------------------
Income:
Interest on bank deposits $ 3,184 $ 1,207 $ 557
Gain and interest on marketable securities 2,567 3,819 2,883
Gain from early extinguishments of notes 34,108 13,199 3,125
Interest on long-term loan (see note 2) 2,885 114
Other 595 198 62
------- ------- -------
$40,454 $21,308 $ 6,741
======= ======= =======
F-25
ORCKIT COMMUNICATIONS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
Year Ended December 31
---------------------------
2001 2002 2003
------- ------- -------
in Thousands
---------------------------
Expenses:
Interest in respect of convertible
subordinated notes $ 5,862 $ 3,086 $ 1,114
Amortization of convertible subordinated
notes issuance costs 710 393 139
Other (mainly currency transaction
gains and losses) - net 487 213 380
------- ------- -------
7,059 3,692 1,633
------- ------- -------
$33,395 $17,616 $ 5,108
======= ======= =======
K. NET INCOME (LOSS) PER SHARE
Year Ended December 31
------------------------------
2001 2002 2003
-------- -------- --------
in Thousands
------------------------------
Numerator - Basic
Net income (loss) $ 856 $ 4,083 $(21,616)
======== ======== ========
Denominator - Basic
Weighted average ordinary shares outstanding
(net of treasury shares) 4,632 4,932 4,332
======== ======== ========
Basic net income (loss) per share $ 0.18 $ 0.83 $ (4.99)
======== ======== ========
Numerator - Diluted $ 856 $ 4,083 $(21,616)
======== ======== ========
Denominator - Diluted
Weighted average ordinary shares outstanding 4,632 4,932 4,332
Dilutive potential of ordinary shares
equivalents - options 243 231
-------- -------- --------
4,875 5,163 4,332
======== ======== ========
Diluted net income (loss) per share $ 0.18 $ 0.79 $ (4.99)
======== ======== ========
The potential effect of the convertible subordinated notes was not
taken into account, since its effect is anti-dilutive. In 2003, the
potential effect of the options was not taken into account, since its
effect is anti-dilutive.
---------------
-------------------------------
---------------
F-26
REPORT OF INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
ORCKIT COMMUNICATIONS LTD.
Our audits of the consolidated financial statements of Orckit Communications
Ltd. referred to in our report dated February 22, 2004 also included an audit of
a Schedule - Valuation and Qualifying Accounts for each of the three years in
the period ended December 31, 2003 (the "Schedule"). In our opinion, the
Schedule presents fairly in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
Tel-Aviv, Israel /s/ Kesselman & Kesselman
February 22, 2004 Certified Public Accountants (Israel)
Kesselman & Kesselman is a member of PricewaterhouseCoopers International
Limited, a company limited by guarantee registered in England and Wales.
F-27
ORCKIT COMMUNICATIONS LTD.
SCHEDULE - VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 2003
(U.S. $ In thousands)
Column a Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance At Additions Balance
Beginning of Charged to At End of
Period Expenses Deductions Period
-------- -------- -------- --------
Allowance for doubtful accounts:
Year ended December 31, 2003 $ 83 $ 63 $ (63) $ 83
==== ==== ===== ====
Year ended December 31, 2002 $ 549 $ (466) $ 83
==== ===== ====
Year ended December 31, 2001 $ 150 $ 399 $ 549
==== ==== ====
F-28
ORCKIT COMMUNICATIONS LTD.
EXHIBIT INDEX
Exhibit
Number Title
------ -----
4.7 Spediant Stock Option Plan
4.8 Promissory Note dated March 30, 2004 made by Orckit Communications Ltd. to HSBC Bank USA
8.1 Subsidiaries of Orckit Communications Ltd.
12.1 Certification of Principal Executive Officer pursuant to 17 CFR 240.13a-14(a), as
adopted pursuant toss.302 of the Sarbanes-Oxley Act
12.2 Certification of Principal Financial Officer pursuant to 17 CFR 240.13a-14(a), as
adopted pursuant toss.302 of the Sarbanes-Oxley Act
13.1 Certification of Principal Executive Officer pursuant to 18 U.S.C.ss.1350, as adopted
pursuant toss.906 of the Sarbanes-Oxley Act
13.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to 906 of the Sarbanes-Oxley Act
14.1 Consent of Kesselman & Kesselman, independent auditors of Orckit Communications Ltd.