UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
_______________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December
31, 2011
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________to___________
Commission File Number: 0-31857
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
|
(Exact
name of registrant as specified in its charter)
|
|
Delaware
|
|
77-0554122
|
(State or other
jurisdiction of incorporation
|
|
(IRS Employer
Identification No.)
|
or
organization)
|
|
|
|
275
Gibraltar Drive, Sunnyvale, CA 94089
|
(Address
of principal executive offices)
|
Issuers telephone
number: (408) 736-6900
|
|
|
Securities registered pursuant to Section 12(b) of
the Act:
|
|
|
|
|
Title of each class
|
|
Name of each exchange on which
registered
|
|
Common Stock, par
value $0.001 per share
|
|
The Nasdaq Stock
Market LLC
|
|
Series A
Participating Preferred Stock Purchase Rights
|
|
The Nasdaq Stock
Market LLC
|
|
Securities registered pursuant to
Section 12(g) of the Act: None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes [ ] No [X]
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the
issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [
]
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and disclosure will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer [ ]
Accelerated filer [
] Non-accelerated filer [
] Smaller reporting company
[X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The aggregate market value of the
voting and non-voting common equity held by non-affiliates (based upon the
closing sale price on the Nasdaq Capital Market on June 30, 2011) was
approximately $51,377,462.
As of March 2, 2012 there were
8,829,176 shares of Common Stock, $0.001 per share par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors and Section
16(a) Beneficial Ownership Reporting Compliance), 11, 12 (as to Security
Ownership of Certain Beneficial Owners) and 13 of Part III incorporate by
reference information from the registrants proxy statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the registrants 2012 Annual Meeting of Stockholders to be held on
May 18, 2012.
ALLIANCE FIBER OPTIC PRODUCTS,
INC.
TABLE OF CONTENTS
2011 FORM 10-K
|
|
Page
|
PART I
|
|
1
|
|
|
Item
1. Business
|
|
1
|
|
Item
1A. Risk Factors
|
|
7
|
|
Item
1B. Unresolved Staff
Comments
|
|
16
|
|
Item
2. Properties
|
|
16
|
|
Item
3. Legal
Proceedings
|
|
17
|
|
Item
4. Mine Safety Disclosures
|
|
17
|
|
Executive Officers of the Registrant
|
|
17
|
|
|
PART II
|
|
18
|
|
|
Item
5. Market for Registrants Common Equity,
Related Stockholder Matters and Issuer
Purchases of Equity
Securities
|
|
18
|
|
Item
6. Selected Financial Data
|
|
19
|
|
Item
7. Managements Discussion and Analysis of
Financial Condition and Results of
Operations
|
|
19
|
|
Item
7A. Quantitative and Qualitative Disclosures
About Market Risk
|
|
24
|
|
Item
8. Financial Statements
and Supplementary Data
|
|
24
|
|
Item
9. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosure
|
|
47
|
|
Item
9A. Controls and
Procedures
|
|
47
|
|
Item
9B. Other Information
|
|
47
|
|
|
PART III
|
|
48
|
|
|
Item
10. Directors, Executive
Officers and Corporate Governance
|
|
48
|
|
Item
11. Executive Compensation
|
|
48
|
|
Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
|
48
|
|
Item
13. Certain Relationships
and Related Transactions, and Director Independence
|
|
49
|
|
Item
14. Principal Accounting
Fees and Services
|
|
49
|
|
|
PART IV
|
|
49
|
|
|
Item
15. Exhibits and Financial
Statement Schedules
|
|
49
|
|
|
SIGNATURES
|
|
50
|
|
|
EXHIBIT INDEX
|
|
51
|
|
i
PART I
Item 1. Business
When used in this Report, the words expects,
anticipates, believes, estimates, plans, intends, could, will,
may and similar expressions are intended to identify forward-looking
statements. These are statements that relate to future periods and include
statements as to our operating results, revenues, sources of revenues, cost of
revenues, gross margins, profitability, the amount and mix of anticipated
investments, exposure to interest or exchange rate changes, expenditures and
expense levels, our liquidity and the adequacy of our capital resources,
anticipated working capital and capital expenditures, the impact of the economic
environment on our business and our customers, reliance on our connectivity
products, our cash flow, trends in average selling prices, our reliance on the
commercial success of our optical passive products, plans for future products
and enhancements of existing products, features, benefits and uses of our
products, demand for our products, our expectations regarding the impact of
accounting changes, our success being tied to relationships with key customers,
industry trends and market demand, acquisitions of complementary businesses,
products or technologies, our efforts to protect our intellectual property,
potential indemnification agreements, increases in the number of possible
license offers and patent infringement claims, our competitive position, sources
of competition, our competitive strengths, consolidation in our industry, our
international strategy, our employee relations, the adequacy of our internal
controls, our expectations regarding our use of the earnings generated by our
overseas operations, and the potential effect of recent accounting
pronouncements and our critical accounting policies and estimates.
Forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expected. These risks and
uncertainties include, but are not limited to, those risks discussed in Item 1A
Risk Factors, below, as well as risks related to the development of the
metropolitan, last mile access, and enterprise networks, customer acceptance of
our products, our ability to retain and obtain customers, industry-wide
overcapacity and shifts in supply and demand for optical components and modules,
our ability to meet customer demand and manage inventory, fluctuations in demand
for our products, declines in average selling prices, the loss of one or more
key customers, development of new products by us and our competitors, increased
competition, inability to obtain sufficient quantities of a raw materials, loss
of a key supplier, integration of acquired businesses or technologies, the
impact of the economy, financial stability in foreign markets, foreign currency
exchange rates, costs associated with being a public company, failure to meet
customer requirements, our ability to license intellectual property on
commercially reasonable terms, economic stability, and the state of the capital
markets. These forward-looking statements speak only as of the date hereof. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to
reflect any change in the Companys expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
All references to Alliance Fiber Optic Products, AFOP, we,
us, our or the Company mean Alliance Fiber Optic Products, Inc. and its
subsidiaries, except where it is made clear that the term means only the parent
company.
AFOP, OPIS and SPECTRAMUX are our trademarks. We may also refer to
trademarks of other corporations and organizations in this document.
Overview
Alliance Fiber Optic Products designs, manufactures and markets a broad
range of high-performance fiber optic components, and integrated modules
incorporating these components, for leading and emerging communications
equipment manufacturers and service providers. We offer a broad range of
products including interconnect devices that are used to connect optical fibers
and components, couplers and splitters that are used to divide and combine
optical power, and dense wavelength division multiplexing, or DWDM, devices that
separate and combine multiple specific wavelengths. Our emphasis on design for
manufacturing and our comprehensive manufacturing expertise enable us to produce
our products efficiently, with high quality, and in volume quantities. Our
product scope and ability to integrate our components into optical modules
enable us to satisfy a wide range of customer requirements throughout the
optical networking market. Our customers deploy our products in long-haul
networks that connect cities, metropolitan networks that connect areas within
cities, last mile access networks that connect to individual businesses and
homes, and enterprise networks within businesses.
Industry Background
The popularity of the Internet and the growing number of data-intensive
Internet-based applications and services has fueled a significant increase in
the volume of data traffic. This traffic growth has increased the demands on
communication networks originally developed to primarily
transport voice traffic. To meet this demand, many communications service
providers have and are designing and installing new networks based on fiber
optic technology, which provides greater data-carrying capacity, or bandwidth,
and increased transmission speeds compared to existing communications networks.
Until recently, much of the fiber deployed had been dedicated to long-haul
networks. However, the demands for high-speed network access and bandwidth are
shifting the focus towards more complex metropolitan networks and last mile
access networks, which require an increasing number of connections and
components.
1
Optical fiber
is currently being deployed across the following segments of communications
networks: long-haul, metropolitan, last mile access, and enterprise.
Long-haul networks.
Long-haul
networks connect the communications networks of cities around the world and
transport large amounts of data and voice traffic. To solve congestion problems,
service providers have invested significant resources in the deployment of
optical infrastructure. As a result, current long-haul networks provide high
bandwidth for transmitting data over very long distances. The build-out of
long-haul networks represents an important step in improving network
infrastructure to support increased demand for new services and greater traffic
volumes.
Metropolitan networks
.
Metropolitan networks connect long-haul networks to last mile access networks
within urban areas. Due to the increase in data traffic and the demand for
enhanced services, the existing metropolitan network infrastructure has become a
bottleneck for the provision of communications services to business and
residential end users. As a result, service providers are making investments in
infrastructure to reduce capacity constraints in metropolitan networks.
Last mile access networks
. Last
mile access networks connect business and residential end users to their service
provider in order to provide increased bandwidth to the end user. Traditional
access networks use the existing copper wire-based infrastructure, which is slow
compared to the high-speed networks commonly used within businesses. Service
providers are beginning to deploy fiber technologies in the last mile access
network in order to provide high bandwidth connectivity to the end user.
Enterprise networks.
Local area
networks serving the business community have utilized fiber optic links for over
a decade. Historically these links have connected vertical backbone requirements
between various floors of copper-based networks within office buildings. As the
bandwidth of local networks has increased, optical fiber has become a pervasive
medium for horizontal network links especially in the storage network
environment.
Service providers are seeking to maximize the performance and capacity of
both new and existing optical networks through advances in optical technology.
Wavelength division multiplexing, or WDM, has been used for several years to
increase system capacity by combining different light signals at different
wavelengths, on a single optical fiber. Each wavelength represents a separate
high-bandwidth channel that can carry data. Multiplexing devices combine, or
multiplex, these different wavelengths at one end of the optical network, and
demultiplexing devices, or demultiplexer, separate them at the other end. WDM
technology has been enhanced with the introduction of dense wavelength division
multiplexing, or DWDM, which permits the wavelengths to be spaced more closely
together. The tighter spacing allows even more wavelengths to be transmitted on
one optical fiber. The use of WDM and DWDM technology is well established in the
long-haul market and is increasingly utilized in the metropolitan and last mile
access markets.
Fiber optic components are used within optical networks to create,
combine, isolate, amplify, split, direct and perform various other functions on
the optical signals. Fiber optic components are divided into two broad
categories, active and passive components. Active components require power to
operate and use electrical signals to create, modulate or amplify optical
signals. Passive optical components connect, guide, mix, filter, route, adjust
and stabilize optical signals transmitted through an optical network.
Market Conditions
In periods prior to 2004, communication equipment manufacturers purchased
optical transport systems and related devices in anticipation of an extremely
rapid increase in demand for bandwidth. While demand for bandwidth continues to
increase, this demand has grown at a far slower pace than previously
anticipated. As a result, communication equipment manufacturers ended up with
excess inventories of optical systems and devices that continue to create a
barrier to new sales opportunities for much of the following several years.
Global economic declines of the later portion of the decade impeded as stronger
recovery of demand for communications equipment broadly although more demand
resulted from deployment of access related systems for broadband applications in
this period.
2
This situation
has created challenges for suppliers in the optical communication industry. Due
to decreased unit shipments as a result of overcapacity in the industry and the
resulting competition for fewer sales opportunities, average selling prices have
declined as companies compete for significantly smaller market
opportunities.
Over the past four years, as mentioned, the optical components industry
has experienced a slight increase and resumption in business levels. Recent
orders for our products have been utilized both for upgrades of existing
networks and new network builds. In addition, certain large telecommunications
service providers have recently begun to deploy new broadband access networks
based on fiber optic technologies for residential users. These fiber-to-the-home
networks, or FTTH, are expected to significantly increase the capacity and
expand the types of services that can be utilized by residential users. It
remains difficult, however, to predict the timing or extent of a full industry
recovery and the potential impact to our business from this or any other
deployment initiatives.
Products
Our lines of optical products support the needs of current and next
generation optical network systems applications. Our connectivity (formerly
named Optical Path Management Solutions, or OPMS) product family provides a
comprehensive line of optical interconnect devices, couplers and splitters, PLC
(planar lightwave circuits) and related optical products, as well as customized
integrated modules incorporating these devices. Our optical passive products
(formerly named Wavelength Management Solutions, or WMS) include WDM CWDM and
DWDM components and modules that utilize thin film filter technologies to
separate optical signals, variable attenuators, optical switches and other
optical devices utilizing micro optic lensing technology including integrated
electro-optical modules incorporating these products.
The following is a discussion of our current product offerings.
Connectivity Products.
In
nearly all fiber optic networks, the optical fiber, passive optical components
and active optical devices must be joined using optical interconnection systems.
Our connectivity platform provides fundamental component support for these
applications as well as standard and custom value added integrated solutions
that address the need for higher functionality and modularity. All of our
connectivity products described below are in production and are shipping to
customers.
Connectivity Modules.
The
evolution of optical components is driven by the increasing need for packaging
density, module performance and overall cost effectiveness. We design and
package our various components to provide superior integrated connectivity
modules for our customers. Our integrated modules are designed to reduce our
customers system design requirements and ease implementation.
Optical Connectors, Adapters and Cable Assemblies
. Optical connectors and adapters are precision devices that
connect fibers together. Optical cable assemblies are used to bridge relatively
short distances with optical paths. We offer a broad range of industry standard
connection products that support a wide range of fiber and fiber cable types.
Further, with our vertically integrated design and manufacturing capability, we
are able to customize these products to meet our customers needs for compact
size and special features. We specialize in providing our customers with high
performance custom cable assemblies to serve in conjunction with our optical
interconnection solutions at all interface points in the optical communications
network.
Fused and Planar Fiber Optical Splitters and
Couplers
. Fused and planar fiber optical
splitters and couplers are branching devices that are used to split optical
power from a single fiber, or set of fibers, into a different set of fibers.
They are often used to distribute optical signals to multiple locations for
processing. These devices utilize signal and power sharing features to reduce
the total cost of delivering bandwidth to end-users. Our optical splitters and
couplers reduce insertion loss, or the power loss incurred when inserting
components into an optical path, and deliver high performance, including uniform
optical wavelength splitting.
Optical Tap Couplers and Ultra Low Polarization Dependent Loss Tap
Couplers
. Optical tap couplers are fused
fiber branching devices that split off a portion of light to allow for optical
monitoring and feedback. These devices are used extensively in fiber amplifier
power control. They are also utilized in transmission equipment for performance
monitoring and control. Our ultra low polarization dependent loss devices offer
low levels of sensitivity to polarization, which is a characteristic of light
that can cause a reduction in the fidelity of optical signals. These devices
enable more effective monitoring and management of optical networks.
3
Amplifier
WDM Couplers
. Amplifier WDM couplers are used
with specialized fibers to combine or separate specific wavelengths of light
associated with standard telecommunications optical amplifier requirements. Our
amplifier WDM couplers are stable low power loss components with high power
handling capability.
Optical Fixed Attenuators
.
Optical fixed attenuators diminish the optical power within a given optical path
without interference or reduction in optical signal quality. Typically, this
function is embedded in an optical connector or adapter element to simplify
optical network installation. We utilize attenuating fiber that reduces power
while preserving performance characteristics, including optical signal quality
and reliability.
Fused Fiber WDM Couplers
. Fused
fiber WDM couplers are used to combine and separate optical signals transmitted
on different wavelengths. This function provides the first level of bandwidth
expansion for a network by increasing a fibers signal carrying capacity. Fused
fiber WDM couplers may also be used to add additional functionality to the
network such as network status monitoring. We believe our fused fiber WDM
couplers provide a cost effective way to minimize loss and maximize wavelength
isolation.
Optical Passive Products.
As the capacity and complexity of optical networks increases, future
systems face significant challenges. Performance characteristics such as
stability, wavelength isolation, channel balance and power loss due to
polarization become important to optimize, and product solutions which enhance
these characteristics provide competitive advantage. In recent years, WDM has
become the preferred method of increasing bandwidth throughout optical networks.
Our filter-based products serve WDM and DWDM systems as core passive elements
that direct and manage larger numbers of optical signal channels. These
particular Optical Passive Products also enable network DWDM systems to manage
and monitor a large number of optical signals by separating these signals into
different paths that can be processed individually.
Our Optical Passive Products devices serve many system OEM customers
needs for current and next generation network equipment. All of our Optical
Passive Products described below are in production and are shipping to
customers.
Filter WDMs
. Our thin film filter
based WDMs are used to combine and separate optical signals. Our filter-based
products allow for higher isolation and narrower wavelength separations than
fused fiber technology. Our filter WDMs are designed for a range of network
applications including combining active and passive components and wavelength
monitoring, splitting and separating tasks.
Amplifier Filter WDMs
. Amplifier
filter WDMs utilize thin film filter technology to maintain wavelength
separation in demanding applications. In addition, filter technology allows for
narrow wavelength separation. Our amplifier filter WDMs are designed for a range
of applications, such as splitting wavelengths and connecting lasers used in
signal power amplification.
DWDMs
. Dense wave division
multiplexers, or DWDMs, are integrated optical modules that combine, or
multiplex, and separate, or demultiplex, multiple optical signals of different
wavelengths on a single fiber. The separation of wavelengths are so narrow, or
dense, that a large number of channels (greater than 10) can be combined within
the band of usable wavelengths of the fiber itself. We utilize proprietary thin
film technology in the development and manufacture of our DWDM products. This
technology delivers excellent performance characteristics, including narrow
channel separation and wide channel bandpass, which is the range of frequencies
that will pass through a filter. Thin film filter technology allows for a range
of solutions for 200 GHz, 100 GHz and 50 GHz International Telecom Union
wavelength spacing applications, which permit 40 channels, 80 channels, and 160
channels, respectively, to be transmitted across a single fiber. We believe that
our DWDMs directly address the scalable channel plans found in metropolitan and
last mile access network applications.
CWDMs
. Coarse wavelength division
multiplexers, or CWDMs, are integrated optical modules that multiplex or
demultiplex multiple optical signals of different wavelengths on a single fiber.
Our CWDM product separate wavelength into 20 nanometers, or spacing to cover the
complete fiber optical communication spectrum from 1270 nm to 1610
nm.
With the unique low insertion loss and flat band-pass profile, CWDMs
provide an economic and efficient wavelength division multiplexing solution for
metropolitan and access networks. Our CWDM product covers four channel, eight
channel, and sixteen channel mux and demux applications, and upgradeability for
both four channel and eight channel types. We also offer optical add-drop
modules, or OADMs, for CWDM networks, with the capability of adding or dropping
from one to fifteen channels. In addition to the CWDM mux, demux and optical
add/drop modules, we also offer complete rackmount CWDM solutions to customers
so they can easily mount our CWDM products directly on their
system rack. We believe our CWDM products directly address the
metropolitan and access markets competitive wavelength management needs.
4
CCWDMs
. Compact coarse wavelength
division multiplexers, or CCWDMs, are integrated optical modules that are
designed to significantly improve optical performance, while reducing
manufacturing costs, in a package less than 1/4 the size of conventional CWDM
modules. Our CCWDMs feature high wavelength accuracy and stability, low
insertion loss, high isolation, low polarization dependent loss and an
epoxy-free optical path. Our Telcordia 1209/1221-qualified CCWDM builds on
AFOP's proprietary optical bench platform, and we believe it has the smallest
footprint of any comparable CWDMs. With a channel spacing of 20 nm and wide
bandpass characteristics, it allows for datacom or telecom network applications
with low-cost uncooled lasers. These CCWDM Mux/Demuxes are available in four or
eight channels and include an expansion port for 16 channel systems.
Add/Drop DWDM Filters.
Add/drop
DWDM filter products are used to insert or extract specific wavelengths in a
DWDM system. While a large number of channels can be transmitted through a
single fiber network, often only selected channels of information are required
at a particular location. Our 200 GHz, 100 GHz and 50 GHz add/drop components
use high performance filter technology and operate with very little optical
power loss in order to provide high channel separation and high stability.
Optical Isolators
These devices
use polarization rotation to block return signals from the forward optical path.
They limit distortions in devices and signals caused by reflected lights in the
fiber.
Optical Bypass Switches
As the
name suggests, these devices utilize beam shifting optics or mirror to switch
optical signals from one fiber to another in response to a control signal
provided electronically. Optical switches are used in test equipment for basic
functionality and in networks to provide protection and redundancy.
Automatic Variable Optical Attenuators
. Automatic variable optical attenuators are designed to control the
optical power in a fiber. They are often combined with an active system
component to maintain optical power on a network even if the input signal is
changing power. Our automatic variable optical attenuators are specifically
designed for application in DWDM networks for use with individual channel source
elements such as add/drop transmitters. The cost and performance characteristics
of our automatic variable optical attenuators are specifically targeted to allow
for the use of these devices in volume as principal DWDM channel stabilization
components.
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as confidentiality agreements and licensing arrangements, to
establish and protect our proprietary rights. As of December 31, 2011, we had 62
United States patents issued or assigned to us and had 24 United States patent
applications pending. Our 62 U.S. patents expire between September 2013 and June
2028. We also have 15 foreign patents issued, and 3 foreign patent applications
pending. Our foreign patents issued will expire between January 2012 and
December 2029. We also utilize unpatented proprietary know-how and trade secrets
and employ various methods to protect them.
From time to time, third parties, including our competitors, may assert
patent, copyright and other intellectual property rights to technologies that
are important to us. We expect we will increasingly be subject to license offers
and infringement claims as the number of products and competitors in our market
grows and the functions of products overlap. Patents of third parties may be
determined to be valid, or some of our products may ultimately be determined to
infringe them. Other companies may pursue litigation with respect to those or
other claims. The results of any litigation are inherently uncertain. In the
event of an adverse result in any litigation with respect to intellectual
property rights relevant to our products that could arise in the future, we
could be required to obtain licenses to the infringing technology, to pay
substantial damages under applicable law, to cease the manufacture, use and sale
of infringing products or to expend significant resources to develop
non-infringing technology. Licenses may not be available from third parties
either on commercially reasonable terms or at all. In addition, litigation
frequently involves substantial expenditures and can require significant
management attention, even if we ultimately prevail. Accordingly, any
infringement claim or litigation against us could significantly harm our
business, operating results, financial condition, or cash flows. As of December
31, 2011, we were not aware of infringement claims or litigation pending against
us.
5
Customers
We sell our products to communications equipment manufacturers that
incorporate our products into their systems that they in turn sell to network
service providers. In certain cases, we sell our products to other component manufacturers for resale or inclusion in their products. In the year
ended December 31, 2011, we sold our products to more than 200 customers. One
customer accounted for 14.3% of our revenues in the year ended December 31,
2011. Two customers accounted for 16.1% and 14.6% of our revenues in the year
ended December 31, 2010. The following is a summary of our revenues generated by
geographic segments (in thousands):
|
|
Years Ended December 31,
|
|
|
2011
|
|
2010
|
Revenues
|
|
|
|
|
|
|
North America
|
|
$
|
22,929
|
|
$
|
20,416
|
Europe
|
|
|
7,470
|
|
|
11,624
|
Asia
|
|
|
11,621
|
|
|
13,366
|
|
|
$
|
42,020
|
|
$
|
45,406
|
Sales, Marketing and Technical
Support and Product Management
Sales
. Our direct sales force
markets and sells our products primarily in the United States. We also maintain
a sales support staff in Taiwan to service customers based in the Asia Pacific
region. Our direct sales force and technical marketing personnel maintain close
contact with our customers and provide technical support.
Marketing.
We have a number of
marketing programs to support the sale and distribution of our products and to
inform existing and potential customers about the capabilities and benefits of
our products. Our marketing efforts include participating in industry trade
shows and technical conferences, advertising in trade journals and communicating
through our corporate website and direct mail.
Technical Support and Product Management
. We maintain a technically knowledgeable support staff that we believe
is critical to our development of long-term customer relationships. Our
technical support and product management staff works closely with our customers
to understand their product requirements, to assist customers with utilizing our
product line, and to develop customized product solutions.
Competition
The fiber optic component industry is highly competitive and subject to
rapid technological change. We believe that the principal differentiating
factors in the fiber optic component market are support for multiple optical
interfaces, high optical power, wavelength selection, manufacturing capacity,
reliable and compact packaging, price, product innovation and reliability of
product performance. Based on our assessment of the performance and price of
similar competitive product offerings, we believe that our products compare
favorably, although we cannot assure you that they will continue to do so.
Our principal competitors in the components market include Oclaro Inc.,
DiCon Fiberoptics, JDS Uniphase Corp., Oplink Communications, Inc., Senko
Advanced Components and Tyco Electronics Corporation. We estimate that we had
approximately 20 competitors in the components market as of December 31, 2011.
We believe that we primarily compete with diversified suppliers for the majority
of our product line and to a lesser extent with a large number of niche
companies that offer a more limited product line. Competitors throughout the
optical component industry, including those who sell active components, may
rapidly become competitors in portions of our business. Competitors who provide
both active and passive components may have a competitive advantage because they
provide a more complete product solution than we provide. In addition, our
industry has continued to experience significant consolidation, and we
anticipate that further consolidation will occur. This consolidation has further
increased and we believe will further increase competition. We expect
significant pricing pressure from our competitors that may negatively affect our
margins. We cannot assure you that we will be able to compete successfully with
existing or future competitors or that competitive pressures will not seriously
harm our business, operating results and financial condition.
Product Development
As of December 31, 2011, we had a total of 65 engineers and technicians
that are directly involved in research and development of our products located
in the United States, Taiwan and China. Our engineering team has extensive
design, packaging, processing, and software experience in optical components,
interfaces and systems.
6
Our primary
product development center is located in Sunnyvale, California, where we opened
our Photonics Technology Center in March 2001. Our Taiwanese subsidiary also
engages in product development. Our research and development expenses were $3.2
million for the years ended December 31, 2011 and 2010, respectively. We spend a
substantial proportion of our financial resources to develop new technologies
and products to serve the next generation communication markets.
Sources and Availability of Raw
Materials
We make significant purchases of key materials, components and equipment,
including ferrules, graded index lenses, or GRIN lenses, filters and other
components from third party suppliers. We obtain most of our critical raw
materials and components from a single or limited number of suppliers. When
possible, we also develop and maintain alternative sources for essential
materials and components. However, there is only one supplier of GRIN lenses.
The inability to obtain sufficient quantities of these materials or components
may result in delays, increased costs, and reductions in our product
shipments.
Manufacturing
We currently manufacture the majority of our connectivity products at our
facility in Tu-Cheng City, Taiwan. We manufacture our filter-based and advanced
products at our facility near Shenzhen, China.
Each of our facilities maintains comprehensive in-house manufacturing
processes, including component and integrated module design, integration,
production, and testing. We plan to continue to invest resources in
manufacturing management, engineering and quality control.
We have established a quality management system which is designed to
ensure that the products we provide to our customers meet or exceed their
requirements. All of our three facilities are ISO 9001-2000 certified. In
addition, our Taiwan facility is TL-9000 certified.
Employees
As of December 31, 2011, we had 1,037 full-time employees, including 33
located in the United States, 309 in Taiwan and 695 in China. Of our 1,037
full-time employees, 65 are engaged in research and development, 870 are engaged
in manufacturing production, 25 are engaged in sales, marketing, application
support and customer service, and 77 are engaged in general and administration.
None of our employees are represented by a labor union. We have not experienced
any work stoppages and we consider our relations with our employees to be
good.
Additional Information
We were incorporated in California in December 1995. In October 2000,
prior to our initial public offering, we reincorporated in Delaware as Alliance
Fiber Optic Products, Inc. Our internet address is www.afop.com. We make
available free of charge through a hyperlink on our website our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) of the
Exchange Act as soon as reasonably practicable after the material is furnished
to the SEC. Our website and the information contained therein or connected
thereto is not intended to be incorporated into this Annual Report on Form 10-K.
Item 1A. Risk Factors
We have a history of losses, may
experience future losses and may not be able to generate sufficient revenues in
the future to sustain profitability.
We had net income of approximately $4.4 million and $6.0 million in the
year ended December 31, 2011 and 2010, respectively. Although we generated a
profit in these two fiscal years, we may not be able to sustain profitability in
the future. Although our cash, cash equivalents, short-term investment and
long-term investments increased in 2011, we may experience negative cash flows
again in the future. As of December 31, 2011, we had an accumulated deficit of
approximately $53.4 million.
We continue to experience fluctuating demand for our products. If demand
for our products continues to decline, we may not be able to decrease our
expenses on a timely basis or at levels that offset any such decreases. If
demand for our products increases in the future, we
expect to incur significant and increasing expenses for expansion of our
manufacturing operations, research and development, sales and marketing, and
administration, and in expanding direct sales and distribution channels. Given
the rate at which competition in our industry intensifies and the fluctuations
in demand for our products, we may not be able to adequately control our costs
and expenses or achieve or maintain adequate operating margins. As a result, to
maintain profitability, we will need to generate and sustain substantially
higher revenues while maintaining reasonable cost and expense levels. We may not
be able to sustain profitability on a quarterly or an annual basis.
7
Our connectivity products have
historically represented a significant part of our revenues, and if we are
unsuccessful in commercially selling our optical passive products, our business
will be seriously harmed.
Sales of our
connectivity products accounted for 74.8% and 69.1% of our revenues in the
fiscal years ended December 31, 2011 and 2010, respectively, and a majority of
our historical revenues. We expect to substantially depend on these products for
the majority of our near-term revenues. We have in the past, and may in the
future experience declines in average selling prices. Any significant decline in
the price of, or demand for, these products, or failure to increase their market
acceptance, would seriously harm our business. In addition, we believe that our
future growth and a significant portion of our future revenues will depend on
the commercial success of our optical passive products, which we began shipping
commercially in July 2000. Demand for these products has fluctuated over the
past few years, declining sharply starting in mid fiscal 2001 and then
increasing beginning in 2003. If demand for these products does not continue to
increase and our target customers do not continue to adopt and purchase our
optical passive products, our revenues may decline and we may have to write-off
additional inventory that is currently on our books.
Continuing weak general economic or
business conditions may have a negative impact on our business.
Continuing concerns over inflation, deflation, another recession, energy
costs, geopolitical issues, the availability and cost of credit, Federal budget
proposals, unemployment, global economic stability, the U.S. mortgage market and
an uncertain real estate market in the U.S. have contributed to increased
volatility and diminished expectations for the global economy and expectations
of slower global economic growth going forward. These factors, combined with
volatile oil prices, declining business and consumer confidence, a volatile
stock market and increased unemployment, have precipitated an economic slowdown
and recession. If the economic climate in the U.S. and abroad does not improve
or continues to deteriorate, our business, including our customers and our
suppliers, could be negatively affected, resulting in a negative impact on our
revenues.
We depend on a small number of
customers for a significant portion of our total revenues and the loss of, or a
significant reduction in orders from, any of these customers, would
significantly reduce our revenues and harm our operating results.
In the years ended December 31, 2011 and 2010 our 10 largest customers
comprised 63.7% and 67.1% of our revenues, respectively. One customer accounted
for 14.3% of our total revenues for the year ended December 31, 2011. Two
customers accounted for 16.1 % and 14.6% of our total revenues for the year
ended December 31, 2010, respectively.
We derive a significant portion of our revenues from a small number of
customers, and we anticipate that we will continue to do so in the foreseeable
future. These customers may decide not to purchase our products at all, to
purchase fewer products than they did in the past, or to alter their purchasing
patterns in some other way. The loss of any significant customer, a significant
reduction in sales we make to them, or any problems collecting receivables from
them would likely harm our financial condition and results of operations.
Our quarterly and annual financial
results have historically fluctuated due primarily to introduction of, demand
for, and sales of our products, and future fluctuations may cause our stock
price to decline.
We believe that period-to-period comparisons of our operating results are
not a good indication of our future performance. Our quarterly operating results
have fluctuated in the past and are likely to fluctuate significantly in the
future due to a number of factors. For example, the timing and expenses
associated with product introductions and establishing additional manufacturing
lines and facilities, changes in manufacturing volume, declining average selling
prices of our products, the timing and extent of product sales, the mix of
domestic and international sales, the mix of sales channels through which our
products are sold, the mix of products sold and significant fluctuations in the
demand for our products have caused our operating results to fluctuate in the
past. Because we incur operating expenses based on
anticipated revenue trends, and a high percentage of our expenses are fixed in
the short term, any delay in generating or recognizing revenues or any decrease
in revenues could significantly harm our quarterly results of operations. Other
factors, many of which are more fully discussed in other risk factors, may also
cause our results to fluctuate. Many of the factors that may cause our results
to fluctuate are outside of our control. If our quarterly or annual operating
results do not meet the expectations of investors and securities analysts, the
trading price of our common stock could significantly decline.
8
If we cannot attract more optical
communications equipment manufacturers to purchase our products, we may not be
able to increase or sustain our revenues.
Our future
success will depend on our ability to migrate existing customers to our new
products and our ability to attract additional customers. Some of our present
customers are relatively new companies. The growth of our customer base could be
adversely affected by:
-
customer unwillingness to implement our
products;
-
any delays or difficulties that we may incur in
completing the development and introduction of our planned products or product
enhancements;
-
the success of our customers;
-
excess inventory in the telecommunications
industry;
-
new product introductions by our
competitors;
-
any failure of our products to perform as
expected; or
-
any difficulty we may incur in meeting customers
delivery requirements or product specifications.
The
fluctuations in the economy have affected the telecommunications industry.
Telecommunications companies have cut back on their capital expenditure budgets,
which has and may continue to further decrease demand for equipment and parts,
including our products. This decrease has had and may continue to have an
adverse effect on the demand for fiber optic products and negatively impact the
growth of our customer base.
We are exposed to risks and
increased expenses and business risk as a result of Restriction on Hazardous
Substances, or RoHS directives.
Following the lead of the European Union, or EU, various governmental
agencies have either already put into place or are planning to introduce
regulations that regulate the permissible levels of hazardous substances in
products sold in various regions of the world. For example, the RoHS directive
for EU took effect on July 1, 2006. The labeling provisions of similar
legislation in China went into effect on March 1, 2007. Consequently, many
suppliers of products sold into the EU have required their suppliers to be
compliant with the new directive. Many of our customers have adopted this
approach and have required our full compliance. Though we have devoted a
significant amount of resources and effort planning and executing our RoHS
program, it is possible that some of our products might be incompatible with
such regulations. In such event, we could experience the following consequences:
loss of revenue, damaged reputation, diversion of resources, monetary penalties,
and legal action.
The market for fiber optic
components is increasingly competitive, and if we are unable to compete
successfully our revenues could decline.
The market for fiber optic components is intensely competitive. We
believe that our principal competitors are the major manufacturers of optical
components and integrated modules, including vendors selling to third parties
and business divisions within communications equipment suppliers. Our principal
competitors in the components market include Oclaro Inc. DiCon Fiberoptics,
Inc., JDS Uniphase Corp., Oplink Communications Inc., Senko Advanced Components
and Tyco Electronics Corporation. We believe that we primarily compete with
diversified suppliers for the majority of our product line and to a lesser
extent with niche companies that offer a more limited product line. Competitors
in any portion of our business may also rapidly become competitors in other
portions of our business.
9
Many of
our current and potential competitors have significantly greater financial,
technical, marketing, purchasing, manufacturing and other resources than we do.
As a result, these competitors may be able to respond more quickly to new or
emerging technologies and to changes in customer requirements, to devote greater
resources to the development, promotion and sale of products, to negotiate lower
prices on raw materials and components, or to deliver competitive products at
lower prices.
Several of our existing and
potential customers are also current and potential competitors of ours. These
companies may develop or acquire additional competitive products or technologies
in the future and subsequently reduce or cease their purchases from us. In light
of the consolidation in the optical networking industry, we also believe that
the size of suppliers will be an increasingly important part of a purchasers
decision-making criteria in the future. We may not be able to compete
successfully with existing or new competitors, and we cannot ensure that the
competitive pressures we face will not result in lower prices for our products,
loss of market share, or reduced gross margins, any of which could harm our
business.
New and competing technologies are
emerging due to increased competition and customer demand. The introduction of
products incorporating new or competing technologies or the emergence of new
industry standards could make our existing products noncompetitive. For example,
there are technologies for the design of wavelength division multiplexers that
compete with the technology that we incorporate in our products. If our products
do not incorporate technologies demanded by customers, we could lose market
share causing our business to suffer.
If we fail to effectively manage our
operations, specifically given the past history of sudden and dramatic downturn
in demand for our products, our operating results could be harmed.
As of December 31, 2011, we had a
total of 33 full-time employees in Sunnyvale, California, 309 full-time
employees in Taiwan, and 695 full-time employees in China. Matching the scale of
our operations with demand fluctuations, combined with the challenges of
expanding and managing geographically dispersed operations, has placed, and will
continue to place, a significant strain on our management and resources. To
manage the expected fluctuations in our operations and personnel, we will be
required to:
-
improve existing and implement new operational,
financial and management controls, reporting systems and
procedures;
-
hire, train, motivate and manage additional
qualified personnel, especially if we experience a significant increase in
demand for our products;
-
effectively expand or reduce our manufacturing
capacity, attempting to adjust it to customer demand; and
-
effectively manage relationships with our
customers, suppliers, representatives and other third parties.
In addition, we will need to
coordinate our domestic and international operations and establish the necessary
infrastructure to implement our international strategy. If we are not able to
manage our operations in an efficient and timely manner, our business will be
severely harmed.
Our success also depends, to a large
degree, on the efficient and uninterrupted operation of our facilities. We have
expanded our manufacturing facilities in China and manufacture many of our
products there. Our facility in Taiwan also houses a substantial portion of our
manufacturing operations. There is significant political tension between Taiwan
and China. If there is an outbreak of hostilities between Taiwan and China, our
manufacturing operations may be disrupted or we may have to relocate our
manufacturing operations. Tensions between Taiwan and China may also affect our
facility in China. Relocating a portion of our employees could cause temporary
disruptions in our operations and divert managements attention.
Because of the time it takes to
develop fiber optic components, we incur substantial expenses for which we may
not earn associated revenues.
The development of new or enhanced
fiber optic products is a complex and uncertain process. We may experience
design, manufacturing, marketing and other difficulties that could delay or
prevent the development, introduction or marketing of new products and
enhancements. Development costs and expenses are incurred before we generate
revenues from sales of products resulting from these efforts. Our total research
and development expenses were approximately $3.2 million for each of the years
ended December 31, 2011 and 2010. We intend to continue to invest in our
research and product development efforts, which could have a negative impact on
our earnings in future periods if we do not earn associated revenues from such
efforts.
10
If we are unable to develop new
products and product enhancements that achieve market acceptance, sales of our
fiber optic components could decline, which could reduce our
revenues.
The
communications industry is characterized by rapidly changing technology,
frequent new product introductions, changes in customer requirements, evolving
industry standards and, more recently, significant variations in customer
demand. Our future success depends on our ability to anticipate market needs and
develop products that address those needs. As a result, our products could
quickly become obsolete if we fail to predict market needs accurately or develop
new products or product enhancements in a timely manner. Our failure to predict
market needs accurately or to develop new products or product enhancements in a
timely manner will harm market acceptance and sales of our products. If the
development or enhancement of these products or any other future products takes
longer than we anticipate, or if we are unable to introduce these products to
market, our sales will not increase. Even if we are able to develop and
commercially introduce them, these new products may not achieve the widespread
market acceptance necessary to provide an adequate return on our investment.
Current and future demand for our
products depends on the continued growth of the Internet and the communications
industry, which is experiencing consolidation, realignment, and fluctuations in
product inventory and demand for fiber optic products.
Our future success depends on the
continued growth of the Internet as a widely used medium for communications and
commerce, and the growth of optical networks to meet the increased demand for
capacity to transmit data, or bandwidth. If the Internet does not continue to
expand as a medium for communications and commerce, the need to significantly
increase bandwidth across networks and the market for fiber optic components may
not continue to develop. If this growth does not continue, sales of our products
may decline, which would adversely affect our revenues. Our customers have
experienced an oversupply of inventory due to fluctuating demand for their
products that has resulted in inconsistent demand for our products. Future
demand for our products is uncertain and will depend heavily on the continued
growth and upgrading of optical networks, especially in the metropolitan, last
mile, and enterprise access segments of the networks.
Inconsistent spending by
telecommunication companies over the past several years has resulted in
fluctuating demand for our products. The rate at which communication service
providers and other fiber optic network users have built new fiber optic
networks or installed new systems in their existing fiber optic networks has
fluctuated in the past and these fluctuations may continue in the future. These
fluctuations may result in reduced demand for new or upgraded fiber optic
systems that utilize our products and therefore, may result in reduced demand
for our products. Declines in the development of new networks and installation
of new systems have resulted in the past in a decrease in demand for our
products, an increase in our inventory, and erosion in the average selling
prices of our products.
The communications industry is
experiencing continued consolidation and realignment, as industry participants
seek to capitalize on the rapidly changing competitive landscape developing
around the Internet and new communications technologies such as fiber optic
networks. As the communications industry consolidates and realigns to
accommodate technological and other developments, our customers may consolidate
or align with other entities in a manner that results in a decrease in demand
for our products.
We are experiencing fluctuations in
market demand due to overcapacity in our industry and an economy that is stymied
by the current financial and economic crisis, international terrorism, war and
political instability.
The United States economy has
experienced and continues to experience significant fluctuations in consumption
and demand. During the past several years, telecommunication companies have
mostly decreased their spending, which has resulted in excess inventory,
overcapacity and a decrease in demand for our products. We may experience
further decreases in the demand for our products due to a weak domestic and
international economy and the impact of the current financial and economic
crisis here and abroad as the fiber optics industry copes with the effects of
oversupply of products, international terrorism, war and political and economic
instability. Even if the general economy experiences a recovery, the activity of
the United States telecommunications industry may lag behind the recovery of the
overall United States economy.
11
The optical networking component
industry has in the past, is now, and may in the future, experience declining
average selling prices, which could cause our gross margins to decline.
The
optical networking component industry has in the past experienced declining
average selling prices as a result of increasing competition and greater unit
volumes as communication service providers continue to deploy fiber optic
networks. Average selling prices are decreasing and may continue to decrease in
the future in response to product introductions by competitors, price pressures
from significant customers, greater manufacturing efficiencies achieved through
increased automation in the manufacturing process and inventory build-up due to
decreased demand. Average selling price declines may contribute to a decline in
our gross margins which could harm our results of operations.
We will not attract new orders for
our fiber optic components unless we can deliver sufficient quantities of our
products to optical communications equipment manufacturers.
Communications service providers and
optical systems manufacturers typically require that suppliers commit to provide
specified quantities of products over a given period of time. If we are unable
to commit to deliver quantities of our products to satisfy a customers
anticipated needs, we will lose the order and the opportunity for significant
sales to that customer for a lengthy period of time. In addition, we would be
unable to fill large orders if we do not have sufficient manufacturing capacity
to enable us to commit to provide customers with specified quantities of
products. However, if we build our manufacturing capacity and inventory in
excess of demand, as we have done in the past, we may produce excess inventory
that may have to be reserved or written off.
We depend on a limited number of
third parties to supply key materials, components and equipment, such as
ferrules, optical filters and lenses, and if we are not able to obtain
sufficient quantities of these items at acceptable prices, our ability to fill
orders would be limited and our operating results could be harmed.
We depend on third parties to supply
the raw materials and components we use to manufacture our products. To be
competitive, we must obtain from our suppliers, on a timely basis, sufficient
quantities of raw materials and components at acceptable prices. We obtain most
of our critical raw materials and components from a single or limited number of
suppliers and generally do not have long-term supply contracts with them. As a
result, our suppliers could terminate the supply of a particular material or
component at any time without penalty. Finding alternative sources may involve
significant expense and delay, if these sources can be found at all. One
component, GRIN lenses, is only available from one supplier. Difficulties in
obtaining raw materials or components in the future may delay or limit our
product shipments, which could result in lost orders, increase our costs, reduce
our control over quality and delivery schedules and require us to redesign our
products. If a supplier became unable or unwilling to continue to manufacture or
ship materials or components in required volumes, we would have to identify and
qualify an acceptable replacement. A delay or reduction in shipments or any need
to identify and qualify replacement suppliers would harm our
business.
Because we experience long lead
times for materials and components, we may not be able to effectively manage our
inventory levels, which could harm our operating results.
Because we experience long lead
times for materials and components and are often required to purchase
significant amounts of materials and components far in advance of product
shipments, we may not effectively manage our inventory levels, which could harm
our operating results. Alternatively, if we underestimate our raw material
requirements, we may have inadequate inventory, which could result in delays in
shipments and loss of customers. If we purchase raw materials and increase
production in anticipation of orders that do not materialize or that shift to
another quarter, we will, as we have in the past, have to carry or write off
excess inventory and our gross margins will decline. Both situations could cause
our results of operations to be below the expectations of investors and public
market analysts, which could, in turn, cause the price of our common stock to
decline. The time our customers require to incorporate our products into their
own can vary significantly and generally exceeds several months, which further
complicates our planning processes and reduces the predictability of our
forecasts. Even if we receive these orders, the additional manufacturing
capacity that we add to meet our customers requirements may be underutilized in
a subsequent quarter.
We are exposed to risks and
increased expenses as a result of laws requiring companies to evaluate internal
controls over financial reporting.
Although we will not have to comply
with the auditor attestation requirements of Section 404(b) of the
Sarbanes-Oxley Act of 2002 until we become an accelerated filer, we are still
required to perform an assessment of our internal control over financial
reporting and to disclose managements assessment of the same under Section
404(a) of Sarbanes-Oxley. We have implemented an ongoing program to perform the
system and process evaluation and testing we believe to be necessary to comply
with this requirement, however, we cannot assure you that we will be successful
in our efforts. In the event that our chief executive officer, acting chief
financial officer or, when applicable, our independent registered public
accounting firm, determines that our internal control over financial reporting
is not effective as defined under Section 404(a), investor perceptions of our
company may be negatively affected and this could cause a decline in our stock
price.
12
We depend on key personnel to
operate our business effectively in the rapidly changing fiber optic components
market, and if we are unable to hire and retain appropriate management and
technical personnel, our ability to develop our business could be harmed.
Our
success depends to a significant degree upon the continued contributions of the
principal members of our technical sales, marketing, engineering and management
personnel, many of whom perform important management functions and would be
difficult to replace. We particularly depend upon the continued services of our
executive officers, particularly Peter Chang, our President and Chief Executive
Officer; David Hubbard, our Senior Vice President of Sales and Marketing;
Wei-shin Tsay, our Senior Vice President of Product Development; Anita Ho, our
Acting Chief Financial Officer, and other key engineering, sales, marketing,
finance, manufacturing and support personnel. In addition, we depend upon the
continued services of key management personnel at our Taiwanese subsidiary and
at our facility in China. None of our officers or key employees is bound by an
employment agreement for any specific term, and may terminate their employment
at any time.
Our ability to continue to attract
and retain highly skilled personnel will be a critical factor in determining
whether we will be successful in the future. We may have difficulty hiring
skilled engineers at our manufacturing facilities in the United States, Taiwan,
and China. If we are not successful in attracting, assimilating or retaining
qualified personnel to fulfill our current or future needs, our business may be
harmed.
If we are not able to achieve
acceptable manufacturing yields and sufficient product reliability in the
production of our fiber optic components, we may incur increased costs and
delays in shipping products to our customers, which could impair our operating
results.
Complex and precise processes are
required for the manufacture of our products. Changes in our manufacturing
processes or those of our suppliers, or the inadvertent use of defective
materials, could significantly reduce our manufacturing yields and product
reliability. Because the majority of our manufacturing costs are relatively
fixed, manufacturing yields are critical to our results of operations. Lower
than expected production yields could delay product shipments and impair our
operating results. We may not obtain acceptable yields in the future.
In some cases, our existing
manufacturing techniques, which involve substantial manual labor, may not allow
us to cost-effectively meet our production goals so that we maintain acceptable
gross margins while meeting the cost targets of our customers. We may not
achieve adequate manufacturing cost efficiencies.
Because we plan to introduce new
products and product enhancements, we must effectively transfer production
information from our product development department to our manufacturing group
and coordinate our efforts with those of our suppliers to rapidly achieve volume
production. In our experience, our yields have been lower during the early
stages of introducing new product to manufacturing. If we fail to effectively
manage this process or if we experience delays, disruptions or quality control
problems in our manufacturing operations, our shipments of products to our
customers could be delayed.
Because the qualification and sales
cycle associated with fiber optic components is lengthy and varied, it is
difficult to predict the timing of a sale or whether a sale will be made, which
may cause us to have excess manufacturing capacity or inventory and negatively
impact our operating results.
In the communications industry,
service providers and optical systems manufacturers often undertake extensive
qualification processes prior to placing orders for large quantities of products
such as ours, because these products must function as part of a larger system or
network. This process may range from three to six months and sometimes longer.
Once they decide to use a particular suppliers product or component, these
potential customers design the product into their system, which is known as a
design-in win. Suppliers whose products or components are not designed in are
unlikely to make sales to that customer until at least the adoption of a future
redesigned system. Even then, many customers may be reluctant to incorporate
entirely new products into their new systems, as this could involve significant
additional redesign efforts. If we fail to achieve design-in wins in our
potential customers qualification processes, we will lose the opportunity for
significant sales to those customers for a lengthy period of time.
13
In
addition, some of our customers require that our products be subjected to
standards-based qualification testing, which can take up to nine months or more.
While our customers are evaluating our products and before they place an order
with us, we may incur substantial sales and marketing and research and
development expenses, expend significant management efforts, increase
manufacturing capacity and order long lead-time supplies. Even after the
evaluation process, it is possible a potential customer will not purchase our
products. In addition, product purchases are frequently subject to unplanned
processing and other delays, particularly with respect to larger customers for
which our products represent a very small percentage of their overall purchase
activity. Accordingly, our revenues and operating results may vary significantly
and unexpectedly from quarter to quarter.
If our customers do not qualify our
manufacturing lines for volume shipments, our optical networking components may
be dropped from supply programs and our revenues may decline.
Customers generally will not
purchase any of our products, other than limited numbers of evaluation units,
before they qualify our products, approve our manufacturing process and approve
our quality assurance system. Our existing manufacturing lines, as well as each
new manufacturing line, must pass through various levels of approval with our
customers. For example, customers may require that we be registered under
international quality standards. Our products may also have to be qualified to
specific customer requirements. This customer approval process determines
whether the manufacturing line achieves the customers quality, performance and
reliability standards. Delays in product qualification may cause a product to be
dropped from a long-term supply program and result in significant lost revenue
opportunity over the term of that program.
Our fiber optic components are
deployed in large and complex communications networks and may contain defects
that are not detected until after our products have been installed, which could
damage our reputation and cause us to lose customers.
Our products are designed for
deployment in large and complex optical networks. Because of the nature of these
products, they can only be fully tested for reliability when deployed in
networks for long periods of time. Our fiber optic products may contain
undetected defects when first introduced or as new versions are released, and
our customers may discover defects in our products only after they have been
fully deployed and operated under peak stress conditions. In addition, our
products are combined with products from other vendors. As a result, should
problems occur, it may be difficult to identify the source of the problem. If we
are unable to fix defects or other problems, we could experience, among other
things:
-
loss of customers;
-
damage to our reputation;
-
failure to attract new customers or achieve market
acceptance;
-
diversion of development and engineering
resources; and
-
legal actions by our customers.
The occurrence of any one or more of
the foregoing factors could negatively impact our revenues.
14
The market for fiber optic
components is unpredictable, characterized by rapid technological changes,
evolving industry standards, and significant changes in customer demand, which
could result in decreased demand for our products, erosion of average selling
prices, and could negatively impact our revenues.
The market for fiber optic
components is characterized by rapid technological change, frequent new product
introductions, changes in customer requirements and evolving industry standards.
Because this market is new, it is difficult to predict its potential size or
future growth rate. Widespread adoption of optical networks, especially in the
metropolitan, last mile, and enterprise access segments of the networks, is
critical to our future success. Potential end-user customers who have invested
substantial resources in their existing copper lines or other systems may be
reluctant or slow to adopt a new approach, such as optical networks. Our success
in generating revenues in this market will depend on:
-
the education of potential end-user customers and
network service providers about the benefits of optical networks;
and
-
the continued growth of the metropolitan, last
mile, and enterprise access segments of the communications
network.
If we fail to address changing
market conditions, sales of our products may decline, which would adversely
impact our revenues.
We may be unable to successfully
integrate acquired businesses or assets with our business, which may disrupt our
business, divert managements attention and slow our ability to expand the range
of our proprietary technologies and products.
To expand the range of our
proprietary technologies and products, we may acquire complementary businesses,
technologies or products, if appropriate opportunities arise. We may be unable
to identify other suitable acquisitions at reasonable prices or on reasonable
terms, or consummate future acquisitions or other investments, any of which
could slow our growth strategy. We may have difficulty integrating the acquired
products, personnel or technologies of any company or acquisition that we may
make. Similarly, we may not be able to attract or retain key management,
technical or sales personnel of any other companies that we acquire or from
which we acquire assets. These difficulties could disrupt our ongoing business,
distract our management and employees and increase our expenses.
If our common stock is not relisted
on the Nasdaq Global Market, we may be subject to certain provisions of the
California General Corporation Law that may affect our charter documents and
result in additional expenses.
Beginning at the commencement of
trading on November 8, 2002, the listing of our common stock was transferred
from the Nasdaq Global Market to the Nasdaq Capital Market. As a result, we may
become subject to certain sections of the California General Corporation Law
that will affect our charter documents if our common stock is not returned to
being listed on the Nasdaq Global Market. A recent Delaware decision has called
into question the applicability of the California General Corporation Law to
Delaware corporations. However, if the California General Corporation Law
applies to our company, we will not be able to continue to have a classified
board or continue to eliminate cumulative voting by our stockholders. In
addition, certain provisions of our Certificate of Incorporation that call for
supermajority voting may need to be approved by stockholders every two years or
be eliminated. Also, in the event of reorganization, stockholders will have
dissenting stockholder rights under both California and Delaware law. Any of
these changes will result in additional expense as we will have to comply with
certain provisions of the California General Corporation Law as well as the
Delaware General Corporation Law. We included these provisions in our charter
documents in order to delay or discourage a change of control or changes in our
management. Because of the California General Corporation Law, we may not be
able to avail ourselves of these provisions.
If we fail to protect our
intellectual property rights, competitors may be able to use our technologies,
which could weaken our competitive position, reduce our revenues or increase our
costs.
The fiber optic component market is
a highly competitive industry in which we, and most other participants, rely on
a combination of patent, copyright, trademark and trade secret laws,
confidentiality procedures and licensing arrangements to establish and protect
proprietary rights. The competitive nature of our industry, rapidly changing
technology, frequent new product introductions, changes in customer requirements
and evolving industry standards heighten the importance of protecting
proprietary technology rights. Since the United States Patent and Trademark
Office keeps patent applications confidential until a patent is issued, our
pending patent applications may attempt to protect proprietary technology
claimed in a third party patent application. Our existing and future patents may
not be sufficiently broad to protect our proprietary technologies as policing
unauthorized use of our products is difficult and we cannot be certain that the
steps we have taken will prevent the misappropriation or unauthorized use of our
technologies, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as United States laws. Our competitors and
suppliers may independently develop similar technology, duplicate our products,
or design around any of our patents or other intellectual property. If we are
unable to adequately protect our proprietary technology rights, others may be
able to use our proprietary technology without having to compensate us, which
could reduce our revenues and negatively impact our ability to compete
effectively.
15
Litigation may be necessary to enforce our intellectual property rights
or to determine the validity or scope of the proprietary rights of others. As a
result of any such litigation, we could lose our proprietary rights and incur
substantial unexpected operating costs. Any action we take to protect our
intellectual property rights could be costly and could absorb significant
management time and attention. In addition, failure to adequately protect our
trademark rights could impair our brand identity and our ability to compete
effectively.
We may be subject to intellectual
property infringement claims that are costly to defend and could limit our
ability to use some technologies in the future.
Our industry is very competitive and
is characterized by frequent intellectual property litigation based on
allegations of infringement of intellectual property rights. Numerous patents in
our industry have already been issued, and as the market further develops and
participants in our industry obtain additional intellectual property protection,
litigation is likely to become more frequent. From time to time, third parties
may assert patent, copyright, trademark and other intellectual property rights
to technologies or rights that are important to our business. In addition, we
have and we may continue to enter into agreements to indemnify our customers for
any expenses or liabilities resulting from claimed infringements of patents,
trademarks or copyrights of third parties. Any litigation arising from claims
asserting that our products infringe or may infringe the proprietary rights of
third parties, whether the litigation is with or without merit, could be
time-consuming, resulting in significant expenses and diverting the efforts of
our technical and management personnel. We do not have insurance against our
alleged or actual infringement of intellectual property of others. These claims
could cause us to stop selling our products, which incorporate the challenged
intellectual property, and could also result in product shipment delays or
require us to redesign or modify our products or to enter into licensing
agreements. These licensing agreements, if required, would increase our product
costs and may not be available on terms acceptable to us, if at all.
Although we are not aware of any
intellectual property lawsuits filed against us, we may be a party to litigation
regarding intellectual property in the future. We may not prevail in any such
actions, given their complex technical issues and inherent uncertainties.
Insurance may not cover potential claims of this type or may not be adequate to
indemnify us for all liability that may be imposed. If there is a successful
claim of infringement or we fail to develop non-infringing technology or license
the proprietary rights on a timely basis, our business could be
harmed.
Because our manufacturing operations
are located in active earthquake fault zones in Taiwan, and our Taiwan locations
are susceptible to the effects of a typhoon, we face the risk that a natural
disaster could limit our ability to supply products.
Our primary manufacturing operations
in Taiwan are located in active an earthquake fault zone. This region has
experienced large earthquakes in the past and may likely experience them in the
future. In September 2001, a typhoon hit Taiwan causing businesses, including
our manufacturing facility, and the financial markets to close for two days.
Because the majority of our manufacturing operations are located in Taiwan, a
large earthquake or typhoon in Taiwan could disrupt our manufacturing operations
for an extended period of time, which would limit our ability to supply our
products to our customers in sufficient quantities on a timely basis, harming
our customer relationships.
Item 1B. Unresolved Staff
Comments
None
Item 2. Properties
In the United States, we lease a
total of approximately 18,088 square feet of administrative, sales, marketing,
product development and manufacturing space in one building located in
Sunnyvale, California pursuant to a lease that expires in January
2016.
In Taiwan, we lease a total of
approximately 38,800 square feet in one facility located in Tu-Cheng City,
Taiwan. This lease expires at various times from May 2012 to December 2014. In
December 2000, we purchased approximately 8,200 square feet of space immediately
adjacent to the leased facility for $0.8 million, bringing the total square
footage to approximately 47,000 square feet. Of this total, 33,400 square feet
is used for manufacturing and 13,600 square feet is used for administration and
product development.
We lease a 132,993 square foot
facility in Shenzhen, China, which lease will expire in October 2014.
16
We believe that our facilities are
adequate to meet our requirements for the near term and that additional or
replacement space, when needed, will be available on commercially reasonable
terms.
Item 3. Legal
Proceedings
From time to time we may be involved
in litigation relating to claims arising in the ordinary course of business. As
of the date of this Form 10-K, there are no material legal proceedings pending
against us or, to the best of our knowledge, threatened against us.
Item 4. Mine Safety
Disclosures
Not applicable.
Executive Officers of the
Registrant
Our executive officers as of
December 31, 2011 were as follows:
Peter C. Chang
, 54, has served as our Chairman of the Board, Chief Executive
Officer, President and Secretary since our formation in December 1995. From 1990
through 1995, Mr. Chang was Division Manager at Hon Hai Holding. From 1984
through 1988, he was an engineer at AlliedSignal Inc. and from 1988 through 1990
was a member of the technology staff at Lucent Bell Labs. Mr. Chang received a
B.S. in Mechanical Engineering from the National Taiwan University and an M.S.
in Mechanical Engineering from Notre Dame University.
David A.
Hubbard
, 52, has served as our Executive
Vice President, Sales and Marketing since January 2011. Prior to that, Mr.
Hubbard served as Vice President, Sales and Marketing since October 1996. From
February 1995 to September 1996, Mr. Hubbard was Director of Marketing/Business
Development at Tracor/AEL Industries. From 1985 to 1995 Mr. Hubbard held several
product line and business management positions at Tyco Electronics/AMP inc. Mr.
Hubbard received his M.S. from University of Connecticut and his B.S. from State
University of New York.
Wei-Shin Tsay,
Ph.D.
, 60, has served as our Senior Vice
President, Product Development since August 2000. From 1996 through August 2000,
Dr. Tsay held various management positions in engineering, operations, and
marketing at JDS Uniphase. From 1994 through 1996, Dr. Tsay held various product
management positions at Lucent Microelectronics/Optoelectronics Strategic
Business Unit. From 1982 through 1994, Dr. Tsay held various engineering and
technical management positions at Bell Labs. Dr. Tsay received an M.S. in
Manufacturing Systems Engineering from Lehigh University, a Ph.D. in physics
from the University of Rochester and a B.S. in Physics at the National Tsing-Hua
University in Hsin-Chu, Taiwan. Dr. Tsay is currently on a leave of absence and
ceased being an executive officer in February, 2012.
Anita K. Ho
, 65, has served as our Acting Chief Financial Officer since
July 2002. From October 2000 to July 2007, Ms. Ho has also served as our
Corporate Controller. From 1998 to 2000, Ms. Ho was a Finance Manager at 3Com
Corporation. From 1995 through 1998, Ms. Ho was a member of the finance staff at
3Com Corporation. Ms. Ho received a B.S. in Accounting from Soochow University
in Taipei, Taiwan.
17
PART II
Item 5. Market for Registrants
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our
common stock, par value $0.001, was traded on the Nasdaq Global Market under the
ticker symbol AFOP until November 8, 2002, when it began to trade on the
Nasdaq Capital Market under the same ticker symbol. The following table
summarizes the high and low closing prices for our common stock as reported on
the Nasdaq Capital Market.
|
|
High
|
|
Low
|
2011
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
20.59
|
|
$
|
9.35
|
Second
Quarter
|
|
$
|
11.29
|
|
$
|
7.57
|
Third
Quarter
|
|
$
|
9.19
|
|
$
|
7.06
|
Fourth
Quarter
|
|
$
|
8.96
|
|
$
|
7.03
|
|
2010
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
8.25
|
|
$
|
5.65
|
Second
Quarter
|
|
$
|
8.20
|
|
$
|
6.15
|
Third
Quarter
|
|
$
|
9.20
|
|
$
|
7.05
|
Fourth
Quarter
|
|
$
|
15.85
|
|
$
|
8.25
|
As of
March 2, 2012, our common stock was held by 52 stockholders of record (not
including beneficial holders of common stock held in street name). We declared a
cash dividend of $0.02 per share, in 2009 which was paid in 2010. The Company
does not anticipate paying any additional dividends in the foreseeable
future
.
Stock Repurchase Program
On November 30, 2011, we announced a
program to repurchase up to $6 million worth of our outstanding common stock.
Repurchases under the program may be made in open market and privately
negotiated transactions in compliance with Securities and Exchange Commission
Rule 10b-18, subject to market conditions, applicable legal requirement and
other factors. We are not required to repurchase any amount of common stock in
any period and the program may be modified or suspended at any time. As of March
2, 2012, approximately $5.0 million is remaining under this repurchase program.
The duration of the repurchase program is open-ended.
The following table sets forth
information with respect to purchases of our common stock pursuant to the
repurchase program during the month ended December 31, 2011:
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
|
|
|
|
|
Total Number
|
|
Shares
that
|
|
|
|
|
|
|
|
of Shares
|
|
May Yet
Be
|
|
|
|
|
|
|
|
Purchased as
|
|
Purchased
|
|
|
Total Number
|
|
Average
|
|
Part of Publicly
|
|
Under
the
|
|
|
of Shares
|
|
Price Paid
|
|
Announced
|
|
Plans or
|
Period
|
|
Purchased
|
|
Per Share
|
|
Programs
|
|
Programs *
|
December 1 - December
31, 2011
|
|
41,487
|
|
$
|
7.8228
|
|
41,487
|
|
$
|
5,675,456
|
Total
|
|
41,487
|
|
$
|
7.8228
|
|
41,487
|
|
$
|
5,675,456
|
|
|
|
|
|
|
|
|
|
|
|
* Represents dollar
amount
|
|
|
|
|
|
|
|
|
|
|
18
Securities Authorized for Issuance
Under Equity Compensation Plans
Information regarding securities authorized for issuance under our equity
compensation plans can be found under Item 12 of this Annual Report on Form
10-K.
Item 6. Selected Financial
Data
Not required.
Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations
The following discussion should be
read in conjunction with our Consolidated Financial Statements and Notes
thereto.
Recent Accounting Pronouncements
See Note 1 to the Consolidated
Financial Statements for a full description of recent accounting pronouncements,
including the expected dates of adoption and estimated effects on results of
operations and financial condition, which is incorporated herein by
reference.
Critical Accounting Policies and
Estimates
There have been no significant
changes in the Companys critical accounting policies during the twelve months
ended December 31, 2011 as compared to what was previously disclosed in the
Companys Form 10-K for the fiscal year ended December 31, 2010 as filed with
the SEC.
General
Managements discussion and analysis
of our financial condition and results of operations are based on our
Consolidated Financial Statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related to revenue
recognition, bad debts, inventories, asset impairments, income taxes,
contingencies, and litigation. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values for assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
We believe the following critical
accounting policies affect managements more significant judgments and estimates
used in the preparation of our Consolidated Financial Statements:
Revenue Recognition
We recognize revenue upon shipment
of our products to customers, provided that we have received a purchase order,
the price is fixed, collection of the resulting receivable is reasonably assured
and transfer of title and risk of loss has occurred. Subsequent to the sale of
our products, we have no obligation to provide any modification or customization
upgrades, enhancements or post contract customer support.
Stock-based Compensation Expense
Stock-based compensation expense
recognized under Accounting Standards Codification (ASC) 718 was $0.8 million
and $0.3 million for the years ended December 31, 2011 and 2010, respectively,
as determined by the Black-Scholes
valuation model and represents stock-based compensation
expense related to share based compensation arrangements under our stock option
plan and our Employee Stock Purchase Plan, or ESPP.
19
Allowance for Doubtful
Accounts
Allowances are provided for estimated returns and potential uncollectable
trade receivables. Provisions for return allowances are recorded at the time
revenue is recognized based on our historical returns, current economic trends
and changes in customer demand. Such allowances are adjusted periodically to
reflect actual and anticipated experience. We also identify specific accounts
considered to have a high risk of uncollectibility and reserve the full amount.
Material differences may result in the amount and timing of our revenue for any
period if management made different judgments or utilized different
estimates.
Inventory
Inventories are stated at the lower
of cost or market, with cost being determined using standard cost, which
approximates actual cost on a first-in, first-out basis. Market value is
determined as the lower of replacement cost or net realizable value. Provisions
are made for excess and obsolete inventory based on historical usage and
managements estimates of future demand. Inventory reserves, once established,
are only reversed upon sale or disposition of related inventory.
Short-Term and Long-Term
Investments
We generally invest our cash in
certificates of deposit, corporate bonds and commercial paper. Such investments
are made in accordance our investment policy, which establishes guidelines
relative to diversification and maturities designed to maintain safety and
liquidity. These guidelines are periodically reviewed and modified in light of
trends in yields and interest rates.
Valuation of Long-Lived
Assets
We review the valuation of
long-lived assets and assess the impairment of the assets whenever events or
changes in circumstances indicate that the carrying value may not be recoverable
due to: significant underperformance relative to expected historical or
projected future operating results; significant changes in the manner of our use
of the assets or the strategy for the overall business; and significant negative
industry or economic trends. When we determine that the carrying value of
long-lived assets may not be recoverable based on the existence of one or more
of the above indicators of impairment, we measure any impairment based on a
projected discounted cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our current business
model. We did not record any asset impairment charge for the years ended
December 31, 2011 and 2010, respectively.
Income Taxes
We adopted ASC 740,
Accounting for Uncertainty in Income Taxes
on January 1, 2007. It is our policy to record income tax
interest and penalties in the income tax provision. We did not have any material
unrecognized tax benefits or uncertain tax positions at December 31, 2011 or
2010.
Overview
We were founded in December 1995 and
commenced operations to design, manufacture and market fiber optic interconnect
products, which we call our connectivity products, or what we previously called
our OPMS products. We have broadened our connectivity product line to include
attenuators, planar lightwave circuit splitters, and fused fiber products. In
early 1999, we started forming a new product line based in part on our
proprietary technology. We started selling our optical passive products, or what
we previously called our DWDM products, and other wavelength management products
in July 2000. Since introduction, sales of optical passive products have
fluctuated with the overall market for these products.
20
We market and sell our products
predominantly through our direct sales force. From our inception through
December 31, 2011, we derived the majority of our revenues from our connectivity
product line. Our optical passive products contributed as a percentage of
revenues 25.2% and 30.9% for the years ended December 31, 2011 and 2010,
respectively. In the years ended December 31, 2011 and 2010, our 10 largest
customers comprised 64% and 67% of our revenues, respectively. One customer
accounted for 14.3% of our revenues in 2011. Two customers accounted for 16.1%
and 14.6% of our revenues in 2010, respectively. Our cost of revenues consists
of raw materials, components, direct labor, manufacturing overhead and
production start-up costs. We expect that our cost of revenues as a percentage
of revenues will fluctuate from period to period based on a number of factors
including:
-
changes in manufacturing volume;
-
costs incurred in establishing additional manufacturing lines and
facilities;
-
inventory write-downs and impairment charges related to manufacturing
assets;
-
mix of products sold;
-
changes in our pricing and pricing by our competitors;
-
mix of sales channels through which our products are sold; and
-
mix of domestic and international sales.
Research
and development expenses consist primarily of salaries and related personnel
expenses, fees paid to outside service providers, materials costs, test units,
facilities, overhead and other expenses related to the design, development,
testing and enhancement of our products. We expense our research and development
costs as they are incurred. We believe that a significant level of investment
for product research and development is required to remain competitive. We
expect research and development expenses may increase as we intend to continue
to invest in our research and product development efforts during 2012.
Sales and marketing expenses consist
primarily of salaries, commissions and related expenses for personnel engaged in
marketing, sales and technical support functions, as well as the costs
associated with trade shows, promotional activities and travel expenses. We
intend to continue to invest amounts similar to our spending levels in 2011 in
our sales and marketing efforts, both domestically and internationally, in order
to increase market awareness and to generate sales of our products. However, we
cannot be certain that our expenditures will result in higher revenues. In
addition, we believe our future success depends upon establishing successful
relationships with a variety of key customers.
General and administrative expenses
consist primarily of salaries and related expenses for executive, finance,
administrative, accounting and human resources personnel, insurance and
professional fees for legal and accounting support. We expect general and
administrative expenses will increase in absolute dollar to support our revenue
growth, higher insurance premiums, and costs associated with compliance with SOX
404 regulations.
We own a controlling interest in the
outstanding common stock of Alliance Fiber Optic Products, Ltd (formally named
Transian Technology Ltd. Co.), a Taiwan corporation. This majority owned
subsidiary is engaged in design and manufacturing of our products.
In December 2000, we established a
wholly owned subsidiary, Alliance Fiber Optic Products, in the Peoples Republic
of China, which we have developed as a manufacturing facility. We commenced
production at this facility in the third quarter of 2003.
21
Results of Operations
The following table sets forth the
relationship between various components of operations, stated as a percentage of
revenues, for the periods indicated.
|
|
Years Ended
December 31,
|
|
|
2011
|
|
2010
|
Revenues
|
|
100.0%
|
|
|
100.0%
|
|
Cost
of revenues:
|
|
68.0
|
|
|
65.8
|
|
Gross profit
|
|
32.0
|
|
|
34.2
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Research and
development
|
|
7.6
|
|
|
7.1
|
|
Sales and
marketing
|
|
5.5
|
|
|
5.3
|
|
General and
administrative
|
|
9.9
|
|
|
8.4
|
|
Total
operating expenses
|
|
23.0
|
|
|
20.8
|
|
|
Income from operations
|
|
9.0
|
|
|
13.4
|
|
Interest and other income, net
|
|
1.3
|
|
|
1.0
|
|
Net Income before tax
|
|
10.3
|
|
|
14.4
|
|
Income tax
|
|
(0.2
|
)
|
|
1.2
|
|
Net Income
|
|
10.5%
|
|
|
13.2%
|
|
Comparison of Fiscal Year 2011 and
Fiscal Year 2010
Revenues.
Revenues were $42.0 million and $45.4 million for the years ended December 31, 2011 and 2010, respectively. Connectivity
products revenue remained flat at $31.4 million in 2011 and 2010, respectively. Optical passive products revenue decreased
to $10.6 million in 2011 from $14.0 million in 2010. Revenues decreased mainly due to lower average selling prices and
decreased orders for our products by our customers which resulted in lower volume shipments.
Cost of Revenues.
Cost of revenues in the year ended December
31, 2011 decreased to $28.6 million from $29.9 million in fiscal year 2010. Cost
of revenues as a percentage of net revenues increased to 68.0% in the year ended
December 31, 2011 from 65.8% in fiscal year 2010. The decrease of cost of
revenues in 2011 was mainly due to decreased volume of products sold.
Gross Profit
. Gross profit for the year ended December 31, 2011 was $13.4
million, or 32.0% of revenues, compared with gross profit of $15.5 million, or
34.2% of revenues, in fiscal year 2010. The connectivity products gross profit
increased to $11.9 million in 2011 from $11.6 million in 2010. The optical
passive products gross profit decreased to $1.5 million in 2011 from $3.9
million in 2010. For the year ended December 31, 2011, the utilization of our
factories was lower due to the decreased volume shipments of our products, which
contributed to lower gross margins. We expect our gross profit as a percentage
of revenues in 2012 to remain at levels similar to 2011 levels. However, our
average selling prices are declining, which we believe will negatively impact
our gross profit and may offset any benefits from improved absorption.
Research and Development
Expenses
. Research and development expenses
remained the same at $3.2 million in the years ended December 31, 2011 and 2010,
respectively. As a percentage of revenues, research and development expenses
increased to 7.6% in 2011 from 7.1% in 2010 as a result of decreased revenues.
We expect research and development expenses may increase as we intend to
continue to invest in our research and product development efforts.
Sales and Marketing
Expenses
. Sales and marketing expenses
decreased to $2.3 million in the year ended December 31, 2011 from $2.4 million
in fiscal year 2010. The lower sales and marketing expenses were due to lower
bonuses and commissions as a result of lower revenues. As a percentage of
revenues, sales and marketing expenses increased to 5.5% in 2011 from 5.3% in
2010 as a result of decreased revenues. We intend to continue to invest amounts
similar to our spending levels in 2011 in our sales and marketing efforts, both
domestically and internationally, as we work to increase market awareness and to
generate additional sales of our products.
General and Administrative
Expenses
. General and administrative
expenses increased to $4.1 million in the year ended December 31, 2011 from $3.8
million in fiscal year 2010. The higher general and administrative expenses were
mainly due to higher stock based compensation charges. As a percentage of
revenues, general and administrative expenses increased to 9.9% in 2011 from
8.4% in 2010 as a result of decreased revenues. We expect general and
administrative expenses will increase to support growth in our business, and
costs associated with SOX 404 compliance.
22
Stock-Based Compensation.
Total
stock-based compensation was $0.8 million and $0.3 million for the years ended
December 31, 2011 and 2010, respectively.
Interest and Other Income, Net.
Interest and other income, net, was $0.6
million and $0.5 million for the years ended December 31, 2011 and 2010,
respectively. These amounts consisted primarily of interest income, which
fluctuated based on cash balances and changes in interest rates.
Provision for
Taxes
. Our effective alternative minimum
tax, or AMT, rate was 20% for federal and 6.7% for state in the year ended
December 31, 2011. Income tax benefit was $0.06 million and income tax expense
was $0.56 million for the year ended December 31, 2011 and 2010, respectively.
The credit for the twelve months ended December 31, 2011 was due to the reversal
of over accrual for California state tax in 2010.
Under a California tax law,
effective retroactively to the beginning of 2008, our net operating loss, or
NOL, deduction was suspended for 2011. Beginning in 2008, the carryforward
period for NOLs is extended from 10 to 20 years. Beginning in 2013, we are
permitted to carry back NOLs for two years. Carrybacks are limited to 50% of
NOLs for 2011 and 75% for 2012.
As of December 31, 2011, we had
approximately $27.6 million and $20.4 million of net operating loss
carryforwards for federal and state tax purposes, respectively, which will
expire after 2022 for federal and after 2017 for state purposes, if not
utilized. We have provided a full valuation allowance against our net deferred
tax assets because realization of our deferred tax assets is uncertain due to
our history of losses.
Liquidity and Capital Resources
Comparison of Fiscal Year 2011
and Fiscal Year 2010
Net cash provided by operating
activities was $5.7 million and $5.4 million in 2011 and 2010, respectively. The
increase in our cash provided by operating activities in 2011 was primarily due
to a decrease in inventory of $0.8 million, a decrease in accounts receivable of
$0.6 million, and contribution from adjustments for non-cash charges, including
depreciation and stock based compensation of $0.8 million. These were offset by
a decrease in net income of $1.6 million, a decrease in accounts payable of $1.3
million and a decrease in accrued expenses of $1.0 million. The increase in our
cash provided by operating activities in 2010 was primarily due to an increase
in net income of $4.6 million, an increase in accounts payable of $1.2 million,
and an increase in accrued liabilities of $1.7 million, which was offset by an
increase in inventory of $2.5 million, and an increase in accounts receivable of
$2.3 million.
Cash used in investing activities
was $0.2 million and $7.3 million in 2011 and 2010, respectively. In 2011, we
spent $1.6 million to acquire property and equipment and $10.1 million in
purchases of long-term investments, which was offset in part by net proceeds
from the sale of short-term securities of $11.5 million. In 2010, we spent $3.8
million to acquire property and equipment and the net purchase of short-term
securities was $3.6 million.
Cash generated by financing
activities was $0.4 million and $0.3 million in 2011 and 2010, respectively.
Cash generated by financing activities in 2011 and 2010 was comprised of
proceeds from the exercise of options to purchase shares of our common stock and
common stock issued through our ESPP, which was offset by payment of a cash
dividend in 2010 and repayment of bank borrowings. We used $0.3 million to
repurchase our common stock in 2011.
Between November 2004 and September
2007, we entered into two mortgage loans of $0.7 million total with an interest
rate of 3.20% and three equipment loans of $0.7 million total with an interest
rate of 3.68% in Taiwan, of which two of the equipment loans have matured and
were paid off in 2010. The outstanding loans are secured by the building and
equipment we own in Taiwan.
Our principal source of liquidity as
of December 31, 2011 consisted of $13.8 million in cash and cash equivalents,
$25.8 million interest bearing marketable securities, and $10.1 in long-term
investments. We believe that our current cash, cash equivalents, short-term and
long-term investments will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
However, our future growth, including potential acquisitions, may require
additional funding. If cash generated from operations is insufficient to satisfy
our long-term liquidity requirements, we may need to raise capital through
additional equity or debt financings, additional credit facilities, strategic
relationships or other arrangements. If additional funds are raised through the
issuance of securities, these securities could have rights, preferences and
privileges senior to those of the holders of our common stock, and the terms of
any debt facility could impose restrictions on our operations. The sale of
additional equity or debt securities could result in additional dilution to our
stockholders, and additional financing may not be available in amounts or on
terms acceptable to us, if at all. If we are unable to obtain additional
financing, we may be required to reduce our research and development and
marketing expenses. Strategic arrangements, if necessary to raise additional
funds, may require us to relinquish our rights to certain of our technologies or
products. Our failure to raise capital when needed could harm our business,
financial condition and operating results.
23
Contractual Obligations
Our
long-term debt obligations are for principal and interest on two mortgage loans
and one equipment loan from a financial institution in Taiwan.
In July 2004, we moved into our
corporate headquarters in Sunnyvale, California. The lease had a six-year term
commencing on July 22, 2004. In June 2010, we renewed the lease for an 18,088
square foot facility in the same building, which lease will expire in January
2016.
In Taiwan, we lease a total of
approximately 38,800 square feet in one facility located in Tu-Cheng City,
Taiwan. This lease expires at various times from May 2012 to January 2013. In
December 2000, we purchased approximately 8,200 square feet of space immediately
adjacent to the leased facility for $0.8 million, bringing the total square
footage to approximately 47,000 square feet.
We lease a 132,993 square foot
facility in Shenzhen, China which lease will expire in October 2014.
The following summarizes our
contractual obligations at December 31, 2011 (in thousands):
|
|
Payments Due By Period
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
More
than
|
Contractual obligations
|
|
Total
|
|
1 year
|
|
1-3 Years
|
|
4-5 Years
|
|
5 Years
|
Debt Obligations
Including Interest Payments
|
|
$
|
233
|
|
$
|
101
|
|
$
|
132
|
|
$
|
-
|
|
$
|
-
|
Operating Lease Obligations
|
|
|
1,630
|
|
|
652
|
|
|
748
|
|
|
230
|
|
|
-
|
Total
|
|
$
|
1,863
|
|
$
|
753
|
|
$
|
880
|
|
$
|
230
|
|
$
|
-
|
Off-Balance Sheet Arrangements
We do not have any off-balance sheet
arrangements, as such term is defined in rules promulgated by the Securities and
Exchange Commission, that have or are reasonably likely to have a current or
future material effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
Item 7A. Quantitative and
Qualitative Disclosures About Market Risk
Not required.
Item 8. Financial Statements and
Supplementary Data
24
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
Page
|
Consolidated Financial
Statements
|
|
|
Report of Marcum
LLP
|
|
26
|
Consolidated
Balance Sheets
|
|
27
|
Consolidated
Statements of Income
|
|
28
|
Consolidated
Statements of Cash Flows
|
|
29
|
Consolidated
Statements of Stockholders Equity
|
|
30
|
Notes to
Consolidated Financial Statements
|
|
31
|
25
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Audit Committee of the Board of
Directors
of Alliance Fiber Optic Products, Inc.
We have audited the accompanying
consolidated balance sheets of Alliance Fiber Optic Products, Inc. (the
Company) as of December 31, 2011 and December 31, 2010, and the related
consolidated statements of income, stockholders equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Alliance Fiber Optic Products, Inc., as
of December 31, 2011 and December 31, 2010, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/Marcum LLP
Marcum LLP
San Francisco, California
March 16, 2012
26
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Consolidated Balance Sheets
(in thousands, except share
data)
|
|
December 31,
|
|
|
2011
|
|
2010
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
13,820
|
|
|
$
|
8,040
|
|
Short-term
investments
|
|
|
25,768
|
|
|
|
37,320
|
|
Accounts
receivable, net
|
|
|
6,630
|
|
|
|
7,224
|
|
Inventories,
net
|
|
|
6,763
|
|
|
|
7,439
|
|
Prepaid expense and
other current assets
|
|
|
714
|
|
|
|
733
|
|
Total
current assets
|
|
|
53,695
|
|
|
|
60,756
|
|
|
Long-term
investments
|
|
|
10,098
|
|
|
|
-
|
|
Property and equipment, net
|
|
|
7,718
|
|
|
|
7,523
|
|
Other
assets
|
|
|
162
|
|
|
|
170
|
|
Total
assets
|
|
$
|
71,673
|
|
|
$
|
68,449
|
|
|
Liabilities and
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
3,647
|
|
|
$
|
4,931
|
|
Accrued
expenses
|
|
|
3,624
|
|
|
|
4,633
|
|
Current portion of
bank loan
|
|
|
97
|
|
|
|
104
|
|
Total
current liabilities
|
|
|
7,368
|
|
|
|
9,668
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Bank loan
|
|
|
129
|
|
|
|
231
|
|
Other long-term
liabilities
|
|
|
562
|
|
|
|
546
|
|
Total
long-term liabilities
|
|
|
691
|
|
|
|
777
|
|
Total
liabilities
|
|
|
8,059
|
|
|
|
10,445
|
|
|
Commitments and
contingencies (Note 10)
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Preferred stock,
par value $0.001: 5,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
no
shares issued and outstanding at December 31, 2011 and 2010,
|
|
|
|
|
|
|
|
|
respectively
|
|
|
-
|
|
|
|
-
|
|
Common stock, par
value $0.001: 20,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
8,891,219
and 8,793,636 shares issued and outstanding at
|
|
|
|
|
|
|
|
|
December
31, 2011 and 2010, respectively
|
|
|
9
|
|
|
|
9
|
|
Additional
paid-in-capital
|
|
|
114,957
|
|
|
|
113,707
|
|
Accumulated
deficit
|
|
|
(53,353
|
)
|
|
|
(57,784
|
)
|
Accumulated other
comprehensive income
|
|
|
2,001
|
|
|
|
2,072
|
|
Total
stockholders' equity
|
|
|
63,614
|
|
|
|
58,004
|
|
Total
liabilities and stockholders' equity
|
|
$
|
71,673
|
|
|
$
|
68,449
|
|
The accompanying notes are an integral
part of these Consolidated Financial Statements.
27
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Consolidated Statements of Income
(in thousands, except per
share data)
|
|
Years Ended December 31,
|
|
|
2011
|
|
2010
|
Revenues
|
|
$
|
42,020
|
|
|
$
|
45,406
|
Cost of revenues
|
|
|
28,578
|
|
|
|
29,872
|
Gross
profit
|
|
|
13,442
|
|
|
|
15,534
|
Operating expenses:
|
|
|
|
|
|
|
|
Research
and development
|
|
|
3,181
|
|
|
|
3,218
|
Sales and
marketing
|
|
|
2,306
|
|
|
|
2,406
|
General
and administrative
|
|
|
4,141
|
|
|
|
3,811
|
Total
operating expenses
|
|
|
9,628
|
|
|
|
9,435
|
Income from
operations
|
|
|
3,814
|
|
|
|
6,099
|
Interest and other income,
net
|
|
|
553
|
|
|
|
468
|
Net income before
tax
|
|
|
4,367
|
|
|
|
6,567
|
Income tax
|
|
|
(64
|
)
|
|
|
555
|
Net income
|
|
$
|
4,431
|
|
|
$
|
6,012
|
Net income per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.50
|
|
|
$
|
0.70
|
Diluted
|
|
$
|
0.49
|
|
|
$
|
0.69
|
Shares used in
computing net income per share:
|
|
|
|
|
|
|
|
Basic
|
|
|
8,867
|
|
|
|
8,580
|
Diluted
|
|
|
9,109
|
|
|
|
8,759
|
The accompanying notes are an integral
part of these Consolidated Financial Statements.
28
ALLIANCE FIBER OPTIC PRODUCTS,
INC.
Consolidated Statements of Cash Flows
(in thousands)
|
|
Years Ended December 31,
|
|
|
2011
|
|
2010
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,431
|
|
|
$
|
6,012
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,513
|
|
|
|
1,113
|
|
Amortization
of stock based compensation
|
|
|
762
|
|
|
|
256
|
|
Loss
on disposal of property and equipment
|
|
|
19
|
|
|
|
24
|
|
Provision
for inventory valuation
|
|
|
(111
|
)
|
|
|
111
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
594
|
|
|
|
(2,272
|
)
|
Inventories
|
|
|
787
|
|
|
|
(2,566
|
)
|
Prepaid
expenses and other current assets
|
|
|
19
|
|
|
|
(218
|
)
|
Other
assets
|
|
|
8
|
|
|
|
63
|
|
Accounts
payable
|
|
|
(1,285
|
)
|
|
|
1,231
|
|
Accrued
expenses
|
|
|
(1,009
|
)
|
|
|
1,660
|
|
Other
long-term liabilities
|
|
|
17
|
|
|
|
37
|
|
Net
cash provided by operating activities
|
|
|
5,745
|
|
|
|
5,451
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of short-term investments
|
|
|
(14,893
|
)
|
|
|
(31,100
|
)
|
Proceeds
from sales and maturities of short-term investments
|
|
|
26,425
|
|
|
|
27,539
|
|
Purchase
of long-term investments
|
|
|
(10,098
|
)
|
|
|
-
|
|
Purchase
of property and equipment
|
|
|
(1,635
|
)
|
|
|
(3,782
|
)
|
Net
cash used in investing activities
|
|
|
(201
|
)
|
|
|
(7,343
|
)
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock under ESPP
|
|
|
414
|
|
|
|
398
|
|
Proceeds
from the exercise of common stock options
|
|
|
399
|
|
|
|
889
|
|
Repurchase
of common stock
|
|
|
(325
|
)
|
|
|
-
|
|
Payment of
dividends
|
|
|
-
|
|
|
|
(849
|
)
|
Repayment
of bank borrowings
|
|
|
(95
|
)
|
|
|
(117
|
)
|
Net
cash provided by financing activities
|
|
|
393
|
|
|
|
321
|
|
|
Effect of exchange
rate changes on cash and cash equivalents
|
|
|
(157
|
)
|
|
|
1,086
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
5,780
|
|
|
|
(485
|
)
|
Cash and cash
equivalents at beginning of year
|
|
|
8,040
|
|
|
|
8,525
|
|
Cash and cash equivalents at end of
year
|
|
$
|
13,820
|
|
|
$
|
8,040
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
(9
|
)
|
|
$
|
(9
|
)
|
Cash paid for income taxes
|
|
$
|
(98
|
)
|
|
$
|
(76
|
)
|
The accompanying notes are an integral
part of these Consolidated Financial Statements.
29
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Consolidated Statements of Stockholders'
Equity
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Deferred
|
|
Earnings
|
|
Other
|
|
|
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
Stock-based
|
|
(Accumulated
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Compensation
|
|
Deficits)
|
|
Income/(Loss)
|
|
Total
|
Balance at December 31, 2009
|
|
8,489
|
|
|
$
|
8
|
|
$
|
111,196
|
|
|
$
|
969
|
|
$
|
(63,796
|
)
|
|
$
|
562
|
|
|
$
|
48,939
|
|
Deferred stock-based compensation
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
256
|
|
|
-
|
|
|
|
-
|
|
|
|
256
|
|
Issuance of stock on exercise of
options
|
|
200
|
|
|
|
1
|
|
|
888
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
889
|
|
Issuance of stock purchased through ESPP
|
|
104
|
|
|
|
-
|
|
|
398
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
398
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the
year
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
6,012
|
|
|
|
-
|
|
|
|
6,012
|
|
Unrealized gain on
short-term investments
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
12
|
|
|
|
12
|
|
Currency translation
adjustments
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
1,498
|
|
|
|
1,498
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
8,793
|
|
|
|
9
|
|
|
112,482
|
|
|
|
1,225
|
|
|
(57,784
|
)
|
|
|
2,072
|
|
|
|
58,004
|
|
Deferred stock-based compensation
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
762
|
|
|
-
|
|
|
|
-
|
|
|
|
762
|
|
Issuance of stock on exercise of options
|
|
77
|
|
|
|
-
|
|
|
399
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
399
|
|
Issuance of stock purchased through
ESPP
|
|
55
|
|
|
|
-
|
|
|
414
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
414
|
|
Repurchase of common sstock
|
|
(35
|
)
|
|
|
-
|
|
|
(325
|
)
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(325
|
)
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the
year
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
4,431
|
|
|
|
-
|
|
|
|
4,431
|
|
Unrealized loss on
short-term investments
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
(19
|
)
|
Currency translation
adjustments
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
(52
|
)
|
|
|
(52
|
)
|
Comprehensive
Income
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Balance at December 31, 2011
|
|
8,890
|
|
|
$
|
9
|
|
$
|
112,970
|
|
|
$
|
1,987
|
|
$
|
(53,353
|
)
|
|
$
|
2,001
|
|
|
$
|
63,614
|
|
The accompanying notes are an integral
part of these Consolidated Financial Statements.
30
ALLIANCE FIBER OPTIC PRODUCTS,
INC.
Notes to Consolidated Financial
Statements
1. The Company and summary of
significant accounting policies
The Company
Alliance
Fiber Optic Products, Inc. (the Company) was incorporated in California on
December 12, 1995 and reincorporated in Delaware on October 19, 2000. The
Company designs, manufactures and markets fiber optic components for
communications equipment manufacturers. The Companys headquarters are located
in Sunnyvale, California, and it has operations in Taiwan and China.
Use of estimates
The preparation of financial
statements in accordance with generally accepted accounting principles in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates involve those required in the assessment of allowance for
sales returns, doubtful accounts and/or potential excess obsolete inventory.
Actual results could differ from those estimates.
Basis of presentation
The consolidated financial
statements include the accounts of the Company and its subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Foreign currency
translation
The Companys operations through
foreign subsidiaries use the local currency as their functional currency. All
assets and liabilities of the subsidiaries are translated at rates of exchange
on the balance sheet date. Revenues and expenses are translated at the average
rate of exchange for the period. Gains and losses resulting from foreign
currency translation are recorded as a separate component of other comprehensive
income in stockholders equity. Foreign currency transaction gains and losses
are recorded in interest and other income and have not been material.
Cash, cash equivalents, short-term
and long-term investments
The Company considers all highly
liquid instruments with a maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents consist of cash deposited in money
market, certificate of deposit, and checking accounts.
The Company accounts for its
investments under the provisions of Accounting Standards Codification (ASC)
320 Investments - Debt and Equity Securities. Investments in highly liquid
financial instruments with remaining maturities greater than three months and
maturities of less than one year are classified as short-term investments.
Financial instruments with remaining maturities greater than one year are
classified as long-term investments. Investments in related party companies are
included in Other Assets in the Consolidated Balance Sheets. All investments
are classified as available-for-sale and are reported at fair value using the
specific identification method with net unrealized gain/(loss) reported, net of
tax as other comprehensive gain/(loss) in stockholders equity. The fair value
of the Companys available-for-sale securities are based on quoted market prices
or other methodologies for those investments with no quoted market prices at the
balance sheet dates.
The Companys financial instruments
also include accounts receivable, accounts payable and debts, and are carried at
cost, which approximates the fair value of these instruments.
31
ALLIANCE FIBER OPTIC PRODUCTS,
INC.
Notes to Consolidated Financial
Statements
Fair value of financial
instruments
In September 2006, the Financial
Accounting Standards Board (the FASB) issued ASC 820 Fair Value
Measurements. ASC 820 defines fair value, establishes a framework for measuring
fair value, and enhances fair value measurement disclosure. In October 2008, the
FASB issued Financial Staff Position ASC 820 Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active. ASC 820 clarifies
the application of ASC 820 in a market that is not active, and provides guidance
on the key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. Effective January 1,
2008, the Company adopted the measurement and disclosure requirements related to
financial assets and financial liabilities.
ASC 820 delayed the effective date
for all nonfinancial assets and nonfinancial liabilities, except for items that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), until the beginning of fiscal
2010.
Allowance for doubtful accounts
The Company performs periodic credit
evaluations of customers financial condition. The Company maintains allowances
for doubtful accounts for estimated losses resulting from the inability or
unwillingness of customers to make required payments. When the Company becomes
aware that a specific customer is unable to meet its financial obligations, for
example, as a result of bankruptcy or deterioration in the customers operating
results or financial position, the Company records a specific allowance to
reflect the level of credit risk in the customers outstanding receivable
balance. In addition, the Company records additional allowances based on
historical sales returns. The Company is not able to predict changes in the
financial condition of customers, and if circumstances related to customers
deteriorate, estimates of the recoverability of trade receivables could be
materially affected and the Company may be required to record additional
allowances. Alternatively, if the Company provides more allowances than the
Company needs, the Company may reverse a portion of such provisions in future
periods based on actual collection experience.
Inventories
Inventories are stated at the lower
of cost or market, with cost being determined using standard cost, which
approximates actual cost on a first-in, first-out basis. Market value is
determined as the lower of replacement cost or net realizable value. Provisions
are made for excess and obsolete inventory based on historical usage and
managements estimates of future demand. Inventory reserves, once established,
are only reversed upon sale or disposition of related inventory.
Property and equipment
Property and equipment is stated at
cost less accumulated depreciation and impairment charges. Depreciation is
computed using the straight-line method using estimated useful lives of two to
five years for machinery and equipment and five years for furniture and
fixtures. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the estimated life of the assets,
generally two to four years, or the lease term. Depreciation and amortization
expense was $1.5 million in 2011 and $1.1 million in 2010.
32
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
Impairment of Long-lived
Assets
We review our long-lived assets for
impairment whenever events or changes in business circumstances indicate that
the carrying amount of assets may not be fully recoverable or that the useful
lives of these assets are no longer appropriate. Each impairment test is based
on a comparison of the undiscounted future cash flows to the recorded value of
the asset. If an impairment is indicated, the asset is written down to its
estimated fair value based on quoted fair market values.
Revenue recognition
The Company recognizes revenue upon
shipment of its products to its customers, provided that the Company has
received a purchase order, the price is fixed, collection of the resulting
receivable is reasonably assured and transfer of title and risk of loss has
occurred. Subsequent to the sale of its products, the Company has no obligation
to provide any modification or customization upgrades, enhancements or post
contract customer support.
Allowances are provided for
estimated returns. A provision for estimated sales return allowances is recorded
at the time revenue is recognized based on historical returns, current economic
trends and changes in customer demand. Such allowances are adjusted periodically
to reflect actual and anticipated experience. Such adjustments, which are
recorded against revenue in the period, could be material. The Company accrued
$0.02 million for warranty reserves as of December 31, 2011 and 2010,
respectively.
Shipping and handling expenses
Shipping and handling expenses are
included in cost of revenue.
Research and development expenses
Research and development costs are
expensed as incurred.
Advertising expenses
Advertising costs are expensed as
incurred and have not been material.
Sales taxes
The Company accounts for taxes
charged to its customers and collected on behalf of taxing authorities on a net
basis.
Income taxes
The Company accounts for income
taxes in accordance with ASC 740 which requires that the Company recognize
deferred tax liabilities and assets based on the differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities, using enacted tax rates in effect in the years the differences are
expected to reverse. Deferred income tax benefit (expense) results from the
change in net deferred tax assets or deferred tax liabilities. A valuation
allowance is recorded when it is more likely than not that some or all deferred
tax assets will not be realized.
The Company adopted ASC 740 which
utilizes a two-step approach wherein a tax benefit is recognized if a position
is more-likely-than-not to be sustained. The amount of the benefit is then
measured to be the highest tax benefit that is greater than 50% likely to be
realized. The Company has elected to include interest and penalties related to
its tax contingencies in income tax expense. The adoption of this interpretation
had no material impact and there were no accruals for interest and penalties
related to uncertain tax position at the inception date through December 31,
2011. The Company files a U.S. federal tax return and a return with the State of
California. The Company has determined that its major tax jurisdictions are the
United States and California. The tax years of 2007 through 2011 remain open and
subject to examination by the appropriate governmental agencies in the United
States or California.
33
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
Stock-based compensation
The Company
estimates the fair value of the share-based payment awards on the date of grant
using an option pricing model. The value of awards that are ultimately expected
to vest is recognized as expense over the requisite employee service period.
Comprehensive income
Comprehensive income is defined as the change in equity of a company from
transactions and other events and circumstances excluding transactions resulting
from investments from owners and distributions to owners. Comprehensive income
consists of cumulative translation adjustments and unrealized gain on short-term
investments and is disclosed in the consolidated statements of stockholders
equity.
Recent accounting pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued
guidance to amend the disclosure requirements related to fair value
measurements. The guidance will add new requirements for disclosures into and
out of Levels 1 and 2 fair value measurements and information on purchases,
sales, issuances, and settlements on a gross basis in the reconciliation of
Level 3 fair value measurements. It also clarifies existing fair value
disclosures about the level of disaggregation, inputs, and valuation techniques.
The Company adopted the guidance effective January 1, 2011, as required. The
adoption of the new guidance did not have a material effect on the Companys
consolidated financial position or results of operations.
In June 2011, the FASB issued guidance amending the presentation
requirements for comprehensive income. For public entities, this guidance is
effective for fiscal years, and interim periods within those years, beginning
after December 15, 2011 with early adoption permitted. Upon adoption, the
Company will have the option to report total comprehensive income, including
components of net income and components of other comprehensive income, as a
single continuous statement or in two separate but consecutive statements. The
Company does not anticipate the adoption of this guidance will have a material
impact on its consolidated financial statements.
2. Stockholders Equity
Preferred Stock.
The Company is
authorized to issue 5,000,000 shares of preferred stock, none of which was
outstanding as of December 31, 2011. The Board of Directors may determine the
rights, preferences and privileges of any preferred stock issued in the future.
Common Stock.
On April 28, 2011,
the Company amended its Amended and Restated Certificate of Incorporation to
decrease the number of shares of common stock authorized for issuance from
80,000,000 to 20,000,000. On August 27, 2010, the Company effected a 1-for-5
reverse split of its outstanding common stock, pursuant to previously obtained
stockholder authorization. The number of authorized shares of common stock was
not changed. The reverse stock split reduced the Companys issued and
outstanding shares of common stock as of August 27, 2010 from approximately
42,928,188 shares to approximately 8,585,633 shares. All share and per share
numbers reflect the reverse split and were applied on a retroactive basis.
Stockholder Rights Plan.
On March
10, 2011, the Board of Directors entered into an Amended and Restated Rights
Agreement (the Restated Rights Plan), which amended and restated the original
rights agreement dated as of May 29, 2001 (the Original Agreement). In
connection with the adoption of the Original Agreement, one preferred stock
purchase right (a Right) was distributed for each outstanding share of common
stock. Since the occurrence of a one-
for-five reverse
split of the common stock at the close of business on August 7, 2010, five
Rights had been associated with each outstanding share of common stock. The
Restated Rights Plan restores the initial one Right per share of common stock
ratio of the Original Agreement, but is also subject to adjustment as provided
in the Restated Rights Plan. Rights continue to be attached to all outstanding
shares of common stock, and no separate Rights certificates have been
distributed.
34
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
Rights will
separate from the common stock and a "Distribution Date" will occur upon the
earliest of the following: (i) a public announcement that a person, entity or
group of affiliated or associated persons and/or entities (an "Acquiring
Person") has acquired, or obtained the right to acquire, beneficial ownership of
fifteen percent (15%) or more of the outstanding shares of common stock (other
than (A) as a result of repurchases of stock by the Company or certain
inadvertent actions by institutional or certain other stockholders, (B) the
Company, any subsidiary of the Company or any employee benefit plan of the
Company or any subsidiary, (C) Foxconn Holding Limited (which owned in excess of
fifteen percent (15%) of the outstanding shares of common stock when the
Original Agreement was implemented), so long as such entity, together with its
affiliated or associated persons and/or entities, does not increase its
beneficial ownership by more than one percent (1%) of the outstanding shares of
common stock above the percentage held in May 2001 (or such lesser percentage as
may result following any transfer of securities after such date until Foxconn
beneficially owns less than fifteen percent (15%) of the outstanding shares of
common stock)) and (D) certain other instances set forth in the Restated Rights
Plan); or (ii) ten (10) business days (unless such date is extended by the Board
of Directors) following the commencement of a tender offer or exchange offer
which would result in any person, entity or group of affiliated or associated
persons and/or entities becoming an Acquiring Person (unless such tender offer
or exchange offer is a Permitted Offer as defined in the Restated Rights Plan).
As soon as practicable following the Distribution Date, separate certificates
evidencing the Rights ("Rights Certificates") will be mailed to holders of
record of the common stock as of the close of business on the Distribution Date,
and the separate Rights Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on the earliest of (i) May 29, 2021, (ii) consummation of a merger
transaction with a person, entity or group who (x) acquired common stock
pursuant to a Permitted Offer and (y) is offering in the merger the same price
per share and form of consideration paid in the Permitted Offer or (iii)
redemption or exchange of the Rights by the Company as described in the Amended
Rights Plan.
3. Stock-based Compensation
The Accounting Standards Codification (ASC) 718 requires companies to
record compensation expense for stock options measured at fair value, on the
date of grant, using an option-pricing model. The fair value of stock options
granted and stock purchased pursuant to the 2000 Employee Stock Purchased Plan
(ESPP) prior to June 30, 2010 was determined using the Binomial Lattice Model.
The Company adopted the Black-Scholes valuation model for stock options granted
and stock purchased pursuant to the ESPP after June 30, 2010. The Company
believes that the Black-Scholes model is more appropriate in determining fair
value of its stock-based compensation and does not differ materially from the
previous valuation model used.
At December 31, 2011, the Company had one stock-based compensation plan,
the 2000 Stock Incentive Plan, which is described below.
In November 2000, the Company adopted its 2000 Stock Incentive Plan under
which 300,000 shares of common stock were reserved for issuance to eligible
employees, directors and consultants upon exercise of stock options and stock
purchase rights. The number of shares reserved for issuance under the Companys
2000 Stock Incentive Plan will be increased on the first day of the Companys
fiscal year by the lesser of 340,000 shares, 5% of the fully diluted outstanding
shares of the Companys common stock on that date or a lesser amount determined
by the Companys Board of Directors. There was no increase on January 1, 2011,
because the Board determined there were enough shares available for issuance in
2011 pursuant to the Plan. Stock options, restricted stock, restricted stock
units (RSUs) or stock appreciation rights may be awarded under the 2000 Stock
Incentive Plan.
35
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
The plan was
amended and restated in 2010 to, among other things, extend the term under which
awards may be granted under the plan until March 17, 2020, eliminate a 10
million share ceiling on the aggregate number of shares of common stock that may
be issued under the plan, and to include certain qualifying performance criteria
and annual award limits so that awards granted under the plan qualify as
performance-based compensation" under the requirements of Section 162(m) of the
Internal Revenue Code of 1986, as amended.
Under the 2000 Stock Incentive Plan, participants may be granted RSUs,
representing an unfunded, unsecured right to receive common stock on the date
specified in the recipients award. The RSUs granted under the plan generally
vest over two years at a rate of 50 percent per year or five years at a rate of
20 percent per year. The Company recognizes compensation expense on a
straight-line basis over the applicable vesting term of the award.
During the year ended December 31, 2011, the Company granted 273,000 RSUs
with a total grant-date fair value of $2.5 million. The resulting compensation
expense recorded in the year ended December 31, 2011 was approximately $0.4
million. At December 31, 2011, there was $2.1 million of unrecognized
compensation cost related to RSUs, of which $0.5 million is expected to be
realized over two years and $1.6 million is expected to be realized over five
years.
Options granted under the 2000 Stock Incentive Plan generally vest over
four years and are exercisable for not more than ten years. However, most
options granted in the past four years have been fully vested at the time of
grant.
The following information relates to stock option activity for the year
ended December 31, 2011:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
Options
|
|
Shares
|
|
Price
|
|
Life
|
|
Value
|
Outstanding at
December 31, 2010
|
|
920,040
|
|
|
$
|
7.27
|
|
|
|
|
|
Granted
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
(77,100
|
)
|
|
|
5.17
|
|
|
|
|
|
Forfeited
|
|
(18,660
|
)
|
|
|
16.31
|
|
|
|
|
|
Outstanding at
December 31, 2011
|
|
824,280
|
|
|
$
|
7.26
|
|
4.95 Years
|
|
$
|
940,111
|
Vested and expected to vest at December
31, 2011
|
|
817,576
|
|
|
$
|
7.25
|
|
4.92 Years
|
|
$
|
939,684
|
Exercisable at
December 31, 2011
|
|
676,461
|
|
|
$
|
7.09
|
|
4.15 Years
|
|
$
|
929,635
|
The aggregate
intrinsic value in the table above represents the total pre-tax intrinsic value
(the difference between the closing stock price on the last trading day of the
fourth quarter of fiscal 2010 and 2011and the exercise price, multiplied by the
number of in-the-money options) that would have been received by the option
holders had all option holders exercised their options on December 31, 2011 and
2010. This amount changes based on the fair market value of the Companys common
stock. The total intrinsic value of options exercised for the years ended
December 31, 2011 and 2010 were $0.2 million and $2.2 million, respectively.
The dividend rate was 0% for the years ended December 31, 2011 and 2010.
Cash received from option exercises during the year ended December 31,
2011 and 2010 was approximately $0.4 million and $0.9 million, respectively, and
is included within the financing activities section in the accompanying
consolidated statements of cash flows.
36
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
Information
relating to stock options outstanding at December 31, 2011 is as
follows:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
Range of
|
|
Number
|
|
Remaining
|
|
Average
|
|
Number
|
|
Average
|
Exercise
|
|
Outstanding
|
|
Contractual
|
|
Exercise
|
|
Exercisable
|
|
Exercise
|
Price
|
|
As of 12/31/11
|
|
Term
|
|
Price
|
|
As of 12/31/11
|
|
Price
|
$
2.00
-
$
4.40
|
|
16,550
|
|
4.54
|
|
$
|
3.63
|
|
15,883
|
|
$
|
3.60
|
$
4.50
-
$
4.50
|
|
138,080
|
|
3.86
|
|
$
|
4.50
|
|
138,080
|
|
$
|
4.50
|
$
4.55
-
$
4.80
|
|
138,150
|
|
2.91
|
|
$
|
4.69
|
|
138,150
|
|
$
|
4.69
|
$
5.95
-
$
7.80
|
|
137,100
|
|
2.87
|
|
$
|
7.59
|
|
132,099
|
|
$
|
7.65
|
$
7.95
-
$
7.95
|
|
157,000
|
|
8.56
|
|
$
|
7.95
|
|
39,249
|
|
$
|
7.95
|
$
8.25 - $12.05
|
|
237,400
|
|
5.62
|
|
$
|
9.96
|
|
213,000
|
|
$
|
10.08
|
|
|
824,280
|
|
4.95
|
|
$
|
7.26
|
|
676,461
|
|
$
|
7.09
|
Options
exercisable as of December 31, 2011 and 2010 were 676,461 and 705,068 at an
average exercise price of $7.09 and $7.03 per share, respectively.
Employee Stock Purchase Plan
In November 2000, the Company adopted its ESPP. The Company reserved
300,000 shares of common stock for issuance under the ESPP. The ESPP was amended
and restated in 2010. On April 29, 2011, the stockholders approved an increase
by 300,000 in the number of shares of common stock available for issuance. On
the first day of January of each year beginning January 1, 2001 through December
31, 2010, additional shares of common stock were reserved for issuance under the
ESPP as determined by the Board of Directors. The ESPP limited the annual
increase to the lesser of 1% of the Companys issued and outstanding common
stock or 200,000 shares. The ESPP provides eligible employees with the
opportunity to acquire shares of common stock at a price of 85% of the lower of
the fair market value of the common stock on the first day of the offering
period or the last day of the offering period, whichever is lower. The ESPP is
structured as a qualified employee stock purchase plan under Section 423 of the
Internal Revenue Code of 1986, as amended. However, the ESPP is not intended to
be a qualified pension, profit sharing or stock bonus plan under Section 401(a)
of the 1986 Code and is not subject to the provisions of the Employee Retirement
Security Act of 1974. The Board may amend, suspend, or terminate the Plan at any
time without notice. A total of 55,184 and 104,398 shares were issued under the
ESPP in 2011 and 2010, respectively.
The following information relates to the ESPP:
|
2011
|
|
2010
|
Weighted average fair
value per share of shares purchased
|
$
|
7.51
|
|
$
|
3.82
|
Total compensation expense for
ESPP
|
$
|
168,660
|
|
$
|
168,123
|
Total amount of cash
received from the purchase of stock through ESPP
|
$
|
414,465
|
|
$
|
398,329
|
Total intrinsic value of ESPP stock
purchased at December 31st
|
$
|
8,244
|
|
$
|
1,238,203
|
There were
304,466 shares available for future issuance under the ESPP as of December 31,
2011.
37
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
The following table summarizes employee stock-based compensation expense
resulting from stock options, RSUs, and the ESPP (in thousands):
|
|
Years Ended
December 31,
|
|
|
2011
|
|
2010
|
Included in cost of
revenue
|
|
$
|
99
|
|
$
|
85
|
Included in operating
expenses:
|
|
|
|
|
|
|
Research and
development
|
|
|
75
|
|
|
32
|
Sales and marketing
|
|
|
177
|
|
|
38
|
General and
administrative
|
|
|
411
|
|
|
101
|
Total
|
|
|
663
|
|
|
171
|
Total stock-based
compensation expense
|
|
$
|
762
|
|
$
|
256
|
4. Net Income per
Share
Basic net
income per share is computed by dividing net income for the period by the
weighted average number of shares of common stock outstanding during the period.
Diluted net income per share is computed by dividing the net income for the
period by the combination of dilutive common share equivalents, comprised of
shares issuable under the Companys stock-based compensation plans, and the
weighted average number of common shares outstanding during the period. There
were no incremental dilutive common share equivalents in the periods
presented.
The following table sets forth the computation of basic and diluted net
income per share for the years indicated (in thousands, except per share
amounts):
|
|
Years Ended December 31,
|
|
|
2011
|
|
2010
|
Numerator:
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
$
|
4,431
|
|
$
|
6,012
|
|
Denominator:
|
|
|
|
|
|
|
Shares used in computing net income per share:
|
|
|
|
|
|
|
Weighted average of common shares outstanding
|
|
|
|
|
|
|
Basic
|
|
|
8,867
|
|
|
8,580
|
Diluted
|
|
|
9,109
|
|
|
8,759
|
|
Net income per share
attributable to common stockholders:
|
|
|
|
|
|
|
Basic
|
|
$
|
0.50
|
|
$
|
0.70
|
Diluted
|
|
$
|
0.49
|
|
$
|
0.69
|
The following
outstanding options that were out-of-the money were excluded from the
computation of diluted net income per share (in thousands) as the effect would
have been anti-dilutive:
|
|
Years Ended December 31,
|
|
|
2011
|
|
2010
|
Options to purchase
common stock
|
|
242
|
|
256
|
38
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
5. Balance Sheet Components (in
thousands)
|
|
December 31,
|
|
|
2011
|
|
2010
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,338
|
|
|
$
|
2,846
|
|
Money market
instruments and funds
|
|
|
12,482
|
|
|
|
5,194
|
|
|
|
$
|
13,820
|
|
|
$
|
8,040
|
|
|
Accounts receivable,
net:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
6,751
|
|
|
$
|
7,345
|
|
Less: Allowance
for doubtful accounts and sales returns
|
|
|
(121
|
)
|
|
|
(121
|
)
|
|
|
$
|
6,630
|
|
|
$
|
7,224
|
|
|
Allowance for
doubtful accounts and sales returns:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
121
|
|
|
$
|
121
|
|
Utilized
|
|
|
-
|
|
|
|
-
|
|
Balance at end of year
|
|
$
|
121
|
|
|
$
|
121
|
|
|
Inventories,
net:
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
2,263
|
|
|
$
|
2,211
|
|
Work-in-process
|
|
|
2,475
|
|
|
|
2,713
|
|
Raw materials
|
|
|
2,025
|
|
|
|
2,515
|
|
|
|
$
|
6,763
|
|
|
$
|
7,439
|
|
|
Accrued
expenses:
|
|
|
|
|
|
|
|
|
Compensation Costs
|
|
$
|
2,547
|
|
|
$
|
3,334
|
|
Professional
fees
|
|
|
50
|
|
|
|
35
|
|
Outside commission
|
|
|
215
|
|
|
|
309
|
|
Royalties
|
|
|
39
|
|
|
|
32
|
|
ESPP
|
|
|
104
|
|
|
|
102
|
|
Deferred
rent
|
|
|
85
|
|
|
|
(2
|
)
|
Warranty
|
|
|
19
|
|
|
|
20
|
|
Operating
related (Taiwan and China)
|
|
|
312
|
|
|
|
416
|
|
Income tax
|
|
|
56
|
|
|
|
188
|
|
Others
|
|
|
197
|
|
|
|
199
|
|
|
|
$
|
3,624
|
|
|
$
|
4,633
|
|
|
Other long-term
liabilities:
|
|
|
|
|
|
|
|
|
Accrued pension liability (Taiwan)
|
|
$
|
541
|
|
|
$
|
528
|
|
Other
liabilities
|
|
|
21
|
|
|
|
18
|
|
|
|
$
|
562
|
|
|
$
|
546
|
|
Accumulated other
comprehensive Income:
|
|
|
|
|
|
|
|
|
Cumulative translation adjustments
|
|
$
|
2,008
|
|
|
$
|
2,060
|
|
Unrealized gain
on short-term investments
|
|
|
(7
|
)
|
|
|
12
|
|
|
|
$
|
2,001
|
|
|
$
|
2,072
|
|
39
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
6. Property and Equipment,
Net
|
|
December 31,
|
(in thousands)
|
|
2011
|
|
2010
|
Machinery and
equipment
|
|
$
|
14,204
|
|
|
$
|
13,022
|
|
Furniture and fixtures
|
|
|
619
|
|
|
|
585
|
|
Leasehold
improvements
|
|
|
770
|
|
|
|
1,213
|
|
Building and equipment
prepayments
|
|
|
1,187
|
|
|
|
1,366
|
|
|
|
$
|
16,780
|
|
|
$
|
16,186
|
|
Less: Accumulated
depreciation
|
|
|
(9,062
|
)
|
|
|
(8,663
|
)
|
Total property and
equipment, net
|
|
$
|
7,718
|
|
|
$
|
7,523
|
|
7. Income Taxes
The components
of income (loss) before income taxes are as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
2011
|
|
2010
|
Income subject to
domestic income taxes only
|
|
$
|
4,419
|
|
|
$
|
3,054
|
Income (loss) subject to foreign income
taxes only
|
|
|
(52
|
)
|
|
|
3,514
|
Total
|
|
$
|
4,367
|
|
|
$
|
6,568
|
The following is a reconciliation of the effective tax rates and the
United States statutory federal income tax rate:
|
|
Years Ended December 31,
|
|
|
2011
|
|
2010
|
Statutory federal
income tax rate
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
State income tax
|
|
(5.9
|
)
|
|
(5.9
|
)
|
Stock
compensation
|
|
0.9
|
|
|
0.7
|
|
Deferred compensation
|
|
(1.6
|
)
|
|
-
|
|
Net operating loss
carryforward
|
|
37.0
|
|
|
20.1
|
|
Minimum tax
|
|
(2.2
|
)
|
|
(4.3
|
)
|
Foreign tax
differential
|
|
3.1
|
|
|
12.8
|
|
Research and development
credits
|
|
1.7
|
|
|
0.2
|
|
Investment
credits
|
|
4.6
|
|
|
3.5
|
|
Valuation allowance
|
|
(4.9
|
)
|
|
(3.8
|
)
|
Other
|
|
2.8
|
|
|
2.2
|
|
Effective tax rate
|
|
1.5
|
%
|
|
(8.5
|
)%
|
40
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
Deferred tax assets consisted of the
following (in thousands):
|
|
Years Ended December 31,
|
|
|
2011
|
|
2010
|
Deferred tax
assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
10,481
|
|
|
$
|
12,175
|
|
Credit
carryforwards
|
|
|
1,879
|
|
|
|
2,021
|
|
Depreciation and amortization
|
|
|
(4
|
)
|
|
|
(2
|
)
|
Stock
compensation
|
|
|
487
|
|
|
|
322
|
|
Accruals and allowances
|
|
|
554
|
|
|
|
733
|
|
Total
|
|
|
13,397
|
|
|
|
15,249
|
|
Less: valuation allowances
|
|
|
(13,397
|
)
|
|
|
(15,249
|
)
|
Net deferred tax
assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
Years Ended December 31,
|
|
|
2011
|
|
2010
|
Valuation allowances
on deferred tax assets:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
15,249
|
|
|
$
|
16,725
|
|
Addition
|
|
|
-
|
|
|
|
-
|
|
Utilized
|
|
|
(1,852
|
)
|
|
|
(1,476
|
)
|
Balance at end of
year
|
|
$
|
13,397
|
|
|
$
|
15,249
|
|
|
The
components of income tax provisions by jurisdiction are as follows (in
thousands):
|
|
Years Ended December 31,
|
|
|
2011
|
|
2010
|
Federal
|
|
$
|
85
|
|
|
$
|
39
|
State
|
|
|
(220
|
)
|
|
|
192
|
Foreign
|
|
|
71
|
|
|
|
325
|
|
|
$
|
(64
|
)
|
|
$
|
556
|
Based upon the
weight of available evidence, which includes the Companys historical operating
performance and the accumulated deficit, the Company provided a full valuation
allowance against net deferred tax asset.
For those foreign subsidiaries where the Company intends to permanently
reinvest earnings, no U.S. income or foreign tax withholding has been provided
for in deferred income taxes.
As of December 31, 2011, the Company has a net operating loss
carryforward of approximately $27.6 million for federal and $20.4 million for
state tax purposes. If not utilized, these carryforwards will begin to expire
after 2022 for federal and after 2017 for state purposes.
41
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
As of December
31, 2011, the Company has research credit carryforwards of approximately $1.2
million and $0.9 million for federal and state income tax purposes,
respectively. If not utilized, the federal carryforward will expire in various
amounts beginning in 2019. The California tax credit can be carried forward
indefinitely.
Internal Revenue Code Section 382 limits the use of net operating loss
and tax credit carryforwards in certain situation where changes occur in the
stock ownership of a company. In the event the Company has had a change in
ownership, utilization of the carryforwards could be restricted. The Company has
concluded no change in stock ownership has occurred during the year.
8. Concentrations of Certain Risks
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents,
short-term and long-term investments and accounts receivable. The Company limits
the amount of deposits in any one financial institution and any one financial
instrument. The Company invests its excess cash principally in certificates of
deposit, debt instruments issued by high-credit quality financial institutions
and corporations and money market accounts with financial institutions in the
United States.
The Company performs periodic credit evaluations of its customers
financial condition, and limits the amount of credit extended when deemed
necessary, but generally does not require collateral.
One customer accounted for 16.3% and 23.6% of the Companys accounts
receivable at December 31, 2011 and 2010, respectively.
One customer accounted for 14.3% of revenues in the year ended December
31, 2011. Two customers accounted for 16.1% and 14.6% of revenues in the year
ended December 31, 2010, respectively.
Certain components used in manufacturing the Companys products have
relatively few alternative sources of supply, and establishing additional or
replacement suppliers for such components cannot be accomplished quickly.
9. Geographic Segment
Information
The Company operates in a single industry segment. This industry segment
is characterized by rapid technological change and significant competition.
The following is a summary of the Companys revenues generated by
geographic segments, revenues generated by product lines and identifiable assets
located in these segments (in thousands):
|
|
Years Ended
December 31,
|
|
|
2011
|
|
2010
|
Revenues
|
|
|
|
|
|
|
North America
|
|
$
|
22,929
|
|
$
|
20,416
|
Europe
|
|
|
7,470
|
|
|
11,624
|
Asia
|
|
|
11,621
|
|
|
13,366
|
|
|
$
|
42,020
|
|
$
|
45,406
|
42
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
|
|
Years Ended December 31,
|
|
|
2011
|
|
2010
|
Revenues
|
|
|
|
|
|
|
Connectivity Products
|
|
$
|
31,411
|
|
$
|
31,362
|
Optical Passive
Products
|
|
|
10,609
|
|
|
14,044
|
|
|
$
|
42,020
|
|
$
|
45,406
|
|
|
|
Years Ended December 31,
|
|
|
2011
|
|
2010
|
Property and
Equipment, net
|
|
|
|
|
|
|
United States
|
|
$
|
91
|
|
$
|
79
|
Taiwan
|
|
|
3,491
|
|
|
3,589
|
China
|
|
|
4,136
|
|
|
3,855
|
|
|
$
|
7,718
|
|
$
|
7,523
|
10. Commitments and
Contingencies
Litigation
From time to
time, the Company may be involved in litigation in the normal course of
business. As of the date of these financial statements, the Company is not aware
of any material legal proceedings pending or threatened against the
Company.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements as of December 31, 2011
and 2010, respectively.
Indemnification and Product Warranty
The Company indemnifies certain customers, suppliers and subcontractors
for attorney fees and damages and costs awarded against these parties in certain
circumstances in which products are alleged to infringe third party intellectual
property rights, including patents, trade secrets, trademarks or copyrights. In
all cases, there are limits on and exceptions to the potential liability for
indemnification relating to intellectual property infringement claims. The
Company cannot estimate the amount of potential future payments, if any, that
might be required to make as a result of these agreements. As of December 31,
2011, the Company has not paid any claim or been required to defend any action
related to indemnification obligations, and accordingly, the Company has not
accrued any amounts for such indemnification obligations. However, the Company
may record charges in the future as a result of these indemnification
obligations.
The Company generally warrants products against defects in materials and
workmanship and non-conformance to specifications for varying lengths of time.
If there is a material increase in customer claims compared with historical
experience, or if costs of servicing warranty claims are greater than expected,
the Company may record a charge against cost of revenues. The Company accrued
$0.02 million warranty reserves as of December 31, 2011 and 2010,
respectively.
43
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
Operating Leases
The Company
leases certain office space under long-term operating leases expiring at various
dates through 2016. Total rent expense under these operating leases was
approximately $0.6 million and $0.7 million for the years ended December 31,
2011 and 2010, respectively.
Total future minimum lease payments under operating leases as of December
31, 2011 are summarized below (in thousands):
Years ending December 31,
|
|
|
2012
|
$
|
652
|
2013
|
|
397
|
2014
|
|
351
|
2015
|
|
212
|
2016 and
after
|
|
18
|
Total
|
$
|
1,630
|
11. Bank Loans
In November 2004, the Company entered into a ten-year loan of $0.5
million in Taiwan with an interest rate of 2.3% for the first two years and 3.6%
for the following years. In November 2006, the Company entered into a seven-year
loan of $0.2 million in Taiwan with an interest rate of 2.8%. Both loans are
secured by the Companys building in Taiwan. In September 2007, the Company also
entered a five-year equipment loan of $0.1 million with an interest rate of
3.68%.
Payments due under bank loans as of December 31, 2010 are as follows (in
thousands)
Years ending December 31,
|
|
|
|
2012
|
$
|
101
|
|
2013
|
|
80
|
|
2014
|
|
52
|
|
Total payment
|
|
233
|
|
Less: Amounts
representing interest
|
|
(7
|
)
|
Present value of net remaining
payments
|
|
226
|
|
Less: current
portion
|
|
(97
|
)
|
Long-term portion
|
$
|
129
|
|
12. Related Party
Transactions
As of December 31, 2011, based on information filed with the SEC, Foxconn
Holding Limited was a holder of 18.0% of the Companys common stock. In the
normal course of business, the Company sells products to and purchases raw
materials from Hon Hai Precision Company Limited, who is the parent company of
Foxconn Holding Limited. These transactions were made at prices and terms
consistent with those of unrelated third parties. Sales of products to Hon Hai
Precision Industry Company Limited were $0.02 million and four thousand dollars
in the years ended December 31, 2011 and 2010, respectively. Purchases of raw
materials from Hon Hai Precision Company Limited were $1.3 million and $2.3
million in the years ended December 31, 2011 and 2010 respectively. Amounts due
from Hon Hai Precision Company Limited were $0 and four thousand dollars at
December 31, 2011 and 2010, respectively. Amounts due to Hon Hai Precision
Company Limited were $0.4 million and $0.5 million at December 31, 2011 and
2010, respectively.
13. Fair Value of Financial
instruments
Effective January 1, 2008, the Company adopted ASC 820 which provides a
definition of fair value, establishes a hierarchy for measuring fair value under
generally accepted accounting principles, and requires certain disclosures
about fair values used in the financial statements. ASC 820
does not extend the use of fair value beyond what is currently required by other
pronouncements, and it does not pertain to stock-based compensation under ASC
718,
Share-Based Payments
or to leases under ASC 840,
Accounting
for Leases
.
44
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
In February
2008, FASB Staff Position ASC 820 was issued. This FSP provides a one year
deferral of the effective date of ASC 820 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Therefore, the Company has
adopted the provisions of ASC 820 with respect to financial assets and
liabilities only.
ASC 820 defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Valuation techniques used
to measure fair value under ASC 820 must maximize the use of observable inputs
and minimize the use of unobservable inputs. The standard describes a fair value
hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value,
which are the following:
-
Level 1 Inputs are based upon quoted prices in
active markets for identical assets or liabilities.
-
Level 2 Are based upon inputs other than Level 1
that are observable, either directly or indirectly, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active;
or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.
-
Level 3 Inputs are generally unobservable inputs
that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities.
The Company
measures the following financial assets at fair value on a recurring basis. The
fair value of these financial assets at December 31, 2011 and December 31, 2010
(in thousands) were as follows:
|
|
Fair Value
Measurements at
|
|
|
Reporting Date Using
|
|
|
|
|
|
Quoted
Prices
|
|
Significant
|
|
|
|
|
|
|
|
|
in Active
|
|
Other
|
|
Significant
|
|
|
Balance at
|
|
Markets for
|
|
Observable
|
|
Unobservable
|
|
|
December
31,
|
|
Identical
Assets
|
|
Inputs
|
|
Inputs
|
|
|
2011
|
|
(Level 1)
|
|
(level 2)
|
|
(Level 3)
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
12,482
|
|
$
|
12,482
|
|
$
|
-
|
|
$
|
-
|
Marketable
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
21,112
|
|
|
21,112
|
|
|
-
|
|
|
-
|
Corporate
bonds
|
|
|
4,655
|
|
|
-
|
|
|
4,655
|
|
|
-
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
10,098
|
|
|
10,098
|
|
|
-
|
|
|
-
|
Total
|
|
$
|
48,348
|
|
$
|
43,692
|
|
$
|
4,655
|
|
$
|
-
|
45
ALLIANCE FIBER OPTIC
PRODUCTS, INC.
Notes to Consolidated
Financial Statements
|
|
Fair Value Measurements at
|
|
|
Reporting Date
Using
|
|
|
|
|
|
Quoted Prices
|
|
Significant
|
|
|
|
|
|
|
|
|
in Active
|
|
Other
|
|
Significant
|
|
|
Balance at
|
|
Markets for
|
|
Observable
|
|
Unobservable
|
|
|
December 31,
|
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
|
|
2010
|
|
(Level
1)
|
|
(level
2)
|
|
(Level
3)
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual
funds
|
|
$
|
5,194
|
|
$
|
5,194
|
|
$
|
-
|
|
$
|
-
|
Marketable Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
21,578
|
|
|
21,578
|
|
|
-
|
|
|
-
|
Commercial
paper
|
|
|
2,994
|
|
|
-
|
|
|
2,994
|
|
|
-
|
Corporate bonds
|
|
|
12,748
|
|
|
-
|
|
|
12,748
|
|
|
-
|
Total
|
|
$
|
42,514
|
|
$
|
26,772
|
|
$
|
15,742
|
|
$
|
-
|
As of December 31, 2011, the Company held investments in corporate bonds,
commercial paper, certificates of deposit, and money market securities. The
Companys cash and cash equivalents are comprised of investments with original
maturities of 90 days or less from the date of purchase. The Companys
short-term investments are comprised of corporate bonds, certificates of deposit
and commercial paper with original maturities of 91 days or more from the date
of purchase. The Companys long-term investments are comprised of certificates
of deposit with original maturities of 365 days or more from the date of
purchase.
14. Subsequent
Event
The Company
has evaluated subsequent events through the time of the filing of this report on
Form 10-K. The Company is not aware of any significant events that occurred
subsequent to the balance sheet date prior to the filing of this report that
would have a material impact on the Companys condensed consolidated financial
statements.
46
Item 9. Changes In and
Disagreements With Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and
Procedures
Evaluation of disclosure
controls and procedures.
We
maintain disclosure controls and procedures, as such term is defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that
are designed to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Acting Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Our disclosure controls and procedures have
been designed to meet reasonable assurance standards. Additionally, in designing
disclosure controls and procedures, our management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure controls and
procedures also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
Based on
their evaluation as of the end of the period covered by this Annual Report on
Form 10-K, our Chief Executive Officer and Acting Chief Financial Officer have
concluded that, as of such date, our disclosure controls and procedures were
effective at the reasonable assurance level.
There were no
changes in our internal control over financial reporting that occurred in the
fourth quarter of 2011 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Managements Annual Report on
Internal Control over Financial Reporting.
Our management is responsible for establishing and
maintaining internal control over our financial reporting. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections of any evaluation of the effectiveness of
internal control to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with policies or procedures may deteriorate.
As of the end
of the fiscal year, an evaluation was performed under the supervision and with
the participation of our management, including the Chief Executive Officer and
Acting Chief Financial Officer, of the effectiveness of our internal control
over financial reporting (as defined in Section 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended, and sections 302 and 404 of the
Sarbanes-Oxley Act) based on the framework in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
As part of this evaluation, we
analyzed and tested our processes for control effectiveness (controls which
reasonably assure accurate and complete financial information in accordance with
GAAP), prevention of acts of fraud and transactions being approved by
management. When necessary, we confirmed that appropriate corrective action
(including process improvements) had been undertaken.
Based on the
evaluation as of the end of the fiscal year 2011, the Companys Chief Executive
Officer and Acting Chief Financial Officer have concluded that our internal
controls over financial reporting were effective.
Item 9B. Other
Information
Not
Applicable.
47
PART
III
Item 10. Directors,
Executive Officers and Corporate Governance
The information required by this item is incorporated by reference from
the information under the caption Election of Directors contained in the
Companys Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the Companys 2012
Annual Meeting of Stockholders to be held on May 18, 2012 (the Proxy
Statement). Certain information required by this item concerning executive
officers is set forth in Part I of this Report under the caption Executive
Officers of the Registrant.
Item 405 of
Regulation S-K calls for disclosure of any known late filing or failure by an
insider to file a report required by Section 16(a) of the Exchange Act. This
disclosure is contained in the section entitled Section 16(a) Beneficial
Ownership Reporting Compliance in the Proxy Statement and is incorporated
herein by reference.
The Company
has a separately designated standing Audit Committee established in accordance
with Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee
are Richard Black (Chairperson), James C. Yeh and Ray Sun, all of whom meet the
independence standards established by The Nasdaq Stock Market for serving on an
audit committee. The Board of Directors has determined that Richard Black is an
audit committee financial expert as defined by SEC regulations.
The Companys
Board of Directors adopted a Code of Ethics for all of its directors and
officers on March 24, 2004. The Companys Code of Ethics is available on the
Companys website at http://www.afop.com
.
To date, there have been
no waivers under the Companys Code of Ethics. The Company will post certain
waivers to or amendments of its Code of Ethics, as required by applicable law,
on the Companys website at http://www.afop.com
.
Item 11. Executive
Compensation
The
information required by this item is incorporated by reference from the
information under the captions Election of Directors 2011 Director
Compensation, and Executive Compensation, contained in the Proxy Statement.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The
information required by this item is incorporated by reference from the
information under the caption Security Ownership of Certain Beneficial Owners
and Management contained in the Proxy Statement.
Equity Compensation Plan
Information
Set forth in
the table below is certain information regarding the Companys equity
compensation plans as of December 31, 2011:
|
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
remaining available for
|
|
Number of securities to
|
|
Weighted-average
|
|
future issuance under
|
|
be issued upon exercise
|
|
exercise price of
|
|
equity compensation
|
|
of outstanding options,
|
|
outstanding options,
|
|
plans (excluding securities
|
|
warrants and rights
|
|
warrants and rights
|
|
reflected in column (a))
|
Plan category
|
|
(a)
|
|
(b)
|
|
(c)
|
Equity compensation plans
|
|
|
|
|
|
|
|
|
approved by security holders
|
1,097,280
|
(1)
|
|
$
|
7.26
|
|
713,591
|
(2)
|
Equity compensation plans
not
|
|
|
|
|
|
|
|
|
approved by security
holders
|
-
|
|
|
|
-
|
|
-
|
|
Total
|
1,097,280
|
|
|
$
|
7.26
|
|
713,591
|
|
48
(1) Includes 824,280 shares
to be issued upon exercise of outstanding options and 273,000 shares of
unvested
RSUs granted under the 2000 Stock Incentive Plan.
(2) Includes:
(i) 409,125 shares reserved for issuance under the Companys 2000 Stock
Incentive Plan. The number of shares reserved for issuance under the Companys
2000 Stock Incentive Plan will be increased on the first day of the Companys
fiscal year by the lesser of 340,000 shares, 5% of the fully diluted outstanding
shares of the Companys common stock on that date or a lesser amount determined
by the Companys Board of Directors. There was no increase on January 1, 2011
because the Board determined there were enough shares available for issuance in
2011 pursuant to the Plan. Stock options, restricted stock, restricted stock
units or stock appreciation rights may be awarded under the 2000 Stock Incentive
Plan.
(ii) 304,466
shares reserved for issuance under the Companys ESPP. On April 29, 2011 the
stockholders approved an increase by 300,000 the number of shares of Common
Stock available for issuance. The number of shares reserved for issuance under
the ESPP could be increased on the first day of the Companys fiscal year from
2001 through 2010, by an amount as may be determined by the Board of Directors,
or, if less, the lesser of 200,000 shares or 1.0% of the outstanding common
stock on that date. The ESPP permits eligible employees to contribute up to 20%
of cash compensation toward the semi-annual purchase of the Companys common
stock. The purchase price per share is 85% of the fair market value on the last
trading day prior to the beginning of the six-month period at which an eligible
employee is enrolled; or the fair market value on the last trading day of the
month in which the six-month period expired, whichever is lower.
Item 13. Certain
Relationships and Related Transactions, and Director Independence
The
information required by this item is incorporated by reference from the
information contained under the caption Election of Directors - Certain
Relationships and Related Party Transactions, and Election of Directors
Board Structure, Independence, Meetings and Committees contained in the Proxy
Statement.
Item 14. Principal
Accounting Fees and Services
The
information required by this item is incorporated by reference from the
information set forth under the caption Ratification of Independent Registered
Public AccountantPrincipal Accountant Fees and Services and Pre-Approval
Policies and Procedures in the Proxy Statement.
PART IV
Item 15
. Exhibits and Financial Statement Schedules
(a)
|
The following
documents are filed as part of this report:
|
|
|
|
|
|
|
|
(1)
|
Financial Statements
|
|
|
|
|
|
|
|
|
|
Reference is made to
the index to Consolidated Financial Statements under Item 8 of Part II
hereof.
|
|
|
|
|
|
|
|
(2)
|
Financial Statement Schedules
|
|
|
|
|
|
|
|
|
|
Schedules have been
omitted because they are not applicable or the information required to be
set forth therein is included in the Consolidated Financial Statements or
Notes thereto.
|
|
|
|
|
|
|
|
(3)
|
Exhibits
|
|
|
|
|
|
|
|
|
|
See the List of
Exhibits, which follows the signature pages of this report and is
incorporated herein by
reference.
|
49
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
ALLIANCE FIBER OPTIC PRODUCTS, INC.
|
|
Date: March 16, 2012
|
|
|
|
By
|
/s/ Peter C.
Chang
|
|
|
|
Peter C. Chang
|
|
|
|
President and Chief Executive
Officer
|
|
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter C. Chang and Anita K. Ho, and each of them,
his true and lawful attorneys-in-fact, each with full power of substitution, for
him or her in any and all capacities, to sign any amendments to this report on
Form 10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact or their
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to
the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Name
|
|
Title
|
|
Date
|
|
/s/ Peter C.
Chang
|
|
President, Chief Executive Officer
|
|
March 16, 2012
|
Peter C. Chang
|
|
(Principal Executive Officer) and
|
|
|
|
|
Chairman
|
|
|
|
/s/ Anita K. Ho
|
|
Acting Chief Financial Officer
|
|
March 16, 2012
|
Anita K. Ho
|
|
(Principal Financial and
Accounting
|
|
|
|
|
Officer)
|
|
|
|
/s/ Richard
Black
|
|
Director
|
|
March 16, 2012
|
Richard Black
|
|
|
|
|
|
/s/ Gwong-Yih
Lee
|
|
Director
|
|
March 16, 2012
|
Gwong-Yih Lee
|
|
|
|
|
|
/s/ Ray Sun
|
|
Director
|
|
March 16, 2012
|
Ray Sun
|
|
|
|
|
|
/s/ James C. Yeh
|
|
Director
|
|
March 16, 2012
|
James C. Yeh
|
|
|
|
|
50
EXHIBIT INDEX
Exhibit
Number
|
|
Description of
Document
|
3(i
|
).1
|
|
Integrated copy of
the Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3(i).1 to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended March 30,
2011).
|
|
|
|
|
3(i
|
).2
|
|
Certificate of
Designation of Series A Participating Preferred Stock of Alliance Fiber
Optics Products, Inc. (incorporated by reference to Exhibit 3(i).2 to the
Companys Annual Report on Form 10-K for the year ended December 31,
2002).
|
|
|
|
|
3(ii
|
).1
|
|
Restated Bylaws of
the Registrant (incorporated by reference to Exhibit 3(ii).3 to the
Companys Registration Statement on Form S-1 (File No.
333-45482)).
|
|
|
|
|
4.1
|
|
|
Form of Common Stock
Certificate (incorporated by reference to Exhibit 4.1 to the Companys
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2002).
|
|
|
|
|
4.2
|
|
|
Amended and Restated
Rights Agreement dated as of August 31, 2000 (Registration Rights)
(incorporated by reference to Exhibit 4.2 to the Companys Registration
Statement on Form S-1 (File No. 333-45482)).
|
|
|
|
|
4.3
|
|
|
Amended and Restated
Rights Agreement dated as of March 10, 2011 between the Company and
American Stock Transfer and Trust Company, LLC (incorporated by reference
to Exhibit 4.1 to the Companys Form 8-A/A (File No.
000-31857)).
|
|
|
|
|
10.1
|
|
|
Reserved.
|
|
|
|
|
10.2
|
#
|
|
Form of
Indemnification Agreement between the Company and its officers and
directors (incorporated by reference to Exhibit 10.2 to the Companys
Registration Statement on Form S-1 (File No. 333-45482)).
|
|
|
|
|
10.3
|
#
|
|
Alliance Fiber Optic
Products, Inc. 2000 Stock Incentive Plan, as amended and restated,
(incorporated by reference to Exhibit 10.2 to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
2010).
|
|
|
|
|
10.4
|
#
|
|
Alliance Fiber Optic
Products, Inc. 2000 Employee Stock Purchase Plan (as amended and restated
effective November 1, 2010) (incorporated by reference to Exhibit 10.1 to
the Companys Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2010).
|
|
|
|
|
10.5
|
#***
|
|
Form of Restricted
Stock Unit Agreement under the 2000 Stock Incentive Plan (as amended and
restated).
|
|
|
|
|
10.6
|
|
|
Reserved.
|
|
|
|
|
10.7
|
#
|
|
Form of Stock Option
Agreement under the Alliance Fiber Optic Products, Inc. 2000 Stock
Incentive Plan, as amended and restated (incorporated by reference to
Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2010).
|
|
|
|
|
10.8
|
|
|
Lease dated June 2,
2010 by and between Arden Realty Limited Partnership and Alliance Fiber
Optic Products, Inc. (incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2010).
|
|
|
|
|
21.1
|
|
|
Subsidiaries of the Company
(incorporated by reference to Exhibit 21.1 to the Companys Annual Report
on Form 10-K for the year ended December 31, 2000).
|
|
|
|
|
23.1
|
|
|
Consent of Marcum LLP, Independent Registered Public Accounting
Firm.
|
|
|
|
|
24.1
|
|
|
Power of Attorney
(see page 53 of this Form 10-K)
|
|
|
|
|
31.1
|
|
|
Rule 13a14(a) certification of Chief
Executive Officer.
|
|
|
|
|
31.2
|
|
|
Rule 13a14(a) certification of Acting Chief
Financial Officer.
|
|
|
|
32.1
|
*
|
|
Statement of Chief
Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. § 1350).
|
|
|
|
32.2
|
*
|
|
Statement of Acting
Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. § 1350).
|
|
|
|
101.INS
|
**
|
|
XBRL Taxonomy
Instance Document
|
|
|
|
101.SCH
|
**
|
|
XBRL Taxonomy Schema
Document
|
|
|
|
101.PRE
|
**
|
|
XBRL Taxonomy
Presentation Linkbase Document
|
|
|
|
101.LAB
|
**
|
|
XBRL Taxonomy Label
Linkbase Document
|
|
|
|
101.CAL
|
**
|
|
XBRL Taxonomy
Calculation Linkbase Document
|
|
|
|
101.DEF
|
**
|
|
XBRL Taxonomy
Definition Linkbase document
|
____________________
* In accordance with Item
601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the
certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to
accompany this Form 10-K and will not be deemed filed for purpose of Section
18 of the Exchange Act. Such certifications will not be deemed to be
incorporated by reference into any filing under the Securities Act or the
Exchange Act, except to the extent that the registrant specifically incorporates
it by reference.
** In accordance with Rule
406T of Regulation S-T, the information furnished in these exhibits will not be
deemed filed for purpose of Section 18 of the Exchange Act. Such exhibits will
not be deemed to be incorporated by reference into any filing under the
Securities Act or Exchange Act.
*** Filed
herewith.
# Indicates management
contract or compensatory plan or arrangement.
51
Alliance Fiber Optic (NASDAQ:AFOP)
Historical Stock Chart
From Jun 2024 to Jul 2024
Alliance Fiber Optic (NASDAQ:AFOP)
Historical Stock Chart
From Jul 2023 to Jul 2024