Commitments and Contingencies

Lease Commitments

MRV leases certain facilities and equipment under non-cancelable lease agreements expiring in various years through 2020. Following are the aggregate minimum annual lease payments under leases in effect as of December 31, 2012 (in thousands):



Years ending December 31,	Operating leases
2013	$	1,801
2014	1,639
2015	1,364
2016	826
2017	361
Thereafter	—
Total	$	5,991

Annual rental expense under non-cancelable operating lease agreements for the years ended December 31, 2012, 2011 and 2010, was $2.7 million, $3.2 million and $2.7 million, respectively.

On October 8, 1996, the Company entered into a lease amendment with Bud H. Harris for the lease of office space located in Chatsworth, CA. The Company exercised multiple options to extend the original lease term, and the current term of the lease is for 10 years from April 1, 2007, with no option to extend the lease term. The total lease payments over the initial term will approximate $2.0 million. The Company took possession of the facility and the lease term commenced. Pursuant to the amendment, the Company was granted an improvement allowance of $70,000 which is being amortized as a reduction to rent expense over the life of the lease.

On June 30, 2005 the Company entered into a lease amendment as successor-in-interest to Luminent, Inc. with George DiRado for the lease of office and warehouse space located in Chatsworth, CA. The current term of the lease is for 10 years starting January 1, 2006 through December 31, 2015, with an option to extend the lease five years. The total lease payments over the initial term will be approximate $2.1 million. The Company took possession of the facility and the lease term commenced.

On June 30 2008, the Company entered into a lease amendment with Tecla Immobillare for the lease of office space located in Rome, Italy. The term of the lease is for six years from March 1, 2010, with an option to extend the lease term for six years. The total lease payments over the initial term will approximate $0.9 million. The Company took possession of the facility and the lease term commenced. Pursuant to the lease, the Company was not granted any rent abatement.

On June 30 2008, the Company entered into a lease amendment with Fanocle S.p.A. for the lease of office space located in Rome, Italy. The term of the lease is for six years from March 1, 2010, with an option to extend the lease term for one six year period. The total lease payments over the initial term will approximate $0.7 million. The Company took possession of the facility and the lease term commenced. Pursuant to the lease, the Company was not granted any rent abatement.

On December 16, 2009, the Company entered into a lease amendment with Chelmsford Associates, LLC for the lease of office space located in Chelmsford, MA. The term of the lease is for five years, six months from March 1, 2010, with an option to extend the lease term for a five year period. The total lease payments over the initial term will approximate $1.5 million. The Company took possession of the facility and the lease term commenced. Pursuant to the lease, the Company was granted rent abatement of $146,000, which is being amortized as a reduction to rent expense over the life of the lease.

Purchase Commitments with Outsourcing Partners and Component Suppliers

The Company utilizes several outsourcing partners to manufacture sub-assemblies for the Company’s products and to perform final assembly and testing of finished products. These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days. The Company also obtains individual components for its products from a wide variety of individual suppliers. Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. As of December 31, 2012, the Company had outstanding off-balance sheet third-party manufacturing commitments and component purchase commitments of $4.2 million.

Royalty Commitment

Certain of MRV's Israeli subsidiaries are obligated to the Office of the Chief Scientist of the Government of Israel ("Chief Scientist") with respect to the government's participation in research and development expenses for certain products. The royalty to the Chief Scientist is recorded in cost of goods sold, and is calculated at a rate of 2.0% to 5.0% of sales of such products developed with the participation, up to the cost of such participation. The outstanding obligation as of December 31, 2012 is $287 thousand. We have further reserved $243 thousand against a disputed claim that was raised in 2005, though the last correspondence with the Chief Scientist on the matter occurred in 2008. Amounts received from the participation of the Chief Scientist are offset against the related research and development expenses incurred. MRV did not receive participation from the Chief Scientist for the years ended December 31, 2012, 2011, and 2010.

Indemnification Obligations

In connection with the sale by MRV of Source Photonics in October 2010, MRV agreed to indemnify the buyer against certain claims brought after the closing for prior-occurring events. Most of the indemnification obligations have expired. However any indemnification obligations related to intellectual property extend until the third anniversary of the closing, indemnification related to employee benefits, environmental liabilities and taxes extend until their applicable statute of limitations has run plus 90 days, and indemnification obligations are not time limited for title and ownership representations. These indemnification obligations are subject to a $1.0 million deductible and a $20.0 million cap and we have purchased an insurance policy to protect against such obligations. In connection with the sale by MRV of CES in March 2012, MRV agreed to indemnify the buyer for the representations and warranties made in the sale purchase agreement, and we have purchased an insurance policy to protect us against any claims of indemnification related to the representations and warranties. Our sale purchase agreements for the sale of Interdata and Alcadon include customary indemnification obligations. In addition, in connection with the sale of Interdata the Company and the buyer entered into a Representations and Warranties Agreement that contains an arrangement whereby if the Company does not obtain a representations and warranties insurance policy within 90 days of close of the sale transaction, and if the Company's cash falls below $20.0 million prior to December 31, 2013, the Company will deposit 1.5 million euros (or $2.0 million U.S. equivalent as of December 31, 2012) in an escrow account to secure its indemnification obligations under the Representations and Warranties Agreement. The Company expects to maintain cash balances sufficient to avoid making a deposit.

Litigation

In connection with the Company's past stock option grant practices, MRV and certain of its former directors and officers have been subjected to a number of stockholder lawsuits.

In June 2008, the Company announced that our Board of Directors, based on information provided by management, and in consultation with management, concluded that the financial statements and the related reports of our independent public accountants should not be relied upon due to the Company's intention to restate its financial results from 2002 through 2008 to correct its accounting for option grants and other issues. The Board of Directors appointed a Special Committee of independent directors, along with independent legal counsel and outside accounting experts, to investigate the issues, and a restatement of the Company's financial statements was filed in its Annual Report on Form 10-K for the year ended December 31, 2008 in October 2009.

From June to August 2008, five purported stockholder derivative and securities class action lawsuits were filed in the U.S. District Court in the Central District of California and one derivative lawsuit was filed in the Superior Court of the State of California against the Company and certain of our former officers and directors. The five lawsuits filed in the Central District of California were consolidated. Claims were asserted under Section 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder. In November 2010, the judge overseeing the securities class action lawsuits gave final approval to a stipulated $10.0 million settlement agreement, which was covered by our director and officer insurance policies.

As of January 4, 2013, litigation in the federal and state derivative actions has been stayed pending court approval of a proposed settlement between the derivative plaintiffs, individual defendants and the Company. On March 1, 2013 the parties filed a Stipulation of Settlement (the "Stipulation") with the federal court, and the plaintiffs filed a motion for preliminary approval of the Stipulation. There can be no assurance that either the federal or state court will approve the Stipulation. The Stipulation includes, among other things, (a) a release of all claims relating to the derivative litigation for the Company, the individual defendants and the plaintiffs; (b) a provision that $2.5 million in cash be paid to the Company by the Company's insurance carriers; (c) payment of attorneys' fees to plaintiffs' counsel including $500,000 in cash and 250,000 warrants to purchase the Company's Common Stock, with a five-year term and strike price of the closing price of the Company's Common Stock on the date an order of the federal District Court approving the settlement becomes final; (d) the continued payment by the Company of applicable reasonable attorneys' fees for the individual defendants. Within 120 days following the later of the issuance of an order approving the Settlement by the federal District Court, or the end of the period available for appeal, the Company would be required to take certain corporate governance reform actions, many of which have already been implemented.

To date, a majority of the costs related to the Company's and defendants' defense of these actions have been paid by the Company's insurance carriers under its director and officer insurance policies, including the securities class action settlement. However, we have accrued for requests for payment for services of defense counsel and other parties through December 31, 2012, see Note 5, Accrued Liabilities. We have agreed to pay reasonable attorney fees and expenses for the individual defendants in the Stipulation, and will continue to incur our own legal expenses until this matter is finally resolved and non-appealable. Any such future obligations are not determinable at this time.

From time to time, MRV has received notices from third parties alleging possible infringement of patents with respect to product features or manufacturing processes. Management believes such notices are common in the communications industry because of the large number of patents that have been filed on these subjects. The Company's policy is to discuss these notices with the parties in an effort to demonstrate that MRV's products and/or processes do not violate any patents. The Company has been involved in such discussions with Alcatel-Lucent SA, Apcon, Inc., Finisar Corporation, International Business Machines, Mediacom Broadband LLC, Ortel Communications, Ltd., Nortel Networks Corporation, Rockwell Automation, Inc. and The Lemelson Foundation in the past.

MRV and its subsidiaries have been named as defendants in other lawsuits involving matters that the Company considers routine to the nature of its business. Management is of the opinion that the ultimate resolution of such matters will not have a material adverse effect on our business, operating results and financial condition.