Table of Contents
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, 2014 |
|
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: 0-318570
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. [X]
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 [X] |
Non-accelerated
filer [ ] |
Smaller
reporting company [ ] |
(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 Global Market on June 30, 2014) was
approximately $336,565,971.
As of March 3, 2015 there were
17,817,734 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 2015 Annual Meeting of Stockholders to be held on
May 20, 2015.
Table of Contents
ALLIANCE FIBER OPTIC PRODUCTS,
INC.
TABLE OF CONTENTS
2014 FORM 10-K
i
Table of Contents
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 margin, profitability, the amount and mix of anticipated
investments, expenditures and expenses, our liquidity and the adequacy of our
capital resources, our uses of cash, our intent and ability to pay dividends in
the future and the amount of future dividends, if any, the impact of the
economic environment on our business, exposure to interest rate or currency
fluctuations, anticipated working capital and capital expenditures, 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 success being tied to
relationships with key customers, industry trends and market demand, our ability
to protect our intellectual property, the potential benefit of indemnification
agreements, increases in the number of possible requests for licenses and patent
infringement claims, our competitive position, sources of competition,
consolidation in our industry, our international strategy, risks associated with
our international operations, inventory management, our factory utilization
levels, our employee relations, the adequacy of our internal controls, and the
effect of recent, future and changing accounting pronouncements and our critical
accounting policies, estimates, models, judgments and assumptions related to our
financial results. 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 elsewhere in this report, as well as risks related to the
development of the metropolitan, last mile access, data center 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, pricing pressure from customers or potential customers, development of
new products by us and our competitors, increased competition, inability to
obtain sufficient quantities of a raw material component, loss of a key
supplier, integration of acquired businesses or technologies, financial
stability in foreign markets, foreign currency exchange rates, interest rates,
costs associated with being a public company, failure to meet customer
requirements, our ability to license intellectual property on commercially
reasonable terms, the impact of the economic environment, and the risks set
forth below under Part II, Item 1A, Risk Factors. 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.
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Industry Background
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.
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 and
datacenters.
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 continued to increase, this demand had 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.
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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 five years, 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 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 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.
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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.
Fiber Array Units (
FAUs). FAUS are used to precisely attach
multiple fibers to Planar Waveguide Circuit devices including PLC AWGs, VMUX,
and PLC based WSS and ROADMs. These fiber arrays are often provided with
standard connector terminations on the opposing end of the array and can be
constructed to incorporate up to 100 fibers in a single precise array
configuration. Our fiber array products are targeted at the highest precision
and reliability requirements in the communications market.
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 product devices
serve many system original equipment manufacturers, or 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.
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.
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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 our 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, 2014, we had 69 United States patents issued or
assigned to us and had 18 United States patent applications pending. Our 69 U.S.
patents expire between March 2015 and December 2031. We also have 13 foreign
patents issued, and 1 foreign patent application pending. Our foreign patents
issued will expire between August 2015 and April 2030. 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, 2014, we were not aware of infringement claims or litigation
pending against us.
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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, 2014, we sold our products to more than
200 customers. One customer accounted for 39.6% and 35.3%, and another customer
accounted for 10.0%, of our revenues in the year ended December 31, 2014, 2013
and 2012, respectively. The following is a summary of our revenues by geographic
segment (in thousands):
|
|
Years Ended December 31, |
|
|
2014 |
|
2013 |
|
2012 |
Revenues |
|
|
|
|
|
|
|
|
|
North
America |
|
$ |
52,101 |
|
$ |
42,815 |
|
$ |
27,299 |
Europe |
|
|
18,102 |
|
|
15,604 |
|
|
8,933 |
Asia |
|
|
15,784 |
|
|
17,651 |
|
|
10,379 |
|
|
$ |
85,987 |
|
$ |
76,070 |
|
$ |
46,611 |
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 JDS Uniphase Corp., Oclaro Inc., Oplink
Communications, Inc., which was acquired by Koch Industries, Senko Advanced
Components and TE Connectivity. We estimate that we had over 20 competitors in the components
market as of December 31, 2014. 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.
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Product Development
As of December 31, 2014, we had a total
of 76 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.
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 $4.3 million, $3.7
million and $3.3 million for the years ended December 31, 2014, 2013 and 2012,
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, filters and other
components from third party suppliers. We have established multiple sources from
which to obtain our critical raw materials and components. If there is a
significant surge demand, we may have difficulty obtaining sufficient quantities
of these materials or components, which may result in delays, increased costs,
and reductions in our product shipments.
Manufacturing
We 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 these 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. Our Taiwan and China facilities
are ISO 9001-2000 certified. In addition, our Taiwan facility is TL-9000
certified.
Employees
As of December 31, 2014, we had 1,397
full-time employees, including 34 located in the United States, 345 in Taiwan
and 1,018 in China. Of our full-time employees, 76 are engaged in research and
development, 1,220 are engaged in manufacturing production, 16 are engaged in
sales, marketing, application support and customer service, and 85 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 website 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 Securities 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 and may
experience future losses.
From inception through December 31,
2014, we had an accumulated deficit of $26.8 million.
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We continue to experience fluctuating
demand for our products. If demand for our products declines, 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 continues to increase in the future, we
may incur significant and increasing expenses for expansion of our manufacturing
operations, research and development, sales and marketing, and administration,
and in expanding our 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, we will need to
generate and sustain substantially higher revenues while maintaining reasonable
cost and expense levels, and our failure to do so may result in additional
losses.
We depend on a small number of
customers for a significant portion of our revenues, and one customer for
approximately 40% of our revenues in 2014 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, 2014.
2013 and 2012, our 10 largest customers comprised 74.3%, 75.6% and 64.0% of our
revenues, respectively. One customer accounted for 39.6% and 35.3%, and another
customer accounted for 10.0%, of our revenues for the year ended December 31,
2014, 2013 and 2012, 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, to demand price concessions, or to alter their purchasing patterns in some
other way. The loss of any significant customer, a significant reduction in
sales we make to a customer, or any problems collecting receivables from one or
more significant customers would likely harm our financial condition and results
of operations.
Our connectivity products have
historically represented a significant part of our revenues, and if we are
unsuccessful in selling our optical passive products, our business may be
harmed.
Sales of our connectivity products
accounted for 75.3%, 75.8% and 70.0% of our revenues in the years ended December
31, 2014, 2013 and 2012, 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. 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.
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, the Federal deficit
and credit rating, unemployment, global economic instability, slowing growth in
China 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.
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 demand for our products have
caused our operating results to fluctuate in the past. Because we incur
operating expenses based on anticipated revenue levels; and a significant
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 elsewhere in this report, 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.
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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., JDS Uniphase Corp., Oplink Communications Inc.,
which was acquired by Koch Industries, Senko Advanced Components and TE
Connectivity. 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.
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.
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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, 2014, we
had 34 full-time employees in Sunnyvale, California, 345 full-time employees in
Taiwan, and 1,018 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 need to
coordinate our domestic and international operations and establish and maintain
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. 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 research and
development expenses were $4.3 million, $3.7 million and $3.3 million for the
years ended December 31, 2014, 2013 and 2012, respectively. 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.
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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
fluctuating 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 have experienced
fluctuations in market demand due to overcapacity in our industry and an economy
that is stymied by current financial and economic conditions, international
terrorism, war and political instability.
The United States economy
has experienced and continues to experience significant fluctuations in
consumption and demand. We have in the past and may in the future experience
decreases in 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.
The optical networking
component industry often experiences declining average selling prices, and
declines in average selling prices of products could cause our gross margins to
decline.
The optical networking
component industry often experiences declining average selling prices as a
result of increasing competition and from pricing pressures resulting in greater
unit volumes purchases as communication service providers continue to deploy
fiber optic networks. We expect that average selling prices will continue to
decrease over time in response to new product and technology introductions by us
or 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.
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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.
Because we experience
long lead times for materials and components, we may not be able to effectively
manage our inventory levels or manufacturing capacity, 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.
If we are unable to
maintain effective internal control over financial reporting, investors may lose
confidence in the accuracy and completeness of our reported financial
information and the market price of our common stock may be negatively affected.
As a public company, we are
required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 which
requires that we evaluate and determine the effectiveness of our internal
control over financial reporting and provide a management report on our internal
controls. 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. If we have a material weakness in our internal control over financial
reporting, we may not detect errors on a timely basis and our financial
statements may be materially misstated. During the evaluation and testing
process, if we identify one or more material weaknesses in our internal control
over financial reporting, our management will be unable to conclude that our
internal control over financial reporting is effective.
Our independent registered
public accounting firm is also required to issue an attestation report on the
effectiveness of our internal control over financial reporting on an annual
basis. Even if our management concludes that our internal control over financial
reporting is effective, our independent registered public accounting firm may
conclude that there are material weaknesses with respect to our internal
controls or the level at which our internal controls are documented, designed,
implemented or reviewed. If we are unable to conclude that our internal control
over financial reporting is effective or if our auditors were to express an
adverse opinion on the effectiveness of our internal control over financial
reporting because we had one or more material weaknesses, investors could lose
confidence in the accuracy and completeness of our financial disclosures, which
could cause the price of our common stock to decline. Internal control
deficiencies could also result in a restatement of our financial results.
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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 Executive Vice President of Sales and Marketing; 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. We do not have key person life insurance policies covering any of
our employees.
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,
impair our operating results and harm our reputation. 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.
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.
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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.
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, enterprise access, and datacenter 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. |
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If we fail to address
changing market conditions, sales of our products may decline, which would
adversely impact our revenues.
Disclosure requirements
relating to conflict minerals could increase our costs and limit the supply of
certain metals that may be used in our products and affect our reputation with
customers and stockholders.
As required under the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank
Act), the Securities and Exchange Commission promulgated final rules regarding
annual disclosures by public companies of their use of certain minerals and
metals, known as conflict minerals, which are mined from the Democratic
Republic of the Congo (DRC), and adjoining countries, and their efforts to
prevent the sourcing of such conflict minerals from these countries. These rules
require us to engage in due diligence efforts to ascertain and disclose the
origin of some of the raw materials used in the production process. Annual
disclosures are required no later than May 31 of each year. We have and will
continue to incur costs associated with complying with these disclosure
requirements, including due diligence to determine the sources of conflict
minerals, if any, used in our products and other potential changes to our
products, processes, or sources of supply as a consequence of such due diligence
activities. The rules and our compliance procedures could adversely affect the
supply and pricing of materials used in our products. Not all suppliers offer
conflict free conflict minerals, so we cannot be certain that we will be able
to obtain sufficient quantities of conflict minerals from such suppliers or at
competitive prices. Also, our reputation with our customers and stockholders
could be damaged if we determine that certain of our products contain minerals
not determined to be conflict free or if we are unable to sufficiently verify
the origins of conflict minerals used in our products through the procedures we
may implement. If we cannot determine that our products exclude conflict
minerals sourced from the DRC or adjoining countries, some of our customers may
discontinue, or materially reduce, purchases of our products, which could
negatively affect our results of operations. In addition, our customers may
require us to report to them on our conflict minerals compliance, and if we do
not perform this function to a customers satisfaction, they may cease to do
business with us.
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 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
Table of Contents
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.
We have significant
manufacturing operations in China, which exposes us to risks inherent in doing
business in China.
A significant portion of
our manufacturing is conducted at our facilities in Shenzhen, China, and we also
conduct research and development-related activities in Shenzhen. Employee
turnover in China is high due to the intensely competitive and fluid market for
skilled labor. We will need to continue to hire appropriate personnel, obtain
and retain required legal authorization to hire such personnel, and expend time
and financial resources to hire and train such personnel. In addition, we
believe that salary inflation rates for the skilled personnel we hire and seek
to retain in China are likely to be higher than inflation rates elsewhere.
Operating in China subjects
us to political, legal and economic risks. In particular, the political, legal
and economic climate in China, both nationally and regionally, is fluid and
unpredictable. Our ability to operate in China may be adversely affected by
changes in Chinese laws and regulations such as those related to, among other
things, taxation, import and export tariffs, environmental regulations, land use
rights, intellectual property, currency controls, employee benefits and other
matters. In addition, we may not obtain or retain the requisite legal permits to
continue to operate in China, and costs or operational limitations may be
imposed in connection with obtaining and complying with such permits.
We intend to continue to
export the products manufactured at our facilities in China. Under current
regulations, upon application and approval by the relevant governmental
authorities, we will not be subject to certain Chinese taxes and will be exempt
from certain duties on imported materials that are used in the manufacturing
process and subsequently exported from China as finished products. However,
Chinese trade regulations are in a state of flux, and we may become subject to
other forms of taxation and duties in China or may be required to pay export
fees in the future. In the event that we become subject to new taxation or
export fees in China, our business and results of operations could be materially
adversely affected.
We are subject to
anti-corruption laws in the jurisdictions in which we operate, including the
U.S. Foreign Corrupt Practices Act. Our failure to comply with these laws could
result in penalties which could harm our reputation and have a material adverse
effect on our business, results of operations and financial
condition.
16
Table of Contents
Because of our worldwide
operations, we are subject to risks associated with compliance with applicable
anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, or FCPA,
which generally prohibits U.S. companies and their employees and intermediaries
from making payments to foreign officials for the purpose of obtaining or
keeping business, securing an advantage, or directing business to another, and
requires public companies to maintain accurate books and records and a system of
internal accounting controls. Under the FCPA, U.S. companies may be held liable
for actions taken by directors, officers, employees, agents, or other strategic
or local partners or representatives. If we or our intermediaries fail to comply
with the requirements of the FCPA or similar laws, governmental authorities in
the United States and elsewhere could seek to impose civil and criminal fines
and penalties which could have a material adverse effect on our business,
results of operations and financial condition.
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 34,406 square feet in one facility located in Tu-Cheng City, Taiwan. This
lease expires at various times from June 2015 to January 2017. We also own
10,623 square feet of space immediately adjacent to our leased facility. In
December 2013, we purchased 6,960 square feet of space we previous leased for
$1.6 million. In April 2014, we also purchased 10,633 square feet of space we
previously leased for $1.6 million, bringing the total square footage to 62,622
square feet.
In China, we renewed the
lease for our 132,993 square foot facility in Shenzhen, China, which will expire
in October 2019. In December 2014, we entered into two leases for our two new
manufacturing facilities next to our facility in Shenzhen, China. Each facility
has 55,285 square feet and both leases expire in December 2019. We lease 243,563
total square feet in the three facilities in Shenzhen.
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, 2014 were as follows:
Peter C.
Chang, 57, 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, 55, 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.
17
Table of Contents
Anita K.
Ho, 68, 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.
18
Table of Contents
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, is
traded on The Nasdaq Global Market under the ticker symbol AFOP. The following
table summarizes the high and low average closing prices for our common stock
for the periods indicated as reported on The Nasdaq Global Market:
|
|
High |
|
Low |
2014 |
|
|
|
|
|
|
First
Quarter |
|
$ |
14.37 |
|
$ |
13.61 |
Second Quarter |
|
$ |
19.36 |
|
$ |
18.37 |
Third
Quarter |
|
$ |
15.22 |
|
$ |
14.60 |
Fourth Quarter |
|
$ |
13.29 |
|
$ |
12.73 |
|
2013 |
|
|
|
|
|
|
First Quarter |
|
$ |
6.03 |
|
$ |
5.87 |
Second
Quarter |
|
$ |
9.57 |
|
$ |
9.13 |
Third Quarter |
|
$ |
16.13 |
|
$ |
15.04 |
Fourth
Quarter |
|
$ |
17.29 |
|
$ |
16.31 |
As of March 3, 2015, our common stock
was held by 31 stockholders of record (not including beneficial holders of
common stock held in street name).
Dividends
We declared a cash dividend of $0.15
per share in November 2014, which was paid in December 2014. We also declared a
cash dividend of $0.15 per share in November 2013, which was paid in December
2013. Our board of directors intends to pay an annual cash dividend, the amount
of which will be determined by the board of directors from time to time. The
intention of the board to declare an annual cash dividend is dependent upon a
variety of factors related to our business and applicable law, among others, and
we cannot assure you that we will pay dividends in the future. There are
currently no contractual restrictions on our ability to pay dividends.
Stock Repurchase Program
On October 29, 2014, we announced a
program to repurchase up to $15.0 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 requirements 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
December 31, 2014, approximately $5.31 million was remaining to purchase shares
of our common stock under the repurchase program. The duration of the repurchase
program is open-ended.
19
Table of Contents
The following table sets forth
information with respect to purchases of our common stock pursuant to the
repurchase program during the periods indicated:
|
|
|
|
|
|
|
|
|
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 * |
October 29 - October 31,
2014 |
|
129,165 |
|
$ |
11.9506 |
|
129,165 |
|
$ |
13,453,820 |
November 1 - November 30, 2014 |
|
496,752 |
|
$ |
13.4130 |
|
496,752 |
|
$ |
6,780,968 |
December 1 - December 31,
2014 |
|
114,273 |
|
$ |
12.8701 |
|
114,273 |
|
$ |
5,307,979 |
Total |
|
740,190 |
|
$ |
13.0740 |
|
740,190 |
|
$ |
5,307,979 |
____________________ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Represents
dollar amount |
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
The following data should be read in
conjunction with Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations and consolidated financial statements and
notes thereto contained in Item 8, Financial Statements and Supplementary Data
of this report. The selected consolidated balance sheet data at December 31,
2014 and 2013 and the selected consolidated statements of operations data for
each of the years ended December 31, 2014, 2013 and 2012 have been derived from
our audited consolidated financial statements that are included elsewhere in
this report. The selected consolidated balance sheet data at December 31, 2012,
2011 and 2010 and the selected consolidated statements of operations data for
each year ended December 31, 2011 and 2010 have been derived from our audited
consolidated financial statements not included in this report. Historical
results are not necessarily indicative of the results to be expected in the
future.
20
Table of Contents
|
|
Years Ended December 31, |
|
|
2014 |
|
2013 |
|
2012 |
|
2011 |
|
2010 |
|
|
(in thousands, except per share data) |
Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
85,987 |
|
|
$ |
76,070 |
|
$ |
46,611 |
|
$ |
42,020 |
|
$ |
45,406 |
|
Cost of revenues |
|
|
51,770 |
|
|
|
46,952 |
|
|
30,617 |
|
|
28,578 |
|
|
29,872 |
|
Research and
development |
|
|
4,340 |
|
|
|
3,702 |
|
|
3,298 |
|
|
3,181 |
|
|
3,218 |
|
Selling, marketing and administrative |
|
|
8,274 |
|
|
|
8,315 |
|
|
6,967 |
|
|
6,447 |
|
|
6,217 |
|
Operating
income |
|
|
21,603 |
|
|
|
17,101 |
|
|
5,729 |
|
|
3,814 |
|
|
6,099 |
|
Interest and other income, net |
|
|
769 |
|
|
|
708 |
|
|
727 |
|
|
553 |
|
|
468 |
|
Income before
taxes |
|
|
22,372 |
|
|
|
17,809 |
|
|
6,456 |
|
|
4,367 |
|
|
6,567 |
|
Benefit (provision) for income taxes |
|
|
(7,864 |
) |
|
|
999 |
|
|
3,185 |
|
|
64 |
|
|
(555 |
) |
Net
income |
|
|
14,508 |
|
|
|
18,808 |
|
|
9,641 |
|
|
4,431 |
|
|
6,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.78 |
|
|
$ |
1.06 |
|
$ |
0.55 |
|
$ |
0.25 |
|
$ |
0.35 |
|
Diluted |
|
|
0.77 |
|
|
|
1.02 |
|
|
0.54 |
|
|
0.25 |
|
|
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in
computing net income per share (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
18,488 |
|
|
|
17,785 |
|
|
17,596 |
|
|
17,734 |
|
|
17,160 |
|
Diluted |
|
|
18,935 |
|
|
|
18,481 |
|
|
17,861 |
|
|
18,218 |
|
|
17,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities |
|
$ |
65,215 |
|
|
$ |
57,132 |
|
$ |
43,549 |
|
$ |
49,685 |
|
$ |
45,360 |
|
Total assets |
|
|
105,173 |
|
|
|
100,565 |
|
|
71,353 |
|
|
71,673 |
|
|
68,449 |
|
Long-term liabilities |
|
|
978 |
|
|
|
600 |
|
|
616 |
|
|
691 |
|
|
776 |
|
Total stockholders' equity |
|
|
86,260 |
|
|
|
81,174 |
|
|
60,031 |
|
|
63,614 |
|
|
58,004 |
|
____________________
(1) The per share information,
including the number of shares used in basic and diluted net income per share,
has been adjusted to reflect a one-for-five reverse stock split on August 27,
2010 and a two-for-one stock split on August 30, 2013.
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
included elsewhere in this report.
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 our results of
operations and financial condition, which is incorporated herein by
reference.
Critical Accounting Policies and
Estimates
General
Managements discussion and analysis of
our financial condition and results of operations is 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.
21
Table of Contents
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
We measure and recognize compensation
expense for stock options, RSUs and shares purchased pursuant to our Employee
Stock Purchase Plan (ESPP) based on their estimated fair value and recognize the
costs in the financial statements under Accounting Standards Codification
(ASC) 718. The fair value of RSUs is equal to the market value of our common
stock on the date the award is granted. We estimate the fair value of stock
options and ESPP shares using the Black-Scholes valuation model. We expense the estimated fair
value to earnings on a straight-line basis.
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 product 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.
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.
Short-Term and Long-Term Investments
We generally invest our cash in
certificates of deposit and corporate bonds. 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 year ended December 31, 2014,
2013 or 2012.
22
Table of Contents
Income Taxes
We account for income taxes in
accordance with ASC 740-10. ASC 740-10 requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements. Under this method, deferred tax
assets and liabilities are determined based on the differences between the
financial statements and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The effect of a change in tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment date.
We record net deferred tax assets to
the extent we believe these assets will more likely than not be realized. In
making such determination, we consider all available positive and negative
evidence, including future reversals of existing taxable temporary differences,
projected future taxable income, tax planning strategies and recent financial
operations. In the event we were to determine that we would be able to realize
our deferred income tax assets in the future in excess of their net recorded
amount, we would make an adjustment to the valuation allowance, which would
reduce the provision for income taxes.
Management assesses the available
positive and negative evidence to estimate if sufficient future taxable income
will be generated to utilize the existing deferred tax assets. Based on this
assessment, as of December 31, 2013, a reduction in valuation allowance in the
amount of $8.2 million was recorded. The amount of the deferred tax asset
considered realizable, however, could be adjusted if estimates of future taxable
income are reduced. As of December 31, 2014, we did not have a valuation
allowance.
ASC 740-10 also prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a
tax return. For those benefits to be recognized, a tax position must be more
likely than not to be sustained upon examination by taxing authorities.
Differences between tax positions taken or expected to be taken in a tax return
and the benefit recognized and measured pursuant to the interpretation are
referred to as unrecognized benefits. A liability is recognized for an
unrecognized tax benefit because it represents an enterprises potential future
obligation to the taxing authority for a tax position that was not recognized as
a result of applying the provisions of ASC 740-10. As of December 31, 2014, 2013
and 2012, the total amount of unrecognized tax benefits were $1.1 million, $0.7
million and $0 respectively.
Deferred tax assets pertaining to
windfall tax benefits on exercise of share awards and the corresponding credit
to additional paid-in capital are recorded if the related tax deduction reduces
tax payable. We have elected the with-and-without approach excluding indirect
tax effects regarding ordering of windfall tax benefits to determine whether
the windfall tax benefit did reduce taxes payable in the current year. Under
this approach, the windfall tax benefits would be recognized in additional
paid-in capital only if an incremental tax benefit is realized after considering
all other tax benefits presently available to us.
We consider the earnings of certain
non-U.S. subsidiaries to be indefinitely invested outside the United States on
the basis of estimates that future domestic cash generation will be sufficient
to meet future domestic cash needs. We have not recorded a deferred tax
liability of approximately $3.4 million related to U.S. federal and state income
taxes and foreign withholding taxes on approximately $13.7 million of
undistributed earnings of foreign subsidiaries indefinitely invested outside the
United States. Should we decide to repatriate the foreign earnings, we would
have to adjust the income tax provision in the period we determined that the
earnings will no longer be indefinitely invested outside the United States.
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. We have broadened our
connectivity product line to include attenuators, planar lightwave circuit
splitters, and fused fiber products. We started selling our optical passive
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.
23
Table of Contents
We market and sell our products
predominantly through our direct sales force. From our inception through
December 31, 2014, we derived the majority of our revenues from our connectivity
product line. Our optical passive products contributed as a percentage of
revenues 24.7%, 24.2% and 30.0% for the years ended December 31, 2014, 2013 and
2012, 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 2015.
Sales, marketing, and administrative
expenses consist 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.
It also consists of salaries and related expenses for executive, finance,
administrative, accounting and human resources personnel, insurance and
professional fees for legal and accounting support. We intend to continue to
invest amounts similar to our spending levels in 2014 in our sales and marketing
efforts, both domestically and internationally, in order to increase market
awareness and to generate sales of our products. We expect administrative
expenses will increase in absolute dollars to support our revenue growth, higher
insurance premiums, and costs associated with compliance with Section 404 of the
Sarbanes-Oxley Act of 2002.
We cannot be certain that our
expenditures will result in higher revenues. In addition, we believe our future
success depends upon establishing and maintaining successful relationships with
a variety of key customers.
We own all of the outstanding common
stock of Alliance Fiber Optic Products, Ltd (formally named Transian Technology
Ltd. Co.), a Taiwan corporation. This wholly 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.
24
Table of Contents
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, |
|
2014 |
|
2013 |
|
2012 |
Revenues |
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Cost of revenues: |
60.2 |
|
|
61.7 |
|
|
65.7 |
|
Gross profit |
39.8 |
|
|
38.3 |
|
|
34.3 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and
development |
5.1 |
|
|
4.9 |
|
|
7.1 |
|
Selling,
marketing and administrative |
9.6 |
|
|
10.9 |
|
|
14.9 |
|
Total
operating expenses |
14.7 |
|
|
15.8 |
|
|
22.0 |
|
|
Income from operations |
25.1 |
|
|
22.5 |
|
|
12.3 |
|
Interest and other income,
net |
0.9 |
|
|
0.9 |
|
|
1.6 |
|
Income before benefit for income
taxes |
26.0 |
|
|
23.4 |
|
|
13.9 |
|
Benefit (provision) for
income taxes |
(9.1 |
) |
|
1.3 |
|
|
6.8 |
|
Net income |
16.9 |
% |
|
24.7 |
% |
|
20.7 |
% |
Comparison of Fiscal Year 2014, 2013
and 2012
Revenues. Revenues were $86.0 million, $76.1 million and $46.6 million
for the years ended December 31, 2014, 2013 and 2012, respectively. Connectivity
products revenues were $64.8 million, $57.7 million and $32.6 million for the
years ended December 31, 2014, 2013 and 2012, respectively. Optical passive
products revenues were $21.2 million, $18.4 million and $14.0 million for the
years ended December 31, 2014, 2013 and 2012, respectively. Revenues increased
in 2014 and 2013 mainly due to increased orders for our products by our
customers which resulted in higher volume shipments.
Cost of Revenues. Cost of revenues were $51.8 million, $47.0 million and $30.6
million for the years ended December 31, 2014, 2013 and 2012, respectively. Cost
of revenues as a percentage of net revenues were 60.2%, 61.7% and 65.7% for the
years ended December 31, 2014, 2013 and 2012, respectively. The higher cost of
revenues in 2014 and 2013 were due to higher order levels. The lower cost of
revenues as a percentage of net revenues in 2014 and 2013 resulted from
increased factory utilization due to higher production levels.
Gross Profit. Gross profit was $34.2 million, $29.1 million and $16.0
million for the year ended December 31, 2014, 2013 and 2012, respectively. Gross
profit as a percentage of net revenues was 39.8%, 38.3% and 34.3% for the years
ended December 31, 2014, 2013 and 2012, respectively. The utilization of our
factories was higher due to the increased volume shipments of our products,
which contributed to higher gross margins and higher gross profit as a
percentage of net revenues. However, our average selling prices are declining,
which we believe may negatively impact our gross profit and may offset any
benefits from improved absorption.
Research and Development
Expenses. Research and development expenses
were $4.3 million, $3.7 million and $3.3 million for the years ended December
31, 2014, 2013 and 2012, respectively. As a percentage of revenues, research and
development expenses were 5.1%, 4.9% and 7.1% for the years ended December 31,
2014, 2013 and 2012, respectively. The increase in dollars each year was mainly
due to higher headcount and equipment expenses. The increase in 2014 from 2013
as a percentage of revenues was due to higher equipment expenses. The decrease
in 2013 from 2012 as a percentage of revenues was due to higher revenues. We
expect research and development expenses may increase as we intend to continue
to invest in our research and product development efforts.
Sales, Marketing and Administrative
Expenses. Sales, marketing and administrative
expenses were $8.3 million for each of the years ended December 31, 2014 and
2013 and $7.0 million for the year ended December 31, 2012. As a percentage of
revenues, sales, marketing and administrative expenses were 9.6%, 10.9% and
14.9% for the years ended December 31, 2014, 2013 and 2012, respectively. The
decrease as a percentage of revenues in 2014 and 2013 over the previous year was
due to increased revenues. We intend to continue to invest amounts similar to
our spending levels in 2014 in our sales, marketing, and administrative efforts,
both domestically and internationally, as we work to increase market awareness
and to generate additional sales of our products.
25
Table of Contents
Stock-Based Compensation. Total
stock-based compensation was $2.2 million, $1.9 million and $1.1 million for the
years ended December 31, 2014, 2013 and 2012, respectively. The increase each
year was due to restricted stock units granted in 2011 and 2013 and stock
options granted in 2013 and 2014, and resulted in higher stock-based
compensation expense.
Interest and Other Income, Net.
Interest and other income, net, was $0.8
million, $0.7 million and $0.7 million for the years ended December 31, 2014,
2013 and 2012, respectively. These amounts consisted primarily of interest
income, which fluctuated based on cash balances and changes in interest
rates.
Income Taxes. An income tax provision of $7.9 million was recorded for the
year ended December 31, 2014 and an income tax benefit of $1.0 million and $3.2
million were recorded for the years ended December 31, 2013 and 2012,
respectively. The benefit for the years ended December 31, 2013 and 2012 were as
a result of reduction of valuation allowances for deferred tax assets which
offset current taxes due.
In prior periods, California tax law
suspended the use of net operating losses (NOLs). Beginning in 2012, the
moratorium on the utilization of the NOLs was lifted.
As of December 31, 2014, we had
approximately $0.9 million and $5.2 million of NOL carryforwards for federal and
state tax purposes, respectively, which will expire after 2024 for federal and
after 2018 for state purposes, if not utilized.
As of December 31, 2014, we had
approximately $1.2 million and $1.0 million of research credit carryforwards for
federal and state tax purposes, respectively, which will expire after 2019 for
federal tax purposes. The state tax credit can be carried forward indefinitely.
Liquidity and Capital Resources
Comparison of Fiscal Year 2014,
2013 and 2012
Net cash provided by operating
activities was $23.1 million in 2014. The increase in our cash provided by
operating activities in 2014 was primarily due to net income of $14.5 million, a
decrease in deferred tax assets of $ 2.3 million, an increase in accrued
expenses of $1.6 million, an decreased in inventory of $1.3 million, and
adjustments for non-cash charges, including depreciation of $2.8 million and
stock based compensation of $2.2 million. These were offset by a decrease in
accounts payable of $2.4 million.
Net cash provided by operating
activities was $21.0 million in 2013. The increase in our cash provided by
operating activities in 2013 was primarily due to net income of $18.8 million,
an increase in accounts payable of $5.1 million, an increase in accrued expenses
of $3.0 million, and adjustments for non-cash charges, including depreciation
and stock based compensation of $4.1 million. These were offset by an increase
in inventory of $3.7 million, an increase in accounts receivable of $3.5
million, an increase in deferred tax assets of $2.3 million, and an increase in
prepaid expenses of $0.6 million.
Net cash provided by operating
activities was $10.0 million in 2012. The increase in our cash provided by
operating activities in 2012 was primarily due to net income of $9.6 million, an
increase in accounts payable of $ 2.9 million, and adjustments for non-cash
charges, including depreciation of $1.6 million and stock based compensation of
$1.1 million. These were offset by an increase in deferred tax assets of $3.7
million, an increase in accounts receivable of $1.4 million, and an increase in
prepaid expenses of $0.5 million.
Net cash used in investing activities
was $8.0 million, $7.6 million and $4.3 million for the years ended December 31,
2014, 2013 and 2012, respectively. We spent $4.0 million, $7.8 million and $1.5
million to acquire property and equipment for the years ended December 31, 2014,
2013 and 2012, respectively. The net purchase of short-term and long-term
investments were $4.0 million, $0.2 million and $2.9 million for the years ended
December 31, 2014, 2013 and 2012, respectively.
Net cash used in financing activities
was $10.6 million in 2014. Net cash used in financing activities was primarily
due to $9.7 million used to repurchase common stock pursuant to our stock
repurchase program and $2.7 million used to pay cash dividends, which was offset
by $0.6 million from exercise of options to purchase shares of our common stock,
$0.7 million from common stock issued through our ESPP and $0.5 million from tax
withholdings adjustments related to net share settlements of RSUs.
26
Table of Contents
Net cash generated by financing
activities was $0.8 million in 2013. Cash generated by financing activities in
2013 comprised $5.2 million proceeds from the exercise of options to purchase
shares of our common stock and $0.5 million from common stock issued through our
ESPP, which was offset by $2.8 million used to pay cash dividends, $1.3 million
used to pay tax withholdings related to net share settlements of RSUs and $0.9
million used to repurchase common stock pursuant to our stock repurchase
program.
Net cash used in financing activities
was $15.3 million in 2012. Net cash used in financing activities was primarily
due to $11.0 million used to pay cash dividends and $4.8 million used to
repurchase common stock pursuant to our stock repurchase program and $0.6
million used to pay tax withholdings related to net share settlements of RSUs,
which was offset by $0.9 million from exercise of options to purchase shares of
our common stock and $0.4 million from common stock issued through our
ESPP.
Our principal source of liquidity as of
December 31, 2014 consisted of $22.7 million in cash and cash equivalents, $31.9
million interest bearing marketable securities, and $10.6 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
funding, 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.
Contractual Obligations
The lease on our corporate headquarters
in Sunnyvale, California, has 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 34,406
square feet in one facility located in Tu-Cheng City, Taiwan. This lease expires
at various times from June 2015 to January 2017.
In China, we renewed the lease for our
132,993 square foot facility in Shenzhen, China, which will expire in October
2019. In December 2014, we entered into two leases for our two new manufacturing
facilities next to our facility in Shenzhen, China. Each facility has 55,285
square feet and both leases expire in December 2019.
The following summarizes our
contractual obligations at December 31, 2014 (in thousands):
|
|
Payments Due By Period |
|
|
|
|
Less than |
|
|
|
|
|
More than |
Contractual obligations |
|
Total |
|
1
year |
|
1-3 Years |
|
4-5 Years |
|
5
Years |
Operating Lease
Obligations |
|
2,962 |
|
972 |
|
1,153 |
|
837 |
|
- |
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.
27
Table of Contents
Item 7A. Quantitative and
Qualitative Disclosures About Market Risk
We are exposed to risks associated with
the translation of Taiwan (NT) and China (RMB) denominated financial results and
accounts into U.S. dollars for financial reporting purposes. The carrying value
of the assets and liabilities held in our Taiwan and China subsidiaries will be
affected by fluctuations in the value of the U.S. dollar as compared to the NT
and RMB. Changes in the value of the U.S. dollar as compared to the NT and RMB
could have an adverse effect on our reported results of operations and financial
condition. As the net positions of our unhedged foreign currency transactions
fluctuate, our earnings might be negatively affected. In addition, the reported
carrying value of our NT and RMB denominated assets and liabilities held in our
Taiwan and China subsidiaries will be affected by fluctuations in the value of
the U.S. dollar compared to the NT and RMB. As of December 31, 2014, we had a
net asset balance, excluding intercompany payables and receivables, in our
Taiwan and China subsidiaries denominated in NT and RMB. If the NT and RMB were
to weaken 10% against the dollar, our net asset balance would decrease by
approximately $2.2 million as of this date.
Item 8. Financial Statements and
Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
28
Table of Contents
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board
of Directors and Stockholders
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, 2014 and 2013, and the related consolidated
statements of income and comprehensive income, stockholders equity and cash
flows for each of the years in the three year period ended December 31, 2014. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
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 consolidated financial statements are
free of material misstatement. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
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, 2014 and 2013, and the consolidated results of its operations
and its cash flows for each of the years in the three year period ended December 31,
2014, in conformity with accounting principles generally accepted in the United
States of America.
We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), Alliance Fiber Optic Products, Inc.s internal control over financial
reporting as of December 31, 2014, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission in 2013 and our report dated March 13, 2015 expressed
an unqualified opinion on the effectiveness of the Companys internal control
over financial reporting.
Marcum LLP
San Francisco, California
March
13, 2015
29
Table of Contents
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
To the Audit Committee of the
Board
of Directors and Shareholders
of Alliance Fiber Optic Products,
Inc.
We have audited Alliance Fiber Optic
Products, Inc.s (the "Company") internal control over financial reporting as of
December 31, 2014, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013. The Company's management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying "Management Annual Report on Internal Control Over Financial
Reporting". Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial
reporting was maintained in all material respects. Our audit of internal control
over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
consolidated financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that degree of compliance with the policies or
procedures may deteriorate.
In our opinion, Alliance Fiber Optic
Products, Inc. maintained, in all material aspects, effective internal control
over financial reporting as of December 31, 2014, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013.
We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets as of December 31, 2014 and 2013 and
the related consolidated statements of income and comprehensive income,
shareholders equity, and cash flows for each of the years in the three year period ended
December 31, 2014 of the Company and our report dated March 13, 2015 expressed
an unqualified opinion on those financial statements.
Marcum llp
San Francisco, California
March 13, 2015
30
Table of Contents
ALLIANCE FIBER OPTIC PRODUCTS,
INC.
Consolidated Balance Sheets
(in
thousands, except share data)
|
December 31, |
|
2014 |
|
2013 |
Assets |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash
equivalents |
$ |
22,723 |
|
|
$ |
18,603 |
|
Short-term
investments |
|
31,857 |
|
|
|
28,076 |
|
Accounts receivable,
net |
|
10,806 |
|
|
|
11,566 |
|
Inventories,
net |
|
9,305 |
|
|
|
10,630 |
|
Deferred tax asset,
net |
|
3,690 |
|
|
|
6,036 |
|
Prepaid
expenses and other current assets |
|
2,077 |
|
|
|
1,745 |
|
Total
current assets |
|
80,458 |
|
|
|
76,656 |
|
|
|
|
|
|
|
|
|
Long-term investments |
|
10,635 |
|
|
|
10,453 |
|
Property and equipment,
net |
|
13,868 |
|
|
|
13,258 |
|
Other assets |
|
212 |
|
|
|
198 |
|
Total
assets |
$ |
105,173 |
|
|
$ |
100,565 |
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders'
Equity |
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
Accounts
payable |
$ |
9,236 |
|
|
$ |
11,657 |
|
Accrued expenses and other
current liabilities |
|
8,699 |
|
|
|
7,134 |
|
Total
current liabilities |
|
17,935 |
|
|
|
18,791 |
|
|
|
|
|
|
|
|
|
Long-term
liabilities: |
|
978 |
|
|
|
600 |
|
Total
liabilities |
|
18,913 |
|
|
|
19,391 |
|
|
|
|
|
|
|
|
|
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, 2014 and
2013, respectively |
|
- |
|
|
|
- |
|
Common stock,
par value $0.001: 100,000,000 shares authorized; 17,942,595
and 18,408,261 shares issued and outstanding at December
31, 2014 and 2013, respectively |
|
18 |
|
|
|
18 |
|
Additional
paid-in-capital |
|
111,622 |
|
|
|
117,369 |
|
Accumulated
deficit |
|
(26,817 |
) |
|
|
(38,625 |
) |
Accumulated other comprehensive
income |
|
1,437 |
|
|
|
2,412 |
|
Total
stockholders' equity |
|
86,260 |
|
|
|
81,174 |
|
Total
liabilities and stockholders' equity |
$ |
105,173 |
|
|
$ |
100,565 |
|
The accompanying notes are an integral
part of these Consolidated Financial Statements.
31
Table of Contents
ALLIANCE FIBER OPTIC PRODUCTS,
INC.
Consolidated Statements of Income
and Comprehensive Income
(in thousands,
except per share data)
|
Years Ended December 31, |
|
2014 |
|
2013 |
|
2012 |
Revenues |
$ |
85,987 |
|
|
$ |
76,070 |
|
|
$ |
46,611 |
Cost of revenues |
|
51,770 |
|
|
|
46,952 |
|
|
|
30,617 |
Gross profit |
|
34,217 |
|
|
|
29,118 |
|
|
|
15,994 |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
Research and
development |
|
4,340 |
|
|
|
3,702 |
|
|
|
3,298 |
Selling,
marketing and administrative |
|
8,274 |
|
|
|
8,315 |
|
|
|
6,967 |
Total
operating expenses |
|
12,614 |
|
|
|
12,017 |
|
|
|
10,265 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
21,603 |
|
|
|
17,101 |
|
|
|
5,729 |
Interest and other income,
net |
|
769 |
|
|
|
708 |
|
|
|
727 |
Income before benefit (provision) for income
taxes |
|
22,372 |
|
|
|
17,809 |
|
|
|
6,456 |
Benefit (provision) for
income taxes |
|
(7,864 |
) |
|
|
999 |
|
|
|
3,185 |
Net income |
|
14,508 |
|
|
|
18,808 |
|
|
|
9,641 |
|
Foreign currency
translation adjustments |
|
(961 |
) |
|
|
(392 |
) |
|
|
792 |
Net unrealized
gain (loss) on investments available for sale |
|
(15 |
) |
|
|
10 |
|
|
|
1 |
Comprehensive
income |
$ |
13,532 |
|
|
$ |
18,426 |
|
|
$ |
10,434 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
0.78 |
|
|
$ |
1.06 |
|
|
$ |
0.55 |
Diluted |
$ |
0.77 |
|
|
$ |
1.02 |
|
|
$ |
0.54 |
Shares used in computing
net income per share: |
|
|
|
|
|
|
|
|
|
|
Basic |
|
18,488 |
|
|
|
17,785 |
|
|
|
17,596 |
Diluted |
|
18,935 |
|
|
|
18,481 |
|
|
|
17,861 |
The accompanying notes are an integral
part of these Consolidated Financial Statements.
32
Table of Contents
ALLIANCE FIBER OPTIC PRODUCTS,
INC.
Consolidated Statements of Cash Flows
(in thousands)
|
|
Years Ended December 31, |
|
|
2014 |
|
2013 |
|
2012 |
Cash flows from
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
$
|
14,508 |
|
|
$
|
18,808 |
|
|
$
|
9,641 |
|
Adjustments to reconcile net income
to net cash |
|
|
|
|
|
|
|
|
|
|
|
|
provided
by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
2,799 |
|
|
|
2,175 |
|
|
|
1,609 |
|
Amortization
of stock based compensation |
|
|
2,160 |
|
|
|
1,917 |
|
|
|
1,066 |
|
Loss on
disposal of property and equipment |
|
|
3 |
|
|
|
107 |
|
|
|
13 |
|
Provision
for (recovery of) inventory valuation |
|
|
(30 |
) |
|
|
(84 |
) |
|
|
88 |
|
Deferred
tax assets |
|
|
2,346 |
|
|
|
(2,334 |
) |
|
|
(3,702 |
) |
Changes
in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
760 |
|
|
|
(3,520 |
) |
|
|
(1,416 |
) |
Inventories |
|
|
1,355 |
|
|
|
(3,613 |
) |
|
|
(258 |
) |
Prepaid
expenses and other current assets |
|
|
(332 |
) |
|
|
(579 |
) |
|
|
(452 |
) |
Other
assets |
|
|
(14 |
) |
|
|
51 |
|
|
|
(87 |
) |
Accounts
payable |
|
|
(2,421 |
) |
|
|
5,066 |
|
|
|
2,944 |
|
Accrued
expenses and other current liabilities |
|
|
1,565 |
|
|
|
3,019 |
|
|
|
491 |
|
Other
long-term liabilities |
|
|
378 |
|
|
|
(16 |
) |
|
|
53 |
|
Net
cash provided by operating activities |
|
|
23,077 |
|
|
|
20,997 |
|
|
|
9,990 |
|
|
Cash flows from investing
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of short-term
investments |
|
|
(35,438 |
) |
|
|
(21,492 |
) |
|
|
(32,140 |
) |
Proceeds from sales and maturities of
short-term investments |
|
|
31,643 |
|
|
|
21,908 |
|
|
|
29,427 |
|
Purchase of long-term
investments |
|
|
(182 |
) |
|
|
(179 |
) |
|
|
(176 |
) |
Purchase of property and
equipment |
|
|
(3,980 |
) |
|
|
(7,830 |
) |
|
|
(1,450 |
) |
Net
cash used in investing activities |
|
|
(7,957 |
) |
|
|
(7,593 |
) |
|
|
(4,339 |
) |
|
Cash flows from financing
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock under ESPP |
|
|
661 |
|
|
|
521 |
|
|
|
416 |
|
Proceeds from the exercise of stock
options |
|
|
607 |
|
|
|
5,239 |
|
|
|
888 |
|
Tax payments related to net share
settlements of RSUs |
|
|
501 |
|
|
|
(1,326 |
) |
|
|
(647 |
) |
Repurchase of common stock |
|
|
(9,676 |
) |
|
|
(873 |
) |
|
|
(4,780 |
) |
Payment of dividends |
|
|
(2,700 |
) |
|
|
(2,761 |
) |
|
|
(10,960 |
) |
Repayment of bank
borrowings |
|
|
- |
|
|
|
- |
|
|
|
(230 |
) |
Net
cash (used in) provided by financing activities |
|
|
(10,607 |
) |
|
|
800 |
|
|
|
(15,313 |
) |
|
Effect of exchange rate changes
on cash and cash equivalents |
|
|
(393 |
) |
|
|
(394 |
) |
|
|
635 |
|
Net increase in
cash and cash equivalents |
|
|
4,120 |
|
|
|
13,810 |
|
|
|
(9,027 |
) |
Cash and cash equivalents at
beginning of year |
|
|
18,603 |
|
|
|
4,793 |
|
|
|
13,820 |
|
Cash and cash
equivalents at end of year |
|
$ |
22,723 |
|
|
$ |
18,603 |
|
|
$ |
4,793 |
|
|
Supplemental disclosure of cash
flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for
interest |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(4 |
) |
Cash paid for income
taxes |
|
$ |
(1,092 |
) |
|
$ |
(433 |
) |
|
$ |
(450 |
) |
The accompanying notes are an integral
part of these Consolidated Financial Statements.
33
Table of Contents
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 |
|
Deficit) |
|
Income/(Loss) |
|
Total |
Balance at December 31, 2011 |
|
17,783 |
|
|
$ |
18 |
|
$
|
112,961 |
|
|
$
|
1,987 |
|
|
$
|
(53,353 |
) |
|
$
|
2,001 |
|
|
$
|
63,614 |
|
Deferred
stock-based compensation |
|
- |
|
|
|
- |
|
|
- |
|
|
|
1,066 |
|
|
|
- |
|
|
|
- |
|
|
|
1,066 |
|
Issuance of stock on exercise of options and RSUs |
|
340 |
|
|
|
- |
|
|
888 |
|
|
|
(647 |
) |
|
|
- |
|
|
|
- |
|
|
|
241 |
|
Issuance of
stock purchased through ESPP |
|
118 |
|
|
|
- |
|
|
416 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
416 |
|
Issuance of cash dividends |
|
- |
|
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
(10,960 |
) |
|
|
- |
|
|
|
(10,960 |
) |
Repurchase of
common stock |
|
(976 |
) |
|
|
- |
|
|
(4,780 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,780 |
) |
Net income for the year |
|
- |
|
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
9,641 |
|
|
|
- |
|
|
|
9,641 |
|
Other
comprehensive gain |
|
- |
|
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
793 |
|
|
|
793 |
|
Balance at December 31, 2012 |
|
17,265 |
|
|
|
18 |
|
|
109,485 |
|
|
|
2,406 |
|
|
|
(54,672 |
) |
|
|
2,794 |
|
|
|
60,031 |
|
Deferred
stock-based compensation |
|
|
|
|
|
- |
|
|
- |
|
|
|
1,917 |
|
|
|
- |
|
|
|
- |
|
|
|
1,917 |
|
Issuance of stock on exercise of options and RSUs |
|
1,210 |
|
|
|
- |
|
|
5,239 |
|
|
|
(1,326 |
) |
|
|
- |
|
|
|
- |
|
|
|
3,913 |
|
Issuance of
stock purchased through ESPP |
|
92 |
|
|
|
- |
|
|
521 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
521 |
|
Issuance of cash dividends |
|
- |
|
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
(2,761 |
) |
|
|
- |
|
|
|
(2,761 |
) |
Repurchase of
common stock |
|
(159 |
) |
|
|
- |
|
|
(873 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(873 |
) |
Net income for the year |
|
- |
|
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
18,808 |
|
|
|
- |
|
|
|
18,808 |
|
Other
comprehensive loss |
|
- |
|
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(382 |
) |
|
|
(382 |
) |
Balance at December 31, 2013 |
|
18,408 |
|
|
$ |
18 |
|
$ |
114,372 |
|
|
$ |
2,997 |
|
|
$ |
(38,625 |
) |
|
$ |
2,412 |
|
|
$ |
81,174 |
|
Deferred
stock-based compensation |
|
- |
|
|
|
- |
|
|
- |
|
|
|
2,160 |
|
|
|
- |
|
|
|
- |
|
|
|
2,160 |
|
Issuance of stock on exercise of options and RSUs |
|
224 |
|
|
|
- |
|
|
2,491 |
|
|
|
(1,383 |
) |
|
|
- |
|
|
|
- |
|
|
|
1,108 |
|
Issuance of
stock purchased through ESPP |
|
51 |
|
|
|
- |
|
|
661 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
661 |
|
Issuance of cash dividends |
|
- |
|
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
(2,700 |
) |
|
|
- |
|
|
|
(2,700 |
) |
Repurchase of
common stock |
|
(740 |
) |
|
|
- |
|
|
(9,676 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(9,676 |
) |
Net income for the year |
|
- |
|
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
14,508 |
|
|
|
- |
|
|
|
14,508 |
|
Other
comprehensive loss |
|
- |
|
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(975 |
) |
|
|
(975 |
) |
Balance at December 31, 2014 |
|
17,943 |
|
|
$ |
18 |
|
$ |
107,848 |
|
|
$ |
3,774 |
|
|
$ |
(26,817 |
) |
|
$ |
1,437 |
|
|
$ |
86,260 |
|
The accompanying notes are an integral
part of these Consolidated Financial Statements.
34
Table of Contents
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 consolidated
financial statements in accordance with accounting principles generally accepted
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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates involve those required in the
assessment of the allowance for sales returns, doubtful accounts and/or
potential excess obsolete inventory, stock-based compensation and valuation of
deferred tax assets. 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
as of 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.
35
Table of Contents
Fair value of financial instruments
The Company applies fair value
accounting for all financial assets and liabilities and non-financial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements on a recurring basis. The Company defines fair value as the price
that would be received from selling an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. When
determining the fair value measurements for assets and liabilities, which are
required to be recorded at fair value, the Company considers the principal or
most advantageous market in which the Company would transact and the
market-based risk measurements or assumptions that market participants would use
in pricing the asset or liability, such as risks inherent in valuation
techniques, transfer restrictions and credit risk. Fair value is estimated by
applying the following hierarchy, which prioritizes the inputs used to measure
fair value into three levels and bases the categorization within the hierarchy
upon the lowest level of input that is available and significant to the fair
value measurement:
Level 1
Quoted prices in active markets for
identical assets or liabilities.
Level 2
Observable inputs other than quoted prices
in active markets for identical assets and liabilities, quoted prices for
identical or similar assets or liabilities in inactive markets, 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 that are generally unobservable and
typically reflect managements estimate of assumptions that market participants
would use in pricing the asset or liability.
The Companys valuation techniques used
to measure the fair value of money market funds and certain marketable equity
securities were derived from quoted prices in active markets for identical
assets or liabilities.
In accordance with the fair value
accounting requirements, companies may choose to measure eligible financial
instruments and certain other items at fair value. The Company has not elected
the fair value option for any eligible financial instruments.
Allowance for doubtful accounts
The Company performs periodic credit
evaluations of its customers financial condition. The Company maintains an
allowance 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. We
regularly review our inventories for obsolescence and reserves are established
when necessary. 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. Inventory reserves were $2.4 million, $2.4 million and $1.9
million for the years ended December 31, 2014, 2013 and 2012, respectively.
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 25 years
for buildings, two to 10 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
expenses were $2.8 million, $2.2 million and $1.6 million for the years ended
December 31, 2014, 2013 and 2012, respectively.
Impairment of Long-lived
Assets
The Company reviews its 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 fair market values.
36
Table of Contents
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, have generally not been material. The Company
accrued $0.08 million, $0.06 million and $0.02 million for warranty reserves as
of December 31, 2014, 2013 and 2012, respectively.
Shipping and handling expenses
Shipping and handling expenses are
included in cost of revenue.
Research and development expenses
Research and development costs are
charged to expense as incurred.
Advertising expenses
Advertising costs are charged to
expense as incurred and have not been material in 2014, 2013 and 2012.
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 applies 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 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, California, Taiwan and
China.
The Company follows the provisions of
ASC 740-10-25, Income Taxes: Recognition ("ASC 740-10-25"). The total amount of
unrecognized tax benefits as of December 31, 2014, 2013 and 2012 were $1.1
million, $0.7 million and $0 respectively. The Company does not anticipate any
significant change to its unrecognized tax positions over the next 12 months.
The total amount of unrecognized tax benefits that, if recognized, would affect
the effective tax rate were $0.4 million, $0.3 million and $0 as of December 31,
2014, 2013 and 2012, respectively. The increase in unrecognized tax benefits
during the year ended December 31, 2014 was mainly due to the increase in
additional state income tax liabilities. The increase in unrecognized tax
benefits during the year ended December 31, 2014 was mainly due to the increase
in additional state income tax liabilities. The increase in unrecognized tax
benefits during the year ended December 31, 2013 was mainly due to the increase
in the valuation of the Companys research credit for federal and state income
taxes purposes.
37
Table of Contents
A reconciliation of the beginning and
ending balances of the total amounts of unrecognized tax benefits for the years
ended December 31, 2014 and 2013 are as follows:
Balance at January 1,
2013 |
$ |
- |
Additions for tax positions of the current
year |
|
683 |
Balance at December 31,
2013 |
$ |
683 |
Additions for tax positions of the prior
year |
|
280 |
Additions for tax
positions of the current year |
|
117 |
Balance at December 31, 2014 |
$ |
1,080 |
The Company recognizes interest and
penalties accrued related to unrecognized tax benefits in the provision for
income taxes. During the years ended December 31, 2014, 2013 and 2012, the
Company recognized approximately $0.1 million, $0.1 million and $0,
respectively, for interest and penalties.
Deferred tax assets pertaining to
windfall tax benefits on the exercise of share awards and the corresponding
credit to additional paid-in capital are recorded if the related tax deduction
reduces tax payable. The Company has elected the with-and-without approach
excluding indirect tax effects regarding ordering of windfall tax benefits to
determine whether the windfall tax benefit reduced taxes payable in the current
year. Under this approach, the windfall tax benefits would be recognized in
additional paid-in capital only if an incremental tax benefit is realized after
considering all other tax benefits presently available to the Company without
considering available income tax credits. The Companys deferred tax assets as
of December 31, 2014 and 2013 do not include $.06 million and $1.8 million,
respectively, of excess tax benefits from employee stock option exercises that
are a component of its net operating loss carryovers. Stockholders equity will
be increased by the same amount if and when such excess tax benefits are
ultimately realized.
The Company files income tax returns in
the United States (federal), Taiwan, China and in various state and local
jurisdictions. The Company is no longer subject to federal income tax
examinations by tax authorities for years prior to 2011, California State and
China income tax examination by tax authorities for years prior to 2010, and
Taiwan income tax examinations by tax authorities for years prior to 2008. The
Company is not currently under examination by any federal, state or local
jurisdiction. It is not anticipated that unrecognized tax benefits will
significantly change in the next twelve months.
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
an 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. Accumulated other comprehensive income consists of
cumulative translation adjustments and unrealized gains on short-term
investments and is disclosed in the consolidated statements of stockholders
equity.
Recent accounting pronouncements
In May 2014, the FASB issued a new
financial accounting standard which outlines a single comprehensive model for
entities to use in accounting for revenue arising from contracts with customers
and supersedes current revenue recognition guidance. The accounting standard is
effective for annual reporting periods (including interim reporting periods
within those periods) beginning after December 15, 2016. Early adoption is not
permitted. The Company is currently evaluating the impact of this accounting
standard on its consolidated financial statements.
In July 2013, the FASB issued guidance
on the presentation of an unrecognized tax benefit when a net operating loss
carryforward, similar tax loss or tax carryforward exists. The FASB concluded
that an unrecognized tax benefit should be presented as a reduction of a
deferred tax asset except in certain circumstances the unrecognized tax benefit
should be presented as a liability and should not be combined with deferred tax
assets. The amendment is effective prospectively for fiscal years, and interim
periods within those years, beginning after December 15, 2013, with early
adoption permitted. The adoption of this guidance did not have a material impact
on the Companys consolidated financial statements.
38
Table of Contents
In March 2013, the FASB issued guidance
to clarify when to release cumulative foreign currency translation adjustments
when an entity ceases to have a controlling financial interest in a subsidiary
or group of assets within a foreign entity. The amendment is effective
prospectively for fiscal years, and interim periods within those years,
beginning after December 15, 2013 and should be applied prospectively to
derecognition events occurring after the effective date. Early adoption is
permitted. The adoption of this guidance did not have a material impact on the
Companys consolidated financial statements.
In February 2013, the FASB issued
guidance requiring presentation of amounts reclassified from each component of
accumulated other comprehensive income. In addition, disclosure is required of
the effects of significant reclassifications on income statement line items
either on the face of the statement where net income is presented or as a
separate disclosure in the notes to the financial statements. For public
entities, this guidance is effective prospectively for reporting periods
beginning after December 15, 2012. The adoption of this guidance did not have a
material impact on the Companys 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, 2014. The
Board of Directors may determine the rights, preferences and privileges of any
preferred stock issued in the future.
Common Stock. On November 1, 2013, the Company amended its Amended and
Restated Certificate of Incorporation to increase the number of shares of common
stock authorized for issuance from 20,000,000 to 100,000,000.
On August 30, 2013, the Company
effected a 2-for-1 split of its outstanding common stock, pursuant to previously
obtained stockholder authorization. The number of authorized shares of common
stock was not changed. The stock split increased the Companys issued and
outstanding shares of common stock as of August 30, 2013 from approximately
9,061,568 shares to approximately 18,123,136 shares. All share and per share
numbers reflect the split and were applied on a retroactive basis.
Stock Repurchase Program. On
October 29, 2014, the Company announced a program to repurchase up to $15.0 million worth of the Companys 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 requirements and other
factors. The Company is not required to repurchase any amount of common stock in any period and the program may be modified
or suspended at any time. The duration of the repurchase program is open-ended. For the year ended December 31, 2014 an
aggregate of 740,190 shares of common stock had been repurchased under the program. For the years ended December 31, 2013
and 2012, an aggregate of 158,798 and 976,332 shares of common stock, respectively, had been repurchased under the November
2011 program.
Dividends. On November 14, 2014, the Company announced it had declared a
cash dividend of $0.15 per share, which was payable on December 24, 2014 to
holders of record on December 8, 2014. On November 7, 2013, the Company
announced it had declared a cash dividend of $0.15 per share, which was payable
on December 23, 2013 to holders of record on December 6, 2013. On October 25,
2012, the Company announced it had declared an annual cash dividend of $0.25 per
share, and one-time special cash dividend of $1.00 per share, both of which were
payable on December 11, 2012 to holders of record on November 30, 2012.
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.
39
Table of Contents
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
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 Company adopted the Black Scholes valuation model for stock options granted and stock purchased pursuant to the ESPP after June 30, 2010.
Fair value for stock options was estimated at the date of grant using the Black-Scholes pricing model, with the following weighted average assumptions:
|
|
Years Ended December
31, |
|
|
2014 |
|
2013 |
|
2012 |
Risk-free
interest rate |
|
1.02% |
|
0.49% |
|
0.51% |
Time to maturity (in
years) |
|
4 |
|
4 |
|
3 |
Annualized
volatility |
|
69.67% |
|
30.30% |
|
30.01% |
Expected dividend
rate |
|
1.20% |
|
0.98% |
|
10.83% |
At December 31, 2014, the Company had
one stock-based compensation plan, the 2000 Stock Incentive Plan (the Stock
Incentive Plan), which is described below.
In November 2000, the Company adopted
the 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. On October 21, 2013, the
stockholders approved an increase by 900,000 in the number of shares of common
stock available for issuance under the Stock Incentive Plan. The number of
shares reserved for issuance under the Companys 2000 Stock Incentive Plan may
be increased on the first day of the Companys fiscal year by the lesser of
680,000 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, 2014, because the Board
determined there were enough shares available for issuance in 2014 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.
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 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, over three years at a rate of 33.3 percent per year, or over 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 546,000 RSUs with a total grant-date fair value of
$2.5 million. The resulting compensation expense recorded in the year ended
December 31, 2014 and 2013 was approximately $0.4 million and $0.5 million,
respectively. At December 31, 2014, there was $0.5 million of unrecognized
compensation cost related to RSUs, which is expected to be realized over two
years.
40
Table of Contents
During the year ended December 31,
2013, the Company granted 342,000 RSUs with a total grant-date fair value of
$2.3 million. The resulting compensation expense recorded in the year ended
December 31, 2014 and 2013 was approximately $0.8 million and $0.6 million,
respectively. At December 31, 2014, there was $0.6 million of unrecognized
compensation cost related to RSUs, of which $0.5 million is expected to be
realized over one year and $0.1 million is expected to be realized over two
years.
Options granted under the 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, 2014:
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
Options |
Shares |
|
Price |
|
Life |
|
Value |
Outstanding at December
31, 2013 |
565,640 |
|
|
$ |
5.28 |
|
|
|
|
|
Granted |
346,600 |
|
|
|
12.46 |
|
|
|
|
|
Exercised |
(129,140 |
) |
|
|
4.71 |
|
|
|
|
|
Forfeited |
(90,000 |
) |
|
|
4.45 |
|
|
|
|
|
Outstanding at December
31, 2014 |
693,100 |
|
|
$ |
9.08 |
|
8.33 Years |
|
$ |
3,761,988 |
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31,
2014 |
661,872 |
|
|
$ |
9.04 |
|
8.30 Years |
|
$ |
3,617,550 |
Exercisable at December
31, 2014 |
118,161 |
|
|
$ |
4.75 |
|
5.77 Years |
|
$ |
1,152,749 |
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
2013 and 2014 and 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, 2014 and 2013. 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, 2014 and
2013 was $1.3 million and $12.8 million, respectively.
The dividend rate was 0.15% for each of
the years ended December 31, 2014 and 2013, respectively.
Cash received from option exercises
during the year ended December 31, 2014 and 2013 was approximately $0.6 million
and $5.2 million, respectively, and is included within the financing activities
section in the accompanying consolidated statements of cash flows.
41
Table of Contents
Information relating to stock options
outstanding at December 31, 2014 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 12/31/14 |
|
Term |
|
Price |
|
As
of 12/31/14 |
|
Price |
$2.25 |
-
$4.58 |
|
|
117,800 |
|
6.06 |
|
$ |
3.96 |
|
59,066 |
|
$ |
4.03 |
$4.80 |
-
$6.03 |
|
|
55,900 |
|
6.85 |
|
$ |
5.01 |
|
45,895 |
|
$ |
5.06 |
$6.87 |
-
$6.87 |
|
|
140,400 |
|
8.29 |
|
$ |
6.87 |
|
12,600 |
|
$ |
6.87 |
$8.17 |
-
$8.17 |
|
|
32,400 |
|
8.38 |
|
$ |
8.17 |
|
600 |
|
$ |
8.17 |
$12.32 |
-
$12.32 |
|
|
72,200 |
|
9.92 |
|
$ |
12.32 |
|
- |
|
$ |
- |
$12.50 |
-
$12.50 |
|
|
274,400 |
|
9.19 |
|
$ |
12.50 |
|
- |
|
$ |
- |
|
|
|
|
693,100 |
|
8.33 |
|
$ |
9.08 |
|
118,161 |
|
$ |
4.75 |
Options exercisable as of December 31,
2014 and 2013 were 118,161 and 115,400 at an average exercise price of $4.75 and
$4.01 per share, respectively.
There were 733,924 shares available for
future issuance under the Stock Incentive Plan as of December 31, 2014.
Employee Stock Purchase Plan
In November 2000, the Company adopted
its ESPP. The Company reserved 600,000 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 600,000 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 400,000 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 50,759 and 92,111 shares were issued under the ESPP in 2014 and 2013,
respectively.
There were 268,141 shares available for
future issuance under the ESPP as of December 31, 2014.
The following information relates to
the ESPP:
|
2014 |
|
2013 |
|
2012 |
Weighted average fair
value per share of shares purchased |
$ |
13.01 |
|
$ |
5.66 |
|
$ |
7.07 |
Total compensation expense for
ESPP |
$ |
461,980 |
|
$ |
409,079 |
|
$ |
139,595 |
Total amount of cash
received from the purchase of stock through ESPP |
$ |
660,621 |
|
$ |
521,308 |
|
$ |
416,741 |
Total intrinsic value of ESPP stock
purchased at December 31 |
$ |
75,892 |
|
$ |
863,120 |
|
$ |
291,958 |
42
Table of Contents
The following table summarizes employee
stock-based compensation expense resulting from stock options, RSUs, and the
ESPP (in thousands):
|
|
Years Ended December 31, |
|
|
2014 |
|
2013 |
|
2012 |
Included in cost of
revenue |
|
$ |
491 |
|
$ |
373 |
|
$ |
119 |
Included in operating expenses: |
|
|
|
|
|
|
|
|
|
Research and
development |
|
|
234 |
|
|
232 |
|
|
125 |
Sales,
marketing and administrative |
|
|
1,435 |
|
|
1,312 |
|
|
822 |
Total |
|
|
1,669 |
|
|
1,544 |
|
|
947 |
Total stock-based compensation
expenses |
|
$ |
2,160 |
|
$ |
1,917 |
|
$ |
1,066 |
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, |
|
2014 |
|
2013 |
|
2012 |
Numerator: |
|
|
|
|
|
|
|
|
Net
income |
$ |
14,508 |
|
$ |
18,808 |
|
$ |
9,641 |
|
Denominator: |
|
|
|
|
|
|
|
|
Shares used in
computing net income per share: |
|
|
|
|
|
|
|
|
Weighted
average of common shares outstanding |
|
|
|
|
|
|
|
|
Basic |
|
18,488 |
|
|
17,785 |
|
|
17,596 |
Diluted |
|
18,935 |
|
|
18,481 |
|
|
17,861 |
|
Net income per
share: |
|
|
|
|
|
|
|
|
Basic |
$ |
0.78 |
|
$ |
1.06 |
|
$ |
0.55 |
Diluted |
$ |
0.77 |
|
$ |
1.02 |
|
$ |
0.54 |
43
Table of Contents
5. Balance Sheet Components (in
thousands)
|
December 31, |
|
2014 |
|
2013 |
Cash and cash equivalents: |
|
|
|
|
|
|
|
Cash |
$ |
18,653 |
|
|
$ |
17,676 |
|
Money market instruments and
funds |
|
4,070 |
|
|
|
927 |
|
|
$ |
22,723 |
|
|
$ |
18,603 |
|
|
Accounts receivable, net: |
|
|
|
|
|
|
|
Accounts receivable |
$ |
10,927 |
|
|
$ |
11,687 |
|
Less: Allowance for doubtful accounts
and sales returns |
|
(121 |
) |
|
|
(121 |
) |
|
$ |
10,806 |
|
|
$ |
11,566 |
|
|
Allowance for doubtful accounts and sales returns: |
|
|
|
|
|
|
|
Balance at beginning of
year |
$ |
121 |
|
|
$ |
121 |
|
Utilized |
|
- |
|
|
|
- |
|
Balance at end of year |
$ |
121 |
|
|
$ |
121 |
|
|
Inventories: |
|
|
|
|
|
|
|
Finished goods |
$ |
3,191 |
|
|
$ |
3,201 |
|
Work-in-process |
|
3,430 |
|
|
|
4,498 |
|
Raw materials |
|
5,052 |
|
|
|
5,330 |
|
|
$ |
11,673 |
|
|
$ |
13,029 |
|
|
|
|
|
|
|
|
|
Inventory reserves: |
|
|
|
|
|
|
|
Finished goods |
$ |
647 |
|
|
$ |
746 |
|
Work-in-process |
|
460 |
|
|
|
364 |
|
Raw materials |
$ |
1,261 |
|
|
$ |
1,289 |
|
|
$ |
2,368 |
|
|
$ |
2,399 |
|
|
Accrued expenses and other current liabilities: |
|
|
|
|
|
|
|
Compensation costs |
$ |
5,016 |
|
|
$ |
5,104 |
|
Professional fees |
|
55 |
|
|
|
38 |
|
Outside commissions |
|
143 |
|
|
|
112 |
|
Royalties |
|
135 |
|
|
|
74 |
|
ESPP |
|
138 |
|
|
|
151 |
|
Deferred rent |
|
33 |
|
|
|
57 |
|
Warranty |
|
82 |
|
|
|
57 |
|
Operating related (Taiwan and
China) |
|
417 |
|
|
|
289 |
|
Income tax |
|
2,204 |
|
|
|
890 |
|
Others |
|
476 |
|
|
|
362 |
|
|
$ |
8,699 |
|
|
$ |
7,134 |
|
|
Long-term liabilities: |
|
|
|
|
|
|
|
Income tax payable |
$ |
376 |
|
|
$ |
- |
|
Accrued pension liability
(Taiwan) |
|
602 |
|
|
|
600 |
|
|
$ |
978 |
|
|
$ |
600 |
|
Accumulated other comprehensive Income: |
|
|
|
|
|
|
|
Cumulative translation
adjustments |
$ |
1,447 |
|
|
$ |
2,408 |
|
Unrealized gain/(loss) on short-term
investments |
|
(10 |
) |
|
|
4 |
|
|
$ |
1,437 |
|
|
$ |
2,412 |
|
44
Table of Contents
6. Property and Equipment,
Net
|
December 31, |
(in thousands) |
2014 |
|
2013 |
Machinery and
equipment |
$ |
21,685 |
|
|
$ |
20,696 |
|
Furniture and fixtures |
|
686 |
|
|
|
673 |
|
Leasehold
improvements |
|
1,285 |
|
|
|
986 |
|
Building and equipment prepayments |
|
3,804 |
|
|
|
2,948 |
|
|
$ |
27,460 |
|
|
$ |
25,303 |
|
Less: Accumulated depreciation |
|
(13,592 |
) |
|
|
(12,045 |
) |
Total property and
equipment, net |
$ |
13,868 |
|
|
$ |
13,258 |
|
7. Income Taxes
The components of income before income
taxes are as follows (in thousands):
|
|
Years Ended December 31, |
|
|
2014 |
|
2013 |
|
2012 |
Income subject to domestic income taxes
only |
|
$ |
8,608 |
|
$ |
17,645 |
|
$ |
4,000 |
Income subject to foreign income taxes only |
|
|
13,764 |
|
|
164 |
|
|
2,456 |
|
|
$ |
22,372 |
|
$ |
17,809 |
|
$ |
6,456 |
The income tax provision (benefit) is
composed of the following (in thousands):
|
|
Years Ended December 31, |
Current: |
|
2014 |
|
2013 |
|
2012 |
Federal |
|
$ |
2,663 |
|
$ |
382 |
|
|
$ |
107 |
|
State |
|
|
75 |
|
|
1 |
|
|
|
- |
|
Foreign |
|
|
2,403 |
|
|
953 |
|
|
|
409 |
|
|
|
|
5,141 |
|
|
1,336 |
|
|
|
516 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
1,891 |
|
|
(1,450 |
) |
|
|
(3,160 |
) |
State |
|
|
763 |
|
|
(232 |
) |
|
|
(541 |
) |
Foreign |
|
|
69 |
|
|
(653 |
) |
|
|
- |
|
|
|
|
2,723 |
|
|
(2,335 |
) |
|
|
(3,701 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income
taxes |
|
$ |
7,864 |
|
$ |
(999 |
) |
|
$ |
(3,185 |
) |
45
Table of Contents
Deferred tax assets and liabilities
consist of the following (in thousands):
|
|
Years Ended December 31, |
|
|
2014 |
|
2013 |
|
2012 |
Deferred tax assets -
current: |
|
|
|
|
|
|
|
|
|
|
|
|
Net operating
loss carryforwards |
|
$ |
- |
|
|
$ |
3,501 |
|
|
$ |
8,230 |
|
Windfall tax benefit
carryforwards |
|
|
- |
|
|
|
(580 |
) |
|
|
- |
|
Federal/State
credit carryforwards |
|
|
2,536 |
|
|
|
2,260 |
|
|
|
2,245 |
|
Depreciation and
amortization |
|
|
24 |
|
|
|
6 |
|
|
|
- |
|
Stock
compensation |
|
|
326 |
|
|
|
- |
|
|
|
649 |
|
Accrued liabilities and
allowances |
|
|
1,508 |
|
|
|
1,532 |
|
|
|
788 |
|
Unrecognized
tax benefit |
|
|
(704 |
) |
|
|
(683 |
) |
|
|
- |
|
|
|
|
3,690 |
|
|
|
6,036 |
|
|
|
11,912 |
|
Less: valuation allowance |
|
|
- |
|
|
|
- |
|
|
|
(8,210 |
) |
Total deferred tax
assets |
|
$ |
3,690 |
|
|
$ |
6,036 |
|
|
$ |
3,702 |
|
The following is a reconciliation of
the effective tax rates and the United States statutory federal income tax rate:
|
Years Ended December 31, |
|
2014 |
|
2013 |
|
2012 |
Tax at federal statutory
rate |
34.0 |
% |
|
34.0 |
% |
|
34.0 |
% |
State, net of federal benefit |
5.8 |
|
|
5.8 |
|
|
5.8 |
|
Effect of permanent
differences |
3.8 |
|
|
1.1 |
|
|
- |
|
Stock and deferred compensation |
0.9 |
|
|
(7.2 |
) |
|
(0.8 |
) |
Net operating loss
carryover |
5.6 |
|
|
- |
|
|
- |
|
Foreign tax differential |
(13.1 |
) |
|
0.1 |
|
|
4.4 |
|
Reserarch and development
credits |
- |
|
|
- |
|
|
(1.1 |
) |
Minimum tax |
0.6 |
|
|
1.7 |
|
|
1.4 |
|
Income tax
credits |
(1.9 |
) |
|
(0.9 |
) |
|
(0.3 |
) |
Valuation allowance |
- |
|
|
(47.4 |
) |
|
(88.7 |
) |
Unrecognized tax
position |
2.1 |
|
|
2.3 |
|
|
- |
|
Other |
(2.6 |
) |
|
4.9 |
|
|
(4.0 |
) |
Provision
(benefit) for taxes |
35.2 |
% |
|
(5.6 |
)% |
|
(49.3 |
)% |
The Company accounts for income taxes
under the asset and liability method, which requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements. Under this method, deferred
tax assets and liabilities are determined based on the differences between the
financial statements and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The effect of a change in tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment date.
46
Table of Contents
The Companys effective tax rate was
below the U.S. statutory rate in 2014 mainly due to differentials between the
U.S. statutory rate and the foreign tax rates applied to the earnings of the
Companys foreign subsidiaries. The Companys effective tax rate was
below the U.S. statutory rate in 2013 and 2012 because of the tax benefit
arising from a reduction in the valuation allowance. The Company is subject to
income tax in both the United States and various foreign jurisdictions. The
effective tax rate is also affected by the taxable earnings in foreign
jurisdictions with various different statutory tax rates. The Company reviews
its expected annual effective income tax rates and makes changes on a quarterly
basis as necessary based on certain factors such as forecasted annual operating
income and valuation of deferred tax assets.
The Company records net deferred tax
assets to the extent it believes these assets will more likely than not be
realized. In making such determination, management considers all available
positive and negative evidence, including future reversals of existing taxable
temporary differences, projected future taxable income, tax planning strategies
and recent financial operations. In the event the Company was to determine that
it would be able to realize its deferred income tax assets in the future in
excess of their net recorded amount, the Company would make an adjustment to the
valuation allowance, which would reduce the provision for income taxes.
Management assesses the available
positive and negative evidence to estimate if sufficient future taxable income
will be generated to utilize the existing deferred tax assets. Based on this
assessment, as of December 31, 2014, the Companys valuation allowance was fully
released. The amount of the deferred tax asset considered realizable, however,
could be adjusted if estimates of future taxable income are reduced.
As of December 31, 2014, the Company
has a net operating loss carryforward of approximately $0.9 million for federal
and $5.2 million for state income tax purposes. If not utilized, these
carryforwards will begin to expire after 2024 for federal and after 2018 for
state purposes.
As of December 31, 2014, the Company
has research credit carryforwards of approximately $1.2 million and $1.0 million
for federal and state income tax purposes, respectively. If not utilized, the
federal carryforwards will expire in various amounts beginning in 2019. The
California tax credits can be carried forward indefinitely.
Internal Revenue Code Section 382
limits the use of net operating loss and tax credit carryforwards in certain
situations 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 2014.
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 26.9% of the
Companys accounts receivable at December 31, 2014. Two customers accounted for
46.0% and 18.0% of the Companys accounts receivable at December 31, 2013 and
2012, respectively.
One customer accounted for 39.6% and
35.3%, and another customer accounted for 10%, of revenues in the year ended
December 31, 2014, 2013 and 2012, 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
may not 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.
47
Table of Contents
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, |
|
|
2014 |
|
2013 |
|
2012 |
Revenues |
|
|
|
|
|
|
|
|
|
North
America |
|
$ |
52,101 |
|
$ |
42,815 |
|
$ |
27,299 |
Europe |
|
|
18,102 |
|
|
15,604 |
|
|
8,933 |
Asia |
|
|
15,784 |
|
|
17,651 |
|
|
10,379 |
|
|
$ |
85,987 |
|
$ |
76,070 |
|
$ |
46,611 |
|
|
|
Years Ended December 31, |
|
|
2014 |
|
2013 |
|
2012 |
Revenues |
|
|
|
|
|
|
|
|
|
Connectivity
Products |
|
$ |
64,791 |
|
$ |
57,660 |
|
$ |
32,622 |
Optical Passive
Products |
|
|
21,196 |
|
|
18,410 |
|
|
13,989 |
|
|
$ |
85,987 |
|
$ |
76,070 |
|
$ |
46,611 |
|
|
Years Ended December 31, |
|
|
2014 |
|
2013 |
Property and Equipment,
net |
|
|
|
|
|
|
United
States |
|
$ |
185 |
|
$ |
40 |
Taiwan |
|
|
8,568 |
|
|
7,148 |
China |
|
|
5,115 |
|
|
6,070 |
|
|
$ |
13,868 |
|
$ |
13,258 |
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, 2014 or 2013, 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 it might be required to make
as a result of these agreements. As of December 31, 2014, 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 $0.08 million, $0.06 million and
$0.02 million warranty reserves as of December 31, 2014, 2013 and 2012,
respectively.
48
Table of Contents
Operating Leases
The Company leases certain office space
under long-term operating leases expiring at various dates through 2019. Total
rent expense under these operating leases was approximately $0.7 million for
each of the years ended December 31, 2014, 2013 and 2012.
Total future minimum lease payments
under operating leases as of December 31, 2014 are summarized below (in
thousands):
Years ending December 31, |
|
|
2015 |
$ |
972 |
2016 |
|
701 |
2017 |
|
452 |
2018 |
|
446 |
2019 and after |
|
391 |
Total |
$ |
2,962 |
11. Related Party Transactions
As of December 31, 2014, and based on
information filed with the Securities and Exchange Commission on January 4, 2002
for the year ended December 31, 2000, Foxconn Holding Limited (Foxconn) and
Hon Hai Precision Industry Co. Ltd. (Hon Hai) held 17.83% of the Companys
common stock. In the normal course of business, the Company sells products to
and purchases raw materials from Hon Hai, who is the parent company of Foxconn.
These transactions were made at prices and terms consistent with those of
unrelated third parties.
Sales of products to Hon Hai Precision
Co., Ltd. were $0.07 million, $0.01 million and $0.06 million in the years ended
December 31, 2014, 2013 and 2012, respectively. Amounts due from Hon Hai
Precision Co., Ltd. were $0.05 million, $0.01 million and $0 at December 31,
2014, 2013 and 2012, respectively.
Purchases of raw materials from Hon Hai
Precision Co., Ltd. were $1.8 million, $1.5 million and $1.0 million in the
years ended December 31, 2014, 2013 and 2012 respectively. Amounts due to Hon
Hai Precision Co., Ltd. were $0.4 million, $0.3 million and $0.3 million at
December 31, 2014, 2013 and 2012.
12. Fair Value of Financial
instruments
U.S. GAAP defines fair value as the
price that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. When determining the fair value measurements for assets and
liabilities required to be recorded at fair value, the Company considers the
principal or most advantageous market in which the Company would transact a
purchase or sale and the market-based risk measurements or assumptions that
market participants would use in pricing the asset or liability.
The Company uses a fair value hierarchy
established by U.S. GAAP that established a three-tiered fair value hierarchy of
valuation techniques based on whether the inputs to those valuation techniques
are observable or unobservable to prioritize inputs used to measure fair value.
Observable inputs reflect market data obtained from independent sources, while
unobservable inputs reflect the Companys market assumptions. A financial
instruments categorization within the fair value hierarchy is based upon the
lowest level of input that is available and significant to the fair value
measurement. Those tiers are defined as follows:
|
Level 1 |
inputs are quoted prices in
active markets for identical assets or liabilities. |
|
|
|
|
Level
2 |
inputs other than quoted prices
included within Level 1 that are observable, either directly or
indirectly. |
|
|
|
|
Level 3
|
inputs are unobservable and shall
be used to the extent that observable inputs are not available in the
overall fair value measurement. |
49
Table of Contents
The following table represents the fair
value hierarchy for the Companys financial assets (investments) measured at
fair value on a recurring basis at December 31, 2014 and December 31, 2013 (in
thousands):
|
|
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 |
|
|
2014 |
|
(Level
1) |
|
(Level 2) |
|
(Level 3) |
Cash
equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Money market
mutual funds |
|
$ |
4,070 |
|
$ |
4,070 |
|
$ |
- |
|
$ |
- |
Marketable
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits |
|
|
21,782 |
|
|
21,782 |
|
|
- |
|
|
- |
Corporate bonds |
|
|
10,075 |
|
|
- |
|
|
10,075 |
|
|
- |
Long-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
|
10,635 |
|
|
10,635 |
|
|
- |
|
|
- |
Total |
|
$ |
46,562 |
|
$ |
36,487 |
|
$ |
10,075 |
|
$ |
- |
|
|
|
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 |
|
|
2013 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Cash
equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Money market
mutual funds |
|
$ |
927 |
|
$ |
927 |
|
$ |
- |
|
$ |
- |
Short-term
investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits |
|
|
15,065 |
|
|
15,065 |
|
|
- |
|
|
- |
Corporate bonds |
|
|
13,011 |
|
|
- |
|
|
13,011 |
|
|
- |
Long-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
|
10,453 |
|
|
10,453 |
|
|
- |
|
|
- |
Total |
|
$ |
39,456 |
|
$ |
26,445 |
|
$ |
13,011 |
|
$ |
- |
As of December 31, 2014 and 2013, the
Company held investments in corporate bonds, certificates of deposit, and money
market securities. The Companys cash and cash equivalents consist of
investments with original maturities of 90 days or less from the date of
purchase. The Companys short-term investments consist of corporate bonds and
certificates of deposit 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.
50
Table of Contents
13. Selected Quarterly Data
(Unaudited)
The following table presents summary unaudited quarterly financial data
(in thousands, except per share data):
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net |
|
$ |
24,882 |
|
$ |
24,199 |
|
$ |
18,096 |
|
$ |
18,810 |
Gross profit |
|
|
9,914 |
|
|
9,695 |
|
|
7,139 |
|
|
7,469 |
Net income |
|
|
5,015 |
|
|
3,782 |
|
|
4,303 |
|
|
1,408 |
Net income per share -
basic |
|
|
0.27 |
|
|
0.20 |
|
|
0.23 |
|
|
0.08 |
Net income per share - diluted |
|
|
0.26 |
|
|
0.20 |
|
|
0.23 |
|
|
0.08 |
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net |
|
$ |
12,153 |
|
$ |
19,039 |
|
$ |
23,074 |
|
$ |
21,804 |
Gross profit |
|
|
4,408 |
|
|
7,280 |
|
|
8,856 |
|
|
8,574 |
Net income |
|
|
1,850 |
|
|
4,282 |
|
|
5,621 |
|
|
7,055 |
Net income per share -
basic |
|
|
0.11 |
|
|
0.24 |
|
|
0.31 |
|
|
0.38 |
Net income per share - diluted |
|
|
0.10 |
|
|
0.23 |
|
|
0.30 |
|
|
0.37 |
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.
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 in 2013.
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.
51
Table of Contents
Based on the
evaluation as of the end of the fiscal year 2014, the Companys Chief Executive
Officer and Acting Chief Financial Officer have concluded that our internal
controls over financial reporting were effective.
Our independent
public accounting firm, Marcum LLP, audited the effectiveness of our internal
control over financial reporting. Their report appears in Part II Item 8.
Financial Statements and Supplementary Data.
Changes in
Internal Controls. There were no changes in
our internal control over financial reporting that occurred in the fourth
quarter of 2014 that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 9B. Other Information
Not
Applicable.
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 2015 Annual Meeting of Stockholders to
be held on May 20, 2015 (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 2014 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.
52
Table of Contents
Equity Compensation Plan Information
Set forth in the
table below is certain information regarding the Companys equity compensation
plans as of December 31, 2014:
|
|
|
|
|
|
|
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 |
|
1,069,100 |
(1) |
|
$ |
9.08 |
|
1,002,065 |
(2) |
Equity
compensation plans not |
|
|
|
|
|
|
|
approved by
security holders |
|
- |
|
|
|
- |
|
- |
|
Total |
|
1,069,100 |
|
|
$ |
9.08 |
|
1,002,065 |
|
____________________
(1) Includes 693,100 shares to be issued
upon exercise of outstanding options and 376,000 shares of unvested RSUs granted
under the Stock Incentive Plan.
(2) Includes:
(i) 733,924
shares reserved for issuance under the Stock Incentive Plan. The number of
shares reserved for issuance under the plan may be increased on the first day of
the Companys fiscal year by the lesser of 680,000 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.
(ii) 268,141
shares reserved for issuance under the Companys ESPP. The ESPP permits eligible
employees to contribute up to 20% of cash compensation up to 1,000 shares
maximum 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.
53
Table of Contents
(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 Exhibit Index, which follows
the signature pages of this report and is incorporated herein by reference.
54
Table of Contents
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 13, 2015 |
|
|
|
|
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 13, 2015 |
Peter C. Chang |
|
(Principal Executive Officer)
and |
|
|
|
|
Chairman |
|
|
|
|
|
|
|
/s/ Anita K. Ho |
|
Acting Chief Financial
Officer |
|
March 13, 2015 |
Anita K. Ho |
|
(Principal Financial and
Accounting |
|
|
|
|
Officer) |
|
|
|
|
|
|
|
/s/ Richard Black |
|
Director |
|
March 13, 2015 |
Richard Black |
|
|
|
|
|
|
|
|
|
/s/ Gwong-Yih Lee |
|
Director |
|
March 13, 2015 |
Gwong-Yih Lee |
|
|
|
|
|
|
|
|
|
/s/ Ray Sun |
|
Director |
|
March 13, 2015 |
Ray Sun |
|
|
|
|
|
|
|
|
|
/s/ James C. Yeh |
|
Director |
|
March 13, 2015 |
James C. Yeh |
|
|
|
|
55
Table of Contents
EXHIBIT INDEX
Exhibit |
|
|
Number |
|
Description of
Document |
|
3(i).1** |
|
|
Integrated copy of the Amended and Restated
Certificate of Incorporation of the Company. |
|
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,
(incorporated by reference to Exhibit 10.5.2 to the Companys Annual
Report on Form 10-K for the year end December 31, 2011). |
|
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). |
56
Table of Contents
Exhibit |
|
|
Number |
|
Description of
Document |
|
23.1 |
|
|
Consent of Marcum LLP, Independent
Registered Public Accounting Firm. |
|
24.1 |
|
|
Power of Attorney (see page 55 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 Securities Exchange Act
of 1934 (the Exchange Act). Such certifications will not be deemed to be
incorporated by reference into any filing under the Securities Act of 1933 (the
Securities Act) or the Exchange Act, except to the extent that the registrant
specifically incorporates it by reference.
** Filed herewith.
# Indicates management contract or
compensatory plan or arrangement.
57
Exhibit 3(i).1
THIS DOCUMENT
CONSTITUTES AN INTEGRATED COPY OF THE REGISTRANTS CERTIFICATE OF INCORPORATION,
AS AMENDED THROUGH THE DATE OF THIS FILING. THE DOCUMENTS SO INTEGRATED ARE ON
FILE WITH THE DELAWARE SECRETARY OF STATE.
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF ALLIANCE FIBER OPTIC
PRODUCTS, INC.
ARTICLE I
The name of the corporation
is Alliance Fiber Optic Products, Inc..
ARTICLE II
The address of the
registered office of the corporation in the State of Delaware is 1013 Centre
Road, in the City of Wilmington, County of New Castle. The name of its
registered agent at such address is Corporation Services Company.
ARTICLE III
The nature of the business
or purposes to be conducted or promoted is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE IV
A. Classes of
Stock. The total number of shares
of all classes of classes of capital stock that the corporation shall have
authority to issue is one hundred five million (105,000,000), of which one
hundred million (100,000,000) shares of the par value of one tenth of one cent
($0.001) each shall be Common Stock (the Common Stock) and five million
(5,000,000) shares of the par value of one tenth of one cent ($0.001) each shall
be Preferred Stock (the Preferred Stock). The number of authorized shares of
Common Stock or Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority of the then outstanding shares of Common Stock, without a
vote of the holders of the Preferred Stock, or of any series thereof, unless a
vote of any such Preferred Stock holders is required pursuant to the provisions
established by the Board of Directors of the corporation (the Board of
Directors) in the resolution or resolutions providing for the issue of such
Preferred Stock, and if such holders of such Preferred Stock are so entitled to
vote thereon, then, except as may otherwise be set forth in this Restated
Certificate of Incorporation, the only stockholder approval required shall be
the affirmative vote of a majority of the combined voting power of the Common
Stock and the Preferred Stock so entitled to vote.
B. Preferred Stock. The Preferred Stock may be issued in any number
of series, as determined by the Board of Directors. The Board of Directors is
expressly authorized to
provide for the issue, in one or more series, of all or any of the remaining
shares of Preferred Stock and, in the resolution or resolutions providing for
such issue, to establish for each such series the number of its shares, the
voting powers, full or limited, of the shares of such series, or that such
shares shall have no voting powers, and the designations, preferences and
relative, participating, optional or other special rights of the shares of such
series, and the qualifications, limitations or restrictions thereof. The Board
of Directors is also expressly authorized (unless forbidden in the resolution or
resolutions providing for such issue) to increase or decrease (but not below the
number of shares of the series then outstanding) the number of shares of any
series subsequent to the issuance of shares of that series. In case the number
of shares of any such series shall be so decreased, the shares constituting such
decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
C. Common
Stock.
1. Relative Rights of
Preferred Stock and Common Stock.
All preferences, voting powers, relative, participating, optional or other
special rights and privileges, and qualifications, limitations, or restrictions
of the Common Stock are expressly made subject and subordinate to those that may
be fixed with respect to any shares of the Preferred Stock.
2. Voting
Rights. Except as otherwise
required by law or this Restated Certificate of Incorporation, each holder of
Common Stock shall have one vote in respect of each share of stock held by such
holder of record on the books of the corporation for the election of directors
and on all matters submitted to a vote of stockholders of the corporation.
3. Dividends. Subject to the preferential rights of the
Preferred Stock, the holders of shares of Common Stock shall be entitled to
receive, when and if declared by the Board of Directors, out of the assets of
the corporation which are by law available therefor, dividends payable either in
cash, in property or in shares of capital stock.
4. Dissolution, Liquidation
or Winding Up. In the event of
any dissolution, liquidation or winding up of the affairs of the corporation,
after distribution in full of the preferential amounts, if any, to be
distributed to the holders of shares of the Preferred Stock, holders of Common
Stock shall be entitled, unless otherwise provided by law or this Restated
Certificate of Incorporation, to receive all of the remaining assets of the
corporation of whatever kind available for distribution to stockholders ratably
in proportion to the number of shares of Common Stock held by them respectively.
ARTICLE V
In furtherance and not in
limitation of the powers conferred by the laws of the State of Delaware:
A. The Board of Directors is
expressly authorized to adopt, amend or repeal the by-laws of the corporation,
provided, however, that the by-laws may only be amended in accordance with the
provisions thereof.
B. Elections of directors
need not be by written ballot unless the by-laws of the corporation shall so
provide.
C. The books of the
corporation may be kept at such place within or without the State of Delaware as
the by-laws of the corporation may provide or as may be designated from time to
time by the Board of Directors.
ARTICLE VI
A. Number of
Directors. The authorized number
of directors of the corporation shall be determined from time to time by
resolution adopted by the affirmative vote of a majority of the entire Board of
Directors at any regular or special meeting of such Board, within any limits
prescribed in the by-laws of the corporation.
B. Classes of
Directors. The Board of
Directors, other than those directors elected by the holders of any series of
Preferred Stock as provided for or fixed pursuant to the provisions of Article
IV of this Restated Certificate of Incorporation, shall be divided into three
classes, designated Class I, Class II and Class III, as nearly equal in number
as possible, and the term of office of directors of one class shall expire at
each annual meeting of stockholders, and in all cases as to each director until
his or her successor shall be elected and shall qualify or until his or her
earlier resignation, removal from office, death or incapacity. Additional
directorships resulting from an increase in number of directors shall be
apportioned among the classes as equally as possible. The initial term of office
of directors of Class I shall expire at the annual meeting of stockholders in
2001, the initial term of office of directors of Class II shall expire at the
annual meeting of stockholders in 2002, and the initial term of office of
directors of Class III shall expire at the annual meeting of stockholders in
2003. At each annual meeting of stockholders the number of directors equal to
the number of directors of the class whose term expires at the time of such
meeting (or, if less, the number of directors properly nominated and qualified
for election) shall be elected to hold office until the third succeeding annual
meeting of stockholders after their election.
C. Vacancies. Except as otherwise provided for or fixed
pursuant to the provisions of Article IV of this Restated Certificate of
Incorporation relating to the rights of the holders of any series of Preferred
Stock to elect additional directors, and subject to the provisions hereof, newly
created directorships resulting from any increase in the authorized number of
directors, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal, or other cause, may be filled only by
the affirmative vote of a majority of the remaining directors then in office,
even though less than a quorum of the Board of Directors. Any director elected
in accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or in which the vacancy occurred, and until such directors successor
shall have been duly elected and qualified or until his or her earlier
resignation, removal from office, death or incapacity. Subject to the provisions
of this Restated Certificate of Incorporation, no decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
ARTICLE VII
No action required or
permitted to be taken at any annual or special meeting of the stockholders may
be taken without a meeting and the power of stockholders to consent in writing,
without a meeting, to the taking of any action is specifically denied. Special
meetings of the stockholders of the corporation may be called only by the
Chairman of the Board or the Chief Executive Officer of the corporation or by a
resolution adopted by the affirmative vote of a majority of the Board of
Directors.
ARTICLE VIII
A. Limitation on
Liability. A director of the
corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (1) for any breach of the directors duty of loyalty to the
corporation or its stockholders; (2) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (3) under
Section 174 of the Delaware General Corporation Law; or (4) for any transaction
from which the director derived an improper personal benefit.
If the Delaware General
Corporation Law hereafter is amended to further eliminate or limit the liability
of directors, then the liability of a director of the corporation, in addition
to the limitation on personal liability provided herein, shall be limited to the
fullest extent permitted by the amended Delaware General Corporation Law.
B. Indemnification. Each
person who is or is made a party or is threatened to be made a party to or is
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a proceeding), by reason of the
fact that he or she, or a person of whom he or she is the legal representative,
is or was a director or officer of the corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of
such proceeding is alleged action in an official capacity as a director,
officer, employee or agent or in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless by the
corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the corporation
to provide broader indemnification rights than said law permitted the
corporation to provide prior to such amendment), against all expense, liability
and loss (including attorneys fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that, except as provided in the second
paragraph hereof, the corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors of the corporation. The right to indemnification conferred in
this section shall be a contract right and shall include the right to be paid by
the corporation for any expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that, if the Delaware
General Corporation Law requires, the payment of such expenses incurred by a
director or officer in his or her capacity as a director or officer (and not in
any other capacity in which service was or is rendered by such person while a
director or officer, including, without limitation, service to an employee
benefit plan) in advance of the final disposition of a proceeding, shall be made
only upon delivery to the corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this section or otherwise. The corporation may, by action of its Board of
Directors, provide indemnification to employees and agents of the corporation
with the same scope and effect as the foregoing indemnification of directors and
officers.
If a claim under the first
paragraph of this section is not paid in full by the corporation within thirty
(30) days after a written claim has been received by the corporation, the
claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any is required, has
been tendered to the corporation) that the claimant has not met the standards of
conduct which make it permissible under the Delaware General Corporation Law for
the corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the corporation. Neither the failure of the
corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
The right to
indemnification and the payment of expenses incurred in defending a proceeding
in advance of its final disposition conferred in this section shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, provision of the Restated Certificate of Incorporation,
by-law, agreement, vote of stockholders or disinterested directors or otherwise.
C. Insurance. The corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
D. Repeal and
Modification. Any repeal or
modification of the foregoing provisions of this Article VIII shall not
adversely affect any right or protection of any director, officer, employee or
agent of the corporation existing at the time of such repeal or modification. To
the fullest extent permitted by applicable law, the Corporation is authorized to
provide indemnification of (and advancement of expenses to) agents of the
Corporation (and any other persons to which Delaware law permits the Corporation
to provide indemnification) through bylaw provisions, agreements with such
agents or other persons, vote of stockholders or disinterested directors or
otherwise, in excess of the indemnification and advancement otherwise permitted
by Section 145 of the Delaware General Corporation Law, subject only to limits
created by applicable Delaware law (statutory or non-statutory), with respect to
actions for breach of duty to the Corporation, its stockholders, and others.
ARTICLE IX
The Board of Directors is
expressly empowered to adopt, amend or repeal the bylaws of the corporation;
provided, however, that any adoption, amendment or repeal of the bylaws of the
corporation by the Board of Directors shall require the approval of at least
sixty-six and two-thirds percent (66-2/3%) of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any resolution providing for adoption, amendment or
repeal is presented to the Board of Directors). The stockholders shall also have
the power to adopt, amend or repeal the by-laws of the corporation, provided,
however, that in addition to any vote of the holders of any class or series of
stock of the corporation required by law or by this Restated Certificate of
Incorporation, the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the voting power of all of the then outstanding
shares of the stock of the corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required for
such adoption, amendment or repeal by the stockholders of any provisions of the
by-laws of the corporation.
ARTICLE X
Notwithstanding any other
provision of this Restated Certificate of Incorporation, the affirmative vote of
the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then outstanding shares of the stock of the corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to amend in any respect or repeal this Article
X, or Articles VI, VII, VIII and IX.
ARTICLE XI
Each five (5) shares of the Common Stock, par value $0.001 per
share, of the corporation issued and outstanding or held in treasury as of 5:00
p.m. Eastern Time on August 27, 2010 (the Effective Time) shall be
reclassified as and changed into one (1) share of Common Stock, par value $0.001
per share, of the Corporation, without any action by the holders thereof. Each
stockholder who, immediately prior to the Effective Time, owns a number of
shares of Common Stock which is not evenly divisible by five (5) shall, with respect to such fractional interest, be entitled to
receive from the corporation cash in an amount equal to such fractional interest
multiplied by the closing price of the Common Stock as last reported on The
NASDAQ Capital Market immediately prior to the Effective Time.
* * *
CERTIFICATE OF DESIGNATION
OF SERIES A PARTICIPATING
PREFERRED STOCK
OF ALLIANCE FIBER OPTIC PRODUCTS, INC.
1. Series A Participating
Preferred Stock. The shares of
such series shall be designated as Series A Participating Preferred Stock, par
value $0.001 per share, and the number of shares constituting such series shall
be Five Hundred Thousand (500,000). Such number of shares may be increased or
decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A
Participating Preferred Stock to a number less than that of the shares then
outstanding plus the number of shares issuable upon exercise of outstanding
rights, options or warrants or upon conversion of outstanding securities issued
by the Corporation.
2. Dividends and
Distributions.
(A) Subject to the prior and
superior rights of the holders of any shares of any series of Preferred Stock
ranking prior and superior to the shares of Series A Participating Preferred
Stock with respect to dividends, the holders of shares of Series A Participating
Preferred Stock in preference to the holders of shares of Common Stock of the
Corporation and any other junior stock, shall be entitled to receive, when, as
and if declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the first day of March, June,
September and December in each year (each such date being referred to herein as
a Quarterly Dividend Payment Date), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series A Participating Preferred Stock in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $25.00 or, (b) subject to the
provision for adjustment hereinafter set forth, 1,000 times the aggregate per
share amount of all cash dividends, and 1,000 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions other
than a dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock, since the immediately preceding Quarterly Dividend Payment
Date, or, with respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series A Participating
Preferred Stock. In the event the Corporation shall at any time after the close
of business on June 12, 2001 (the Rights Declaration Date) (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock or (iii) combine the outstanding Common Stock into a
smaller number of shares, by reclassification or otherwise, then in each such
case the amount to which holders of shares of Series A Participating Preferred
Stock were entitled immediately prior to such event under clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare
a dividend or distribution on the Series A Participating Preferred Stock as
provided in paragraph (A) above immediately after it declares a dividend or
distribution on the Common Stock (other than a dividend payable in shares of
Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $25.00 per share on
the Series A Participating Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to
accrue and be cumulative on outstanding shares of Series A Participating
Preferred Stock from the Quarterly Dividend Payment Date next preceding the date
of issue of such shares of Series A Participating Preferred Stock unless the
date of issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Participating Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to accrue and
be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Participating Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated pro
rata on a share-by-share basis among all such shares at the time outstanding.
The Board of Directors may fix a record date for the determination of holders of
shares of Series A Participating Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be no more
than 30 days prior to the date fixed for the payment thereof.
3. Voting
Rights. The holders of shares of
Series A Participating Preferred Stock shall have the
following voting rights:
(A) Subject to the provision for
adjustment hereinafter set forth, each share of Series A Participating Preferred
Stock shall entitle the holder thereof to 1,000 votes on all matters submitted
to a vote of the stockholders of the Corporation. In the event the Corporation
shall at any time after the Rights Declaration Date (i) declare any dividend on
Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding
Common Stock into a greater number of shares or (iii) combine the outstanding
Common Stock into a smaller number of shares, by reclassification or otherwise,
then in each such case the number of votes per share to which holders of shares
of Series A Participating Preferred Stock were entitled immediately prior to
such event shall be adjusted by multiplying such number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock outstanding immediately prior to such event.
(B) Except as otherwise provided
herein, in the Certificate of Incorporation or by law, the holders of shares of
Series A Participating Preferred Stock and the holders of shares of Common Stock
and any other capital stock of the Corporation having general voting rights
shall vote together as one class on all matters submitted to a vote of
stockholders of the Corporation.
(C) (i) If at any time dividends
on any Series A Participating Preferred Stock shall be in arrears in an amount
equal to six quarterly dividends thereon, the holders of the Series A
Participating Preferred Stock, voting as a separate series from all other series
of Preferred Stock and classes of capital stock, shall be entitled to elect two
members of the Board of Directors in addition to any Directors elected by any
other series, class or classes of securities and the authorized number of
Directors will automatically be increased by two. Promptly thereafter, the Board
of Directors of this Corporation shall, as soon as may be practicable, call a
special meeting of holders of Series A Participating Preferred Stock for the
purpose of electing such members of the Board of Directors. Said special meeting
shall in any event be held within 45 days of the occurrence of such arrearage.
(ii) During any period when the
holders of Series A Participating Preferred Stock, voting as a separate series,
shall be entitled and shall have exercised their right to elect two Directors,
then and during such time as such right continues (a) the then authorized number
of Directors shall remain increased by two, and the holders of Series A
Participating Preferred Stock, voting as a separate series, shall remain
entitled to elect the additional Directors so provided for, and (b) each such
additional Director shall not be a member of any existing class of the Board of
Directors, but shall serve until the next annual meeting of stockholders for the
election of Directors, or until his or her successor shall be elected and shall
qualify, or until his or her right to hold such office terminates pursuant to
the provisions of this Section
3(C).
(iii) A Director elected
pursuant to the terms hereof may be removed with or without cause by the holders
of Series A Participating Preferred Stock entitled to vote in an election of
such Director.
(iv) If, during any interval
between annual meetings of stockholders for the election of Directors and while
the holders of Series A Participating Preferred Stock shall be entitled to elect
two Directors, there are fewer than two such Directors in office by reason of
resignation, death or removal, then, promptly thereafter, the Board of Directors
shall call a special meeting of the holders of Series A Participating Preferred
Stock for the purpose of filling such vacancy(ies) and such vacancy(ies) shall
be filled at such special meeting. Such special meeting shall in any event be
held within 45 days of the occurrence of any such vacancy(ies).
(v) At such time as the arrearage
is fully cured, and all dividends accumulated and unpaid on any shares of Series
A Participating Preferred Stock outstanding are paid, and, in addition thereto,
at least one regular dividend has been paid subsequent to curing such arrearage,
the term of office of any Director elected pursuant to this Section 3(C), or his or her successor, shall automatically
terminate, and the authorized number of Directors shall automatically decrease
by two, and the rights of the holders of the shares of the Series A
Participating Preferred Stock to vote as provided in this Section 3(C) shall cease, subject to renewal from time to time
upon the same terms and conditions.
(D) Except as set forth herein or
as otherwise provided by law, holders of Series A Participating Preferred Stock
shall have no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of Common Stock and
any other capital stock of the Corporation having general voting rights as set
forth herein) for taking any corporate action.
4. Certain
Restrictions.
(A) Whenever quarterly dividends
or other dividends or distributions payable on the Series A Participating
Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on shares of Series
A Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends on,
make any other distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Participating Preferred
Stock;
(ii) declare or pay dividends on
or make any other distributions on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series A Participating Preferred Stock except dividends paid ratably on the
Series A Participating Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts to which
the holders of all such shares are then entitled;
(iii) redeem or purchase
or otherwise acquire for consideration shares of any stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series A Participating Preferred Stock provided that the Corporation may at any
time redeem, purchase or otherwise acquire shares of any such parity stock in
exchange for shares of any stock of the Corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the Series A
Participating Preferred Stock; or
(iv) purchase or otherwise acquire
for consideration any shares of Series A Participating Preferred Stock or any
shares of stock ranking on a parity with the Series A Participating Preferred
Stock except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders of such
shares upon such terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights and preferences of
the respective series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not
permit any subsidiary of the Corporation to purchase or otherwise acquire for
consideration any shares of stock of the Corporation unless the Corporation
could, under paragraph (A) of this Section 4, purchase or
otherwise acquire such shares at such time and in such manner.
5. Reacquired
Shares. Any shares of Series A
Participating Preferred Stock purchased or otherwise acquired by the Corporation
in any manner whatsoever shall be retired and canceled promptly after the
acquisition thereof. All such shares shall upon their cancellation become
authorized but unissued shares of Preferred Stock and may be reissued as part of
a new series of Preferred Stock to be created by resolution or resolutions of
the Board of Directors, subject to the conditions and restrictions on issuance
set forth herein.
6. Liquidation, Dissolution
or Winding Up.
(A) Upon any liquidation
(voluntary or otherwise), dissolution or winding up of the Corporation, no
distribution shall be made to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series A Participating
Preferred Stock unless, prior thereto, the holders of shares of Series A
Participating Preferred Stock shall have received per share, the greater of
$1,000.00 or 1,000 times the payment made per share of Common Stock, plus an
amount equal to accrued and unpaid dividends and distributions thereon, whether
or not declared, to the date of such payment (the Series A Liquidation
Preference). Following the payment of the full amount of the Series A
Liquidation Preference, no additional distributions shall be made to the holders
of shares of Series A Participating Preferred Stock unless, prior thereto, the
holders of shares of Common Stock shall have received an amount per share (the
Common Adjustment) equal to the quotient obtained by dividing (i) the Series A
Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in
subparagraph (c) below to reflect such events as stock splits, stock dividends
and recapitalization with respect to the Common Stock) (such number in clause
(ii), the Adjustment Number). Following the payment of the full amount of the
Series A Liquidation Preference and the Common Adjustment in respect of all
outstanding shares of Series A Participating Preferred Stock and Common Stock,
respectively, holders of Series A Participating Preferred Stock and holders of
shares of Common Stock shall receive their ratable and proportionate share of
the remaining assets to be distributed in the ratio of the Adjustment Number to
1 with respect to such Preferred Stock and Common Stock, on a per share basis,
respectively.
(B) In the event there are not
sufficient assets available to permit payment in full of the Series A
Liquidation Preference and the liquidation preferences of all other series of
Preferred Stock, if any, which rank on a parity with the Series A Participating
Preferred Stock, then such remaining assets shall be distributed ratably to the
holders of such parity shares in proportion to their respective liquidation
preferences. In the event, following payment in full of all liquidation
preferences of all shares senior to Common Stock (including the Series A
Participating Preferred Stock), there are not sufficient assets available to
permit payment in full of the Common Adjustment, then the remaining assets shall
be distributed ratably to the holders of Common Stock.
(C) In the event the Corporation
shall at any time after the Rights Declaration Date (i) declare any dividend on
Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding
Common Stock, or (iii) combine the outstanding Common Stock into a smaller
number of shares, by reclassification or otherwise, then in each such case the
Adjustment Number in effect immediately prior to such event shall be adjusted by
multiplying such Adjustment Number by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Participating Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of
stock, securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into
a smaller number of shares, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or change of shares of Series A
Participating Preferred Stock shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that are outstanding immediately prior to such
event.
8. Redemption. The shares of Series A Participating Preferred
Stock shall not be redeemable.
9. Ranking. The Series A Participating Preferred Stock shall
rank junior to all other series of the Corporations Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
10. Amendment. The Certificate of Incorporation and the By-Laws
of the Corporation shall not be further amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series A Participating Preferred Stock so as to affect them adversely without
the affirmative vote of the holders of at least 66-2/3% of the outstanding
shares of Series A Participating Preferred Stock voting separately as a class.
11. Fractional
Shares. Series A Participating
Preferred Stock may be issued in fractions of a share which shall entitle the
holder, in proportion to such holders fractional shares, to exercise voting
rights, receive dividends, participate in distributions and to have the benefit
of all other rights of holders of Series A Participating Preferred Stock.
Exhibit 23.1
INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRMS CONSENT
We consent to the incorporation by
reference in the Registration Statement of Alliance Fiber Optic Products, Inc.
on Form S-8 (Nos. 333-194572, 333-176672, 333-170053, 333-141656, 333-158316,
333-50998, 333-50926, 333-54864, 333-54874, 333-119710, 333-119711, 333-123648,
333-123649 and 333-132801) of our report dated March 13, 2015, with respect to
our audits of the consolidated financial statements of Alliance Fiber Optic
Products, Inc. as of December 31, 2014 and 2013 and for each of the years in the three year period ended December 31, 2014, and our report dated March 13, 2015 with respect
to our audit of the effectiveness of internal control over financial reporting
of Alliance Fiber Optic Products, Inc. as of December 31, 2014, which reports
are included in this Annual Report on Form 10-K of Alliance Fiber Optic
Products, Inc. for the year ended December 31, 2014.
/s/ Marcum LLP
Marcum LLP
San
Francisco, California
March 13, 2015
Exhibit 31.1
Certification of the Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Period
Ended December 31, 2014
CERTIFICATION
I, Peter C. Chang, certify
that:
1. I have reviewed this annual report on
Form 10-K of Alliance Fiber Optic Products, Inc.;
2. Based on my knowledge, this report does
not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrants other certifying
officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over
financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the
registrants disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed in this report any change in
the registrants internal control over financial reporting that occurred during
the registrants most recent fiscal quarter (the registrants fourth fiscal
quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over
financial reporting.
5. The registrants other certifying
officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and
material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in the
registrants internal control over financial reporting.
Date: March 13, 2015 |
|
By /s/ Peter C.
Chang |
Peter C. Chang |
Chief Executive Officer |
(Principal Executive
Officer) |
Exhibit 31.2
Certification of the Acting Chief
Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for
the Period Ended December 31, 2014
CERTIFICATION
I, Anita K. Ho, certify that:
1. I have reviewed this annual report on
Form 10-K of Alliance Fiber Optic Products, Inc.;
2. Based on my knowledge, this report does
not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrants other certifying
officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over
financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the
registrants disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed in this report any change in
the registrants internal control over financial reporting that occurred during
the registrants most recent fiscal quarter (the registrants fourth fiscal
quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over
financial reporting.
5. The registrants other certifying
officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and
material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in the
registrants internal control over financial reporting.
Date: March 13, 2015 |
|
By /s/ Anita K.
Ho |
Anita K. Ho |
Acting Chief Financial
Officer |
(Principal Accounting
Officer) |
Exhibit 32.1
STATEMENT OF CHIEF EXECUTIVE OFFICER
UNDER 18 U.S.C. § 1350
I, Peter C.
Chang, the chief executive officer of Alliance Fiber Optic Products, Inc. (the
Company), certify for the purposes of section 1350 of chapter 63 of title 18
of the United States Code that, to the best of my knowledge,
(i) the Annual
Report of the Company on Form 10-K for the period ended December 31, 2014 (the
Report), fully complies with the requirements of section 13(a) or section 15
(d) of the Securities Exchange Act of 1934, and
(ii) the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
/s/
Peter C. Chang |
Peter C. Chang |
|
March 13,
2015 |
Exhibit 32.2
STATEMENT OF ACTING CHIEF FINANCIAL
OFFICER UNDER 18 U.S.C. § 1350
I, Anita K. Ho,
the acting chief financial officer of Alliance Fiber Optic Products, Inc. (the
Company), certify for the purposes of section 1350 of chapter 63 of title 18
of the United States Code that, to the best of my knowledge,
(i) the Annual
Report of the Company on Form 10-K for the period ended December 31, 2014 (the
Report), fully complies with the requirements of section 13(a) or section
15(d) of the Securities Exchange Act of 1934, and
(ii) the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
/s/
Anita K. Ho |
Anita K. Ho |
|
March 13,
2015 |
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