20-F 1 zk1414814.htm 20-F zk1414814.htm
 

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, 2013
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR

¨
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report……………….
 
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)
 
Izhak Tamir, CEO and CFO, +972-3-6962121, info@orckit.com, 126 Yigal Allon Street, Tel Aviv 67443, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
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
 
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, 2013, the Registrant had outstanding 31,095,335 Ordinary Shares, no par value.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
o  Yes       x  No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
o  Yes        x  No

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.  
 
x  Yes        o  No
 
Indicate by check mark whether registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
x  Yes        o  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o                                                                Accelerated filer  o                                                               Non-accelerated filer  x

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

x           U.S. GAAP

 
o
International Financial Reporting Standards as issued by the International Accounting Standards Board

o           Other

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the Registrant has elected to follow.
 
Item 17 o    Item 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
o Yes      x No
 
 
2

 
 
PRELIMINARY NOTE
 
This Annual Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, or the Securities Act, and Section 21E of the Exchange Act.  These forward-looking statements can generally be identified as such because the context of the statement will include words such as “may,” “intends,” “plans,” “believes,” “anticipates,” “expects,” “estimates,” “predicts,” “potential,” “continue,” or “opportunity,” the negative of these words or words of similar import. Similarly, statements that describe 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 also forward-looking statements.  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 Item 3.D, “Key Information – Risk Factors” of this Annual Report.
 
Our actual results of operations and execution of our business strategy could differ materially from those expressed in, or implied by, the forward-looking statements. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends.  We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition.  In evaluating our forward-looking statements, you should specifically consider the risks and uncertainties set forth under Item 3.D, “Key Information – Risk Factors” of this Annual Report.
 
Unless the context otherwise requires, “Orckit,” “us,” “we” and “our” refer to Orckit Communications Ltd. and its subsidiaries.
 
References to “NIS” are to New Israeli Shekels, the lawful currency of the State of Israel.  Unless specified otherwise, translations of NIS into U.S. dollars are provided based on the exchange rate at the date on which the event occurred. The exchange rates used are the representative exchange rates published by the Bank of Israel.
 
 
3

 
 
PART I
 
ITEM 1.                      IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
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, 2012 and 2013 and for each of the years ended December 31, 2011, 2012 and 2013 are derived from our audited consolidated financial statements included in this Annual Report, which have been prepared in accordance with generally accepted accounting principles in the United States. The selected consolidated financial data as of December 31, 2009, 2010 and 2011 and for each of the years ended December 31, 2009 and 2010 are derived from our audited consolidated financial statements not included in this Annual Report. The selected consolidated financial data set forth below should be read in conjunction with and are qualified by reference to “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.
 
   
2009
   
2010
   
2011
   
2012
   
2013
 
Statement of Operations Data:
 
(in thousands, except per share data)
 
Revenues
  $ 12,727     $ 14,631     $ 15,585     $ 11,193     $ 8,176  
Cost of revenues
    8,244       9,340       8,646       4,069       4,715  
Gross profit
    4,483       5,291       6,939       7,124       3,461  
Research and development expenses
    15,330       16,667       13,118       8,212       2,346  
Less grants
    1,722       2,569       3,209       2,689       173  
Research and development expenses, net
    13,608       14,098       9,909       5,523       2,173  
Selling, general and administrative expenses
    15,677       16,498       13,419       8,908       4,338  
Operating loss
    (24,802 )     (25,305 )     (16,389 )     (7,307 )     (3,050 )
Financial expenses, net
    362       1,642       4,991       1,473      
2,307
 
Gain from early extinguishment of notes
    2,985       -       -       -       -  
Income (expenses) from adjustments related to convertible notes
    (883 )     (28 )     3,622       1,867       (528 )
Other income (expenses)
    -       1,624       369       446       (69 )
Net loss
    (23,062 )     (25,351 )     (17,389 )     (6,467 )     (5,954 )
Net loss per share – basic
  $ (1.40 )   $ (1.33 )   $ (0.77 )   $ (0.24 )   $ (0.19 )
Net loss per share – diluted
  $ (1.40 )   $ (1.33 )   $ (0.84 )   $ (0.27 )   $ (0.19 )
Weighted average number of ordinary shares outstanding-basic
    16,483       19,024       22,689       26,477       31,068  
Weighted average number of ordinary shares outstanding- diluted
      16,483         19,024         24,484         29,830         31,068  

 
4

 
 
   
2009
   
2010
   
2011
   
2012
   
2013
 
Balance Sheet Data:
 
(in thousands)
 
Cash, cash  equivalents, bank deposits, marketable and other securities and long-term investments
  $ 47,343     $ 35,546     $ 23,188     $ 3,227     $ 1,958  
Working capital/( Working capital deficit) (1)
    22,931       20,602       211       3,753       (13,048 )
Total assets
    56,357       53,257       40,322       15,499       9,032  
Convertible subordinated  notes, Series A and Series B
    21,996       24,938       29,071       13,493       13,576  
Share capital, additional paid-in capital and warrants (2)
    337,774       356,373       358,134       360,534       360,892  
Shareholders’ equity (capital deficiency)
    17,464       11,252       (4,115 )     (8,387 )     (13,983 )
 
 
(1)
Total current assets net of total current liabilities
 
 
(2)
Net of treasury shares
 
B.           CAPITALIZATION AND INDEBTEDNESS
 
Not applicable
 
C.           REASONS FOR THE OFFER AND USE OF PROCEEDS
 
Not applicable
 
D.            RISK FACTORS
 
We are subject to various risks and uncertainties relating to or arising out of the nature of our business and general business, economic, financial, legal and other factors or conditions that may affect us. 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, cash flows and results of operations.
 
Risks Relating to Our Business and Industry
 
We have a significant amount of debt that matures in 2014, and there is substantial doubt as to our ability to continue as a going concern.
 
We provided by/ (used) cash in our operating activities in the amount of ($16.5) million in 2011, ($7.8) million in 2012 and $0.28 million in 2013. As of December 31, 2013, the total amount of our cash and cash equivalents amounted to approximately $2.0 million (including $0.1 million of restricted cash) and we had a capital deficiency in the amount of $14.0 million.
 
As of December 31, 2013, we had outstanding Series A notes and Series B notes in the aggregate principal amounts of approximately $10.4 million and $4.6 million, respectively.
 
We are required to pay our note holders approximately $10.6 million in July 2014 and approximately $4.4 million in December 2017 (not including interest and CPI adjustments).  These facts raise substantial doubt as to our ability to continue as a going concern, and our audited financial statements for the year ended December 31, 2013 include an explanatory paragraph to this effect by our independent registered public accounting firm.
 
 
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In addition, if the value of the NIS compared to the U.S. dollar increases, the U.S. dollar value of the principal amount of both series of our convertible notes would also increase.  We may be unable to repay the principal amount of the notes when due.  If we are unable to generate sufficient cash flows or otherwise obtain funds necessary to make required payments on these notes, we will be in default under the respective trust agreements governing the notes which could, in turn, cause defaults under any other future indebtedness.
 
The amount of debt we have incurred could adversely affect us in a number of ways, including by:
 
 
·
deterring customers and potential customers from doing business with us;
 
 
·
limiting our ability to obtain financing;
 
 
·
requiring us to apply all or a substantial portion of our cash towards payments on our debt, instead of using those funds for other purposes, such as working capital or capital expenditures;
 
 
·
leading our suppliers to require advance payments, thereby harming our cash flows; and
 
 
·
forcing us to issue equity securities to our creditors in the context of an arrangement or resulting in our liquidation, in which case our currently outstanding ordinary shares will have no value.
 
We are negotiating a creditor arrangement that involves the cancellation of all our currently outstanding ordinary shares and the issuance to our main creditors of ordinary shares constituting 100% of our outstanding share capital following the issuance.  If we do not succeed in consummating an arrangement, we will probably enter liquidation proceedings. In either case, our currently outstanding ordinary shares will have no value.
 
On March 5, 2014, we reached an agreement in principle with the representatives of the holders of our Series A notes and Series B notes with respect to a proposed arrangement under Section 350 of the Israeli Companies Law, 5759-1999 (the "Companies Law"), and on April 13, 2014, the Tel Aviv District Court approved our request to allow us to convene meetings of our shareholders and significant creditors to approve the proposed arrangement. Set forth below are the highlights of the proposed arrangement:
 
 
·
all of our currently outstanding ordinary shares, including the shares of our Chief Executive Officer, Mr. Izhak Tamir, and our Chairman of the Board, Mr. Eric Paneth, would be cancelled;
 
 
·
90% of the debt represented by our Series A notes and Series B notes, less our current cash balance in excess of $1.0 million, would be exchanged for a new series of non-convertible, non-assignable notes in the principal amount thereof (the “Series C Notes”).
 
 
·
the remaining balance of the debt represented by our Series A notes and Series B notes  would be canceled in exchange for 100% of our newly issued ordinary shares;
 
 
·
additional ordinary shares may be issued to certain other creditors in connection with the restructuring of their debt;
 
 
6

 
 
 
·
Mr. Tamir would continue to serve as the our Chief Executive Officer for at least three months following the consummation of the arrangement and would assist us as requested for at least an additional 24 months in the area of customer support and for an unlimited period in the area of litigation and patent monetization;
 
 
·
we and  our existing directors and officers would be granted waivers from claims that would be contingent upon the fulfillment by Mr. Tamir of aforementioned undertakings; and
 
 
·
our directors would be replaced with directors designated by the note holders.
 
For additional information about the proposed arrangement, see Item 10.C "Material Contracts—Proposed Creditor Arrangement". If the proposed arrangement is consummated on the foregoing terms, our currently outstanding ordinary shares including the shares of our CEO Mr. Izhak Tamir and our Chairman of the Board Mr. Eric Paneth will be cancelled and will have no value. There can be no assurance that an arrangement will ultimately be approved and implemented on the foregoing terms or otherwise. Under applicable law, an arrangement requires various approvals, including our significant creditors, our shareholders, the Tel Aviv District Court and the Tel Aviv Stock Exchange. If an arrangement is not consummated, we will probably enter liquidation proceedings.  In that case, as well, our ordinary shares will have no value.   
 
We need additional financing to operate our business and repay our debt.
 
We need to raise additional capital to operate our business and repay our debt. The substantial cash required to fund our operating activities and repay our outstanding notes could impede our ability to operate successfully and to invest in our business. We have not generated cash during any of the years in the period from 2007 through 2013. We need to raise equity or debt, commercialize our intellectual property, or do a combination of these transactions. The high amount of our debt, even after the implementation of the 2012 Arrangement, has discouraged prospective investors from investing in our equity. We may not be able to obtain additional financing on acceptable terms or at all. This would inhibit our ability to operate our business. Our financial condition has already forced us to significantly curtail our operations in the past few years. If we are unable to obtain adequate funds on reasonable terms, we may be required to further curtail operations significantly or obtain funds by entering into financing agreements on unattractive terms, which could adversely affect our results of operations and our ability to operate. If we issue ordinary shares to new investors, especially given the low prevailing market prices of our ordinary shares, our shareholders will be significantly diluted.  
 
We have a history of substantial losses. We may experience additional losses in the future.
 
We have incurred significant research and development expenses addressing the development of the metro CM-100 and CM-4000 products, both telecommunication equipment products addressing high transmission of data for the metropolitan area. We incurred operating losses of approximately $34 million in 2008, $25 million in 2009, $25 million in 2010, $16 million in 2011, $7 million in 2012 and $3 million in 2013. We also incurred significant net losses in each of those years. We cannot be sure that we will be able to become profitable.
 
 
7

 
 
We have recently made significant reductions in our personnel in order to preserve our cash.  This prevents us from being awarded contracts with new customers and could harm our ability to awarded new orders and support existing customers, as well.

In 2011 and in multiple stages in 2012 and 2013, in order to reduce our cash expenditures, we decreased our expenses, mainly by reducing our headcount, in all areas, including research and development, sales and marketing and customer support. We have also reduced our administrative headcount, thereby increasing the administrative responsibilities of the remaining employees. As of April 30, 2014, we have only seven employees. There is no assurance that the reduction in these expenses will improve our results of operations. The reduction in these expenses means that we no longer have the capacity to conduct research and development, attract new customers and satisfy our existing customers. If we fail to satisfy our customers, we could face legal claims for breach of our maintenance and support obligations.
 
Recent and future economic conditions, may adversely affect our business.
 
The current economic and credit environment is having a negative impact on business around the world.  The impact of these conditions on the technology industry and our major current and potential customers has been severe.
 
Conditions may continue to be depressed or may be subject to further deterioration which could lead to a further reduction in consumer and customer spending overall, which could have an adverse impact on sales of our products.  A disruption in the ability of our current customers to access liquidity could cause serious disruptions or an overall deterioration of their businesses which could lead to a significant reduction in their orders of our products, the inability or failure on their part to meet their payment obligations to us and the cancellation or reduction of future projects, any of which could have a material adverse effect on our results of operations and liquidity.  In addition, any disruption in the ability of customers to access liquidity could lead customers to request longer payment terms from us or long-term financing of their purchases from us.  If we are unable to grant extended payment terms when requested by customers, our sales could decrease.  Granting extended payment terms or a significant adverse change in a customer’s financial and/or credit position would have an immediate negative effect on our cash balances, and could require us to assume greater credit risk relating to that customer’s receivables or limit our ability to collect receivables related to purchases by that customer. As a result, we may have to defer recognition of revenues, our reserves for doubtful accounts and write-offs of accounts receivable may increase and our losses may increase.
 
We depend on sales to a limited number of significant customers. The loss of a significant customer, or a decrease in purchases by a significant customer, could have a material adverse effect on our results of operations.
 
Our revenues from 2004 through 2007 were dependent on sales of one product line, the CM-100, to KDDI, a Japanese telecommunication carrier, which has remained a significant customer.  Approximately 16.6% of our revenues in 2011, 25.3% of our revenues in 2012 and 17% in 2013 were derived from sales of CM-100 metro products and services to KDDI. KDDI purchased the CM-100 for initial coverage deployment in its metropolitan area network and began significant deployment in late 2004, continuing through 2005. KDDI’s deployments of the CM-100 decreased in 2006 through 2011. Deployments and revenues from KDDI for 2014 will be insignificant. In 2007, we introduced the CM-4000, a metro product with additional features and capabilities. KDDI has not made and is not expected to make purchases of this product. In 2012, KDDI decided not to award a large upgrade project to us due to our weak financial condition. Moreover, as part of our cost-cutting program in 2012, after KDDI and its distributor did not agree to our request to increase their maintenance payments to us, we terminated the employment of most of the employees who were experts in the CM-100, closed our office in Japan and stopped issuing invoices for support services to the distributor. This resulted in a significant reduction in our overall maintenance revenues and could harm our ability to generate additional sales from KDDI. We do not know for how long a period of time KDDI will continue to purchase the CM-100 from us, nor do we have any control or influence over the purchasing decisions of KDDI, including the quantities and timing of purchases by KDDI.
 
 
8

 
 
In 2008, our products were selected by Media Broadcast GmbH as a network infrastructure building block for network solutions deployed by Deutsche Telekom’s wholesale business unit, and leased to a leading cable operator in Germany. Media Broadcast, which was a subsidiary of Deutsche Telekom, began purchasing and deploying our products in 2008, becoming our second largest customer in 2008. Approximately 44.1% of our revenues in 2008 were derived from sales of metro products to Media Broadcast. Sales to Media Broadcast decreased significantly thereafter and constituted 2.6% of our revenues in 2011, 3.1% of our revenues in 2012 and 6% in 2013. We do not know for how long a period of time Media Broadcast will continue to purchase products from us nor do we have any control or influence over the purchasing decisions of Media Broadcast, including the quantities and timing of its purchases.
 
 In 2009, our CM-4000 products were selected by Bharat Sanchar Nigam Limited (BSNL) in India as part of a nationwide, next generation broadband, triple play network based on gigabit passive optical network (GPON) and carrier Ethernet technologies. In 2010, after receipt of a required approval from TSEC in India, a condition for making sales to BSNL, we started to recognize revenues from sales to BSNL through two OEM channels. We recognized approximately $2.6 million of revenues in 2011, which represented 16.8% of our revenues in 2011, approximately $0.2 million of revenues in 2012, which represented 1.2% of our revenues in 2012, and no revenues in 2013. We had expected to receive a follow-on order from BSNL in an amount of 381 million Indian Rupees equal to approximately $7 million in the third quarter of 2011 through ITI Ltd., a local OEM channel. Since then, we believed on several occasions that we were on the verge of receiving this order, only to be frustrated by new obstacles.  As a result, we wrote off approximately $$0.8 million and $2.3 million of inventory in our 2012 and 2013 financial statements, respectively.
 
In June 2009, our CM-4000 was selected by Mexico’s redIT (formerly MetroNet) as their main network infrastructure building block. The CM-4000 was selected to replace redIT’s existing carrier Ethernet switches that were at the end of their life and could not be purchased any longer. Interoperability between our CM-4000 and their existing equipment was a requirement that enabled redIT to continue delivery of Carrier Ethernet services to leading carriers in Mexico over a multi-vendor network until the expected transition to a full CM-4000 network is completed. Deliveries of our CM-4000 in Mexico started at the end of 2008.  Sales to redIT increased significantly thereafter and constituted 6.7% of our revenues in 2011, 13.4% of our revenues in 2012 and 28% of our revenues in 2013. We cannot be sure that this customer will continue to purchase our products to the same extent, if at all. Our agreement with RedIT provides for payments in multiple installments by RedIT over a period of 36 months after the delivery of our products.  Given our financial and business condition, we may not be able to provide support services to the customer's satisfaction, creating a risk that we will be unable to collect these long-term payments.

In late 2009, a leading Scandinavian telecommunication service provider selected our CM-4000 product to enable services migration and expansion for residential, enterprise and mobile subscribers with shipments beginning in late 2009. Sales to this customer represented 23.1% of our revenues in 2011, 10.2% of our revenues in 2012 and 12% of our revenues in 2013. We cannot be sure that this customer will continue to purchase our products.
 
 
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We have a business collaboration arrangement with 3M Services to distribute our CM-4000 packet transport gears, which led to the selection of our CM-4000 product by several customers, most of which are regional operators in Germany. Sales to 3M accounted for18.6% of our revenues in 2011, 25.6% of our revenues in 2012 and 17% of our revenues in 2013.

For the past several years, we have depended on sales of our CM product lines to a limited number of customers for the substantial majority of our revenues. This dependence will continue in 2014 and beyond. Following the significant reductions in our headcount and budget in 2012, since the end of 2012 we do not have sufficient resources to develop new features required by our customers and prospective customers. At that time, we abandoned our efforts to win Tier 1 customers and we stopped development of Layer-3 functionality. We have since effected additional headcount reductions and, as of April 30, 2014, we have only seven employees, none of whom are research and development, marketing or customer support personnel.  As a result, we have abandoned our efforts to win any new customers and we no longer engage in development or marketing activities.  Instead, we focus on retaining our existing customers by providing them with limited technical support, including by way of outsourcing, even where we are obliged to provide broader support.
 
There is no assurance that our customers will continue to purchase our products or that they will not choose another vendor. The loss of 3M or redIT as a customer or the loss or a significant decrease in revenues from 3M or redIT would have a material adverse effect on our results of operations unless we are able to generate significant additional revenues from other customers.
 
The purchasing patterns in the markets we address will likely result in our revenues being highly volatile.
 
Sales of our product lines are dependent on the capital equipment expenditure budgets of telecommunication carriers for metro network equipment. The purchasing patterns of telecommunication carriers for this type of expansion project are subject to high volatility. Uncertainty with respect to consumer spending as a result of weak economic conditions could cause our customers to delay the placing of orders and slow the pace of reorders. We have experienced a concentrated and inconsistent pattern of purchasing by KDDI, Media Broadcast, BSNL, redIT and by the customers of 3M.
 
Our revenues historically have depended upon our ability to meet the requirements by our customers and potential customers to develop new products and features. We currently do not have sufficient resources to develop new products, features or solutions.
 
In order to win new orders from our current customers, we were required from time to time to develop new product features. These development projects required us to expend significant time and resources. Following the significant reductions in our headcount and budget in 2012 and 2013, we do not have any resources to develop new features required by our customers. This reduces our ability to preserve our existing customers. We have completely abandoned the efforts to win new customers.
 
We currently lack sufficient resources to develop new products and product enhancements.
 
The market for our products is characterized by:
 
 
·
rapid technological change;
 
 
10

 
 
 
·
frequent product introductions and enhancements;
 
 
·
evolving industry standards;
 
 
·
changes in end-user requirements; and
 
 
·
changes in services offered by telecommunication 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 relatively short life cycles for our products. Short 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. Due to our financial condition, we do not expect to be able to respond to technological changes or new product introductions by others or to try to develop or market new products.
 
The market for our telecommunication products is intensely competitive. Because substantially all of our competitors have much greater resources than we have, it may be difficult for us to effect commercial sales or to achieve operating profitability.
 
The market for our products is intensely competitive, and we expect competition to increase in the future. Many of our current and potential competitors are large and established companies and have better name recognition and greater financial, technical, manufacturing, marketing and personnel resources than we. Consolidation has increased the size and scope of a number of our competitors. Any of these competitive factors could make it more difficult for us to retain customers, cause us to lower our prices in order to compete and reduce our market share and revenues, any of which could have a material adverse effect on our financial condition and results of operations. The expansion of research and design facilities in China and India, where engineering costs are significantly lower compared to the United States, Western Europe or Israel, has increased and could further increase competition and price pressure for our products. In addition, manufacturers of telecommunication equipment in China are attempting to leverage their success in supplying telecommunication equipment to local carriers in Asia and market and sell their products outside China.
 
The competitors in our markets are numerous and we expect competition to increase in the future. The principal competitors for our products include Alcatel-Lucent, Brocade, Ciena, Cisco Systems, Inc., ECI Telecom Ltd., Ericsson, Extreme Networks, Inc., Fujitsu, Hitachi, Huwaei, Juniper Networks, NEC, Nokia-Siemens Networks, Tellabs, UTStarcom and ZTE.
 
Government regulation of telecommunication companies could adversely affect the demand for our products.
 
Telecommunication regulatory policies affecting the availability of telephone companies’ services, and other terms on which telephone companies conduct their business, may impede the market penetration of our metro products. For example, our CM-100 and CM-4000 product lines address high bandwidth packets, and are dependent on new service offerings, such as video services, which require regulatory approvals for introduction by telecommunication carriers, including for the scope of content, service packages and tariffs.  Telecommunication companies in markets in other countries in which we may attempt to sell our products are also subject to evolving governmental regulation or state monopolies.  Changes in laws or regulations in Latin America, Germany, the rest of Europe, Japan, India or elsewhere could materially adversely affect our ability, and the ability of our customers, to deploy our products.
 
 
11

 
 
We currently use one subcontractor to manufacture and assemble our products, source components and provide other services. In addition, some of our suppliers are sole suppliers. Our business could suffer if we cannot retain or replace our sole subcontractor or a sole supplier.
 
We currently use one subcontractor for product assembly, component sourcing, inventory warehousing, testing and shipment. As a result, we are highly dependent on this subcontractor.  In addition, some of the components used in our products are purchased, by us or by our subcontractor, from suppliers that are the sole source of such components.
 
We have not entered into multi-year agreements with assurances of supply with any of our suppliers or subcontractor. Our reliance on one subcontractor and on third-party suppliers involves several risks, including:
 
 
·
the potential absence of adequate capacity if we are able to sell a significant amount of our products;
 
 
·
the unavailability of, or interruption in access to, certain process technologies;
 
 
·
reduced control over product quality, delivery, schedules, manufacturing yields and costs; and
 
 
·
higher per unit prices we could be charged for the manufacturing services we purchase based on the amount of services purchased.
 
Shortages of raw materials or production capacity constraints at our suppliers or subcontractor could negatively affect our ability to meet product delivery obligations and result in increased costs for affected products that we may not be able to recover.  Use of a subcontractor also involves the risk of reduced control over product quality, delivery schedules and manufacturing yields, as well as limited negotiating power to reduce costs.
 
In order to have an adequate supply of components with a long lead-time for delivery, we may order significant quantities of components in advance of receiving a purchase order from a customer. 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 our major subcontractor were unwilling or unable to provide us with key components.
 
In addition, supply from single source suppliers limits our ability to purchase components at competitive prices and could require us to maintain higher inventory levels. This could increase our need for working capital and could increase the risk of an inventory write-off.  In addition, we may also be charged higher per unit prices for certain components whose costs are unit sensitive. This would adversely affect our gross profit margins and results of operations. If we cannot obtain sufficient manufacturing services or 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.
 
 
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We are subject to regulations that require us to use components based on environmentally friendly materials. Compliance with these regulations has increased our costs and is expected to continue to increase our costs.  Failure to comply with these regulations could materially adversely affect our results of operations.
 
We are subject to telecommunication industry regulations requiring the use of environmentally-friendly materials in telecommunication equipment. For example, pursuant to a European Union directive, telecommunication equipment suppliers were required to eliminate lead solders from their products (the “RoHs6 regulations”). Although we believe that we are in compliance with the RoHs6 regulations, the tests for compliance with these regulations are limited in their ability to fully ensure compliance. If, in spite of the tests performed, we are not in compliance with these regulations, it could harm our ability to sell our products in Europe and in any other countries that may adopt these regulations. In addition, we have not tested all of our products for RoHs compliance. We have relied on the results for products tested in deciding not to test all of our products. If products that we elected not to test are found not to be compliant with these regulations, it could harm our ability to sell the products that are not compliant.
 
Compliance with these regulations, especially with respect to the requirement that products be lead free, as well as additional regulations that are likely to apply in the future, requires us to undertake significant expense with respect to the re-design of our products. This could also result in part or all of our inventory becoming obsolete. We may also be required to pay higher prices for components that comply with these regulations. In addition, such regulations could reduce our production yield and decrease our gross margin. We may not be able to pass these higher component costs and the cost of the decrease in production yield on to our customers. We cannot at this point estimate the expense that will be required to redesign our products in order to include “environmentally friendly” components. We cannot be sure that we will be able to comply with such regulations, that we will be able to comply on a cost effective basis or that a sufficient supply of compliant components will be available to us. Compliance with such regulations has increased our product design costs and could continue to increase these costs.
 
Our inability or failure to comply with these regulations could have a material adverse effect on our results of operations.
 
We could incur substantial costs if customers assert warranty claims or request product recalls, especially after our cost-cutting measures in 2012 and 2013.
 
Any significant product returns or claims under our warranty or post-contract hardware and software support services, or PCS, could have a material adverse effect on our business and results of operations. We offer complex products that have in the past and may in the future 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 commenced commercial sales of our metro product in 2004. While to date we have not incurred warranty expenses that exceeded our estimates, we could incur a higher level of warranty expense claims at any time compared to our prior experience. We have agreed to indemnify our customers in some circumstances against liability from defects in the products sold by us and expect to continue to provide a similar indemnity in connection with future sales. In some cases, our indemnity also covers indirect damages. Product liability claims could seriously harm our business, financial condition and results of operations. In addition, in certain circumstances, a deterioration of our financial condition could give rise to warranty claims or rights to terminate agreements and return our equipment, which would further harm our financial condition. This risk is more acute after the elimination of our customer support and R&D personnel as part of our cost-cutting measures in 2012 and 2013. In fact, during the first quarter of 2013, we commenced a global product recall of 250 units of one our products that was marketed in 2012. The process has been completed.  In 2013, one of the customers of 3M Services to whom we sold products that later became the subject of such recall threatened to sue 3M Services, for damages of approximately $1.3 million, in connection with products supplied by us, 3M Services informed us that it reserved its right to sue us, in turn, in connection with this matter. This matter has been settled.
 
 
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We are subject to international business risks.
 
We sell our CM-4000 products internationally, in Japan, Korea, India and other countries in Asia, Latin America and Europe. Our international sales and operations are subject to numerous risks inherent in international business activities, including:
 
 
·
compliance with foreign laws and regulations;
 
 
·
staffing and managing foreign operations;
 
 
·
import or currency control restrictions;
 
 
·
burdens that may be imposed by tariffs and other trade barriers;
 
 
·
local and international taxation;
 
 
·
increased risk of collections;
 
 
·
transportation delays;
 
 
·
seasonal reduction of business activities; and
 
 
·
political and economic factors, as well as natural disasters, that may adversely affect our customers and potential customers.
 
These factors, as well as different technical standards or product requirements for our systems in different markets, may limit our ability to operate effectively in foreign markets.
 
We depend on a limited number of key personnel who would be difficult to replace.  If we lose the service of any of these individuals, our business could be harmed.
 
As of April 30, 2014, we have only seven employees, each one of them is important to our operation.  In particular, our operation largely depends on the managerial skills and long-standing relationships of Izhak Tamir, our Chief Executive Officer. If he is unable or unwilling to continue as an officer or consultant, our business could be harmed and our results of operations could be materially and adversely affected.
 
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 U.S. and international patent applications covering certain of our technologies. To protect our proprietary know-how, we rely on patent protection, technical leadership, trade secrets and confidentiality and non-disclosure agreements. These 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 our 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 telecommunication industry have an increasing number of patents and patent applications and have frequently commenced litigation based on alleged infringement. We indemnify our customers with respect to infringement of third party proprietary rights by our products. 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.
 
 
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We face foreign exchange currency risks.
 
We operate in a number of territories and typically our prices are sometimes determined in local currencies of the countries in which we operate. The main currencies of the countries in which we operate are the U.S. dollar, Japanese Yen (“Yen”), NIS and Euro. A major part of our expenses are denominated in U.S. dollars and in NIS. In particular, we are obligated to pay interest on, and to repay the principal of, our convertible notes in NIS. The majority of our salaries are also paid in NIS.  We currently do not use hedge instruments.
 
We are likely to face risks from fluctuations in the value of the Yen, NIS and the Euro compared to the U.S. dollar, our functional currency in our financial statements. Since our sales prices to KDDI are determined in Yen, based on currency exchange rates that prevailed in prior years, an increase in the value of the U.S. dollar against the Yen would cause us to recognize lower dollar revenues and gross profit in our financial statements. In 2011, the value of the U.S dollar slightly decreased against the Yen. In 2012 and 2013, the value of the U.S dollar slightly increased against the Yen.
 
Since some of our sales prices in Europe are linked to the Euro, an increase in the value of the U.S. dollar against the Euro would cause us to recognize lower dollar revenues and gross profit in our financial statements. In 2011 through 2013, the value of the U.S. dollar slightly increased against the Euro. Since our salary and other expenses are denominated in NIS, a decrease in the value of the U.S. dollar against the NIS would cause us to recognize higher dollar expenses in our financial statements. In 2011, the value of the U.S. dollar decreased against the NIS. In 2012 and 2013, the value of the U.S. dollar increased against the NIS.
 
We are subject to taxation in several countries.
 
Because we have operated in several countries, mainly in Israel, Japan, Germany, Korea, India, Mexico and a country in Scandinavia, we are subject to taxation in multiple jurisdictions. We are required to report to and are subject to local tax authorities in Israel, the United States, Japan, Korea and India and cannot be sure of the amount of taxes we may become obligated to pay in these countries. In addition, our income that is derived from sales and support to customers in one country might also be subject to taxation in other countries.  The tax authorities in the countries in which we operate may not agree with our tax position. Our tax benefits from carry forward losses and other tax planning benefits such as Israeli Approved Enterprise programs, may prove to be insufficient due to Israeli tax limitations, or may prove to be insufficient to offset tax liabilities from foreign tax authorities. Foreign tax authorities may also use our gross profit or our revenues in each territory as the basis for determining our income tax, and our operating expenses might not be considered for related tax calculations. This could adversely affect our results of operations.
 
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 subcontractor 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, Hamas (an Islamist militia and political group in the Gaza Strip) and Hezbollah (an Islamist militia and political group in Lebanon).  Recent political uprisings, social unrest and violence in various countries in the Middle East and North Africa, including Israel’s neighbors Egypt and Syria, are affecting the political stability of those countries. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons.  Iran is also believed to have a strong influence with the Syrian government, Hamas and Hezbollah. This situation may potentially escalate in the future to violent events which may affect Israel and us.
 
 
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The future of relations between Israel and the Palestinian Authority is uncertain. Terror attacks, 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 us of the increase in the degree of violence by Palestinians against Israel or the effect of recent uprisings, political instability or military action elsewhere in the Middle East.  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 an increase in hostilities or anti-Israel sentiment.  This may also seriously harm our operating results, financial condition and the ability to expand our business.
 
Our results of operations may be adversely affected by inflation rates in Israel.
 
We could be exposed to risk if the rate of inflation in Israel exceeds the rate of devaluation of the NIS in relation to the Yen, U.S. dollar, Euro, and other currencies of other foreign countries in which we operate, or if the timing of such devaluation lags behind inflation in Israel. In that event, the cost in U.S. dollars of our operations in Israel would increase and our U.S. dollar-measured results of operations would be adversely affected. For example, in 2013, the value of the U.S. dollar decreased in relation to the NIS by 7%, while inflation in 2013 increased by 1.8%. In 2012, the value of the U.S. dollar decreased in relation to the NIS by 2.3%, while inflation in 2012 increased by 1.6%. As a result, our salary expenses, which are primarily linked to the NIS, increased in U.S. dollar terms. In 2011, the value of the U.S. dollar increased in relation to the NIS by 7.7%, while inflation in 2011 increased by 2.2%. Our issuance in March 2007 and June 2011 of convertible notes that are denominated in NIS has made us more sensitive to increases in the value of the NIS relative to the U.S. dollar. In 2012 and 2013, the value of the U.S. dollar decreased in relation to the NIS, and the Israeli CPI increased, which caused us to record significant financial expenses in relation to the Series A notes and Series B notes. Due to these fluctuations, we may record higher or lower expenses in our financial statements.
 
Our past participation in government grant programs restricts our ability to freely transfer manufacturing rights and technology out of Israel, which limits our ability to commercialize our intellectual property
 
In the past, we relied on grants from the Israeli government and other institutions for the financing of a portion of our product development expenditures.
 
Generally, according to Israeli law, any products developed with grants from the Office of the Chief Scientist, or OCS, are required to be manufactured in Israel, unless we obtain prior approval of a governmental committee. As a condition to obtaining this approval, we may be required to pay the OCS up to 300% of the grants we received and to repay these grants at an accelerated rate, depending on the portion of manufacturing performed outside Israel. We have obtained an approval from the OCS to manufacture part of our products outside Israel. We intend to keep sufficient manufacturing activities in Israel so that we will be subject to a repayment percentage of up to 150% of the grants we received. In addition, we are prohibited from transferring to third parties the technology, patents and knowhow developed with these grants without the prior approval of a governmental committee. If such approval is given, we may be required to pay the OCS all or significant portion of the proceeds from transferring to third parties the technology, patents or knowhow developed with these grants. Based on a request from the OCS, we reported and made certain payments related to our manufacturing activities outside of Israel. The OCS may also dispute our reports related to our manufacturing activities outside of Israel. If we are required to pay the OCS more than what we provided for in our financial statements, it could adversely affect our results of operations. As of December 31, 2013, our total contingent royalties to the OCS is approximately $21.3 million.  The position of the OCS is that we would be required to pay at least this amount if we were to transfer our technology, patents or knowhow outside Israel. If the OCS does not modify this position, we may be unable to successfully monetize our patents.
 
 
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In addition, the OCS has claimed that we are required to repay grants in the amount of $0.75 million related to a research and development project that was cancelled.
 
In addition, in April 2014, we received a claim from the OCS to repay grants related to 2012 in an amount of $1.2 million.
 
The tax benefits to which we are currently entitled require us to meet several conditions and may be terminated or reduced in the future, which would increase our taxes.
 
We are entitled to 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, our tax benefits could be reduced or canceled.
 
For more information about Approved Enterprises, see “Item 5.B - Liquidity and Capital Resources – Effective Corporate Tax Rates in Israel,” and “Item 10.E – Taxation – Israeli Tax Considerations – Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959” in this Annual Report, and Note 8a to the financial statements for the year ended December 31, 2013, included in this Annual Report.
 
It may be difficult to enforce a U.S. judgment against us and our officers and directors or to assert U.S. securities law claims in Israel.
 
Service of process upon our directors and officers may be difficult to effect in the United States because all these parties reside outside the United States. Any judgment obtained in the United States against such parties may not be collectible in the United States.
 
It may be difficult to assert U.S. securities law claims in original actions instituted in Israel.  Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate forum to bring such a claim.  In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim.  If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process.  Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing these matters.
 
However, subject to time limitations, Israeli courts may enforce a U.S. judgment in a civil matter, if:
 
 
·
adequate service of process has been effected and the defendant has had a reasonable opportunity to be heard;
 
 
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·
the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel;
 
 
·
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;
 
 
·
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;
 
 
·
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
 
 
·
the U.S. courts are not prohibited from enforcing judgments of the Israeli courts.
 
Provisions of Israeli law may delay, prevent or make an acquisition of us more difficult, which could depress our share price.
 
The Israeli Companies Law, 5759-1999, or the 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. 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 generally not be completed unless at least (i) 50 days have passed since the filing of the merger proposal with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each of the parties to the merger.
 
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 45% or greater 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.
 
The described restrictions could prevent or make more difficult an acquisition of Orckit, which could depress our share price.
 
Risks Relating to the Ownership of our Ordinary Shares
 
We need to effect an arrangement with our main creditors, inlcuding the holders of our Series A notes and Series B notes.  If such an arrangement is effected, our currently outstanding ordinary shares are expected to to be canceled under the terms of the proposed arrangement.
 
According to the terms of the arrangement proposed by us, our Series A notes and the Series B notes would be extinguished in exchange for a new series of notes and ordinary shares, and our currently outstanding ordinary shares will be canceled, including the shares held by our Mr. Tamir and Mr. Paneth. Accordingly, such an arrangement would result in rendering worthless the holdings of our current shareholders.
 
 
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The ordinary shares that may be issued to our creditors in such an arrangement will be freely tradable, and the holders thereof may promptly try to sell such shares in the public markets. There is no assurance that there will be sufficient liquidity to enable such sales.  Such sales, and the potential for such sales, could cause the market price of our ordinary shares to decline significantly. They also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.
 
The trading market for our ordinary shares has low liquidity, which could make it difficult for our shareholders to sell their shares at desired prices and amounts.
 
Our ordinary shares currently are quoted on the OTCQB, an inter-dealer quotation service operated by OTC Markets Group for companies that are current in their SEC reporting obligations. There are no financial or qualitative standards to be traded on this platform. In Israel, our ordinary shares are traded on the maintenance list.   We do not meet the listing conditions of the NASDAQ Stock Market or the TASE. The market for shares quoted on the OTCQB is typically less liquid than that for shares listed on the NASDAQ Stock Market, and trading on the maintenance list is more limited than on the main list of the TASE. This could make it more difficult for our shareholders to sell their shares at desired prices and amounts, which could also adversely affect our ability to raise future capital through the sale of our ordinary shares.
 
We have recently started filings reports in Israel in accordance with the Israeli securities regulations. These regulations require additional costs and management attention and could result in sanctions.
 
In addition to the OTCQB, our ordinary shares are listed on the Tel Aviv Stock Exchange, or the TASE. For so long as our ordinary shares were listed on the NASDAQ Stock Market, we filed a copy of each SEC report with the Israel Securities Authority and were not required to file additional reports under the Israeli securities regulations.  However, following our delisting from the NASDAQ Stock Market, we started filing reports pursuant to the Israeli securities regulations.  This entails additional management attention, increased legal and accounting expenses and enhanced exposure to sanctions for possible violations of Israeli securities laws. Among these requirements, is the preparation of our financial statements in accordance with International Financial Reporting Standards, rather than U.S. GAAP, which requires us to retain and pay additional accounting consultants.  This has increased the time and attention required of Izhak Tamir, who serves as both our Chief Executive Officer and Chief Financial Officer, for financial reporting matters.
 
Holders of our ordinary shares who are U.S. residents face certain income tax risks. In any tax year, we could be deemed a passive foreign investment company, which could result in adverse U.S. federal income tax consequences for U.S. holders of our ordinary shares.
 
Based on the composition and value of our gross assets during 2007, 2008 and 2009, it is likely that we would be deemed to have been a passive foreign investment company, or PFIC, for U.S. federal income tax purposes during each of such years. For 2006, 2010, 2011, 2012 and 2013, we believe that we would not be deemed to have been a PFIC. There can be no assurance that we will not be deemed a PFIC for any future tax year in which, for example, the value of all our assets, as measured by the public market valuation of our ordinary shares and the amount of our liabilities, declines in relation to the value of our passive assets (such as cash, cash equivalents and marketable securities). If we are a PFIC for any tax year, U.S. holders of our ordinary shares during such year may be subject to increased U.S. federal income tax liabilities and reporting requirements for such year and succeeding years, even if we are no longer a PFIC in such succeeding years.
 
 
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U.S. residents should carefully read “Item 10.E - Taxation – United States Federal Income Tax Considerations” in this Annual Report 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.
 
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. Accordingly, we do not expect to pay any cash dividends in the foreseeable future.
 
One shareholder who is also our Chief Executive Officer may be able to control us.
 
As of December 31, 2013, Izhak Tamir, our Chief Executive Officer, Chief Financial Officer and a member of our Board of Directors, beneficially owned an aggregate of 4,850,409 ordinary shares, representing 15.5% of our outstanding ordinary shares, including 4,747,409 ordinary shares, 25,000 ordinary shares issuable upon the exercise of warrants at an exercise price of $5.66 per share and 78,000 ordinary shares issuable upon the exercise of warrants at an exercise price of $3.50 per share.
 
Currently, Mr. Tamir is not party to a shareholders’ agreement with other shareholders. However, if Mr. Tamir acts together with other shareholders, 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. Tamir may make certain transactions more difficult and result in delaying or preventing a change in control of us unless approved by him.
 
Our shareholder bonus rights plan and the super-majority voting requirements in our articles of association may delay, prevent or make more difficult a hostile acquisition of us, 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, 2014, unless our Board takes action to amend the expiration date.  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.
 
In addition, our articles of association require the approval of the holders of at least 75% of our ordinary shares voting on the matter to remove a director from office and the approval of at least two-thirds of our ordinary shares voting on the matter to elect a director.  These requirements could also delay or prevent a change of control of our company.
 
Our share price has fluctuated 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. Between January 1, 2008 through December 31, 2013, our share price has fluctuated from a low of $0.5 to a high of $8.00. The following factors may cause significant fluctuations in the market price of our ordinary shares:
 
 
·
fluctuations in our quarterly revenues and earnings or those of our competitors;
 
 
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·
changes in the conversion prices of our convertible notes, as occurred pursuant to the 2012 Arrangement and as our note holders request from time to time;
 
 
·
announcements concerning us, our competitors or telecommunication companies;
 
 
·
announcements concerning our customers;
 
 
·
announcements of technological innovations;
 
 
·
the introduction of new products;
 
 
·
changes in product price policies involving us or our competitors;
 
 
·
market conditions in the industry;
 
 
·
the conditions of the securities markets, particularly in the technology and Israeli sectors; and
 
 
·
political, economic and other developments in the State of Israel and worldwide.
 
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 actual financial results might vary from our publicly disclosed financial forecasts.
 
From time to time, we publicly disclose financial forecasts. Our forecasts reflect numerous assumptions concerning our expected performance, as well as other factors which are beyond our control and which might not turn out to be correct. As a result, variations from our forecasts could be material. Our financial results are subject to numerous risks and uncertainties, including those identified throughout this “Risk Factors” section. If our actual financial results are worse than our financial forecasts, the price of our ordinary shares may decline.
 
Investors may experience significant dilution as a result of financing transactions or the issuance of ordinary shares under outstanding securities convertible into or exercisable for our ordinary shares.
 
If we issue ordinary shares to new investors, especially given the low prevailing market prices of our ordinary shares, the ownership stake of our existing shareholders will be significantly diluted.  In addition, we may issue additional ordinary shares upon the conversion or exercise of our outstanding stock options, warrants and convertible subordinated notes, and other rights to acquire our ordinary shares.  The issuance of ordinary shares upon the conversion or exercise of such securities will dilute our shareholders' ownership stake.
 
There may be an adverse effect on the market price of our shares as a result of shares being sold or available for sale in the future. If our shareholders sell substantial amounts of our ordinary shares, including shares issued upon the exercise of outstanding options, warrants or convertible notes, the market price of our ordinary shares may fall. Such sales, and the potential for such sales, could cause the market price of our ordinary shares to decline.  These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.
 
 
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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 OTCQB and the maintenance list of the TASE. Trading in our ordinary shares on these markets is made in different currencies (U.S. dollars on OTCQB and NIS on TASE), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Israel). The trading prices of our ordinary shares on these two markets can 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.
 
We are subject to ongoing costs and risks associated with complying with extensive corporate governance and disclosure requirements.
 
As an Israeli company subject to U.S. federal securities laws and Israeli securities laws, we spend a significant amount of management time and resources to comply with laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, SEC regulations, Israeli securities regulations and the Companies Law. Section 404 of the Sarbanes-Oxley Act requires an annual review and evaluation of our internal control over financial reporting of the effectiveness of these controls by our management. There is no guarantee that these efforts will result in management assurance that our internal control over financial reporting is adequate in future periods. In connection with our compliance with Section 404 and the other applicable provisions of the Sarbanes-Oxley Act, our management devotes a substantial amount of time, and we may need to hire additional accounting and financial staff, to assure that we continue to comply with these requirements. We do not have the financial resources to hire such additional personnel.  The management attention and costs relating to compliance with the foregoing requirements could materially and adversely affect our financial results.
 
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, Puglisi Associates, is located at 850 Library Avenue, Suite 204 Newark, Delaware 19711.
 
Major Developments since January 1, 2013

On March 12, 2013, we entered into a Strategic Investment Agreement with Networks3, Inc., a non-practicing entity controlled by Hudson Bay Capital, in order to commercialize our patents and raise equity and debt financing.  On the same date, we entered into a Note Purchase Agreement with Hudson Bay Capital pursuant to which we received a loan of $5,000,000, which was fully repaid on June 30, 2013. See Item 10.C – "Additional Information—Material Contracts—Patent and Financing Transactions".
 
 
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On June 27, 2013, our note holders approved an arrangement whereby the notes would have been retired in exchange for cash, ordinary shares and certain other consideration.  The closing of the arrangement was subject to the closing of the Strategic Investment Agreement. On July 31, 2013, our shareholders approved the arrangement.

On August 11, 2013, Networks3 notified us of its decision to terminate the Strategic Investment Agreement due to our alleged failure to obtain the approval of the OCS on terms satisfactory to Networks3 of the sale of our patents to Networks3. We rejected such allegation and intend to pursue legal action in accordance with our rights under such agreement. Due to the termination of the Strategic Investment Agreement, the arrangement was aborted.

On August 20, 2013, we reached a non-binding understanding with ECI Telecom Ltd. ("ECI") with respect to the terms of a proposed transaction pursuant to which we would grant an exclusive license to ECI to develop, manufacture and sell products comprising our Packet Transport technology.  It was contemplated that we would receive $4.5 million over a period of approximately four years on the account of royalties payable on the sales arising from said license and in consideration for the sale of inventory and research and development equipment to ECI.  As a condition to the transaction, ECI would hire certain of our present and former employees (including key employees and one officer).

On October 2, 2013, we terminated the employment of 15 employees, most of whom were expected to join ECI upon consummation of the proposed transaction with ECI. On October 31, 2013, we entered a services agreement with ECI pursuant to which we were to provide ECI development services through several employees. On November 5, 2013, our Vice President of Research and Development left our employ and joined ECI.

On January 6, 2014, we announced that a condition to the proposed ECI transaction, pursuant to which certain of our present and former employees (including key employees) would be transferred to ECI, cannot be satisfied. Due to our financial situation and the length of the negotiations, we decided to terminate the negotiations with ECI.

On January 30, 2014, the trustees of our Series A notes and our Series B notes published a proposal for a plan of arrangement under Section 350 of the Companies Law, which was formulated by a joint committee of the representatives of the note holders.  On February 4, 2014, the note holders approved the proposed arrangement, as well as a proposal submitted by Neocorp, a member of the VAR Group, to provide management and operational services to us, including the services of Mr. Yoav Kfir as the active Chairman of our Board.  The note holders also authorized the trustees of the note holders to take actions and proceedings (including legal proceedings) to implement the foregoing decisions.
 
On February 18, 2014, the trustees filed a petition with the Court for a stay of proceedings and the appointment of Mr. Yoav Kfir as a trustee over the Company. The Court declined to grant such petition. Instead, the Court directed the parties to finalize their negotiations of the terms of an arrangement with the assistance of a mediator.  The Court also issued an order prohibiting the filing of any claims against us until further notice.  

On March 5, 2014, we reached an agreement in principle with the representative of the note holders on the issues that were in contention in the proposed arrangement. For more information about the proposed arrangement, see Item 10.C "Additional Information—Material Contracts—Proposed Creditor Arrangement".  On the same date, the Court appointed Mr. Shay Nissan as the expert to opine on the terms of the proposed arrangement in accordance with the Companies Law.  
 
 
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On March 6, 2014, in coordination with the representatives of our note holders and our board of directors, our director Mr. Jed Arkin appointed Mr. Kfir as an alternate director in accordance with the Companies Law and our articles of association.

On April 6, 2014, Mr. Nissan submitted to the Court his opinion regarding the terms of the proposed arrangement.

On April 10, 2014, we filed a request with the Tel Aviv District Court to allow us to convene a meeting of our shareholders and significant creditors to approve the proposed arrangement, which was approved on April 13, 2014.  We have scheduled the creditors' meeting for May 4, 2014 and the shareholders' meeting for May 14, 2014.

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 $653,000 in 2011. No material purchases were made in 2012 and 2013. We used internal resources to finance these capital expenditures.
 
B.            BUSINESS OVERVIEW
 
General
 
We used to develop and market telecommunication transport equipment capable of supporting the growing capacity demands for Ethernet services and high bandwidth video services, such as high definition television, or HDTV, Internet Protocol television, or IPTV, video on demand, or VoD, and interactive television (together known also as “video services”), 2G, 3G and 4G mobile backhauling, as well as other types of data services and voice services, whether transmitted over wireline or cellular networks, in metropolitan networks. Our customers are telecommunication service providers active in metropolitan areas. Due to our financial condition, we no longer engage in development or marketing activities.  Instead, we focus on retaining our existing customers by providing them with limited technical support.
 
Our products focus on the needs of metropolitan area networks that primarily address a transmission capacity of 10 or more Gigabits per second, or Gbps.  The majority of metropolitan area networks are currently operating at a transmission capacity of 10 Gbps or below, because they were initially designed to address voice traffic and later upgraded to support high speed Internet service connections. Introduction of mobile broadband technologies such as LTE, and the penetration of content-based services such as IPTV with the transition from Standard Definition (SD) to High Definition (HD) content, together with the migration from linear TV (Broadcast/Multicast) to VoD and growth of Over the Top (OTT) content and file sharing over the Internet, are expected to drive the need for growth in network transmission capacity.
 
Our first generation product line, CM-100 was first delivered for commercial deployment in 2004.  In 2004, this product was selected for commercial deployment by KDDI Corporation in Japan, or KDDI, a major telecommunication carrier in Japan.   KDDI deployed the CM-100 product line as part of a nation-wide build up in Japan of an advanced metro network that is intended to carry “residential triple play” services, which are a bundled offering of voice services, Internet access and a range of video and other media services, as well as Ethernet services for business customers and TDM circuit emulation for 3G mobile backhauling, all based on IP protocols.
 
 
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Media Broadcast GmbH in Germany began deploying the CM-100 in 2008, and we began shipping our products to SK Broadband in Korea in late 2008. Several additional customers have also deployed the CM-100 product line.
 
Our next generation product line, CM-4000, was introduced in 2007 and added new technologies on top of those of CM-100, which address the evolving requirements of service providers delivering broadband services to their fixed and mobile subscribers.
 
Our CM-4000 product lines are designed to enable the provision and management of data, video and voice transport services in an efficient manner that is expected to reduce the costs of transport service providers. Supporting fiber-optic infrastructures, the CM-4000 supports a wide range of interfaces for video, data and voice, together with synchronization technologies which are essential for, but not limited to, backhauling of mobile broadband traffic. It provides multi-service capabilities and reliability similar to the CM-100, while offering higher switching capacity and larger Ethernet user port density. Shipments of the CM-4000 began in 2008.
 
Our CM-4000 metropolitan product lines are optical transport solutions that are designed to handle not only the growing demand for video and data services by telecommunication company customers and small to medium size businesses, but also support most traditional voice services, in compliance with the technical specifications required by existing synchronous voice transmission on copper and on optical media, PDH, SONET or SDH. The CM-4000 product lines are designed to provide the benefits of both Ethernet and TDM (SONET/SDH and PDH) protocols. The product lines are also designed to avoid integrating costly protocol-dependant mapping functionalities that are generally required in adapting SONET/SDH platforms to support data traffic, as well as the costs of hybrid fabric platforms (also known as POTS) that handle both TDM and packet-based traffic.
 
In 2009, our CM-4000 products were selected and started to be deployed by BSNL in India as part of a nationwide, next generation broadband, triple play network. In November 2009, a leading Scandinavian telecommunication service provider selected our CM-4000 product to enable services migration and expansion for residential, enterprise and mobile subscribers with shipments beginning in late 2009. Our CM-4000 products were also chosen and deployed by redIT (formerly MetroNet), a Mexican telecommunication service provider, several customers in Germany through 3M Services, as well as by several additional customers.
 
Following the significant reductions in our headcount and budget in 2012, since the end of 2012 we do not have sufficient resources to develop new features required by our customers and prospective customers. At that time, we abandoned our efforts to win Tier 1 customers and we stopped development of Layer-3 functionality. Due to our financial condition, we have since effected additional headcount reductions and as of April 30, 2014 we have seven employees, none of whom are research and development, marketing or customer support personnel.  Accordingly, we have abandoned our efforts to win any new customers and stopped all development and marketing activities.  Instead, we focus on retaining our existing customers by providing them with limited technical support, including by way of outsourcing, even where we are obliged to provide broader support.
 
 
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Metro Transport Telecommunication Markets, Technology and Products
 
The fiber optic networks of many telecommunication companies in the Metro Transport market located in metropolitan areas are experiencing a shift from carrying primarily voice traffic to carrying a growing mix of data, video and voice traffic. Data transmissions are based on internet protocol, or IP, and carry services such as voice over IP, or VoIP, Internet access and various video services, as well as advanced data services for business customers. Video services include broadcasting streaming video and multicasting streaming video that is either identical or can be differentiated by subscriber choice, either at standard definition capacity or at HDTV capacity. In addition, these services include transmission of all of these services over a cellular network to advanced handheld devices over third generation, 3G or 3.5G, cellular networks and fourth generation, or LTE (Long Term Evolution), cellular networks. Data traffic volumes carried over 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 mainly a result of the rapid growth of the Internet, video services and business services.
 
Offerings to consumers of high speed data services have reached millions of subscribers worldwide. These services are offered either over fiber connections or a combination of fiber and fast access technologies, such as ADSL release 2, very high speed digital subscriber line, or VDSL, and VDSL release 2, wireless or cable networks. Connecting subscribers with fiber is expected to allow for significantly higher speed services, mainly data and video services and, as a result, will require an upgrade of metro telecommunication equipment with technologies that enable very high speed transmissions of data services over fiber networks.
 
The main driver for growth of data traffic is the adoption of new video services by consumers, as well as the explosive growth in the use of tablets and smart phones.  Services such as video-on-demand, HDTV, catch-up TV, file sharing and Internet-TV, delivered over fixed and mobile broadband access technologies, are imposing new requirements on service providers’ networks in terms of bandwidth scaling and quality of service. Video services require peak bandwidth capacity on orders of magnitude higher than deployed for Internet access services, but only at certain hours of the day. Additionally, video services have different characteristics than internet access and voice services. Video services are sensitive to jitter, loss and delay. In addition, existing mechanisms to ensure quality of experience that were developed to address traditional services are insufficient for HDTV and other new video services. Our CM product line was designed to address these requirements for the delivery of video services to consumers.
 
Telecommunication companies have typically managed their data transfer capacity needs through their existing metro transport technologies. These technologies were originally designed for transporting voice services. These traditional solutions, however, are not designed to support high levels of data services 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 traffic. Data traffic is generally less susceptible to corruption resulting from minor time delays and less time-sensitive than voice traffic. In addition, the flow of data traffic is often characterized by rapid bursts, with dynamically varying levels of utilization of communication channels, as opposed to the flow of voice traffic, which has characteristically constant levels of channel utilization.
 
 
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A range of new solutions is being developed to address the need of carriers and service providers to be able to support higher levels of data traffic within metropolitan areas, commonly referred to as metro transport. One type of solution, consisting of a router or switch that transports packets of data, focuses on the characteristics of data traffic without supporting the full range of time division multiplexing, or TDM, circuit services that meet the stringent timing requirements needed for some legacy services. In this type of solution, data services and legacy services are transmitted and maintained in different metro networks. Another type of solution, known as packet-optics transport system, or POTS, uses hybrid fabrics to support both types of traffic, while using duplicated hardware and, in many cases, also duplicated fiber infrastructure. A third type of solution, known as packet transport networks, or PTN, attempts to take advantage of the characteristics of data traffic while continuing to support traditional voice traffic over a converged metro network. Our products offer this third type of solution that provides transmission capacities of 10 Gbps and higher, and supports transmission of both packets of data and the full range of traditional circuit-based voice and data services over the same network. Data services supported include the transmission of a range of video services, whether in standard or HDTV mode, as well as over cellular networks. 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 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. In recent years, through development of new protocols and technologies, Ethernet has evolved to become the standard interface of choice for new deployments in the Wide Area Network, or WAN, as well. In particular, new protocols that improve carriers’ fault management and performance management of Ethernet-based networks have been introduced.
 
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 allows multiple protocols to be transported on top of it. 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 gradually being adopted as networks begin to carry more and different mixtures of traffic.
 
MPLS Transport Profile (MPLS-TP). MPLS-TP is an emerging standard that adds operations, administration and management, or OAM, capabilities from the SONET/SDH world to the data world, and eases the operation of packet transport networks for personnel who are familiar with the operation of legacy SONET/SDH networks.
 
 
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Pseudo Wire Emulation.  Pseudo wire emulation, or PWE, is a standards-approved  technology for mapping different services over packet switched networks, such as MPLS. A pseudowire emulates a point-to-point link that provides a single service which is perceived by its user as an unshared link or circuit of the chosen service and can be used as a convergence layer for multi-service systems.
 
Carrier Ethernet. Carrier Ethernet refers to a combination of technologies, including Ethernet, MPLS and PWE, that enable telecommunication network providers to provide high-bandwidth data services to consumers and enterprises.  Standards for carrier Ethernet networks are being developed by multiple industry organizations, including the IEEE, IETF, MEF and others. We are a leading participant in defining carrier Ethernet standards.
 
Synchronous Ethernet. Synchronous Ethernet is a standard that provides means to deliver frequency synchronization, required for transport of TDM services and backhauling of 2G, 3G and LTE FDD traffic, in quality that is equivalent to SONET/SDH, over Ethernet interfaces.
 
IEEE 1588v2. IEEE 1588v2 is a standard that provides the means to deliver phase and frequency synchronization over packet networks. While frequency synchronization can be provided by legacy SONET/SDH networks, phase synchronization, required for TDD LTE and WiMax, cannot be provided by such legacy networks, and the (more expensive) alternative is to have all the base stations in such wireless networks synchronized using GPS.
 
CM-4000 Product
 
Our CM-4000 product line, the successor to our CM-100 product line, became commercially available in January 2008. The CM-4000 family of products provides a solution for packet transport networks in the metro area. It provides multiservice capabilities and reliability, offers high bandwidth support, with multiple products ranging from metro access to metro core.
 
We believe that our CM-4000 switches address the needs for next-generation packet transport networks with a cost-effective combination of Ethernet and TDM. Our solution is designed to ensure service quality and availability, while enabling a reduction of capital and operating expenses. Using CM-4000 switches enables a customer to achieve network convergence with a plug-and-play network management system, or NMS, that easily interacts with operating support system, or OSS, service applications.  The CM-4000 is a high-capacity MPLS and MPLS-TP based transport switch providing high service availability and scalability, and simplified end-to-end “point-and-click” management through its service/application-oriented CM-view NMS.
 
By cost-effectively enabling a mix of Ethernet and TDM traffic over the same network infrastructure, the CM-4000 helps to secure a service providers’ investment, enabling deployment of advanced mobile broadband, residential multi-play and business Ethernet services, together with traditional TDM services, and the means to gradually migrate them to Ethernet through interworking technologies.
 
Our CM-4000 was designed to efficiently deliver a mix of TDM and advanced packet services over a single, converged transport infrastructure. It offers a traffic management scheme that provides end-to-end performance during congestion, and enables dynamic bandwidth reclamation and optimal bandwidth utilization for the delivery of the following packet and TDM services:
 
 
o
E-Line, E-Tree and E-LAN services with differentiated quality of service, or QoS, application-aware classification and service level agreement, or SLA, guarantee;
 
 
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o
Ethernet virtual private line, or EVPL, and virtual private LAN services, or VPLS;
 
 
o
SONET/SDH to Ethernet interworking;
 
 
o
A full range of TDM (PDH and SONET/SDH) private line services; and
 
 
o
Non-blocking SONET/SDH low-order and high-order cross connect.
 
These services enable the delivery of end-user applications such as multi-play (VoIP, broadcast video, VoD, shifted TV, network private video recorder, or nPVR, and high speed internet access, or HSI), business Ethernet, 3.5G/4G wireless backhaul and on-demand content distribution. They also facilitate the migration towards all-IP by providing a viable path to convergence through the introduction of SONET/SDH to Ethernet interworking.
 
Our CM-4000 product line includes the CM-4314, CM-4206, CM-4140 and CM-401x systems. These systems can be deployed in a variety of topologies, including ring, mesh and tree, over one or multiple 10 Gbps wavelengths.
 
In October 2008, we launched the CM-4140. The CM-4140 is a cost-optimized, low-power and small-footprint MPLS-based carrier Ethernet transport switch. It offers a full suite of carrier-class Ethernet and TDM services for aggregating residential multi-play services, business connectivity and mobile backhaul applications. We believe that it offers a combination of price, power and footprint that compares favorably to competitive solutions. Its cost structure, low power consumption and small size enable service providers to expand the MPLS from the metro core to the edge of the aggregation network, benefiting from an end-to-end MPLS network across the aggregation and core network.
 
The CM-4140 is interoperable with leading third party MPLS switches/routers in the industry and enables Tier 1 service providers to benefit from a “best in class” network solution for the first layer of aggregation that can work together with third party high-capacity and large-scale MPLS switch/routers in the second layer of aggregation. In addition, the CM-4140 was designed to address the needs of Tier 2 and Tier 3 carriers, as well as to complement our existing product offerings.
 
In June, 2011, we announced the introduction of our CM-401x PTN access product line. The new product portfolio is based on 14G full duplex of non-blocking, switching capacity, packed in 1RU with a broad mixture of Ethernet, PDH and SDH interfaces. With the introduction of CM-401x, we strengthened our offering for telecommunication service providers worldwide by offering end-to-end PTN solutions ranging from access to core. This portfolio is aimed at mobile 2G/3G/4G cellular or hub site gateways, as well as service providers delivering enterprise services.
 
The CM-4206 and CM-4314 systems support a common set of interchangeable interface cards and common modules. They support a rich set of Ethernet, TDM, MPLS, MPLS-TP and synchronization functionality with two different chassis form factors, and utilize a common hardware and software architecture.
 
 
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Sales, Marketing and Service
 
Sales and Marketing. In the past, we marketed our products to telecommunication companies both directly and indirectly through original equipment manufacturers, strategic alliances and agency and distribution arrangements.  Due to our financial and manpower condition, we no longer engage in development or marketing activities.  Instead, we focus on retaining our existing customers by providing them with limited technical support, including by way of outsourcing, even where we are obliged to provide broader support.
 
As part of our plan to reduce our operational expenditures, we closed our offices around the world and either liquidated or are in the process of liquidating all local companies.
 
As of December 31, 2013 and March 31, 2014, marketing and sales efforts were conducted by one employee located in Israel.
 
The following is a summary of revenues by geographic area based on the location of the end users for the last three years:
 
   
Year ended December 31
 
   
2011
   
2012
   
2013
 
   
(In thousands)
 
Japan
  $ 2,694     $ 3,587     $ 1,402  
Germany
    3,308       3,217       1,879  
India
    2,622       224       -,-  
Scandinavia
    3,601       1,152       978  
Mexico
    1,184       1,519       2,419  
Other
    2,176       1,494       1,498  
    $ 15,585     $ 11,193     $ 8,176  

The substantial majority of our revenues in 2008 and 2009 were generated from our CM-100 metro product line. The majority of our revenues in 2011, 2012 and 2013 were generated from our CM-4000 metro product line. Our sales to KDDI in Japan accounted for 16.6% of our revenues in 2011, 25.3% of our revenues in 2012 and 17% of our revenues in 2013. Sales to Media Broadcast in Germany accounted for 2.6% of our revenues in 2011, 3.1% of our revenues in 2012 and 6% of our revenues in 2013. Sales to BSNL in India accounted for 16.8% of our revenues in 2011 and 2% of our revenues in 2012. Sales to 3M accounted for 18.6% of our revenues in 2011, 25.6% of our revenues in 2012 and 17% of our revenues in 2013.  Sales to a Scandinavian service provider accounted for 23.1% of our revenues in 2011, 10.3% of our revenues in 2012 and 12% of our revenues in 2013.  Sales to redIT (formerly MetroNet) in Mexico accounted for 6.7% of our revenues in 2011, 13.4% of our revenues in 2012 and 28% of our revenues in 2013.
 
Services and Support. We are required to provide repair services as part of our warranty services and technical support services for our products. Due to our financial and manpower condition, we provide our existing customers with limited technical support, including by way of outsourcing, even where we are obliged to provide broader support. Where applicable, we expect that our local distributor or reseller will provide the first level of service and support. We used to provide more extensive repair and technical support at our local office in the relevant territory and at our headquarters in Israel.
 
 
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To date, substantially all of our product sales outside the United States are subject to an initial warranty and support protection period of up to two years. Sales in the United States are subject to an initial warranty and support period of up to five years. Our warranty generally covers defects in materials or workmanship and failure to meet published specifications, but excludes damage caused by improper use and other express or implied warranties. Based on market conditions, we may agree to indemnify our customers in some circumstances against liability from defects in our products or for indirect damages. 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. In such cases, we may be required to repair affected products even if they are no longer under warranty. Our exposure to indirect damages arising from failures covered by our warranty could be significant.
 
Customers and End-users
 
To date, our CM-100 products have been commercially deployed by KDDI in Japan, Media Broadcast in Germany and SK Broadband in Korea. Our CM-4000 products have been commercially deployed by BSNL in India and by multiple Tier2 and Tier3 customers around the world, including Mexico, Germany and Scandinavia.
 
CM-100 customers and end users
 
Our sales to KDDI in Japan, which began in 2004, were made pursuant to agreements and related terms of sale with OKI, a distributor of telecommunication and enterprise products in Japan. We provided to KDDI a product warranty and post-contract hardware and software support services with respect to products sold. OKI provided on-site product support services and training. In 2012, KDDI decided not to award a large upgrade project to us due to our weak financial condition. Moreover, as part of our cost-cutting program in 2012, after KDDI and OKI did not agree to our request to increase maintenance payments to us, we terminated the employment of most of our employees who were expert in the CM-100, closed our office in Japan and stopped issuing invoices for support services to OKI. This resulted in a significant reduction in our overall maintenance revenues and could harm our ability to generate additional sales from KDDI.

In February 2008, our CM-100 and CM-4000 product lines were selected by Media Broadcast GmbH, or Media Broadcast, as a network infrastructure building block for network solutions deployed by Deutsche Telekom’s wholesale business unit, and leased to a leading cable operator in Germany. Deployments of our CM-100 products in two regions began in 2008 and deliveries were also made, to a lesser extent, in 2009, to a lesser extent in 2010, and to an even lesser extent in 2011.  Further deliveries of our CM-100 products, initial deployment of our CM-4000 products and any expansion of service for Media Broadcast are subject to the cable operator’s decisions. Our sales to Media Broadcast in Germany were made pursuant to a master sales agreement that governs sales to them. We have to provide to Media Broadcast a product warranty and post-contract hardware and software support services with respect to products sold. Media Broadcast provides on-site product support services and training to the end user. The master agreement sets general terms regarding sales that are made to targeted customers. Media Broadcast is not committed to purchase any specific quantity of products.
 
 
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CM-4000 customers and end users
 
Since 2008, we have had a business collaboration with 3M Services to distribute our CM-4000 packet transport gears. This strategic alliance led to the selection of our CM-4000 product by a number of customers, most of which are regional operators in Germany. Among our customers from this channel were VSE NET, EnviaTel, HEAG MediaNet and e.discom Telekommunikation GmbH, each of which selected our CM-4000 products for delivery of Ethernet services for business customers. Deployments of our CM-4000 products by some of these customers began in 2011. We are required to provide to 3M Services a product warranty and post-contract hardware and software support services with respect to products sold. 3M Services provides on-site product support services and training to the end user. The master agreement sets general terms regarding sales that are made to targeted customers. 3M Services is not committed to purchase any specific quantity of products.

In June 2009, our CM-4000 was selected by Mexico’s redIT (formerly MetroNet) as their main network infrastructure building block. The CM-4000 was selected to replace redIT’s existing carrier Ethernet switches that were at the end of their life and could not be purchased any longer. Interoperability between our CM-4000 and their existing equipment was a requirement that enabled redIT to continue delivery of Carrier of Carrier Ethernet services to leading carriers in Mexico over a multi-vendor network until the expected transition to a full CM-4140 network is completed. Deliveries of our CM-4000 in Mexico started at the end of 2008 and continued in higher volumes in 2009, 2010 and 2011. Our sales to redIT in Mexico are made directly. We are required to provide to redIT a product warranty and post-contract hardware and software support services with respect to products sold, as well as on-site product support services and training. redIT is not committed to purchase any specific quantity of products. Our agreement with RedIT provides for payments in multiple installments by RedIT that lasts 36 months after the delivery of our products.  Given our financial and business condition, we may not be able to provide support services to the customer's satisfaction, creating a risk that we will be unable to collect these long-term payments.

In September 2009, our CM-4000 was selected by a Scandinavian service provider to replace its TDM legacy network (SDH) with a packet based transport network (PTN). Originally, the CM-4000 was selected to deliver a mix of legacy TDM services and packet based services over a converged packet network. It is now being used primarily for 4G LTE backhauling. Deliveries of our CM-4000 started with low volumes at the end of 2009, and continued with a higher volume in 2010 and 2011 and reduced significantly in 2012. Our sales to this customer are made directly. We provide a product warranty and post-contract hardware and software support services with respect to products sold, as well as on-site product support services and training. This customer is not committed to purchase any specific quantity of products.

In September 2009, our CM-4000 products were selected by BSNL in India as part of a nationwide, next generation broadband, triple play network based on gigabit passive optical network (GPON) and carrier Ethernet technologies. In 2010 we started to recognize revenues from sales to BSNL. Our initial sales to BSNL were made pursuant to an agreement of sale with an OEM distributor of telecommunication equipment in India. In November 2010, we announced the receipt of an additional purchase order and immediate deployment of our CM-4000 products from Alphion Corporation, a distributor in India, for deployment to BSNL through ITI Ltd. Our solutions were deployed as part of a nationwide, next generation broadband, triple play network based on GPON and carrier Ethernet technologies. Through both channels, we provide to BSNL a product warranty and post-contract hardware and software support services with respect to products sold.
 
Our revenues from RedIT constituted more than 20% of our revenues in 2013.
 
 
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Manufacturing
 
Currently we use one subcontractor for component sourcing, inventory warehousing, board assembly, testing and shipment. We believe that, other than few aspects of the supply chain that we handle ourselves, we can satisfy our production requirements using this one major subcontractor, and we expect to continue to utilize this major subcontractor and other third parties to manufacture, assemble and test our products.
 
At the same time, in light of our business condition, including our headcount reductions, our ability to oversee the activities of our production subcontractor are limited and there is a concern about our ability to successfully handle the aspects of the supply chain that we seek to handle. In addition, given our business condition, there is a concern that our production subcontractor will terminate its engagement with us.  In that event, we would require a long time to locate and transition to a replacement, and it is possible that such a transition will not be feasible at all.
 
Telecommunication company orders are short term and typically involve short delivery time frames. The manufacture of products is mainly against purchase orders, and we usually do not order products based on sales forecasts and do not keep products in inventory. 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.
 
In procuring components, we and our subcontractor rely on a number of suppliers of semiconductor solutions that are the sole source for certain of the components.
 
Industry Standards and Government Regulations
 
Our products must comply with industry standards relating to telecommunication equipment.  Before completing sales in a country, our products must comply with local telecommunication standards, recommendations of quasi-regulatory authorities and recommendations of standards-setting committees. In addition, public carriers require that equipment connected to their networks comply with their own standards. Telecommunication-related policies and regulations are continuously reviewed by governmental and industry standard-setting organizations and are subject to amendment or change. Although we believe that our products currently meet applicable industry and government standards, we cannot be sure that our products will comply with future standards.
 
We are subject to telecommunication industry regulations and requirements set by telecommunication carriers that address a wide range of areas including quality, final testing, packaging and use of environmentally friendly components.  We comply with the European Union's Restriction of Hazardous Substances Directive that required telecommunication equipment suppliers to stop the usage of some materials that are not environmentally friendly by July 1, 2006, known as the “RoHS regulations.” Further regulations, known as the “RoHS6” regulations, require suppliers to stop the usage of lead in solders in telecommunication equipment. An extension for compliance with the RoHS6 regulations that currently has no time limit was granted under the Directive. We expect that other countries, including countries we operate in, will adopt similar directives or other additional regulations. We believe that we are in compliance with the RoHS regulations, although tests for compliance with these regulations are limited in their ability to fully ensure compliance.
 
 
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Competition
 
In light of our financial condition, we focus on retaining our existing customers by providing them with limited technical support services.  This could cause our existing customers to turn to alternative equipment suppliers.
 
We compete on the basis of technological capability of our products and price. However, since we have ceased all development activity, we have lost our competitive edge. Many of our competitors and potential competitors have greater financial, technological, manufacturing, marketing and personnel resources than we have. The expansion of research and development facilities in Asia, where engineering and production costs are lower compared to the United States, Western  Europe or Israel, has increased and could further  increase competition and price pressure on our products.
 
Our competitors in our targeted markets of metro and access telecommunication equipment are numerous and we expect competition to increase in the future. Our principal competitors for our products include Alcatel-Lucent, Brocade, Ciena, Cisco Systems, Inc., ECI Telecom Ltd., Ericsson, Extreme Networks, Huwaei, Juniper Networks, NEC, Nokia-Siemens Networks, UTStarcom, and ZTE. Our market share is negligible compared to those of such competitors.
 
Intellectual Property Rights
 
We regard certain areas of our technology as proprietary. We have obtained numerous patents and have filed U.S. and international 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.
 
C.           ORGANIZATIONAL STRUCTURE
 
List of Significant Subsidiaries
 
 Our wholly-owned subsidiary, Orckit-Corrigent Ltd., is an Israeli company.
 
D.            PROPERTY, PLANTS AND EQUIPMENT
 
As of December 31, 2013, our principal offices in Tel Aviv occupied approximately 19,000 square feet of space, which was subsequently reduced as a result of our downsizing to approximately 8,000 square feet of space. The lease agreement expires on December 31, 2015. We have an option to terminate this lease agreement upon six months' prior written notice. In January 2014, we paid six months' rent in advance. We believe that our offices and facilities are adequate for our current needs and that suitable additional or substitute space will be available when needed.

ITEM 4A.                  UNRESOLVED STAFF COMMENTS
 
 
Not applicable.
 
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
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 in this Annual Report.
 
 
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We have suffered recurring losses as well as negative cash flows in recent years and through the date of issuance of our financial statements for the year ended December 31, 2013. As of December 31, 2013, we had a capital deficiency of $13.9 million. We are required to pay to our note holders approximately $12.7 million in July 2014 and approximately $4.3million in December 2017.
 
On March 12, 2013, we entered into a Strategic Investment Agreement with Networks3, Inc., a non-practicing entity controlled by Hudson Bay Capital, in order to commercialize our patents and raise equity and debt financing, as well as a Note Purchase Agreement with two funds managed by Hudson Bay Capital. We had planned to use the proceeds of the Strategic Investment Agreement to retire our Series A notes and Series B notes pursuant to a court-approved arrangement under Section 350 of the Companies Law. However, Networks3 terminated the the Strategic Investment Agreement due to our alleged failure to obtain the approval of the OCS on terms satisfactory to Networks3. We rejected such allegation and intend to pursue legal action in accordance with our rights under such agreement. See Item 10.C – "Additional Information—Material Contracts—Patent and Financing Transactions".  We are currently working on another creditor arrangement under Section 350 of the Companies Law.  The proposed arrangement involves the cancellation of all our currently outstanding ordinary shares and the issuance to our main creditors of ordinary shares constituting 100% of our outstanding share capital following the issuance.  See Item 10.C – "Additional Information—Material Contracts—Proposed Arrangement". If we do not succeed in consummating an arrangement, we will probably enter liquidation proceedings. In either case, our currently outstanding ordinary shares will have no value.

The foregoing information raises substantial doubt as to our ability to continue as a going concern, and our audited financial statements for the year ended December 31, 2013 include an explanatory paragraph to this effect by our independent registered public accounting firm. Our consolidated financial statements for the year ended December 31, 2013 have been prepared assuming that we will continue as a going concern and do not include any adjustments that might result from the resolution of these uncertainties.

Overview
 
Orckit was founded in 1990. We used to be engaged in the design, development, manufacture and marketing of telecommunication equipment that enables transmission of broadband services. Our telecommunication transport equipment is capable of supporting the growing capacity demands for Ethernet services and high bandwidth video services, such as HDTV, Internet Protocol television, or IPTV, and video on demand, or VoD, and interactive television (together known also as “video services”), 2G, 3G and 4G mobile backhauling, as well as other types of data services and voice services, whether transmitted over wireline or cellular networks, in metropolitan networks. Our target customers are Tier 2 telecommunication service providers active in metropolitan areas. Our metro products consist of our CM-100, our first generation product line, and CM-4000, our second generation product line, as well as CM-View, the corresponding network management system. The CM-4000 product together with the CM-View is called Packet Transport Network (PTN).
 
The end-user base for our products is comprised primarily of telecommunication companies and has historically been concentrated in each year among a small number of companies.
 
 
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The first significant customer for our metro product was KDDI, a Japanese telecommunications carrier that began purchasing our products in 2004 and accounted for $2.6 million (16.6%) of our revenues in 2011, $2.8 million (25.3%) of our revenues in 2012 and $1.4 million (17%) of our revenues in 2013. In early 2008, our product was selected by Media Broadcast GmbH, a German customer, as a network infrastructure building block for network solutions deployed by Deutsche Telekom’s wholesale business unit, and leased to a leading cable operator in Germany.  Sales to Media Broadcast represented $404,000 (2.6%) of our revenues in 2011, $348,000 (3.1%) of our revenues in 2012 and $461,000 (6%) of our revenues in 2013.

 In 2010, we started to recognize revenues from sales to BSNL, an Indian telecommunications company, to which sales are made through two channel partners. Sales to BSNL accounted for approximately $2.6 million (16.8%) of our revenues in 2011, $224,000 (2%) of our revenues in 2012. No revenues from BSNL during 2013.

In June 2009, our CM-4000 was selected by Mexico’s redIT (formerly MetroNet) as their main network infrastructure building block. Sales to Metronet constituted $1.1 million (6.7%) of our revenues in 2011, $1.5 million (13.4%) of our revenues in 2012 and $2.3 million (28%) in 2013.

In September 2009, our CM-4000 was selected by a Scandinavian service provider to replace its TDM legacy network (SDH) with a packet based packet transport network (PTN). Sales to this customer represented $3.6 million (23.1%) of our revenues in 2011, $1.2 million (10.3%) of our revenues in 2012 and $0.9 million (12%) in 2013.

We have been involved in strategic cooperation with 3M Services GmbH (formerly known as Quante-Netzwerke GmbH) since 2008 to distribute our CM-4000 packet transport gears. 3M Services is part of the 3M Group which has representatives in more than 70 countries and provides full-service solutions in the telecommunications sector. This strategic alliance has led to the selection of our CM4000 product by numerous new customers in Germany and Luxembourg, including EnviaTEL GmbH, VSE NET GmbH, Cegecom S.A., K-net TelekommunikationGmbh, HEAG MediaNet and e.discom Telekommunikation GmbH. 3M Services provides support to these customers.  Aggregate sales to various customers through our strategic alliance with 3M Services represented $2.9 million (18.6%) of our revenues in 2011, $2.9 million (25.6%) of our revenues in 2012 and $1.4 million (17%) in 2013.

In March 2011, we announced that three new service providers had selected our PTN solution for migration from their legacy SONET/SDH networks to packet based networks. Two providers are based in the Caribbean and Latin America region and the third in Eastern Europe. We began to recognize revenues from these customers in the second quarter of 2012.

On June 21, 2011, we announced the introduction of our CM-401x PTN access product line. The new product portfolio is based on 14G of full duplex non-blocking, switching capacity, packed in 1RU with a broad mixture of Ethernet, PDH and SDH interfaces. With the introduction of CM-401x, we strengthened our offering for telecommunication service providers worldwide by offering end-to-end PTN solutions ranging from access to core. This portfolio is aimed at mobile 2G/3G/4G cellular or hub site gateways, as well as service providers delivering enterprise services.

On December 14, 2011, we announced that Cable Color, a leading telecommunication service provider in Honduras, had selected our IP/MPLS and MPLS-TP based CM-4000 PTN switches and the accompanying CM-View network management system in order to introduce a networking environment for broadband and enterprise VPN services. Cable Color operates a highly advanced network using state-of-the-art technologies to provide a wide range of broadband services to its customers.
 
 
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Our product sales to end-users are subject to fluctuation from quarter to quarter and year to year.

As a result of our continuing losses and the uncertain economic climate around the world, we decreased our headcount in 2011, which caused our operating expenses to be lower in 2011 than in 2010. In 2012, after the disappointing level of conversions of our notes to ordinary shares pursuant to the 2012 Arrangement, we further significantly decreased our headcount and vacated space, which caused our operating expenses to be lower in 2012 than in 2011.  As a result of the downsizing measures taken in the second half of 2012, our operating expenses were lower in 2013 than in 2012. In 2013, we further reduced our headcount and expenses and were able to generate positive cash flow from operations. However, payments in respect of outstanding indebtedness caused our total cash flows to be negative.
 
Following the significant reductions in our headcount and budget in 2012, since the end of 2012 we do not have sufficient resources to develop new features required by our customers and prospective customers. At that time, we abandoned our efforts to win Tier 1 customers and we stopped development of Layer-3 functionality. We have since effected additional headcount reductions and, as of April 30, 2014, we have seven employees, none of whom are research and development, marketing or customer support personnel.  Accordingly, we abandoned our efforts to win any new customers and stopped all development and marketing activities. Instead, we focus on retaining our existing customers by providing them with limited technical support, including by way of outsourcing, even where we are obliged to provide broader support.
 
 We have reported losses in each of 2007 through 2013 and expect to report a loss for 2014.
 
The current economic and credit environment is having a negative impact on business around the world. Our business is particularly subject to conditions in the telecommunications industry which impact our major customers and potential customers. Such conditions may be depressed or may be subject to deterioration which could lead to a reduction in consumer and customer spending overall, which could have an adverse impact on sales of our products. A disruption in the ability of our significant customers to access liquidity could cause serious disruptions or an overall deterioration of their businesses which could lead to a significant reduction in their orders for our products and the inability or failure on their part to meet their payment obligations to us, any of which could have a material adverse effect on our results of operations and liquidity. In addition, any disruption in the ability of customers to access liquidity could lead customers to request longer payment terms from us or long-term financing of their purchases from us. Granting extended payment terms or a significant adverse change in a customer’s financial and/or credit position could reduce our cash balances, require us to assume greater credit risk relating to that customer’s receivables, cause us to defer recognition of revenues or limit our ability to collect receivables related to purchases by that customer.  As a result, our reserves for doubtful accounts and write-offs of accounts receivable could increase.
 
 Critical Accounting Policies and Estimates
 
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. 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.
 
 
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Critical accounting estimates are those that are most important to the portrayal of our financial condition and our results of operations, and require management’s most difficult, subjective and complex judgments, as a result of the need to make estimates about the effect of matters that are inherently uncertain.  Our most critical accounting estimates, discussed below, pertain to revenue recognition, provision for servicing products under warranty, inventories, fair value of financial instruments, stock-based compensation and other-than-temporary impairments of marketable and non-marketable securities. In determining these estimates, management must use amounts that are based upon its informed judgments and best estimates.  We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances.  The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions and conditions.
 
We are 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 the risk factors disclosed in our filings with the SEC. 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 more subjective judgments.
 
Revenue recognition
 
Revenues from sales of products are recognized when delivery occurs and title passes to the customer, provided that appropriate signed documentation of an arrangement exists, the fee is fixed or determinable and collectability is reasonably assured.

Certain of our arrangements include hardware that functions together with software to provide the essential functionality of the product. Through December 31, 2010, software revenue recognition guidance also applies to non-software deliverables, such as computer hardware, if the software is essential to the functionality of the non-software deliverables, as is the case with our deliverables. Accordingly, revenues from sales of software products were recognized when, in addition to the criteria mentioned above, vendor-specific objective evidence, or VSOE, of fair value for undelivered elements exists. VSOE is typically based on the price charged when an element is sold separately or, if an element is not sold separately, on the price established by authorized management, if it is probable that the price, once established, will not be changed when this element is commercially sold.

In October 2009, the Financial Accounting Standard Board, or the FASB, issued Accounting Standard Update No. 2009-14: Certain Revenue Arrangements That Include Software Elements - ("ASU 2009-14"). ASU 2009-14 amends the scope of the software revenue guidance in Topic 985-605 to exclude, among other things, non-software components of tangible products and software components of tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality. We adopted this guidance on a prospective basis for revenue arrangements entered into, or materially modified, on or after January 1, 2011. Accordingly, such arrangements are no longer accounted for in accordance with the FASB’s software revenue guidance. Rather, they are accounted for in accordance with the new guidance for multiple-deliverable arrangements.
 
 
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We grant to customers post-contract hardware and software support services, or PCS, in connection with our sales. VSOE of the fair value of PCS was established based on our practice with our customers. Therefore, revenues from the sale of products were recognized upon delivery (when the criteria mentioned above are met), and the fair value of PCS is deferred and recognized over the term of the PCS.

In October 2009, the FASB issued Accounting Standard Update No. 2009-13, Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements ("ASU 2009-13"). We adopted this guidance on a prospective basis for revenue arrangements entered into, or materially modified, on or after January 1, 2011. Under the new guidance, we separate our multiple-deliverable arrangements into more than one unit of accounting when both of the following criteria are met:

 
(1)
The delivered item(s) has value to the customer on a stand-alone basis; and

 
(2)
If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially within our control.

If these criteria are met, consideration is allocated at inception of the arrangement to all deliverables on the basis of the relative selling price. The selling price of each deliverable is based upon the following selling price hierarchy: VSOE if available, third party evidence of selling price, or TPE, if VSOE is not available, or the best estimate of selling price if neither VSOE nor TPE is available. Under the new guidance, if VSOE and TPE are not determinable, we utilize our best estimate of selling price in order to allocate consideration for those deliverables. Our best estimate of selling price is developed by considering multiple factors including, but not limited to, sales, costs, margin objectives and geographical location.

The adoption of the amended guidance in both ASU 2009-13 and ASU 2009-14 did not have, nor is it expected to have, a material effect on our financial statements based on our current operations.

We do not, in the normal course of business, provide a right of return to our customers.
 
Convertible subordinated notes
 
We issued Series A notes in 2007 and Series B notes in 2011.  On July 2, 2012, we consummated the 2012 Arrangement with the holders of our Series A notes and Series B notes. The 2012 Arrangement was considered to be a troubled debt restructuring under ASC 470-60 based on both quantitative and qualitative factors. Based on the future undiscounted cash flow payments being greater than the net carrying value of the original debt, no gain was recorded in our statement of operations. A new effective interest rate was established based on the revised cash flows as a result of the 2012 Arrangement. On our consolidated balance sheet, we record the Series A notes based on their debt value plus the fair value of their derivative component and the Series B notes at their fair value.

Provision for servicing products under warranty
 
Sales of substantially all of our metro products to customers are subject to varying warranty periods that do not exceed two years with respect to sales outside the United States. Sales in the United States are subject to warranty periods of up to five years. The annual provision for warranty is calculated as a percentage of our revenues, based on historical experience, or where historical experience is not available, based on management estimates for expenses which may be required, to cover the amounts necessary to settle product-related matters existing as of the balance sheet date and which may arise during the warranty period.
 
 
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The amount of our estimated warranty liability may change if the costs incurred due to product failures increase in the future and exceed our estimates. In the event of any future problems with our products, we may need to increase the amount of our reserves.
 
Inventories
 
We periodically evaluate the quantities of inventories on hand relative to current and historical selling prices and historical and projected sales volume and technological obsolescence. Based on these evaluations, inventory write-offs and write-down provisions are provided to cover risks arising from slow moving items, technological obsolescence, excess inventories, discontinued products and for market prices lower than cost. We had expected to receive a follow-on order from BSNL in an amount of Indian Rupees equal to approximately $7 million in the third quarter of 2011 through ITI Ltd., a local OEM channel. Since then, we believed on several occasions that we were on the verge of receiving this order, only to be frustrated by new obstacles.  If we do not receive this purchase order, we will also not be able to receive any follow-on orders from BSNL. In our financial statements for the year 2012 and 2013, we wrote off approximately $0.8 million and $2.3 million, respectively, of our inventory that can be sold to BSNL only.
 
Obligations to the OCS
 
Our management is required to estimate whether there is reasonable assurance that the grants provided to us by the OCS will be forgiven or repaid.  In addition, when OCS grants are first recognized as deductions from research and development expenses, our management is required to estimate whether repayment of the grants is more probable than non-repayment.
 
 
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Results of Operations

The following table sets forth certain items from our audited consolidated statement of operations as a percentage of total revenues for the periods indicated:

   
2011
   
2012
   
2013
 
Revenues
    100 %     100 %     100 %
Cost of revenues
    55.5       36.4       57.7  
Gross profit
    44.5       63.6       42.3  
Research and development expenses, net
    63.6       49.3       26.6  
Selling, general and administrative expenses
    86.1       79.5       53  
Operating loss
    (105.2 )     (65.3 )     (37.3 )
Financial expenses, net
    32.0       13.2       29.3  
Adjustments related to Series A and Series B convertible notes
    23.2       16.7       5.3  
Other income (Expenses)
    2.4       4.0       (0.8 )
Net loss
    111.6 %     57.8 %     72.8 %

Revenues. The majority of our revenues of $15.6 million in 2011 were generated from sales to BSNL, KDDI, a Scandinavian telecommunication service provider and customers obtained through our alliance with 3M Services. Additional sales were made to a number of smaller customers. The substantial majority of our revenues since 2011 were generated from our CM-4000 product line. Our revenues increased slightly in 2011, mainly as a result of an increase in the sales to our Scandinavian customer, customers obtained through 3M Services and other new smaller customers, partially offset by a decrease in revenues from sales to KDDI and Media Broadcast. The majority of our revenues of $11.1 million in 2012 was generated from customers obtained through 3M Services ($2.9 million) and from KDDI ($2.8 million). The majority of our revenues of $8.2 million in 2013 was generated from RedIT in Mexico ($2.4 million), KDDI ($1.4 million) and customers obtained through 3M Services ($1.4 million).
 
Gross Profit. Cost of revenues consists primarily of salaries, raw materials, subcontracting costs, costs for integration, assembly and testing of finished products, expenses related directly to operational activities, costs related to post-contract hardware and software support services, PCS, maintenance services and the payment of royalties to the OCS. Gross profit was $3.4 million, or 42.3% of revenues, in 2013, compared to $7.1 million, or 63.6%, in 2012. The decrease in our gross profit percentage in 2013 was primarily due to the fact that we wrote-off inventory in an approximately $2.3 million.
 
 
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Operating Expenses
 
   
For the years ended December 31
($ in millions)
   
% Change
 
   
2011
   
2012
   
2013
   
2012 vs. 2011
   
2013 vs. 2012
 
Research and development, net
    9.9       5.5       2.1       (44.4 )     (61.8 )
Selling, general and administrative
    13.4       8.9       4.4       (33.6 )     (51.3 )
    Total operating expenses
    23.3       14.4       6.5       (44.6 )     (54.9 )
 
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 features. Our costs for research and development are expensed as incurred. Government grants for research and development are offset against our gross research and development expenditures. Research grants were $3.2 million in 2011 and $2.7 million in 2012. We received immaterial grants from the OCS in 2013, and there is a risk that the OCS may demand the repayment of the 2012 grant since the applicable project could not be completed as a result of downsizing. Our net research and development expenses were lower in 2012 compared to 2011 mainly due to the headcount reduction that we effected in the second quarter of 2011 having been in effect for all of 2012 and additional reductions of headcount effected over the course of 2012. We also consumed less material and retained fewer sub-contractors for research and received lower research and development grants in 2012. Research grants were lower in 2012 than in 2011 mainly because we invested less expenses in research and development, causing the grants that cover such expenses to be lower. Our net research and development expenses were lower in 2013 compared to 2012 mainly due to the headcount reduction that we effected in the third quarter of 2013 and additional reductions of headcount effected over the course of 2013. We also consumed less material and retained fewer sub-contractors for research.
 
 We anticipate that we will not incur any research and development expenditures in 2014.
 
Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of costs relating to promotions, trade shows, compensation costs for marketing and sales personnel, and other general corporate expenses. Selling, general and administrative expenses were significantly lower in 2013 than in 2012 mainly due to decrease in our headcount over 2013.
 
Financial Expenses, net.  The aggregate effect of these financial items resulted in expense of $5.0 million, $1.5 million and $2.4 million in 2011, 2012 and 2013, respectively. In 2011 and 2012, our financial income was mainly from gain and interest on marketable securities. We also incurred interest expense related to our Series A notes and Series B notes in an amount of $2.4 million, $1.7 million and $1.0 million in 2011, 2012 and 2013, respectively. In 2011 and 2012, we reported impairment and loss from sale of marketable securities in amount of $3 million and $0.5 million, respectively.
 
We had financial income of $1,000 in 2011, financial expenses of $118,000 in 2012 and financial income of $22,000 in 2013 resulting from the valuation of the conversion terms embedded in our Series A notes. In 2011 and 2012, we also had financial income of $3.6 million and $2.0 million, respectively, from the valuation to market value of our Series B notes. In 2013, we had financial expenses of $458,000 from the valuation to market value of our Series B notes.
 
 
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Other Income.  We had other income of $369,000 in 2011 as a result of the sale of an equity investment and income of $446,000 in 2012 was generated from insurance compensation on fixed assets that were damaged in a fire that broke out in the Company’s server room. This compensation was in the form of new equipment that replaced old fully depreciated equipment. A minority of the amounts was generated from equipment that was sold. Other expenses of $69,000 in 2013 include income from the disposal of fixed assets that was eliminated by other expenses relating to OCS commitments.

Impact of Inflation, Devaluation and Fluctuation of Currencies on Results of Operations, Liabilities and Assets
 
As of December 31, 2013, the majority of our assets in non-dollar currencies were in NIS. A devaluation of the Yen, NIS or Euro in relation to the U.S. dollar would have the effect of decreasing the dollar value of our assets in Yen, NIS or Euro, to the extent the underlying value is Yen, NIS or Euro based.  A devaluation of the Yen, NIS or Euro would also have the effect of reducing the U.S. dollar amount of any of our liabilities that are payable in these currencies (unless such payables are linked to the U.S. dollar). Furthermore, a devaluation of the NIS would also have an effect on the U.S. dollar conversion price of our convertible subordinated notes. A devaluation of the NIS in relation to the U.S. dollar would have the effect of decreasing the dollar value of the conversion price of the notes.
 
In 2012 and 2013, a substantial portion of our sales were denominated in Yen and Euro. A substantial part of our expenses, principally payroll and payments to Israeli vendors, is in NIS, while a significant portion of the cost of goods sold is in U.S. dollars. A substantial portion of our cash, cash equivalents and marketable securities is in NIS. Our results of operations are adversely affected by increases in the rate of inflation in Israel when such increases are not offset by a corresponding devaluation of the NIS against the U.S. dollar.  The results are also affected by the currency exchange rate between the U.S. dollar and the Yen and Euro. In 2011, 2012 and 2013, the value of the U.S. dollar declined against the Yen. In 2012 and 2013, the value of the U.S. dollar also decreased against the NIS, which caused our NIS denominated expenses to increase. In 2011, the value of the U.S. dollar increased against the NIS, which caused our NIS denominated expenses to decrease.
 
We are not presently engaged in hedging transactions.  We may, however, enter into foreign currency derivatives, mainly forward exchange contracts, in order to protect our cash flows in respect of existing assets.
 
The following table presents information about the rate of inflation in Israel, the rate of revaluation (devaluation) of the NIS versus the U.S. dollar, the rate of inflation in Israel adjusted for the devaluation and, for 2009 through 2013, the devaluation rate of the Yen against the U.S. dollar (all in %):
 
Years Ended December 31,
 
Israeli Inflation Rate
   
NIS Revaluation
(Devaluation) Rate
   
Israel Inflation Adjusted
 for Devaluation
   
Yen
Revaluation (Devaluation) Rate
 
2009
    3.9       (0.7 )     4.6       2.1  
2010
    2.7       (6.0 )     8.7       (13.1 )
2011
    2.2       7.7       5.5       (5.1 )
2012
    1.6       (2.3 )     3.9       (9.9 )
2013
    1.8       (7.0 )     8.8       (16.7 )

 
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B.            LIQUIDITY AND CAPITAL RESOURCES
 
We have historically financed our operations primarily through sales of equity, issuance of convertible notes, receipt of research and development grants, sale or maturity of marketable securities and loans from banks.

We had working capital (total current assets net of total current liabilities) of $3.8 million as of December 31, 2012 and a working capital deficit of $13.0million as of December 31, 2013. The decrease in our working capital in 2013 occurred primarily as a result of the classification of a large portion of our convertible notes from long-term liabilities to current liabilities.
 
We had cash, cash equivalents, long and short-term securities, other securities and bank deposits of $1.9 million as of December 31, 2013, compared to $3.2 million as of December 31, 2012 and $23.2 million as of December 31, 2011. As of December 31, 2011, our entire securities portfolio was classified as available for sale. The decrease in our cash, cash equivalents, long and short-term securities and bank deposits in 2012 resulted primarily from our losses and from the payments we made to repay a portion of our convertible notes  in accordance with the 2012 Arrangement. We expect that the balance of our cash, cash equivalents and securities will continue to be low in 2014.
 
Recent Financings
 
During 2010, we raised approximately $17.0 million of net proceeds from the sale to investors of ordinary shares and warrants.
 
In April 2010, we completed the sale of 2,635,000 units at a price of $3.78 per unit in a registered direct offering.  Each unit consisted of one ordinary share, a five-year primary warrant to purchase 0.25 of one ordinary share at an exercise price of $5.66 per share and a warrant to purchase 0.25 of one ordinary share at an exercise price of $11.32 per share contingent on our election to force conversion of the primary warrant under certain conditions. We also sold an aggregate of 175,000 units to Izhak Tamir and Eric Paneth, two of our affiliates, which, under Israeli law, was subject to shareholder approval that was received at a shareholders’ meeting held in May 2010. Including those sales, we sold 2,810,000 ordinary shares and primary warrants to purchase up to 702,500 ordinary shares, plus the related contingent warrants to purchase up to 702,500 ordinary shares. The gross proceeds of the offering were approximately $10.6 million and the net proceeds of the offering were approximately $9.7 million.
 
In December 2010, we completed the sale of 2,805,452 units at a price of $2.75 per unit in a public offering.  Each unit consisted of one ordinary share and a five-year warrant to purchase 0.60 of one ordinary share at an exercise price of $3.50 per share. Catalyst Private Equity Partners (Israel) II LP, or Catalyst, a private equity fund, purchased 669,090 units in the offering.  Mr. Yair Shamir, one of our outside directors at that time, serves as the Chairman of the management company of this fund. We also sold an aggregate of 240,000 units to Izhak Tamir and Eric Paneth. As required by Israeli law, the sales to Messrs. Tamir and Paneth were approved at our extraordinary general meeting of shareholders held in March 2011. Including those sales, we sold 3,045,452 ordinary shares and warrants to purchase up to 1,827,271 ordinary shares. The gross proceeds of the offering were approximately $8.4 million and the net proceeds of the offering were approximately $7.8 million. Proceeds of $660,000 from the sales to Messrs. Tamir and Paneth were received in March 2011 upon the receipt of the abovementioned shareholder approval.  The units purchased by Messrs. Tamir and Paneth and Catalyst were purchased pursuant to subscription agreements entered into by each of them on terms and conditions that were substantially the same as those provided in the underwriting agreement entered into in connection with the public offering, except that no underwriting commission was payable by us with respect to the sale of these units. The participation in the offering by Messrs. Tamir and Paneth and Catalyst was approved by our audit committee and board of directors.
 
 
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        In June 2011, we issued Series B convertible notes due December 31, 2017 in a public offering in Israel in the aggregate principal amount NIS 30.8 million (approximately $9.0 million based on the U.S. Dollar/NIS exchange rate at that time) at a price of NIS 940 per unit (each unit comprised of NIS 1,000 principal amount of Series B Notes). The Series B notes bear interest at the rate of 8% per year, are not linked to the Israeli CPI and were convertible into our ordinary shares at the election of the holder thereof at the price of NIS 10.00 per share (approximately $2.75 based on the U.S. Dollar/NIS exchange rate at April 10, 2013). (The conversion price and other terms of the Series B notes were amended pursuant to the 2012 Arrangement; see Item 10.C in this Annual Report under "2012 Arrangement with Note Holders".) The gross proceeds of the offering were approximately $8.5 million and the net proceeds of the offering were approximately $8.0 million. As of December 31, 2012, the aggregate principal amount outstanding under the Series B notes was approximately $4.4 million (based on the U.S. Dollar/NIS exchange rate at December 31, 2012).  The issuance included the sale to Mr. Tamir of NIS 6,731,000 principal amount of the Series B notes (approximately $1.99 million based on the exchange rate at that time) and to Mr. Paneth of NIS 546,000 principal amount of our Series B notes (approximately $160,000 based on the exchange rate at that time). In addition, Catalyst Private Equity Partners (Israeli) II, LP and affiliated funds, purchased an aggregate of NIS 3,724,000 of our Series B notes (approximately $1.1 million based on the exchange rate at that time). The purchases by Messrs. Tamir and Paneth and by the Catalyst funds were made on the same terms as all other individual investors and institutional investors, respectively, in our public offering in Israel. Mr. Yair Shamir, an outside director of Orckit at that time, served as the Chairman of the management company of the Catalyst funds.

In June 2012, pursuant to the terms of the 2012 Arrangement, each of Mr. Tamir and Mr. Paneth provided an unsecured loan to us in the amount of $200,000. The loans do not bear interest, unless otherwise approved by our audit committee and board of directors. The loans are subordinated to all of our obligations pursuant to the Series A notes and Series B notes and may be repaid only after the note holders have been fully repaid.  The loans will convert into ordinary shares upon the closing of an equity financing in which Mr. Tamir and Mr. Paneth have undertaken to invest $1.0 million each. For more information, see Item 10.C of this Annual Report under "2012 Arrangement with Note Holders".

Cash Used in Operating Activities

In 2011, we used $16.5 million of cash in operating activities primarily as a result of our net loss of $17.4 million and $3.9 million in adjustments in the value of our Series A and Series B notes, offset in part, by non-cash charges of $1.1 million for stock based compensation and from accrued interest, premium amortization, currency differences on, and net loss from sale of marketable securities of $2.1 million.

In 2012, we used $7.8 million of cash in operating activities primarily as a result of our net loss of $6.5 million, a decrease in trade payables, accrued expenses and other payables of $2.9 million and the change in market value of our Series B notes, which created non-cash income in the amount of $2.0 million, partly offset mainly by a decrease in trade receivables and other current assets of $2.6 million.
 
In 2013, we provided $0.27 million of cash in operating activities primarily as a result of our net loss of $5.9 million, offset in part by non-cash charges.
 
 
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Cash Provided by Investing Activities

Investing activities provided $0.2 million of cash in 2013, $18.3 million of cash in 2012 and $3.7 million in 2011.
 
Our principal investing activities included proceeds from marketable securities and bank deposits of $19.0 million in 2012 and $12.6 million in 2011 offset in part by purchases of marketable securities of $0.14 million in 2012 and $8.9 million in 2011.
 
Our principal investing activity relating to our operations has been the purchase of equipment, software and other fixed assets used in our business. These purchases totaled $653,000 in 2011 and $46,000 in 2013.
 
Cash Provided by Financing Activities

In 2013 and 2012, we used $1.5 million and $11.1 million in financing activities primarily as a result of our repayment of a portion of our convertible notes. In 2011, we generated $8.0 million of net proceeds from the offering of our Series B notes.
 
In 2013, we received and fully repaid a $5 million loan from two funds affiliated with Hudson Bay Capital.

Series A Convertible Notes
 
In March 2007, we issued NIS-denominated Series A convertible notes in the aggregate principal amount of approximately $25.8 million (based on the U.S. Dollar/NIS exchange rate at that time), which bear interest at the rate of 6% per year and are linked to the Israeli CPI.  The Series A notes are due in March 2017, but were subject to the right of each holder to request early redemption on March 14, 2012.  The early redemption right was postponed until the consummation of the 2012 Arrangement on July 2, 2012, pursuant to which our repayment obligation was spread out over several years; see Item 10.C in this Annual Report under "2012 Arrangement with Note Holders".  In the first quarter of 2009, we paid $3.0 million to repurchase approximately 25% of the then principal amount of the outstanding Series A notes. As of December 31, 2012, the aggregate principal amount outstanding under the Series A notes was approximately $10.8 million (based on the U.S. Dollar/NIS exchange rate at December 31, 2012).
 
The Series A notes were convertible at the election of each holder into our ordinary shares at the conversion price of NIS 63.00 per share (approximately $17.3 based on the U.S. Dollar/NIS exchange rate at April 10, 2013). The conversion price and other terms of the Series A notes were amended pursuant to the 2012 Arrangement; see Item 10.C in this Annual Report under "2012 Arrangement with Note Holders".
 
Working Capital

We will need to increase our working capital during 2014, which might be done through the closing of an arrangement with the note holders or monetizing our intellectual property. We cannot be certain that we will be able to obtain sufficient additional financing through the above methods.
 
 
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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, Trade and Labor, or the OCS, pursuant to the Law for the Encouragement of Industrial Research and Development, 1984, as amended, commonly referred to as the “R&D Law.” We also participated in similar government plans outside Israel, although the majority of our research and development funding was obtained from the government of Israel.

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. Each plan must be approved by the OCS.

In prior years, we relied on grants from the OCS to finance a portion of our product development expenditures. During the three years ended December 31, 2013, we recognized research and development grants in an aggregate amount of approximately $6.0 million.  As of December 31, 2013, our total contingent liabilities to the OCS were approximately $21.3 million.

Under the terms of the grants we received from the OCS, we are obligated to pay royalties of 3% during the first three years following commencement of royalty payments, and up to 5% thereafter. Pursuant to a possible amendment to the R&D Law, our royalty rate may be 3% - 6% per annum. Royalties are payable up to 100% of the amount of such grants, or up to 300% as detailed below, linked to the U.S. Dollar, plus annual interest at LIBOR. The payment of royalties is on all revenues derived from the sale of the products developed pursuant to the funded plans, including revenues from licensed ancillary services.

The R&D Law generally requires that a product developed under a program be manufactured in Israel. However, upon notification to the OCS (and provided that the OCS did not object within 30 days), up to 10% of a company’s approved Israeli manufacturing volume, measured on an aggregate basis, may be transferred out of Israel. In addition, upon the approval of the Chief Scientist, a greater portion of the manufacturing volume may be performed outside of Israel, provided that the grant recipient pays royalties at an increased rate, which may be substantial, and the aggregate repayment amount is increased up to 300% of the grant, depending on the portion of the total manufacturing volume that is performed outside of Israel. The R&D Law further permits the OCS, among other things, to approve the transfer of manufacturing rights outside Israel in exchange for an import of different manufacturing into Israel as a substitute, in lieu of the increased royalties. We have obtained an approval from the OCS for manufacturing outside Israel. We intend to keep sufficient manufacturing activities in Israel so that, under certain assumptions, we will be subject to a repayment percentage of up to 150% of the grants we received and an increased royalty percentage payment.

The R&D Law also allows for the approval of grants in cases in which the applicant declares that part of the manufacturing will be performed outside of Israel or by non-Israeli residents and the research committee is convinced that doing so is essential for the execution of the program.  This declaration will be a significant factor in the determination of the OCS whether to approve a program and the amount and other terms of benefits to be granted.  For example, an increased royalty rate and repayment amount might be required in such cases.

The R&D Law also provides that know-how developed under an approved research and development program may not be transferred to third parties in Israel without the approval of the research committee.  Such approval is not required for the sale or export of any products resulting from such research or development. The R&D Law further provides that the know-how developed under an approved research and development program may not be transferred to any third parties outside Israel, except in certain special circumstances and subject to the OCS’ prior approval. The OCS may approve the transfer of OCS-funded know-how outside Israel, generally in the following cases: (a) the grant recipient pays to the OCS a portion of the sale price paid in consideration for such OCS-funded know-how or the price paid in consideration for the sale of the grant recipient itself, as the case may be (according to certain formulas), or (b) the grant recipient receives know-how from a third party in exchange for its OCS-funded know-how, or (c) such transfer of OCS-funded know-how arises in connection with certain types of cooperation in research and development activities.
 
 
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The R&D Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient.  The law requires the grant recipient and its controlling shareholders and foreign interested parties to notify the OCS 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 in the recipient, and requires the new interested party to undertake to the OCS to comply with the R&D Law.  In addition, the rules of the OCS may require additional information or representations in respect of certain such events. 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 or 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 OCS that it has become an interested party and to sign an undertaking to comply with the R&D Law.
 
Based on a request from the OCS, we reported and made certain payments related to our manufacturing activities outside of Israel. In addition, the OCS has claimed that we are required to repay grants in the amount of $0.75 million related to a research and development project that was cancelled and might demand that we return the entire 2012 grant of $1.2 million for a project that could not be completed as a result of downsizing. The OCS may also dispute our reports related to our manufacturing activities outside of Israel. If we are required to pay the OCS more than we provided for in our financial statements, it could adversely affect our results of operations.
 
Effective Corporate Tax Rates in Israel

Generally, Israeli companies are subject to corporate tax on their taxable income at the rate of 24% for the 2011 tax year and 25% for the 2012 and 2013 tax years.  Following an amendment to the Israeli Income Tax Ordinance [New Version], 1961 (the “Tax Ordinance”), which came into effect on January 1, 2014, the corporate tax rate for 2014 and future tax years was set at the rate of 26.5%. Israeli companies are generally subject to capital gains tax at the corporate tax rate.  However, the effective tax rate payable by a company that derives income from an Approved Enterprise program may be considerably less. For more information, please see “Item 10.E Taxation—Israeli Tax Considerations—Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959.”
 
Under Israeli tax law, at December 31, 2012, we had accumulated losses for tax purposes amounting to approximately $285 million. These losses are available indefinitely to offset future taxable business income. As of December 31, 2012, our carry forward of capital losses for tax purposes were approximately $62 million. Orckit and each of our subsidiaries are assessed on a stand-alone basis. Therefore, accumulated tax losses in each of the entities can offset future taxable business income only in the entity in which the losses were generated.
 
 
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Dividend Policy

We have never declared or paid cash dividends on our capital stock.  For the foreseeable future, we intend to use any future earnings for the operation and expansion of our business. Accordingly, we do not anticipate paying any cash dividends. Payment of future dividends, if any, will be at the discretion of our audit committee and our board of directors and will depend on various factors, such as our statutory retained earnings, financial condition, operating results and current and anticipated cash needs. Under the amended trust agreements governing our Series A notes and Series B notes, we are not permitted to distribute dividends until the fourth early redemption payment date of July 1, 2014.

In the event we declare cash dividends, we will pay those dividends in NIS.  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 finished products and raw materials. Our inventory was $1.07 million as of December 31, 2013, $3.7 million as of December 31, 2012, $4.1 million as of December 31, 2011. Our inventory level was at a similar level in 2012 and 2011. In our financial statements for the year 2012, we wrote off approximately $0.8 million of our inventory that cannot be sold to any customer other than BSNL. In our financial statements for the year 2013, we wrote off approximately $2.3 million of our inventory that cannot be sold to any customer.
 
C.            RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
 
In 2009 through 2012, the majority of our research and development work was focused on the CM-4000 product line. Our research and development expenditures consisted primarily of salaries and related costs, materials and subcontracting costs associated with developing new products.  Following the significant reductions in our headcount and budget in 2012, we do not have sufficient resources to develop new features required by our customers and prospective customers. If requested by customers or prospective customers, we now require guaranteed revenue before we start the development of required features. While we have an initial marketing definition for a new product and solution, we lack the financial resources to develop it.

Our research and development staff consisted of 90 employees as of December 31, 2011, 14 employees as of December 31, 2012, and 4 employees as of December 31, 2013, most of who them were located in Israel and hold engineering or other advanced technical degrees. Our gross research and development expenses were approximately $13.1 million in 2011, $8.2 million in 2012 and $2.3 million in 2013. These expenses were offset by grants from the OCS and other research and development grants of approximately $3.2 million in 2011, $2.7 million in 2012 and an immaterial amount in 2013. Research and development expenses in 2012 were lower than in 2011 due to the reduction in the number of our research and development personnel having been affected in the second half of 2012. Research and development expenses in 2013 were lower than in 2012 due to continuing downsizings in 2013. We expect that research and development expenses in 2014 will be minimal, if at all, since we have ceased all development activity.
 
 
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D.           TREND INFORMATION

The introduction by telecommunication carriers of new data and video services to residential users and enterprises requires significantly higher bandwidth support over metro networks. In areas where new high bandwidth services are offered, it is expected that demand for more robust metro products will increase. In response to this trend, we focused in previous years on innovative telecommunication products for the metro area, where we expected to see a need for equipment upgrades with the growth of new high bandwidth service offerings. These services include “triple play” services, that is, a bundled offering of voice, Internet access and high end high-definition (HD) video services, all based on IP protocols, offered by traditional telecommunication carriers. Services offered may also include Ethernet service for business customers. In addition, we believed that more operators are looking at ways to smoothly migrate their SDH network to a packet based transport infrastructure. Features included in our products enable this smooth migration. In addition, we expect growth in the provision of advanced data and content over cellular services that provide data and video transmissions to advanced 3G and 3.5G and LTE handheld devices, driven by, among other things, the use of smart phones and tablets. Following the significant reductions in our headcount and budget in 2012, we stopped development of Layer-3 functionality. As a result of the above and the downsizing we have lost our competitive edge. Today due to our financial and manpower condition, we no longer engage in development or marketing activities.  Instead, we focus on retaining our existing customers by providing them with limited technical support, including by way of outsourcing, even where we are obliged to provide broader support. Accordingly, we do not expect to take advantage of this trend.
 
E.            OFF-BALANCE SHEET ARRANGEMENTS

We do not have any “off-balance sheet arrangements” as such term is defined in Item 5E of Form 20-F.

F.            TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following table of our material contractual obligations as of December 31, 2013 summarizes the aggregate effect that these obligations are expected to have on our cash flows in the periods indicated.

    Payment due by period
($ in thousands)
 
Contractual Obligations
 
Total
   
Less than 1 year
   
1-3 years
   
3-5 years
   
More than 5 years
 
Long-Term Debt Obligations
    13,576       12,699 1     -       877       -  
Operating Lease Obligations
    60       60 2             -       -  
Other Liabilities Reflected on our Balance Sheet under U.S. GAAP
    9,039       6,744 3     775       -       1, 520 4
    Total
    22,675       19,503       775       877       1,520  
______________
1           The amount presented in the less than 1 year column is based on the 2012 Arrangement with our note holders. The Series B notes are presented at fair value, which on the balance sheet date is lower than the debt value. The total obligation value (without taking into account adjustments for the conversion feature embedded in the Series A and Series B notes and the interest obligation) is $17.1 million. The above amounts do not include future interest.
 
 
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2           Our major premises leases allow for early termination upon advance notice. During 2014, this amount reflects lease payments for a full year. In January 2014, we paid six months' rent in advance.

3           These amounts reflect the trade payables, accrued expenses, deferred income and other payables presented in our balance sheet.

4           This amount reflects our accrued severance pay liability, long-term convertible loan from shareholders. The time of its payment, in whole or in part, cannot be predicted and, as a result, this amount is presented in the more than 5 years column. Of this amount, $1.6 million has been previously funded for the coverage of our accrued severance pay liability by our contributions to employee plans.

In addition, as of December 31, 2013, our contingent liability to the Office of the Chief Scientist in respect of grants received was approximately $21.3 million. This liability is required to be repaid only by royalties based on revenues derived from products (and related services) whose development was funded with these grants. If we cancel projects financed by the OCS, the OCS may demand the repayment of grants we received in the past.
 
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 as of April 30, 2014.
 
Name
 
Age
 
Position
Eric Paneth
 
64
 
Chairman of the Board
Izhak Tamir
 
61
 
Chief Executive Officer, Chief Financial Officer and Director  of Orckit and Chief Executive Officer of Orckit-Corrigent
Naama Avrahamy
 
34
 
Vice President, Finance
Jed M. Arkin(1)(2)(3)
 
50
 
Director
Yoav Kfir(1)(2) (3)
 
42
 
Alternate director
Moti Motil(1)(2)
 
61
 
Director
Moshe Nir(1)(2)
 
63
 
Outside Director
Amiram Levinberg(1)(2)
 
58
 
Outside Director
Naomi Steinfeld(1)(2)
 
46
 
Outside Director
____________________
 
(1)   Member of the Audit Committee.
(2)   Member of the Compensation Committee.
(3)   In March 2014, Mr. Arkin appointed Mr. Yoav Kfir as an alternate director.

The business experience of each of our directors and executive officers is as follows:
 
Eric Paneth has been a director of Orckit since its founding in 1990 and Chairman of the Board since October 2012. Mr. Paneth also served as our Chief Executive Officer from 1990 until October 2012 and as our Chairman of the Board from 1990 until July 2008.  From 1975 until 1983, Mr. Paneth was a senior engineer in the Israeli Government, and from 1985 to 1990, he was head of a technical department in the Israeli Government.  From 1983 until 1985, he was employed by Linkabit Inc., in San Diego, California. Since January 2000, Mr. Paneth has been a director of Tikcro Technologies Ltd., and he has served as its Chief Executive Officer since November 2008.  Mr. Paneth holds an advanced engineering degree from the Technion.
 
 
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Izhak Tamir has been President and a director of Orckit since its founding in 1990.  He has also served as our Chief Financial Officer since July 2012 and as our Chief Executive Officer since October 2012. From July 2008 to September 2011, Mr. Tamir also served as our Chairman of the Board of Directors. Mr. Tamir had also served as Chairman of the Board of our subsidiary, Orckit-Corrigent Ltd., since 2001 and Chief Executive Officer of Orckit-Corrigent since May 2007.  From 2005 until 2012, Mr. Tamir served as a director of Gilat Satellite Networks Ltd. 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 - the Israel Telecommunications Corporation Ltd.  From 1978 to 1985, he was a senior engineer in the Israeli Government. Mr. Tamir has served as Chairman of the Board of Directors of Tikcro Technologies Ltd. since January 2000 and was its Chief Executive Officer from August 2003 to December 2007. Mr. Tamir holds an engineering degree from the Israel Institute of Technology, commonly known as the Technion and an M.B.A. from Tel Aviv University.
 
Naama Avrahamy has been our Vice President, Finance since March 2013.  From 2009 to 2013, she was the Chief Financial Officer of Flight Medical Innovations Ltd. (TASE). From 2003 to 2009, she was an audit manager at Kesselman & Kesselman, a member of PwC International. Ms. Avrahamy holds an M.B.A. from the College of Management, Rishon LeZiyon, and is a Certified Public Accountant in Israel.
 
Jed M. Arkin has been a director of Orckit since August 2001. Since January 2005, he has been a director, and is currently Chairman, of Mosaic Crystals Ltd., a developer of Gallium Nitride semiconductor materials. From January 2000 through April, 2007, Mr. Arkin served as Chairman of MadahCom, Inc., a manufacturer of digital wireless public alerting systems. MadahCom was acquired by Cooper Industries (NYSE: CBE) in April 2007. From March 2005 until April 2007, Mr. Arkin served as a director of Shamir Optical Industries Ltd. 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.
 
 
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Yoav Kfir was appointed an alternate director of Orckit in March 2014. Mr. Kfir serves as the Founder and Managing Director of the VAR Group. Mr. Kfir has served as interim Chief Executive Officer, Chief Financial Officer, advisor or court appointed officer with respect to various companies. Among his roles, Mr. Kfir served as a creditors’ committee member in the restructuring process of the Company, receiver and trustee to Alvarion Ltd., financial advisor in the IDB Group take-over and restructuring process, trustee to Eshbal Technologies Ltd. and a court appointed expert to Sunny Electronics Ltd. He currently serves as a director of Elbit Imaging Ltd.  Prior to founding VAR Group, Mr. Kfir served as an audit manager at Kesselman & Kesselman, a member of PwC International. Mr. Kfir is the sole non-government member of the Friends’ Society of Jerusalem Mental Hospitals and serves as chairman of several audit committees of non-profit organizations. Mr. Kfir holds a B.A in Business Administration from the College of Management, Rishon LeZiyon, and is a Certified Public Accountant in Israel.
 
Moti Motil has been a director of Orckit since November 2002 and served as our Chairman of the Board of Directors from September 2011 until October 2012.  Since 1996, Mr. Motil has served as Vice President Finance and an associate of Palmot Ltd., an investment company based in Israel, and since 2006 has also served as Chief Financial Officer of Gan-Bair Senior Citizen Residence Ltd., a subsidiary of Palmot Ltd. 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 Certified Public Accountant in Israel.
 
Moshe Nir has been an outside director of Orckit since November 2002. 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 B.A. degree in Economics from Tel Aviv University, and an M.B.A. and Post Graduate Diploma in Computer and Information Sciences from the Recanati School of Management, Tel Aviv University.
 
Amiram Levinberg has been an outside director of Orckit since November 2008. Mr. Levinberg co-founded Gilat Satellite Networks Ltd. and served as a director of Gilat from its inception until April 2004. From July 2005 to December 2011, Mr. Levinberg served as the Chairman of the Board and Chief Executive Officer of Gilat, and he continues to serve as its Chairman of the Board. From July 1995 until April 2003, he served as Gilat’s President. Until 2002, Mr. Levinberg also served as Gilat’s Chief Operations Officer. Until July 1995, he served as Gilat’s Vice President of Engineering. From 1977 to 1987, Mr. Levinberg served in a research and development unit of the Israel Defense Forces, where he managed a large research and development project. He was awarded the Israel Defense Award in 1988. Mr. Levinberg also serves on the board of directors of Cardboard Industries and Kargal, a cardboard manufacturer in Israel. He holds a B.Sc. degree in Electrical Engineering and Electronics and a M.Sc. degree in Digital Communications from the Technion.
 
       Naomi Steinfeld has been an outside director of Orckit since October 2011. Ms. Steinfeld is the managing partner of Naomi Steinfeld & Co., a law firm that specializes in tax and international business law, since 1998.  She has been practicing law since 1996, following six years as a certified tax advisor.  Ms. Steinfeld also lectures on tax law in the Executive MBA program at Tel Aviv University. From 2008 to 2011, Ms. Steinfeld served as a director of Israel Aerospace Industries Ltd., Israel's leading aerospace and aviation manufacturer, and of CIH Cross-Israel Highway, the company responsible for planning, building and operating the Trans-Israel Highway.  Since March 2011, Ms. Steinfeld serves as a director of Polar Communication Ltd. Ms. Steinfeld holds an LL.B. degree and an LL.M. degree, concentrating in international commerce, both from Tel Aviv University.
 
 
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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 us to all persons as a group (11persons) who served in the capacity of director or executive officer in 2013 was approximately $1 million. In 2013, we granted to this group options to purchase an aggregate of 5,235,000 ordinary shares under the Orckit Israeli Share Incentive Plan. The options had an exercise price of $0.14 per share, which represented a price equal to the market price of our ordinary shares on the date of grant. 4,000,000 of such options were cancelled during the course of 2013 at the request of the option holders or as a result of the termination of their employment.
 
The following tables set forth the compensation of our senior office holders during the year ended December 31, 2013. We have disclosed the information in the following tables in our annual report for the year ended December 31, 2013 filed with the Israel Securities Authority on March 31, 2014 pursuant to the Israeli Securities Law, 5728-1968, and the regulations promulgated thereunder.
 
a.      Compensation of the five most highly compensated senior office holders of our company or of any entity under the control of our company (in thousands U.S. Dollars, in terms of cost to the company) (1):
 
Details of the Compensation Recipient
   
Compensation on Behalf of Services
       
Name
Position
 
Scope of Position
   
Salary(2)
   
Bonus
   
Stock-based Compen-sation
   
Sales Commission
   
Total
 
Izhak Tamir
CEO and CFO of Orckit and Chairman of the board and CEO of Orckit-Corrigent
    100 %     286 (3)     -       -       20       306  
Oren Tepper(4)
VP Corporate Sales
    100 %     174       -       7       43       224  
Yossi Bar-shishat (5)
VP R&D
    100 %     204       -       13       -       217  
Oren Maymon(6)
VP Operations
    100 %     172       -       4         -       176  
Naama Avrahamy (7)
VP Finance
    100 %     89       -       2       -       91  
 
 
_______________
 
(1)
Includes all compensation recognized in our financial statements for the year ended December 31, 2013 plus compensation paid to such office holders following the end of the year for all services provided during the year.
 
 
54

 
 
(2)
Includes all salary-related benefits, such as car, telephone, social benefits, termination benefits, etc.
 
(3)
We owe Mr. Tamir $383 for unpaid salary, which was deferred at the initiative of Mr. Tamir. Mr. Tamir is entitled to a bonus equal to 0.25% of our annual revenues.

(4)
Mr. Tepper is entitled to a bonus equal to 0.5% of our annual revenues.  In December 2012, he was granted options to purchase 1,000,000 ordinary shares under our share incentive plan, at an exercise price of $0.14 per share, for a seven-year term.  The options vest quarterly over a four-year period commencing September 30, 2013. The options were granted in consideration for a reduction in salary during the vesting period equal to the value of the options based on the Black and Scholes valuation method and, if vested, will not terminate following termination of employment. At his request, Mr. Tepper forfeited the said options in consideration of which his salary was not reduced.  At his initiative, he ceased to be an officer of the Company on March 9, 2014 and at our request, continued to be employed until May 9, 2014. See Note 15b to the Financial Statements for information regarding outstanding options granted to Mr. Tepper.
 
(5)
Mr. Bar-shishat ceased to be an officer of the Company on November 3, 2013. As a result thereof, the options granted to him in December, 2012 to purchase 1,000,000 ordinary shares under our share incentive plan that did not vest expired. See Note 15b to the Financial Statements for information regarding outstanding options granted to Mr. Bar-shishat.
 
(6)
In December 2012, Mr. Maymon was granted options to purchase 1,000,000 ordinary shares under our share incentive plan. The options were granted in consideration for a reduction in salary. At his request, Mr. Maymon forfeited the said options in consideration of which his salary was not reduced.  See Note 15b to the Financial Statements for information regarding outstanding options granted to Mr. Maymon.

(7)
In June 2013, Ms. Avrahamy was granted options to purchase 100,000 ordinary shares under our share incentive plan.

b.      Compensation of the three most highly compensated senior officers of our company whose compensation was provided solely in connection with such office holder's service to our company, if not included in the table above (in thousands  U.S. Dollars, in terms of cost to the company):
 
Details of the Compensation Recipient
   
Compensation on Behalf of Services
   
Other Compen-
sation
       
Name
 
Position
 
Scope of Position
         
Salary
   
Bonus
   
Stock-based Compen-sation
   
Sales Comis-sion
   
Director compen-sation
   
Total
 
Director Compen-sation(1)
 
Directors
                                                      66         66  
___________________

(1)
The compensation package of our directors is described below under "Director Compensation". This amount reflects the total compensation for 2013.

 
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Director Compensation

Pursuant to the requirements of the Companies Law, remuneration of our directors generally requires shareholder approval. In October 2011, our shareholders approved a three-year compensation package for each of our five non-employee directors, comprised of options to purchase up to 27,754 ordinary shares for each of the upcoming three years and cash compensation in the amount of NIS 20,710 (then equivalent to $5,788) per year and NIS 1,200 (then equivalent to $335) per meeting.  The cash component represents the minimum amount permitted to be paid under the applicable regulations promulgated under the Companies Law.  The options were granted under the Orckit Israeli Share Incentive Plan and have an exercise price of $1.59 per share, which represents a 25% premium above the closing price per share of our ordinary shares on the Nasdaq Stock Market on the last trading day preceding the date of the shareholder meeting at which the options were granted. The options vest for so long as the director continues to serve, over a period of three years, in three equal installments of 27,754 on each of the first, second, and third anniversary of the date of grant. The options, to the extent vested, will expire at the earlier of seven years from the date of grant or six months from termination of the director's service.  Mr. Paneth, our Chairman of the Board, receives no compensation from us.
 
C.           BOARD PRACTICES
 
Corporate Governance Practices
 
We are incorporated in Israel and therefore are subject to various corporate governance practices under the Companies Law, relating to such matters as outside directors, the audit committee, the compensation committee, the internal auditor and approvals of interested party transactions.  These matters are in addition to the relevant provisions of U.S. securities laws.
 
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 such 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.
 
Under the Companies Law, our board of directors must determine the minimum number of directors having financial and accounting expertise, as defined in the regulations, that our board of directors should have. In determining the number of directors required to have such expertise, the board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations.  Our board of directors has determined that we require at least one director with the requisite financial and accounting expertise and that Mr. Motil has such expertise.
 
 
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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.
 
Under the Companies Law, the chairman of the board of a company is not permitted to hold another position in the company or a subsidiary thereof other than chairman or director of a subsidiary or, if approved by a special majority of shareholders, chief executive officer of the company. 
 
Outside Directors
 
Qualifications of Outside Directors
 
Under the Companies Law, public companies are required to appoint at least two outside directors. Outside directors are required to possess professional qualifications as set out in regulations promulgated under the Companies Law.  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 (i) such person or person’s relative or affiliate has, at the date of appointment, or had at any time during the two years preceding such date, any affiliation with the company, a controlling shareholder thereof or their respective affiliates; or (ii) in a company that does not have a 25% shareholder, if such person has an affiliation with any person who, at the time of appointment, is the chairman, the chief executive officer, the chief financial officer or a 5% shareholder of the company. The term “affiliation” is broadly defined in the Companies Law, including an employment relationship, a business or professional relationship, control or service as an office holder.
 
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 the lapse of two years from termination of office, a company or its controlling shareholder may not give any direct or indirect benefit to the former outside director.
 
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:
 
 
·
at least a majority of the shares of non-controlling shareholders voted at the meeting vote in favor of the outside director’s election; or
 
 
·
the total number of shares of non-controlling shareholders that voted against the election of the outside director does not exceed two percent of the aggregate voting rights in the company.
 
 
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The initial term of an outside director is three years and may be extended for up to two additional three-year terms.  A company whose shares are listed on a major stock exchange listed in the applicable regulations may reelect an outside director for additional periods of up to three years each only if the audit committee and the board of directors confirm that, in light of the outside director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period would be in the interest of the company.  Reelection of an outside director may be effected through one of the following mechanisms: (1) the board of directors proposed the reelection of the nominee and the election was approved by the shareholders by the majority required to appoint outside directors for their initial term; or (2) a shareholder holding 1% or more of the voting rights proposed the reelection of the nominee, and the reelection is approved by a majority of the votes cast by the shareholders of the company, excluding the votes of controlling shareholders and those who have a personal interest in the matter as a result of their relations with the controlling shareholders, provided that the aggregate votes cast in favor of the reelection by such non-excluded shareholders constitute more than 2% of the voting rights in the company.
 
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 that exercises a power of the 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 under the Companies Law are Mr. Nir, Mr. Levinberg, and Ms. Steinfeld.
 
Alternate Directors
 
Our articles of association provide, consistent with the Companies Law, that any director may appoint another person who is not a director or an alternate director to serve as his alternate director. The term of an alternate director can be terminated at any time by the appointing director and automatically terminates upon the termination of the term of the appointing director. The Companies Law stipulates that an outside director may not appoint an alternate director except under very limited circumstances. An alternate director has the same rights and responsibilities as a director, except for the right to appoint an alternate director. In March 2014, in coordination with the representatives of our note holders and our board of directors, Mr. Jed Arkin appointed Mr. Yoav Kfir as his alternate director.
 
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 a compensation committee.
 
Audit Committee
 
Under the 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.  The members of the audit committee must satisfy certain independence qualifications under the Companies Law, and the chairman of the audit committee is required to be an outside director. The responsibilities of the audit committee include identifying and examining flaws in the business management of the company and suggesting appropriate course of actions, recommending approval of interested party transactions, assessing the company's internal audit system and the performance of its internal auditor.  Our audit committee also assists the board of directors in fulfilling its responsibility for oversight of the quality and integrity of our accounting, auditing and financial reporting practices and financial statements and the independence qualifications and performance of our independent auditors. The audit committee also has the authority and responsibility to recommend for shareholder approval the appointment of our independent auditors and to pre-approve audit fees and all permitted non-audit services and fees. Our audit committee consists of Messrs. Nir (Chairman), Arkin, Motil and Levinberg and Ms. Steinfeld.
 
 
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Compensation Committee
 
Our compensation committee is authorized to, among other things, review, approve and recommend to our board of directors base salaries, incentive bonuses, including the specific goals and amounts, stock option grants, employment agreements, and any other benefits, compensation or arrangements of our executive officers and directors.  Under the Companies Law, our compensation committee is required to propose for shareholder approval by a special majority, a policy governing the compensation of office holders based on specified criteria, to review modifications to the compensation policy from time to time, to review its implementation and to approve the actual compensation terms of office holders prior to approval by the board of directors. The members of the compensation committee must satisfy certain independence qualifications under the Companies Law, and the chairman of the compensation committee is required to be an outside director. Our compensation committee consists of Messrs. Nir (Chairman), Arkin, Motil and Levinberg and Ms. Steinfeld.
 
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 proper business procedure.  The internal auditor must satisfy certain independence requirements. Our internal auditor is Doron Cohen of Fahn Kanne – Grant Thornton.
 
D.            EMPLOYEES
 
The numbers and breakdowns of our employees as of the end of the past three years are set forth in the following table:

   
2011
   
2012
   
2013
 
Numbers of employees by geographic location
                 
Israel
    121       34       16  
Elsewhere
    28       4       0  
   Total workforce
    149       38       16  
Numbers of employees by category of activity
                       
MIS, finance and administration
    19       12       4  
Research and development
    90       14       4  
Manufacturing, testing and quality assurance
    11       7       7  
Sales and marketing (including employed agents)
    29       5       1  
   Total workforce
    149       38       16  

 
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Our number of employees decreased by 111 between December 31, 2011 and December 31, 2012. This decrease was mainly due to the multiple headcount reductions effected over the course of 2012.
 
As of April 30, 2014, we employed seven employees, including our CEO (who is also the CFO and a director of the Company), Sales Manager, VP Finance and three employees in operations.
 
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, social contributions 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, pension plans, 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 to Managers’ Insurance in respect of severance obligations 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 17.5% of wages, of which the employee contributes approximately 12% and the employer contributes approximately 5.5%.
 
We contribute amounts on behalf of our employees to funds known as Managers’ Insurance and/or pension funds at rates that are not lower than the minimum set under applicable law. In most of the cases, each employee who agrees to participate in such funds contributes an amount equal to 5% of such employee’s base salary and the employer contributes approximately 15% of such salary (including payments for disability insurance), which 15% includes the 8.3% for severance pay.
 
E.            SHARE OWNERSHIP
 
As of March 31, 2014, Mr. Izhak Tamir beneficially owned aggregate of 4,850,409 ordinary shares, representing 15.6% of our outstanding ordinary shares, consisting of 4,747,409 ordinary shares, 25,000 ordinary shares issuable upon the exercise of warrants at an exercise price of $5.66 per share, 78,000 ordinary shares issuable upon the exercise of warrants at an exercise price of $3.50 per share.
 
As of , March 31, 2014, Mr. Eric Paneth beneficially owned 1,407,378 ordinary shares, or 4.5% of our ordinary shares, consisting of 1,322,628 ordinary shares, 18,750 ordinary shares issuable upon the exercise of warrants at an exercise price of $5.66 per share and 66,000 ordinary shares issuable upon the exercise of warrants at an exercise price of $3.50 per share.
 
Except for Messrs. Paneth and Tamir, none of our executive officers or directors beneficially owns 1% or more of our outstanding ordinary shares.
 
As of March 31, 2014, options to purchase a total of 3,315,610 ordinary shares (including options whose vesting is subject to our meeting specified performance goals) were outstanding under our share incentive plan, of which options to purchase a total of 684,896 ordinary shares were held by our directors and officers (9 persons) as a group. Our share incentive plan is administered by the board of directors, which is empowered, subject to applicable law, to determine the optionees, dates of grant and the exercise price of options. Unless otherwise decided by our board of directors, 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 $0.01 to $11.46 per share. Option awards generally vest over periods of between three to seven years and generally have a contractual term of from seven to eleven years.
 
 
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Performance-based Options of Eric Paneth and Izhak Tamir
 
At our annual general meeting of shareholders held on July 3, 2008, our shareholders approved option grants to each of Mr. Paneth and Mr. Tamir under a multi-year incentive plan pursuant to the following terms:
 
 
·
the exercise price per share is $6.19, which was the closing price per share of our ordinary shares on the NASDAQ Stock Market on the last trading day preceding the date of the annual general meeting;
 
 
·
the options are divided into five annual tranches of 75,000 ordinary shares each (for an aggregate of 375,000 options over five years) and vest, for so long as the option holder continues to serve, only if the applicable cumulative revenue thresholds are met, as follows:
 
 
o
$50 million for 2009;
 
 
o
$130 million for 2009-2010;
 
 
o
$250 million for 2009-2011;
 
 
o
$420 million for 2009-2012; and
 
 
o
$600 million for 2009-2015.
 
 
·
the options expire six months after the earlier of (i) the date on which our independent auditor delivers to us its signed audit report with respect to our consolidated financial statements for 2016 or (ii) the termination of the option holder’s service;
 
 
·
if the revenue threshold for any period set forth above is met, then the option tranche relating to that period will vest, and any unvested option tranches relating to any previous periods will also vest; and
 
 
·
notwithstanding the foregoing, if the revenue threshold of the final option tranche is met prior to the end of the applicable period, then that option tranche (and any previous unvested option tranches) will vest (but in any event not before the delivery of the signed audit report with respect to our annual consolidated financial statements with respect to 2013).
 
Revenues are determined in accordance with our audited consolidated financial statements for the applicable years. Such financial statements will be prepared in accordance with U.S. GAAP, and the condition with respect to revenues is deemed to be satisfied or not satisfied, as the case may be, on the date on which our independent auditor delivers to us its signed audit report with respect to our annual consolidated financial statements for the applicable year. Our audit committee is authorized to resolve any questions in the interpretation of the terms of the options that may arise.
 
 
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Alternatively, all options vest if there is a “Change of Control” prior to the expiration of the term of the options. A “Change of Control” means (i) a merger, share sale or other transaction or series of transactions in which securities possessing a majority of the voting power of our outstanding securities become “beneficially owned” (as such term is used in Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) by a person or persons different from the persons holding those securities immediately prior to such transaction(s) or (ii) the sale, transfer or other disposition of all or substantially all of our consolidated assets or business in one or more transactions.
 
The foregoing options granted to each of Mr. Tamir and Mr. Paneth, if vested and exercised in full, would constitute an aggregate of approximately 0.3% of our ordinary shares per year, or an aggregate of 1.1% of our outstanding ordinary shares for all of his five option tranches. These percentages are based on the number of ordinary shares outstanding on March 31, 2014, after giving effect to the exercise of such person’s options. To date, no options vested under these grants.
 
Under U.S. GAAP, until such time as the performance conditions are assumed to be satisfied, the ordinary shares underlying such options are not treated as being outstanding for purposes of computing our fully diluted earnings per share.
 
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.
 
The following table sets forth, as of March 31, 2014, the number of our ordinary shares, 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 shareholders are the same. Beneficial ownership is determined in accordance with the rules of the SEC based on voting and investment power with respect to such ordinary shares. Ordinary shares issuable pursuant to options, warrants or convertible notes that are currently exercisable or exercisable or convertible within 60 days of March 31, 2014 are deemed to be outstanding and to be beneficially owned by the person holding such options, warrants or notes for the purpose of computing the percentage ownership of such person, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. All information with respect to the beneficial ownership of any principal shareholder has been furnished by such shareholder or is based on the most recent Schedule 13D or 13G filed with the SEC and, unless otherwise indicated, we believe that persons named in the table have sole voting and sole investment power with respect to all the Ordinary Shares shown as beneficially owned, subject to community property laws, where applicable. As of March 31, 2014, 31,095,335 of our ordinary shares were outstanding.
 
 
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Identity of Person or Group
 
Number of Ordinary Shares
   
Percent Beneficially Owned
 
Izhak Tamir
    4,850,409 (1)     15.5 %
All directors and executive officers as a group (8 persons)
    6,800,357 (2)     21.8 %

 
 (1) Includes (i) 4,747,409 ordinary shares, (ii) 25,000 ordinary shares issuable upon the exercise of warrants at an exercise price of $5.66 per share and (iv) 78,000 ordinary shares issuable upon the exercise of warrants at an exercise price of $3.50 per share.

(2)   Includes 542,540 ordinary shares issuable upon the exercise of options, warrants and convertible notes held by our directors and executive officers that are currently vested or vest within 60 days following March 31, 2014.

As of June 15, 2011, Mr. Tamir each beneficially owned 2,685,367 ordinary shares, or 11.2% of our outstanding ordinary shares, and Mr. Paneth beneficially owned 2,003,617 ordinary shares, or 8.6% of our outstanding ordinary shares. The changes in their respective holdings reflected above were caused by the following events: (i)the purchase in June 2011 by Mr. Tamir of NIS 6,731,000 principal amount of our Series B notes (approximately $1.99 million based on the U.S. Dollar/NIS exchange rate at that time) and by Mr. Paneth of NIS 546,000 principal amount of our Series B notes (approximately $160,000 based on the U.S. Dollar/NIS exchange rate at that time), on the same terms as our public offering of these notes in Israel; (ii) the termination in December 2011 of the variable forward sale contract with Credit Suisse Capital LLC entered into in March 2006 between each of Mr. Tamir and Mr. Paneth with respect to 420,000 ordinary shares each; (iii) the expiration on June 23, 2012 of options held by each of Mr. Tamir and Mr. Paneth to purchase 420,000 ordinary shares at an exercise price of $27.14 per share; and (iv) the conversion on July 16, 2012 of the Series B notes referenced in clause (i) above into 3,678,142 ordinary shares by Mr. Tamir and 298,361 ordinary by Mr. Paneth, at a conversion price of NIS 1.83 per share (approximately $0.47 based on the U.S. Dollar/NIS exchange rate at that time). As of March 31, 2014, Mr. Paneth beneficially owned less than 5% of our outstanding ordinary shares.

As of May 1, 2012, Catalyst Private Equity Partners (Israel) II, LP and affiliated funds beneficially owned 1,370,625 of our ordinary shares, or 5.8% of our outstanding shares.  Catalyst's holdings included 401,454 ordinary shares issuable upon the exercise of warrants at an exercise price of $3.50 per share and 372,400 ordinary shares issuable upon the conversion of Series B notes at a conversion price of NIS 10.00 per share (prior to the 2012 Arrangement). On March 14, 2013, Catalyst filed a Schedule 13G reporting beneficial ownership of only 401,454 ordinary shares represented by such warrants, or 1.3% of our outstanding shares.

As of April 22, 2014, there were 29 holders of record of our ordinary shares in the United States who collectively held approximately 85% 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.
 
 
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B.           RELATED PARTY TRANSACTIONS
 
None.

C.           INTERESTS OF EXPERTS AND COUNSEL
 
Not applicable
 
ITEM 8.                     FINANCIAL INFORMATION
 
Consolidated Statements and Other Financial Information
 
See Item 18.
 
Legal Proceedings
 
We are not party to any legal proceedings.
 
Dividend Policy
 
For a discussion of our dividend policy, please see “Item 5.B – Operating and Financial Review and Prospects – Liquidity and Capital Resources – Dividend Policy.”
 
Significant Changes
 
No significant change has occurred since December 31, 2013, except as otherwise disclosed in this Annual Report.
 
ITEM 9.                     THE OFFER AND LISTING
 
A.            OFFER AND LISTING DETAILS
 
Our ordinary shares are quoted on the OTCQB under the symbol “ORCT” and on the maintenance list of the TASE.
 
The following table sets forth, for the periods indicated, the high and low sale prices of our ordinary shares as reported on the NASDAQ Global Market through March 29, 2012, on the NASDAQ Capital Market from March 30, 2012 through June 21, 2012 and on the OTCQB since June 22, 2012.
 
Calendar Year   Price Per Share  
   
High
   
Low
 
2013
  $ 0.45     $ 0.11  
2012
  $ 0.86     $ 0.11  
2011
  $ 3.35     $ 0.84  
2010
  $ 5.81     $ 2.18  
2009
  $ 4.39     $ 1.77  
       
Calendar Period
 
Price Per Share
 
2014
 
High
   
Low
 
First Quarter
  $ 0.12     $ 0.05  
Second Quarter  (through April 14, 2014)
  $ 0.07     $ 0.04  
 
 
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2013
 
High
   
Low
 
First Quarter
  $ 0.51     $ 0.15  
Second Quarter
  $ 0.23     $ 0.18  
Third Quarter
  $ 0.3     $ 0.12  
Fourth Quarter
  $ 0.18     $ 0.11  
2012
 
High
   
Low
 
First Quarter
  $ 0.86     $ 0.38  
Second Quarter
  $ 0.65     $ 0.15  
Third Quarter
  $ 0.25     $ 0.15  
Fourth Quarter
  $ 0.27     $ 0.11  
                 
Calendar Month
 
Price Per Share
 
   
High
   
Low
 
2014
               
April (through April 14, 2013)
  $ 0.07     $ 0.04  
March
  $ 0.11     $ 0.05  
February
  $ 0.12     $ 0.08  
January
  $ 0.12     $ 0.09  
2013
               
December
  $ 0.18     $ 0.13  
November
  $ 0.17     $ 0.13  
October
  $ 0.16     $ 0.11  
 
The following table sets forth, for the periods indicated, the high and low sale prices of our ordinary shares as reported on the Tel-Aviv Stock Exchange.
 
Calendar Year
 
Price Per Share
 
   
High
   
Low
 
2013
  $ 0.46     $ 0.13  
2012
  $ 0.90     $ 0.13  
2011
  $ 3.25     $ 0.82  
2010
  $ 5.79     $ 2.29  
2009
  $ 4.45     $ 1.90  
 
 
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Calendar Period
 
Price Per Share
 
2014
 
High
   
Low
 
First Quarter
  $ 0.11     $ 0.05  
Second Quarter  (through April 14, 2014)
  $ 0.06     $ 0.04  
2013
               
First Quarter
  $ 0.48     $ 0.13  
Second Quarter
  $ 0.46     $ 0.15  
Third Quarter
  $ 0.34     $ 0.14  
Fourth Quarter
  $ 0.16     $ 0.10  
2012
               
First Quarter
  $ 0.90     $ 0.41  
Second Quarter
  $ 0.51     $ 0.21  
Third Quarter
  $ 0.25     $ 0.16  
Fourth Quarter
  $ 0.25     $ 0.13  
                 
Calendar Month
 
Price Per Share
 
   
High
   
Low
 
2014
               
April (through April 14, 2013)
  $ 0.06     $ 0.04  
March
  $ 0.08     $ 0.05  
February
  $ 0.09     $ 0.08  
January
  $ 0.11     $ 0.08  
2013
               
December
  $ 0.15     $ 0.10  
November
  $ 0.15     $ 0.13  
October
  $ 0.16     $ 0.14  
                 
The share prices as presented above in U.S. dollars were originally denominated in NIS and were converted to U.S. dollars using the representative exchange rate between the US dollar and the NIS published by the Bank of Israel for each applicable day in the presented period.
 
B.            PLAN OF DISTRIBUTION
 
Not applicable
 
 
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C.           MARKETS
 
Our ordinary shares are quoted on the OTCQB under the symbol ORCT.  Our ordinary shares are also listed on the maintenance list of the TASE. See Item 9A of this Annual Report.
 
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 ASSOCIATION
 
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 and articles of association, which are filed as exhibits to this Annual Report.
 
Approval of Certain Transactions
 
Under the Companies Law, a public company must adopt a compensation policy, recommended by the compensation committee and approved by the board of directors and the shareholders, in that order. The shareholder approval requires a majority of the votes cast by shareholders, excluding any controlling shareholder and those who have a personal interest in the matter (similar to the threshold described in the next paragraph below). Our shareholders approved such a policy in July 2013. In general, all office holders’ terms of compensation – including fixed remuneration, bonuses, equity compensation, retirement or termination payments, indemnification, liability insurance and the grant of an exemption from liability – must comply with the company's compensation policy. In addition, the compensation terms of directors, the chief executive officer, and any employee or service provider who is considered a controlling shareholder generally must be approved separately by the compensation committee, the board of directors and the shareholders of the company, in that order. The compensation terms of other officers require the approval of the compensation committee and the board of directors. In addition, under the Companies Law and our articles of association, other types of transactions with our officers or directors or a transaction with another person in which such officer or director has a personal interest must be approved by our board of directors, and if such transaction is considered an extraordinary transaction (as defined below), the transaction must be approved by the audit committee and the board of directors.
 
 
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The Companies Law also requires that any extraordinary transaction with a controlling shareholder or an extraordinary transaction with another person in which a controlling shareholder has a personal interest must be approved by the audit committee, the board of directors and the shareholders of the company, in that order. The shareholder approval must be by a simple majority, provided that (i) such majority vote includes at least a simple majority of the total votes of shareholders having no personal interest in the transaction or (ii) the total number of votes of shareholders mentioned in clause (i) above who voted against such transaction does not exceed 2% of the total voting rights in the company. Any such extraordinary transaction whose term is longer than three years requires further shareholder approval every three years, unless (with respect to transactions not involving management fees or employment terms) the audit committee approves that a longer term is reasonable under the circumstances.
 
The Companies Law prohibits any person who has a personal interest in a matter from participating in the discussion (and voting pertaining to such matter in the company’s board of directors or audit committee), except for in circumstances where the majority of the board of directors has a personal interest in the matter, in which case such matter must be approved by the company’s shareholders.
 
An “extraordinary transaction” is defined in the Companies Law as any of the following: (i) a transaction not in the ordinary course of business; (ii) a transaction that is not on market terms; or (iii) a transaction that is likely to have a material impact on the company’s profitability, assets or liability.
 
Under the Companies Law, a private placement of securities requires approval by the board of directors and the shareholders of the company if it will cause a person to become a controlling shareholder or if:
 
 
·
the securities issued amount to 20% or more of the company’s outstanding voting rights before the issuance;
 
 
·
some or all of the consideration is other than cash or listed securities or the transaction is not on market terms; and
 
 
·
the transaction will increase the relative holdings of a shareholder that holds 5% or more of the company’s outstanding share capital or voting rights or that will cause any person to become, as a result of the issuance, a holder of more than 5% of the company’s outstanding share capital or voting rights.
 
Fiduciary Duties of Directors and Officers
 
The Companies Law imposes a duty of care and a duty of loyalty on the directors and officers of a company.  The duty of care requires a director or office holder to act with the level of care with which a reasonable director or officer in the same position would have acted under the same circumstances.  It includes a duty to use reasonable means to obtain information on the advisability of a given action brought for his approval or performed by him by virtue of his position and all other important information pertaining to these actions.
 
The duty of loyalty of a director or officer includes a general duty to act in good faith for the benefit of the company, and particularly to:
 
 
·
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
 
 
·
refrain from any activity that is competitive with the company;
 
 
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·
refrain from exploiting any business opportunity of the company to receive a personal gain for himself or others; and
 
 
·
disclose to the company any information or documents relating to a company’s affairs which the director or officer has received due to his position as such.
 
The Companies Law requires that directors, officers or a controlling shareholder of a public company disclose to the company any personal interest that he or she may have, including all related material facts or documents in connection with any existing or proposed transaction by the company. The disclosure must be made without delay and no later than the first board of directors meeting at which the transaction is first discussed.
 
Board of Directors
 
Our articles of association provide that our board of directors may from time to time, in its discretion, cause us to borrow any sums of money for our purposes, and may secure or provide for the repayment of such sums in such manner, at such times and upon such terms and conditions in all respects as it thinks fit.
 
Neither our memorandum nor our articles of association, nor the laws of the State of Israel require retirement of directors at a certain age, or share ownership for director qualification, nor do they contain any restriction on the board of directors’ borrowing powers.
 
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, we will provide 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 our most recent financial statements 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.  These dividend and liquidation rights 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.
 
Limitations on the Rights to Own Securities
 
The ownership or voting of 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.
 
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.
 
 
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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: annual general meetings and extraordinary general meetings. Directors are elected only at annual general meetings.  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, unless otherwise required by applicable rules.
 
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 us and other shareholders and to refrain from abusing his power in us, such as in voting in the general meeting of shareholders on the following matters:
 
 
·
any amendment to the articles of association;
 
 
·
an increase of our authorized share capital;
 
 
·
a merger; or
 
 
·
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 us or any other power toward us is under a duty to act in fairness towards us.  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.
 
 
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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.
 
Anti-Takeover Provisions; Mergers and Acquisitions
 
The 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 to 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 (i) 50 days have passed from the time that the requisite proposal for the merger has been filed by each party with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each party.
 
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 also 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 and there is no existing 45% or greater shareholder in the company.  These requirements do not apply if the acquisition (i) occurs in the context of a private placement by the company that received shareholder approval, (ii) was from a 25% shareholder of the company and resulted in the acquirer becoming a 25% shareholder of the company or (iii) was from a 45% shareholder of the company and resulted in the acquirer becoming a 45% shareholder of the company.   The tender offer must be extended to all shareholders, but the offeror is not required to purchase more than 5% of the company's outstanding shares, regardless of how many shares are tendered by shareholders.  The tender offer may be consummated only if (i) at least 5% of the company’s outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.
 
If, as a result of an acquisition of shares, the acquirer will hold more than 90% of a company’s outstanding shares, the acquisition must be made by means of a tender offer for all of the outstanding shares.  If less than 5% of the outstanding shares are not tendered in the tender offer, all the shares that the acquirer offered to purchase will be transferred to it. The law provides for appraisal rights if any shareholder files a request in court within six months following the consummation of a full tender offer, but the acquirer is entitled to stipulate that tendering shareholders forfeit their appraisal rights. If more than 5% of the outstanding shares are not tendered in the tender offer, then the acquirer may not acquire shares in the tender offer that will cause his shareholding to exceed 90% of the outstanding shares.
 
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.
 
 
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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 us, 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 us in the event of a potential takeover which does not reflect our full value and is otherwise not in the best interests of us and our 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 $21.67. 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, 2014, unless our Board takes action to amend the expiration date. The rights are generally redeemable by our board of directors, at a nominal price 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 us.
 
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 (except in connection with distributions), 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, and we have done so.
 
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:
 
 
·
a breach of his duty of care to us or to another person;
 
 
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·
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
 
 
·
a financial liability imposed upon him in favor of another person.
 
We have 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:
 
 
·
a financial liability imposed on or incurred by an office holder in favor of another person by any judgment, including a settlement or an arbitrator's award approved by a court concerning an act performed in his capacity as an office holder. Such indemnification may be approved (i) after the liability has been incurred or (ii) in advance, provided that the undertaking is limited to types of events which our board of directors deems to be foreseeable in light of our actual operations at the time of the undertaking and limited to an amount or criterion determined by our board of directors to be reasonable under the circumstances, and further provided that such events and amounts or criterion are set forth in the undertaking to indemnify;
 
 
·
reasonable litigation expenses, including attorney's fees, expended by the office holder as a result of an investigation or proceeding instituted against him by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against him and either (A) concluded without the imposition of any financial liability in lieu of criminal proceedings or (B) concluded with the imposition of a financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent or in connection with a financial sanction; and
 
 
·
reasonable litigation expenses, including attorneys' fees, expended by the office holder or charged to him by a court, in proceedings instituted against him by or on our behalf or by another person, or in a criminal charge from which he was acquitted, or a criminal charge in which he was convicted for a criminal offense that does not require proof of intent, in each case relating to an act performed in his capacity as an office holder; and

 
·
a financial obligation imposed upon an office holder and reasonable litigation expenses, including attorney fees, expended by the office holder as a result of an administrative proceeding instituted against him. Without derogating from the generality of the foregoing, such obligation or expense will include a payment which the office holder is obligated to make to an injured party as set forth in Section 52(54)(a)(1)(a) of the Israeli Securities Law, 1968 – 5728 (the "Securities Law") and expenses that the office holder incurred in connection with a proceeding under Chapters H'3, H'4 or I'1 of the Securities Law, including reasonable legal expenses, which term includes attorney fees.
 
We have undertaken to indemnify our directors and officers pursuant to applicable law.
 
 
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Limitations on Exculpation, Insurance and Indemnification
 
The 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:
 
 
·
a breach by the office holder of his duty of loyalty unless, with respect to insurance coverage or indemnification, the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
 
 
·
a breach by the office holder of his duty of care if the breach was committed intentionally or recklessly;
 
 
·
any act or omission committed with the intent to derive an illegal personal benefit; or
 
 
·
any fine imposed on the office holder.
 
In addition, under the Companies Law, exculpation of, indemnification of, or 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.  We have obtained such approvals for the procurement of liability insurance covering our officers and directors and for the grant of indemnification letters to our officers and directors and have granted amended and restated indemnification and exculpation letters to our directors and officers that require us to indemnify them to the fullest extent permitted by applicable law.
 
Our articles of association 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
 
For a description of our Standby Equity Purchase Agreement, see “–Liquidity and Capital Resources—Convertible Notes” and “-Liquidity and Capital Resources-Standby Equity Purchase Agreement” under Item 5.B of this Annual Report on Form 20-F.
 
2012 Arrangement with Note Holders (the "2012 Arrangement")
 
Background
 
As of December 31, 2011, we had outstanding NIS-denominated Series A convertible notes in the aggregate principal amount of approximately $28 million (including approximately $6.8 million aggregate principal amount of Series A notes that were purchased in the open market by one of our subsidiaries in 2009), which bear interest at the rate of 6% per year and are linked to the Israeli consumer price index ("CPI"). The Series A notes are due in March 2017, but were subject to the right of each holder to request early repayment of all or part of the principal amount of the notes held by it on March 14, 2012, with a penalty of approximately 3% of the indexed principal amount (equal to the last payable interest coupon preceding the early repayment request).
 
As of December 31, 2011, we also had outstanding NIS-denominated Series B convertible notes in the aggregate principal amount of approximately $8 million, which bear interest at the rate of 8% per year and are not linked to the Israeli CPI.  The Series B notes are due in December 2017 and were not originally entitled to early redemption.
 
 
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Because it was likely that the holders of the Series A notes would request early redemption of their notes in March 2012, in the fourth quarter of 2011, we and the representatives of the Series A note holders entered into negotiations with respect to the terms of an arrangement that would defer the payments to the note holders that request early redemption in consideration for decreasing the conversion prices of the notes. The negotiations on the terms of a proposed arrangement on our behalf were led by independent members of our Board of Directors.  On January 9, 2012, we reached an agreement in principle regarding the fundamental terms of the 2012 Arrangement with the representatives of our Series A note holders. The representatives of our Series B note holders then became part of these negotiations because any such arrangement would require their approval.
 
On February 15, 2012, following the approval of our audit committee and board of directors, we entered into a written agreement regarding the terms of the 2012 Arrangement with the representatives of our Series A note holders and the representatives of our Series B note holders.  On February 22, 2012, we filed a petition with the District Court of Tel Aviv regarding the 2012 Arrangement, as required by Section 350 of the Companies Law.  On March 2, 2012, the Court approved our request to convene meetings of our Series A note holders, our Series B note holders and our shareholders to vote upon the 2012 Arrangement.
 
At the Extraordinary Meeting of Shareholders held on April 19, 2012 (adjourned from its original date of April 15, 2012), our shareholders approved the 2012 Arrangement by the requisite majority and approved an increase in our authorized share capital from 95,000,000 ordinary shares to 170,000,000 ordinary, effective upon the effective date of the 2012 Arrangement.
 
On May 10, 2012, we held a joint meeting of our Series A note holders and Series B note holders to approve the 2012 Arrangement, and voting by written ballot was open until May 13, 2012.  The holders of the Series A and Series B notes unanimously and duly approved the 2012 Arrangement and the amended trust agreement related thereto.
 
On May 14, 2012, we filed a petition with the Court requesting its final approval of the 2012 Arrangement, subject to the satisfaction of all closing conditions. On June 19, 2012, we received the final approval of the District Court of Tel Aviv to the 2012 Arrangement, following the approval of the Tel Aviv Stock Exchange and the Israel Securities Authority.
 
On July 2, 2012, we consummated the 2012 Arrangement with the holders of our Series A notes and Series B notes.
 
Terms of the 2012 Arrangement
 
The main provisions of the 2102 Arrangement are summarized below.
 
Early Redemption of Notes
 
Under the 2012 Arrangement, we have paid an aggregate of approximately $11.6 million to our note holders, as set forth below:
 
In August 2012, we repaid NIS 29,662,842 (approximately $7.4 million) aggregate principal amount of the Series A notes and NIS 2,117,181 (approximately $0.5 million) aggregate principal amount of the Series B notes. In October 2012, we repaid NIS 7,535,235 (approximately $1.9 million) aggregate principal amount of the Series A notes and NIS 1,398,724 (approximately $0.4 million) aggregate principal amount of the Series B notes. In April 2013, we repaid NIS 4,310,968 (approximately $1.2 million) aggregate principal amount of the Series A notes and NIS 559,730 (approximately $0.2 million) aggregate principal amount of the Series B notes.
 
 
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The remaining balance is as follows ($ in millions):
 
Payment Date
 
Series A Notes
   
Series B Notes
 
July 2014
    12.5       0.2  
December 2017     -       4.4  
 
Conversion of Notes into Ordinary Shares
 
Pursuant to the terms of the 2012 Arrangement, the conversion price of the Series A notes was reduced from NIS 63.00 (approximately $16.88 as of December 31, 2012) per share to NIS 1.37 (approximately $0.37) per share during the period from July 3, 2012 to July 22, 2012. Thereafter, the conversion price of the Series A notes increased to NIS 7.61 (approximately $2.04) per share. The conversion price of the Series B notes was reduced from NIS 10.00 (approximately $2.68) per share to NIS 7.61 (approximately $2.04) per share during the period from July 3, 2012 to July 12, 2012. Thereafter, the conversion price of the Series B notes was further reduced to NIS 1.83 (approximately $0.49) per share until August 6, 2012. Thereafter, the conversion price of the Series B notes returned to NIS 7.61 per share.
 
Between July 3, 2012 and August 6, 2012, an aggregate of NIS 3,260,125 (approximately $816,000) principal amount of Series A notes was converted into 2,379,653 ordinary shares, and an aggregate of NIS 10,720,285 (approximately $2,685,000) principal amount of Series B notes was converted into 5,858,079 ordinary shares. The above-mentioned conversions of Series B notes include the conversion of NIS 6,731,000 (approximately $1,686,000) aggregate principal amount of Series B notes held by Mr. Izhak Tamir and NIS 546,000 (approximately $137,000) aggregate principal amount of Series B notes held by Mr. Eric Paneth, which were all the notes held by them.
 
The foregoing does not include NIS 26,000,000 (approximately $7.2 million based on the U.S. Dollar/NIS exchange rate at April 10, 2013) aggregate principal amount of Series A notes that were purchased in the open market by one of our subsidiaries in 2009, which are now secured by a lien in favor of the trustee of Series A notes. Since our balance sheet is consolidated with that of our subsidiaries, these notes are not included among our consolidated liabilities. Our subsidiary does not plan to convert the notes into ordinary shares and is prohibited under the terms of the 2012 Arrangement from selling them or from requesting the early redemption thereof.
 
Forced Conversion
 
Pursuant to the 2012 Arrangement, we have the right to force the conversion of the Series A notes and the Series B notes at the price of $1.95 per share if the prevailing market price of our ordinary shares is at least $3.00 per share. Prevailing market price is the price on the Tel Aviv Stock Exchange for any 20 trading days within a period of 30 consecutive trading days.
 
Additional Provisions
 
The 2012 Arrangement also included the following material provisions:
 
Until January 1, 2014, we were not permitted, directly or indirectly, to repurchase any Series A notes or Series B notes, unless the price per NIS 1.00 principal amount of the notes is not more than NIS 0.60.
 
We were required to use our best efforts to raise an aggregate amount of $10 million of equity by September 30, 2012. Despite making such efforts, we were unable to raise any equity by that date.
 
 
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Each of Mr. Tamir and Mr. Paneth undertook to invest in our equity financings that take place by April 2, 2013 at least 10% of each such financing, up to an aggregate amount of $1.0 million each, if the aggregate amount raised from other investors in such offerings is not less than $7.0 million.
 
 Messrs. Tamir and Paneth each provided a subordinated loan to us in the amount of $200,000, which would be converted into ordinary shares in an equity offering as part of the satisfaction of their commitments described in the immediately preceding paragraph.
 
The monthly salary of each of Mr. Tamir and Mr. Paneth was reduced by 33% for the period between January 1, 2012 and October 2, 2013.  In October 2012, Mr. Paneth resigned from his position as our Chief Executive Officer and began serving as our Chairman of the Board for no compensation.
 
We are permitted to incur debt that is senior to the notes, subject to the following principle conditions: (i) the amount of our senior debt outstanding may not exceed $5 million; (ii) senior debt may be incurred no earlier than August 1, 2012 and only after we have used our best efforts to effect an equity financing; and (iii) we must ensure that our early redemption payments to our Series A note holders and Series B note holders due on October 2, 2012 in accordance with the 2012 Arrangement will be timely made. We have already satisfied the second and third conditions.
 
We are not permitted to distribute dividends or to engage in transactions with controlling shareholders (if any), in each case until the fourth early redemption payment date of July 1, 2014.   
 
We were required to reimburse the representatives of the Series A note holders and the representatives of the Series B note holders for the expenses incurred by them in connection with the 2012 Arrangement.
 
The note holders, Orckit and our office holders waived any claims against each other related to the period ending on the effective date of the 2012 Arrangement.   The parties to the waiver also agreed that no claim or demand would be made against us or our officers and directors in connection with the 2012 Arrangement or the approval thereof.
 
Conditions Precedent
 
The 2012 Arrangement was subject to the satisfaction of the following material conditions by million. At the time, these notes had an aggregate principal amount of $6.3 million, which has increased since then due to increases in the CPI and the exchange rate.
 
Most of the dollar amounts set forth in this Item 10.C are denominated in NIS in the relevant documents. The U.S. dollar amounts set forth above have been translated for convenience according to an exchange rate which was the representative rate of exchange published by the Bank of Israel at the applicable date.
 
Patent and Financing Transactions

On March 12, 2013, we entered into a Strategic Investment Agreement with Networks3, Inc., a non-practicing entity controlled by Hudson Bay Capital. Pursuant to the agreement, Networks3 was to pay us $8 million upon closing, of which $5 million was for the purchase of our patent portfolio, $2.5 million was for the purchase of 4,747,409 of our newly issued ordinary shares at the price of $0.52 per share (constituting approximately 13.3% of our outstanding share capital after giving effect to the issuance thereof), and $0.5 million was for the purchase of an unsecured subordinated note in the principal amount of $0.5 million. The note was to bear interest at the applicable federal rate (approximately 1% per year), as to mature on the third anniversary of the closing and was to be guaranteed by Corrigent.  Of such proceeds, $5 million was designated to repay our Senior A notes and Senior B notes, and $3 million was required to be used to finance our ongoing activities.
 
 
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In addition, we were to be issued common stock of Networks3 constituting 10% of its outstanding capital stock (after giving effect to the issuance thereof) and were to have the right to receive a percentage of the profits of Networks3, if any, generated in the future by payments from third parties for past and future use of patents in the patent portfolio.  Our participation percentage was to start at 25% of aggregate profits in excess of $7.5 million and was to decrease in steps down to 5% of profits in excess of $250 million.

The closing of the Strategic Investment Agreement was conditioned upon various conditions, including the approval of the Israeli Office of the Chief Scientist of the sale of the patent portfolio on terms acceptable to Networks3 in its sole discretion, the retirement of our Senior A notes and Senior B notes, and our having at least $1.0 million in cash on the closing date and no debt (other than certain existing debt). The retirement of the notes required a court approved arrangement with the note holders under Section 350 of the Israeli Companies Law.
 
On March 12, 2013, we also entered into a Note Purchase Agreement with two funds managed by Hudson Bay Capital to issue and sell to them senior secured notes in the aggregate principal amount of $5 million.  This transaction was consummated on March 18, 2013. The notes bore interest at the rate of 1.5% per year until July 30, 2013 and 15% per year thereafter. The notes were due on the earlier of May 31, 2014 and the closing of the transactions contemplated by the aforementioned Strategic Investment Agreement. We had the right to redeem the notes at any time, in whole or in part. If an event of default occurred and the notes were redeemed after July 1, 2013, by either by the holders thereof or by us, or if a bankruptcy event or a change of control of Orckit occurred at any time, we would have been required to pay an additional 20% of the outstanding principal amount plus all the interest that would have accrued under the notes until the scheduled maturity date. The notes were secured by a first priority lien on the patent portfolio of Orckit and Orckit-Corrigent and were guaranteed by Orckit-Corrigent.
 
On August 11, 2013, Networks notified us of its decision to terminate the Strategic Investment Agreement due to our alleged failure to obtain the approval of the OCS on terms satisfactory to Networks3 of the sale of our patents to Networks3. We rejected such allegation and intend to pursue legal action in accordance with our rights under such agreement.
 
The Strategic Investment Agreement, the Note Purchase Agreement and the material exhibits thereto are filed as exhibits to this annual report. The foregoing summary does not purport to be comprehensive and is qualified in its entirety by reference to such agreements.
 
Proposed Arrangement
 
On March 5, 2014, we reached an agreement in principle with the representatives of the holders of our Series A notes and Series B notes with respect to a proposed arrangement under Section 350 of the Companies Law, and on April 10, 2014, we filed a request with the Tel Aviv District Court to allow us to convene a meeting of our shareholders and significant creditors to approve the proposed arrangement, which was approved on April 13, 2014. We have scheduled the creditors' meeting for May 4, 2014 and the shareholders' meeting for May 14, 2014.
 
 
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The debt that is subject to the proposed arrangement consists of the following:

 
·
obligations owing to the holders of our Series A notes and Series B notes in respect of principal, accrued interest and CPI adjustments at the consummation of the arrangement, which as of March 31, 2014 equaled in the aggregate approximately NIS 62.2 million (approximately $17.8 million);

 
·
obligations currently owing to the OCS for research and development grants and accrued interest at the time of the arrangement, which as of December 31, 2013 equaled in the aggregate approximately NIS 5.2 million (approximately $1.5 million) (excluding contingent obligations owing to the OCS in the amount of approximately $21.3 million); and

 
·
obligations owing to Mr. Tamir and Mr. Paneth for employment-related obligations in the amount of approximately NIS 4.1 million (approximately $1.18 million) as of December 31, 2013, unpaid salary of Mr. Tamir for the period commencing January 1, 2014 and ending upon the consummation of the arrangement and notice and severance payments of Mr. Tamir.
 
The amount of debt owing to each of Mr. Tamir and Mr. Paneth will be subject to review by Mr. Lion Orlizki, an independent assessor.

Set forth below are the highlights of the proposed arrangement:
 
 
·
90% of our Series A notes and Series B notes, less our cash balance in excess of $1.0 million, would be exchanged for Series C notes in the principal amount thereof;
 
 
·
all of our currently outstanding ordinary shares would be cancelled, including the shares held by Mr. Tamir and Mr. Paneth;
 
 
·
the remaining balance of our financial obligations in respect of our Series A notes and Series B notes would be cancelled in exchange for newly issued ordinary shares;
 
 
·
the repayment terms of the applicable obligations to the OCS, Mr. Tamir and Mr. Paneth would be restructured, and additional ordinary shares may be issued to them in connection with such restructuring;
 
 
·
Mr. Izhak Tamir would continue to serve as our Chief Executive Officer for at least three months following the consummation of the arrangement and would assist us as requested for at least 24 months following the consummation of the arrangement in the area of customer support, including adapting our customer contracts to our current financial situation;
 
 
·
Mr. Tamir would continue to provide assistance to us following such 24 months for no compensation with respect to monetization of our patents, provided that such assistance would not require non-negligible efforts. In event that non-negligible efforts are required, Mr. Tamir would be compensated separately;
 
 
·
Mr. Tamir would assist us as requested for an indefinite period with respect to certain litigation matters, at our cost;
 
 
·
all non-external members of our board of directors would resign from their positions, and the chief executive officer, any other officers and new directors to serve upon consummation of the arrangement, would be designated by the Series A and Series B note holders;
 
 
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·
the Series C notes would be secured, on a non-recourse basis, by our accounts receivable, intellectual property, license fees and litigation proceeds resulting from our claims against Networks3 and Hudson Bay Capital (the “Secured Proceeds”);
 
 
·
the Series C notes would accrue interest at 9.5% per year, payable annually out of the Secured Proceeds or, to the extent such proceeds are insufficient, such amount will be added to the principal amount of the Series C notes;
 
 
·
the Series C notes will not be linked to the consumer price index and will not be convertible into ordinary shares;
 
 
·
the Series C notes would mature on December 31, 2017;
 
 
·
the Series C notes would be entitled to early redemption payments on a quarterly basis out of the funds generated by the secured assets and 40% of the net proceeds of any third-party financing raised by us;
 
 
·
any cash in excess of $1.0 million at the closing of the proposed restructuring would be used to redeem Series A notes and Series B notes;
 
 
·
a mechanism would be established to ensure the continued support of our existing customers;
 
 
·
there would be a mutual waiver of any claims against the holders of the Series A notes and Series B notes and their trustees, representatives and advisors, the other significant creditors (with respect to the applicable debts) and, subject to Mr. Tamir’s compliance with his aforementioned undertakings, us and our directors and employees, with respect to any claims for actions and omission until the closing of the proposed arrangement; and
 
 
·
our organizational documents would be amended to limit the scope of our activity to collecting accounts receivable from customers or in connection with ongoing projects, supplying products and services to customers, monetiziation of intellectual property, and litigation against Networks3 and Hudson Bay Capital.
 
The proposed arrangement is subject to the satisfaction of the following material conditions:
 
 
·
the requisite approvals of the arrangement by our shareholders and significant creditors;
 
 
·
the approval of our shareholders, or an order of the Court stating that the approval of our shareholders is not required;
 
 
·
the approval of the TASE;
 
 
·
a ruling of the Israeli Tax Authority with respect to the tax ramifications of the arrangement in a way that do not materially adversely affects the creditors; tax considerations could result in changes to the structure of the arrangement; and
 
 
·
the final approval of the Court.
 
 
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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 Federal Income Tax Considerations
 
The following summary describes the material U.S. federal income tax consequences to “U.S. Holders” (as defined below) arising from the purchase, ownership or disposition of our ordinary shares. This summary is based on the Internal Revenue Code of 1986, as amended, or the “Code,” the final, temporary and proposed U.S. Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof, all as of the date hereof and all of which are subject to change (possibly with retroactive effect) or different interpretations. For purposes of this summary, a “U.S. Holder” will be deemed to refer only to any of the following holders of our ordinary shares:
 
 
·
an individual who is either a U.S. citizen or a resident of the U.S. for U.S. federal income tax purposes;
 
 
·
a corporation or other entity taxable as a corporation for U.S. federal income tax purposes created or organized in or under the laws of the U.S. or any political subdivision thereof;
 
 
·
an estate the income of which is subject to U.S. federal income tax regardless of the source of its income; and
 
 
·
a trust, if (a) 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 substantial decisions of the trust, or (b) the trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person.
 
This summary 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 U.S. federal alternative minimum tax, or any aspect of state, local or non-U.S. federal tax laws or U.S. federal tax laws other than U.S. federal income tax laws. In addition, this summary is directed only to U.S. Holders that hold our ordinary shares as “capital assets” within the meaning of Section 1221 of the Code and does not address the considerations that may be applicable to particular classes of U.S. Holders, including financial institutions, regulated investment companies, real estate investment trusts, pension funds, insurance companies, broker-dealers, tax-exempt organizations, grantor trusts, partnerships or other pass-through entities, partners or other equity owners in partnerships or other pass-through entities, U.S. Holders whose functional currency is not the U.S. dollar, U.S. Holders who have elected mark-to-market accounting, U.S. Holders who acquired our ordinary shares through the exercise of options or otherwise as compensation, U.S. Holders who hold our ordinary shares as part of a “straddle,” “hedge” or “conversion transaction,” U.S. Holders selling our ordinary shares short, U.S. Holders deemed to have sold our ordinary shares in a “constructive sale,” and U.S. Holders, directly, indirectly or through attribution, of 10% or more (by vote or value) of our outstanding ordinary shares. If a partnership (including for this purpose any entity, domestic or foreign, treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of our ordinary shares, the U.S. federal income tax treatment of a partner in such partnership generally will depend upon the status of the partner and the activities of the partnership.
 
 
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Each U.S. Holder should consult with its own tax advisor as to the particular tax consequences to it of the purchase, ownership and sale of our ordinary shares, including the effects of applicable tax treaties, state, local, foreign or other tax laws and possible changes in the tax laws.
 
Sale, Exchange or Other Taxable Disposition of Ordinary Shares
 
Subject to the discussion below under “Passive Foreign Investment Company Status,” a U.S. Holder’s sale, exchange or other taxable disposition 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 U.S. dollar value of the amount realized and the U.S. Holder’s tax basis in the ordinary shares disposed of (determined in U.S. dollars).  This gain or loss will be long-term capital gain or loss if such ordinary shares have been held or are deemed to have been held for more than one year at the time of the disposition.  Individual U.S. Holders currently are subject to a maximum tax rate of 15% on long-term capital gains for tax years beginning on or before December 31, 2012. Beginning in 2013, the maximum tax rate applicable to long-term capital is 20%. Short-term capital gains generally are taxed at the same rates applicable to ordinary income.  If the U.S. Holder’s holding period on the date of the taxable disposition is one year or less, such gain or loss is treated as a short-term capital gain or loss.  See “Israeli Tax Considerations —Capital Gains Tax” for a discussion of taxation by Israel of capital gains realized on sales of our ordinary shares.  Any capital loss realized upon the taxable disposition of ordinary shares generally is deductible only against capital gains and not against ordinary income, except that non-corporate U.S. Holders generally may deduct annually from ordinary income up to $3,000 of capital losses in excess of capital gains.  In general, any capital gain or loss recognized by a U.S. Holder upon the taxable disposition of ordinary shares will be treated as U.S.-source income or loss for U.S. foreign tax credit purposes, although the tax treaty between the United States and Israel may permit gain derived from the taxable disposition of ordinary shares by a U.S. Holder to be treated as foreign-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 U.S. dollar purchase price paid by such U.S. Holder to acquire such ordinary shares.  The U.S. dollar cost of an ordinary share purchased with foreign currency generally will be the U.S. dollar value of the purchase price on the date of purchase or, in the case of ordinary shares that are purchased by a cash basis U.S. Holder (or an accrual basis U.S. Holder that so elects), on the settlement date for the purchase.  Such an election by an accrual basis U.S. Holder must be applied consistently from year to year and cannot be revoked without the consent of the U.S. Internal Revenue Service. The holding period of ordinary shares owned by a U.S. Holder will commence on the day following the date of the U.S. Holder’s purchase of such ordinary shares and will include the day on which the ordinary shares are sold by such U.S. Holder.
 
 
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In the case of a U.S. Holder who uses the cash basis method of accounting and who receives NIS in connection with a taxable disposition of ordinary shares, the amount realized will be based on the “spot rate” of exchange on the settlement date of such taxable disposition.  If such U.S. Holder subsequently converts NIS into U.S. dollars at a conversion rate other than the spot rate in effect on the settlement date, he, she or it may have a foreign currency exchange gain or loss treated as ordinary income or loss for U.S. federal income tax purposes.  A U.S. Holder who uses the accrual method of accounting may elect the same treatment required of cash method taxpayers with respect to a taxable disposition of ordinary shares, provided that the election is applied consistently from year to year.  Such election may not be changed without the consent of the U.S. Internal Revenue Service.  If an accrual method U.S. Holder does not elect to be treated as a cash method taxpayer (pursuant to U.S. Treasury Regulations applicable to foreign currency transactions), such U.S. Holder may be deemed to have realized an immediate foreign currency gain or loss for U.S. federal income tax purposes in the event of any difference between the U.S. dollar value of the NIS on the date of taxable disposition and the settlement date.  Any such currency gain or loss  generally would be treated as U.S.-source ordinary income or loss and would be subject to tax in addition to any gain or loss recognized by such U.S. Holder on the taxable disposition of ordinary shares.
 
Treatment of Distributions
 
For U.S. federal income tax purposes, the amount of any distribution with respect to our ordinary shares will equal the amount of cash distributed, the fair market value of any property distributed and the amount of any Israeli taxes withheld on such distribution as described below under “Israeli Tax Considerations -- Tax on Dividends.” Other than distributions in liquidation or in redemption of our ordinary shares that are treated as exchanges, a distribution with respect to our ordinary shares to a U.S. Holder generally will be treated as a dividend to the extent the distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of any distribution that exceeds these earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. Holder’s tax basis in his, her or its ordinary shares (but not below zero), and then generally as capital gain from a deemed sale or exchange of such ordinary shares. Corporate U.S. Holders generally will not be allowed a deduction under Section 243 of the Code for dividends received on our ordinary shares and thus will be subject to tax at the rate applicable to their taxable income. Currently, a noncorporate U.S. Holder’s “qualified dividend income” generally is subject to tax at a rate of 15% or 20% depending on the shareholders' income. For this purpose, “qualified dividend income” generally includes dividends paid by a foreign corporation if, among other things, the noncorporate U.S. Holder meets certain minimum holding period requirements and either (a) the stock of such corporation is readily tradable on an established securities market in the U.S. or (b) such corporation is eligible for the benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange program and is determined to be satisfactory by the U.S. Secretary of the Treasury. The U.S. Secretary of the Treasury has indicated that the income tax treaty between the U.S. and Israel is satisfactory for this purpose. Dividends paid by us will not qualify for the current 15%  or 20% U.S. federal income tax rate, however, if we are treated, for the tax year in which the dividends are paid or the preceding tax year, as a “passive foreign investment company” for U.S. federal income tax purposes. See the discussion below under the heading “Passive Foreign Investment Company Status.”
 
A dividend paid by us in NIS will be included in the income of U.S. Holders at the U.S. dollar amount of the dividend, based on the “spot rate” of exchange in effect on the date of receipt or deemed receipt of the distribution, regardless of whether the payment is in fact converted into U.S. dollars.  U.S. Holders will have a tax basis in the NIS for U.S. federal income tax purposes equal to that U.S. dollar value. Any gain or loss upon the subsequent conversion of the NIS into U.S. dollars or other disposition of the NIS will constitute foreign currency gain or loss taxable as ordinary income or loss and will be treated as U.S.-source income or loss for U.S. foreign tax credit purposes.
 
 
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Dividends received with respect to our ordinary shares will constitute “portfolio income” for purposes of the limitation on the deductibility of passive activity losses and, therefore, generally may not be offset by passive activity losses. Dividends received with respect to our ordinary shares also generally will be treated as “investment income” for purposes of the investment interest deduction limitation contained in Section 163(d) of the Code, and as foreign-source passive income for U.S. foreign tax credit purposes or, in the case of a U.S. Holder that is a financial services entity, financial services income. Subject to certain limitations, U.S. Holders may elect to claim as a foreign tax credit against their U.S. federal income tax liability any Israeli income tax withheld from distributions on our ordinary shares which constitute dividends under U.S. income tax law. U.S. Holders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income tax withheld, but only if the U.S. Holder elects to do so with respect to all foreign income taxes in such year. In addition, special rules may apply to the computation of foreign tax credits relating to “qualified dividend income,” as defined above. The calculation of foreign tax credits and, in the case of a U.S. Holder that elects to deduct foreign income taxes, the availability of deductions involves the application of complex rules that depend on a U.S. Holder’s particular circumstances.
 
U.S. Holders are urged to consult their own tax advisors regarding the U.S. federal income tax consequences of their receipt of any distributions with respect to our ordinary shares.
 
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 (including its pro rata share of the gross income of any company in which it owns 25% or more of the shares by value) is passive in nature (the “Income Test”), or (ii) the average percentage of its assets during such tax year (including its pro rata share of the assets of any company in which it owns 25% or more of the shares by value)  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”).   Passive income for this purpose generally includes dividends, interest, rents, royalties and gains from securities and commodities transactions.
 
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 publicly-traded 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”) 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 whether other valuation methods could be employed to determine the value of our assets for purposes of the Asset Test.
 
Based on the approach to valuation of a public company's assets set forth in the legislative history of the 1997 Act, we believe, based on the composition of our gross income, the composition and value of our gross assets and the amount of our liabilities, that we would be deemed to have been a PFIC during each of 2002, 2003, 2004, 2007, 2008 and 2009, but not during each of 2005, 2006, 2010, 2011 2012 or 2013. There can be no assurance that we will not be deemed a PFIC in any future tax year.
 
 
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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):

 
·
The U.S. Holder would be required to (a) report as ordinary income any so-called “excess distributions” allocated to the current tax year, (b) pay tax on amounts allocated to each prior tax year in which we were a PFIC at the highest rate applicable to ordinary income in effect for such prior year and (c) pay an interest charge on the resulting tax at the rate applicable to deficiencies of U.S. federal income tax.  “Excess distributions” with respect to any U.S. Holder are amounts received by such U.S. Holder with respect to our ordinary shares in any tax year that exceed 125% of the average distributions received by such U.S. Holder from us during the shorter of (i) the three previous years, or (ii) such U.S. Holder’s holding period of our ordinary shares before the then-current tax year.  Excess distributions must be allocated ratably to each day that a U.S. Holder has held our ordinary shares.
 
 
·
The entire amount of any gain realized by such U.S. Holder upon the sale or other disposition of our ordinary shares also would be treated as an “excess distribution” subject to tax as described above.
 
 
·
The tax basis of ordinary shares acquired from a decedent who was a U.S. Holder generally would not receive a step-up to fair market value as of the date of the decedent’s death, but instead would be equal to the decedent’s basis, if lower.
 
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 be a PFIC, the U.S. Holder may avoid the consequences of PFIC classification for subsequent years if he, she or it elects to recognize gain based on the unrealized appreciation in such U.S. Holder’s ordinary shares through the close of the tax year in which we cease to be a PFIC.
 
A U.S. Holder who beneficially owns shares of a PFIC must file U.S. Internal Revenue Service 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 such U.S. Holder recognizes gain upon a disposition of our ordinary shares, receives certain distributions from us or makes the QEF Election or mark-to-market election described below.
 
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, her or its 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 mad