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, 2009
OR
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[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from_________to___________
Commission
File Number: 0-31857
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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77-0554122
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(State
or other jurisdiction of incorporation
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(IRS
Employer Identification No.)
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or
organization)
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275
Gibraltar Drive, Sunnyvale, CA 94089
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(Address
of principal executive offices)
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Issuer’s
telephone number: (408)
736-6900
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each
class
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Name
of each exchange on which
registered
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Common
Stock, par value $0.001 per share
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The Nasdaq Stock
Market LLC
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Series
A Participating Preferred Stock Purchase
Rights
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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 registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer”, and ”smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer
[ ] Accelerated
filer [ ] Non-accelerated
filer [ ] Smaller
reporting company [X]
(Do not check if a smaller reporting
company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes
[ ] No [X]
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates (based upon the closing sale price on the Nasdaq Capital Market
on June 30, 2009) was approximately $45,537,387.
As of
March 5, 2010 there were 42,458,612 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 registrant’s
proxy statement to be filed with the Securities and Exchange Commission in
connection with the solicitation of proxies for the registrant’s 2010 Annual
Meeting of Stockholders to be held on May 14, 2010.
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
TABLE
OF CONTENTS
2009
FORM 10-K
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Page
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PART
I
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1
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Item
1. Business
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1
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Item
1A. Risk Factors
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7
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Item
1B. Unresolved Staff Comments
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17
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Item
2. Properties
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17
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Item
3. Legal Proceedings
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17
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Item
4. (Removed and Reserved)
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18
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Executive
Officers of the Registrant
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18
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PART
II
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19
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Item
5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
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19
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Item
6. Selected Financial Data
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19
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Item
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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19
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Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
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25
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Item
8. Financial Statements and Supplementary Data
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25
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Item
9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
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46
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Item
9A(T). Controls and Procedures
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46
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Item
9B. Other Information
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47
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PART
III
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48
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Item
10. Directors Executive Officers and Corporate Governance
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48
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Item
11. Executive Compensation
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48
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Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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48
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Item
13. Certain Relationships and Related Transactions, and Director
Independence
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49
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Item
14. Principal Accounting Fees and Services
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49
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PART
IV
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49
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Item
15. Exhibits and Financial Statement Schedules
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49
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SIGNATURES
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50
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EXHIBIT
INDEX
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51
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i
PART
I
Item
1. Business
When
used in this Report, the words “expects,” “anticipates,” “believes”,
“estimates,” “plans,” “intends,” “could,” “will,” “may” and similar expressions
are intended to identify forward-looking statements. These are
statements that relate to future periods and include statements as to our
operating results, revenues, sources of revenues, cost of revenues, gross
margins, profitability, the amount and mix of anticipated investments, exposure
to interest or exchange rate changes, expenditures and expense levels, our
liquidity and the adequacy of our capital resources, anticipated working capital
and capital expenditures, the impact of the economic environment on our business
and our customers, our beliefes regarding our auction rate securities and
related repurchase rights, reliance on our connectivity products, our cash flow,
trends in average selling prices, our reliance on the commercial success of our
optical passive products, plans for future products and enhancements of existing
products, features, benefits and uses of our products, demand for our products,
our expectations regarding the impact of accounting changes, our success being
tied to relationships with key customers, industry trends and market demand,
acquisitions of complementary businesses, products or technologies, our efforts
to protect our intellectual property, potential indemnification agreements,
increases in the number of possible license offers and patent infringement
claims, our competitive position, sources of competition, our competitive
strengths, consolidation in our industry, our international strategy, our
employee relations, the adequacy of our internal controls, the potential effect
of recent accounting pronouncements and our critical accounting policies and
estimates. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expected. These risks and uncertainties include, but are not limited
to, those risks discussed in Item 1A – Risk Factors, below, as well as risks
related to the development of the metropolitan, last mile access, and enterprise
networks, customer acceptance of our products, our ability to retain and obtain
customers, industry-wide overcapacity and shifts in supply and demand for
optical components and modules, our ability to meet customer demand and manage
inventory, fluctuations in demand for our products, declines in average selling
prices, the loss of one or more key customers, development of new products by us
and our competitors, increased competition, inability to obtain sufficient
quantities of a raw materials, loss of a key supplier, integration of acquired
businesses or technologies, the impact of the economy, financial stability in
foreign markets, foreign currency exchange rates, costs associated with being a
public company, delisting from the Nasdaq Capital Market, failure to meet
customer requirements, our ability to license intellectual property on
commercially reasonable terms, economic stability, and the state of the capital
markets. These forward-looking statements speak only as of the date
hereof. The Company expressly disclaims any obligation or undertaking
to release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in the Company’s expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
All
references to “Alliance Fiber Optic Products,” “AFOP,” “we,” “us,” “our” or the
“Company” mean Alliance Fiber Optic Products, Inc. and its subsidiaries, except
where it is made clear that the term means only the parent company.
AFOP,
OPIS and SPECTRAMUX are our trademarks. We may also refer to
trademarks of other corporations and organizations in this
document.
Overview
Alliance
Fiber Optic Products designs, manufactures and markets a broad range of
high-performance fiber optic components, and integrated modules incorporating
these components, for leading and emerging communications equipment
manufacturers and service providers. We offer a broad range of
products including interconnect devices that are used to connect optical fibers
and components, couplers and splitters that are used to divide and combine
optical power, and dense wavelength division multiplexing, or DWDM, devices that
separate and combine multiple specific wavelengths. Our emphasis on
design for manufacturing and our comprehensive manufacturing expertise enable us
to produce our products efficiently, with high quality, and in volume
quantities. Our product scope and ability to integrate our components
into optical modules enable us to satisfy a wide range of customer requirements
throughout the optical networking market. Our customers deploy our
products in long-haul networks that connect cities, metropolitan networks that
connect areas within cities, last mile access networks that connect to
individual businesses and homes, and enterprise networks within
businesses.
Industry
Background
The
popularity of the Internet and the growing number of data-intensive
Internet-based applications and services has fueled a significant increase in
the volume of data traffic. This traffic growth has increased the
demands on communication networks originally developed to primarily transport
voice traffic. To meet this demand, many communications service
providers have and are designing and installing new networks based on fiber
optic technology, which provides greater data-carrying capacity, or bandwidth,
and increased transmission speeds compared to existing communications
networks. Until recently, most of the fiber deployed had been
dedicated to long-haul networks. However, the demands for high-speed
network access and bandwidth are shifting the focus towards more complex
metropolitan networks and last mile access networks, which require an increasing
number of connections and components.
1
Optical
fiber is currently being deployed across the following segments of
communications networks: long-haul, metropolitan, last mile access, and
enterprise.
Long-haul
networks. Long-haul networks connect the communications
networks of cities around the world and transport large amounts of data and
voice traffic. To solve congestion problems, service providers have
invested significant resources in the deployment of optical
infrastructure. As a result, current long-haul networks provide high
bandwidth for transmitting data over very long distances. The
build-out of long-haul networks represents an important step in improving
network infrastructure to support increased demand for new services and greater
traffic volumes.
Metropolitan
networks. Metropolitan networks connect long-haul networks to
last mile access networks within urban areas. Due to the increase in
data traffic and the demand for enhanced services, the existing metropolitan
network infrastructure has become a bottleneck for the provision of
communications services to business and residential end users. As a
result, service providers are making investments in infrastructure to reduce
capacity constraints in metropolitan networks.
Last mile access
networks. Last mile access networks connect business and
residential end users to their service provider in order to provide increased
bandwidth to the end user. Traditional access networks use the
existing copper wire-based infrastructure, which is slow compared to the
high-speed networks commonly used within businesses. Service
providers are beginning to deploy fiber technologies in the last mile access
network in order to provide high bandwidth connectivity to the end
user.
Enterprise
networks. Local area networks serving the business community
have utilized fiber optic links for over a decade. Historically these
links have connected vertical backbone requirements between various floors of
copper-based networks within office buildings. As the bandwidth of
local networks has increased, optical fiber has become a pervasive medium for
horizontal network links especially in the storage network
environment.
Service
providers are seeking to maximize the performance and capacity of both new and
existing optical networks through advances in optical
technology. Wavelength division multiplexing, or WDM, has been used
for several years to increase system capacity by combining different light
signals at different wavelengths, on a single optical fiber. Each
wavelength represents a separate high-bandwidth channel that can carry
data. Multiplexing devices combine, or multiplex, these different
wavelengths at one end of the optical network, and demultiplexing devices, or
demultiplexer, separate them at the other end. WDM technology has
been enhanced with the introduction of dense wavelength division multiplexing,
or DWDM, which permits the wavelengths to be spaced more closely
together. The tighter spacing allows even more wavelengths to be
transmitted on one optical fiber. The use of WDM and DWDM technology
is well established in the long-haul market and is increasingly utilized in the
metropolitan and last mile access markets.
Fiber
optic components are used within optical networks to create, combine, isolate,
amplify, split, direct and perform various other functions on the optical
signals. Fiber optic components are divided into two broad
categories, active and passive components. Active components require
power to operate and use electrical signals to create, modulate or amplify
optical signals. Passive optical components connect, guide, mix,
filter, route, adjust and stabilize optical signals transmitted through an
optical network.
Market
Conditions
In
periods prior to 2004, communication equipment manufacturers purchased optical
transport systems and related devices in anticipation of an extremely rapid
increase in demand for bandwidth. While demand for bandwidth
continues to increase, this demand has grown at a far slower pace than
previously anticipated. As a result, communication equipment
manufacturers ended up with excess inventories of optical systems and devices
that continue to create a barrier to new sales opportunities for much of the
following several years. Global economic declines of the later portion of the
decade impeded as stronger recovery of demand for communications equipment
broadly although more demand resulted from deployment of access related systems
for broadband applications in this period.
2
This
situation has created challenges for suppliers in the optical communication
industry. Due to decreased unit shipments as a result of overcapacity
in the industry and the resulting competition for fewer sales opportunities,
average selling prices have declined as companies compete for significantly
smaller market opportunities.
Over the
past four years, as mentioned the optical components industry has experienced a
slight increase and resumption in business levels. Recent orders for
our products have been utilized both for upgrades of existing networks and new
network builds. In addition, certain large telecommunications service
providers have recently announced that they plan to deploy new broadband access
networks based on fiber optic technologies for residential users. These
fiber-to-the-home networks, or FTTH, are expected to significantly increase the
capacity and expand the types of services that can be utilized by residential
users. It remains difficult, however, to predict the timing or extent of a full
industry recovery and the potential impact to our business from this or any
other deployment initiatives.
Products
Our lines
of optical products support the needs of current and next generation optical
network systems applications. Our connectivity (formerly named
Optical Path Management Solutions, or OPMS) product family provides a
comprehensive line of optical interconnect devices, couplers and splitters, PLC
(planar lightwave circuits) and related optical products, as well as customized
integrated modules incorporating these devices. Our optical passive
products (formerly named Wavelength Management Solutions, or WMS) include WDM
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 and the products that
we are developing.
Connectivity Products. In nearly all fiber
optic networks, the optical fiber, passive optical components and active optical
devices must be joined using optical interconnection systems. Our
connectivity platform provides fundamental component support for these
applications as well as standard and custom value added integrated solutions
that address the need for higher functionality and modularity. All of
our connectivity products described below are in production and are shipping to
customers.
Connectivity
Modules. The evolution of optical components is driven by the
increasing need for packaging density, module performance and overall cost
effectiveness. We design and package our various components to
provide superior integrated connectivity modules for our
customers. Our integrated modules are designed to reduce our
customers’ system design requirements and ease implementation.
Optical Connectors, Adapters and
Cable Assemblies. Optical connectors and adapters are
precision devices that connect fibers together. Optical cable
assemblies are used to bridge relatively short distances with optical
paths. We offer a broad range of industry standard connection
products that support a wide range of fiber and fiber cable
types. Further, with our vertically integrated design and
manufacturing capability, we are able to customize these products to meet our
customers’ needs for compact size and special features. We specialize
in providing our customers with high performance custom cable assemblies to
serve in conjunction with our optical interconnection solutions at all interface
points in the optical communications network.
Fused and Planar Fiber Optical
Splitters and Couplers. Fused and planar fiber optical
splitters and couplers are branching devices that are used to split optical
power from a single fiber, or set of fibers, into a different set of
fibers. They are often used to distribute optical signals to multiple
locations for processing. These devices utilize signal and power
sharing features to reduce the total cost of delivering bandwidth to
end-users. Our optical splitters and couplers reduce insertion loss,
or the power loss incurred when inserting components into an optical path, and
deliver high performance, including uniform optical wavelength
splitting.
Optical Tap Couplers and Ultra Low
Polarization Dependent Loss Tap Couplers. Optical tap couplers
are fused fiber branching devices that split off a portion of light to allow for
optical monitoring and feedback. These devices are used extensively
in fiber amplifier power control. They are also utilized in
transmission equipment for performance monitoring and control. Our
ultra low polarization dependent loss devices offer low levels of sensitivity to
polarization, which is a characteristic of light that can cause a reduction in
the fidelity of optical signals. These devices enable more effective
monitoring and management of optical networks.
3
Amplifier WDM
Couplers. Amplifier WDM couplers are used with specialized
fibers to combine or separate specific wavelengths of light associated with
standard telecommunications optical amplifier requirements. Our
amplifier WDM couplers are stable low power loss components with high power
handling capability.
Optical Fixed
Attenuators. Optical fixed attenuators diminish the optical
power within a given optical path without interference or reduction in optical
signal quality. Typically, this function is embedded in an optical
connector or adapter element to simplify optical network
installation. We utilize attenuating fiber that reduces power while
preserving performance characteristics, including optical signal quality and
reliability.
Fused Fiber WDM
Couplers. Fused fiber WDM couplers are used to combine and
separate optical signals transmitted on different wavelengths. This
function provides the first level of bandwidth expansion for a network by
increasing a fiber’s 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.
Planar Lightwave Circuit
Splitters. Our optical splitters reduce insertion loss, or the
power loss incurred when inserting components into an optical path, and deliver
high performance. We believe these devices enable more effective monitoring and
management of optical networks.
Optical Passive
Products. As the capacity and complexity of optical networks
increases, future systems face significant challenges. Performance
characteristics such as stability, wavelength isolation, channel balance and
power loss due to polarization become important to optimize, and product
solutions which enhance these characteristics provide competitive
advantage. In recent years, WDM has become the preferred method of
increasing bandwidth throughout optical networks. Our filter-based
products serve WDM and DWDM systems as core passive elements that direct and
manage larger numbers of optical signal channels. These particular
Optical Passive Products also enable network DWDM systems to manage and monitor
a large number of optical signals by separating these signals into different
paths that can be processed individually.
Our
Optical Passive Products devices serve many system OEM customers needs for
current and next generation network equipment. All of our Optical Passive
Products described below are in production and are shipping to
customers.
Filter WDMs. Our
thin film filter based WDMs are used to combine and separate optical
signals. Our filter-based products allow for higher isolation and
narrower wavelength separations than fused fiber technology. Our
filter WDMs are designed for a range of network applications including combining
active and passive components and wavelength monitoring, splitting and
separating tasks.
Amplifier Filter
WDMs. Amplifier filter WDMs utilize thin film filter
technology to maintain wavelength separation in demanding
applications. In addition, filter technology allows for narrow
wavelength separation. Our amplifier filter WDMs are designed for a
range of applications, such as splitting wavelengths and connecting lasers used
in signal power amplification.
DWDMs. Dense wave
division multiplexers, or DWDMs, are integrated optical modules that combine, or
multiplex, and separate, or demultiplex, multiple optical signals of different
wavelengths on a single fiber. The separation of wavelengths are so
narrow, or dense, that a large number of channels (greater than 10) can be
combined within the band of usable wavelengths of the fiber
itself. We utilize proprietary thin film technology in the
development and manufacture of our DWDM products. This technology
delivers excellent performance characteristics, including narrow channel
separation and wide channel bandpass, which is the range of frequencies that
will pass through a filter. Thin film filter technology allows for a
range of solutions for 200 GHz, 100 GHz and 50 GHz International Telecom Union
wavelength spacing applications, which permit 40 channels, 80 channels, and 160
channels, respectively, to be transmitted across a single fiber. We
believe that our DWDMs directly address the scalable channel plans found in
metropolitan and last mile access network applications.
CWDMs. Coarse
wavelength division multiplexers, or CWDMs, are integrated optical modules that
multiplex or demultiplex multiple optical signals of different wavelengths on a
single fiber. Our CWDM product separate wavelength into 20
nanometers, or spacing to cover the complete fiber optical communication
spectrum from 1270 nm to 1610 nm.
With the
unique low insertion loss and flat band-pass profile, CWDMs provide an economic
and efficient wavelength division multiplexing solution for metropolitan and
access networks. Our CWDM product covers four channel, eight
channel, and sixteen channel mux and demux applications, and upgradeability for
both four channel and eight channel types. We also offer
optical add-drop modules, or OADMs, for CWDM networks, with the capability of
adding or dropping from one to fifteen channels. In addition to the
CWDM mux, demux and optical add/drop modules, we also offer complete rackmount
CWDM solutions to customers so they can easily mount our CWDM products directly
on their system rack. We believe our CWDM products directly address
the metropolitan and access markets’ competitive wavelength management
needs.
4
CCWDMs. Compact
coarse wavelength division multiplexers, or CCWDMs, are integrated optical
modules that are designed to significantly improve optical performance, while
reducing manufacturing costs, in a package less than 1/4 the size of
conventional CWDM modules. Our CCWDMs feature high wavelength accuracy and
stability, low insertion loss, high isolation, low polarization dependent loss
and an epoxy-free optical path. Our Telcordia 1209/1221-qualified CCWDM builds
on AFOP's proprietary optical bench platform, and we believe it has the smallest
footprint of any comparable CWDMs. With a channel spacing of 20 nm and wide
bandpass characteristics, it allows for datacom or telecom network applications
with low-cost uncooled lasers. These CCWDM Mux/Demuxes are available in four or
eight channels and include an expansion port for 16 channel
systems.
Add/Drop DWDM
Filters. Add/drop DWDM filter products are used to insert or
extract specific wavelengths in a DWDM system. While a large number
of channels can be transmitted through a single fiber network, often only
selected channels of information are required at a particular
location. Our 200 GHz, 100 GHz and 50 GHz add/drop components use
high performance filter technology and operate with very little optical power
loss in order to provide high channel separation and high
stability.
Optical
Isolators These devices use polarization rotation to block
return signals from the forward optical path. They limit distortions in devices
and signals caused by reflected lights in the fiber.
Optical Bypass Switches As
the name suggests, these devices utilize beam shifting optics or mirror to
switch optical signals from one fiber to another in response to a control signal
provided electronically. Optical switches are used in test equipment for basic
functionality and in networks to provide protection and redundancy.
Automatic Variable Optical
Attenuators. Automatic variable optical attenuators are
designed to control the optical power in a fiber. They are often
combined with an active system component to maintain optical power on a network
even if the input signal is changing power. Our automatic variable
optical attenuators are specifically designed for application in DWDM networks
for use with individual channel source elements such as add/drop
transmitters. The cost and performance characteristics of our
automatic variable optical attenuators are specifically targeted to allow for
the use of these devices in volume as principal DWDM channel stabilization
components.
Intellectual
Property
We rely
on a combination of patent, copyright, trademark and trade secret laws, as well
as confidentiality agreements and licensing arrangements, to establish and
protect our proprietary rights. As of December 31, 2009, we had
61 United States patents issued or assigned to us and had 20 United States
patent applications pending. Our 61 U.S. patents expire between
September 2013 and April 2028. We also have 16 foreign patents
issued, and 2 foreign patent application pending. Our foreign patents
issued will expire between January 2010 and December 2019. 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, 2009, we were not aware
of infringement claims or litigation pending against us.
5
Customers
We sell
our products to communications equipment manufacturers that incorporate our
products into their systems that they in turn sell to network service
providers. In certain cases, we sell our products to other component
manufacturers for resale or inclusion in their products. In the year
ended December 31, 2009, we sold our products to more than 200
customers. Two customers accounted for 15.1% and 14.9% of our
revenues in the year ended December 31, 2009. One customer accounted
for 15.7% of our revenues in the year ended December 31, 2008. The following is
a summary of our revenues generated by geographic segments (in
thousands):
|
Years Ended December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Revenues
|
||||||||
|
North
America
|
$
|
14,721
|
$
|
21,579
|
||||
|
Europe
|
7,085
|
5,882
|
||||||
|
Asia
|
8,028
|
11,293
|
||||||
| Total |
$
|
29,834
|
$
|
38,754
|
||||
Sales,
Marketing and Technical Support and Product Management
Sales. Our direct
sales force markets and sells our products primarily in the United
States. We also maintain a sales support staff in Taiwan to service
customers based in the Asia Pacific region. Our direct sales force
and technical marketing personnel maintain close contact with our customers and
provide technical support.
Marketing. We have
a number of marketing programs to support the sale and distribution of our
products and to inform existing and potential customers about the capabilities
and benefits of our products. Our marketing efforts include
participating in industry trade shows and technical conferences, advertising in
trade journals and communicating through our corporate website and direct
mail.
Technical Support and Product
Management. We maintain a technically knowledgeable support
staff that we believe is critical to our development of long-term customer
relationships. Our technical support and product management staff
works closely with our customers to understand their product requirements, to
assist customers with utilizing our product line, and to develop customized
product solutions.
Competition
The fiber
optic component industry is highly competitive and subject to rapid
technological change. We believe that the principal differentiating
factors in the fiber optic component market are support for multiple optical
interfaces, high optical power, wavelength selection, manufacturing
capacity, reliable and compact packaging, price, product innovation and
reliability of product performance. Based on our assessment of the
performance and price of similar competitive product offerings, we believe
that our products compare favorably, although we cannot assure you that they
will continue to do so.
Our
principal competitors in the components market include Oclaro Inc., JDS Uniphase
Corp., Oplink Communications, Inc., and Tyco Electronics
Corporation. We estimate that we had approximately 20 competitors in
the components market as of December 31, 2009. 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.
6
Product
Development
As of
December 31, 2009, we had a total of 58 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 $3.0 million and $3.3 million for the years ended
December 31, 2009 and 2008, respectively. We spend a substantial
proportion of our financial resources to develop new technologies and products
to serve the next generation communication markets.
Sources
and Availability of Raw Materials
We make
significant purchases of key materials, components and equipment, including
ferrules, graded index lenses, or GRIN lenses, filters and other components from
third party suppliers. We obtain most of our critical raw materials
and components from a single or limited number of suppliers. When
possible, we also develop and maintain alternative sources for essential
materials and components. However, there is only one supplier of GRIN
lenses. The inability to obtain sufficient quantities of these
materials or components may result in delays, increased costs, and reductions in
our product shipments.
Manufacturing
We
currently manufacture the majority of our connectivity products at our facility
in Tu-Cheng City, Taiwan. We manufacture our filter-based and
advanced products at our facility near Shenzhen, China.
Each of
our facilities maintains comprehensive in-house manufacturing processes,
including component and integrated module design, integration, production, and
testing. We plan to continue to invest resources in manufacturing
management, engineering and quality control.
We have
established a quality management system which is designed to ensure that the
products we provide to our customers meet or exceed their
requirements. All of our three facilities are ISO 9001-2000
certified. In addition, our Taiwan facility is TL-9000 certified.
Employees
As of
December 31, 2009, we had 870 full-time employees, including 39 located in
the United States, 318 in Taiwan and 513 in China. Of our 870
full-time employees, 58 are engaged in product development, 722 are engaged in
manufacturing production, 19 are engaged in sales, marketing, application
support and customer service, and 71 are engaged in general and
administration. None of our employees are represented by a labor
union. We have not experienced any work stoppages and we consider our
relations with our employees to be good.
Additional
Information
We were
incorporated in California in December 1995. In October 2000, prior to our
initial public offering, we reincorporated in Delaware as Alliance Fiber Optic
Products, Inc. Our internet address is www.afop.com. We make
available free of charge through a hyperlink on our website our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) of the
Exchange Act as soon as reasonably practicable after the material is furnished
to the SEC. Our website and the information contained therein or
connected thereto is not intended to be incorporated into this Annual Report on
Form 10-K.
Item
1A. Risk Factors
We
have a history of losses, may experience future losses and may not be able to
generate sufficient revenues in the future to achieve and sustain
profitability.
We had
net income of approximately $1.4 million and $4.1 million in fiscal year 2009
and 2008, respectively. Although we generated a profit in these two
fiscal years, we may not be able to sustain profitability in the
future. Although our cash and cash equivalents increased in 2009, we
may experience negative cash flows again in the future. As of
December 31, 2009, we had an accumulated deficit of approximately $63.8
million.
7
We
continue to experience fluctuating demand for our products. If demand
for our products declines, we may not be able to decrease expense on a timely
basis, or at all, to offset the decrease in revenues. We also expect
declining average selling price, may negatively impact our results of operations
in future periods. If demand for our products increases in the future, we expect
to incur significant and increasing expenses for expansion of our manufacturing
operations, research and development, sales and marketing, and administration,
and in expanding direct sales and distribution channels. Given the
rate at which competition in our industry intensifies and the fluctuations in
demand for our products, we may not be able to adequately control our costs and
expenses or achieve or maintain adequate operating margins. As a
result, to maintain profitability, we will need to generate and sustain
substantially higher revenues while maintaining reasonable cost and expense
levels. We may not be able to sustain profitability on a quarterly or
an annual basis.
Our
connectivity products have historically represented a significant part of our
revenues, and if we are unsuccessful in commercially selling our optical passive
products, our business will be seriously harmed.
Sales of
our connectivity products accounted for 62.5% and 63.1% of our revenues in the
fiscal years ended December 31, 2009 and 2008, respectively, and substantially
all of our historical revenues. We expect to depend on our
connectivity products for the majority of our near-term revenues. Any
significant decline in the demand for these products, or failure to increase
their market acceptance, would seriously harm our business. Declining
average selling prices of our products during 2009 negatively impacted our
revenues and may continue to do so in the future. We believe that our
future growth and a significant portion of our future revenues will depend on
the commercial success of our optical passive related products, which we began
shipping commercially in July 2000. Demand for these products has
fluctuated over the past few years, declining sharply starting in mid fiscal
2001 and then increasing beginning in 2003. If demand does not
continue to increase and our target customers do not continue to adopt and
purchase our optical passive related products, our revenues may decline and we
may have to write-off additional inventory that is currently on our
books.
Declining
general economic or business conditions may have a negative impact on our
business.
Concerns
over inflation, deflation, energy costs, geopolitical issues, the availability
and cost of credit, the Federal stimulus package and budget process, the U.S.
mortgage market and a declining 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
declining stock market and increased unemployment, have precipitated an economic
slowdown and recession. If the economic climate in the U.S. does not improve or
continues to deteriorate, our business, including our customers and our
suppliers, could be negatively affected, resulting in a negative impact on our
revenues.
We
depend on a small number of customers for a significant portion of our
total revenues and the loss of, or a significant reduction in orders from, any
of these customers, would significantly reduce our revenues and harm our
operating results.
In the
years ended December 31, 2009 and 2008 our top 10 customers comprised 62.8% and
62.3% of our revenues, respectively. Two customers accounted for 15.1
% and 14.9% of our total revenues for the year ended December 31, 2009,
respectively. One customer accounted for 15.7 % of our total revenues
for the year ended December 31, 2008
We derive
a significant portion of our revenues from a small number of customers, and we
anticipate that we will continue to do so in the foreseeable future. These
customers may decide not to purchase our products at all, to purchase fewer
products than they did in the past, or to alter their purchasing patterns in
some other way. Reduced orders from a significant customer
contributed to the decrease in our revenues in 2009. The loss of any
significant customer, a significant reduction in sales we make to them, or any
problems collecting receivables from them would likely harm our financial
condition and results of operations.
8
Our
quarterly and annual financial results have historically fluctuated due
primarily to introduction of, demand for, and sales of our products, and future
fluctuations may cause our stock price to decline.
We
believe that period-to-period comparisons of our operating results are not a
good indication of our future performance. Our quarterly operating
results have fluctuated in the past and are likely to fluctuate significantly in
the future due to a number of factors. For example, the timing and
expenses associated with product introductions and establishing additional
manufacturing lines and facilities, changes in manufacturing volume, declining
average selling prices of our products, the timing and extent of product sales,
the mix of domestic and international sales, the mix of sales channels through
which our products are sold, the mix of products sold and significant
fluctuations in the demand for our products have caused our operating results to
fluctuate in the past. Because we incur operating expenses based on
anticipated revenue trends, and a high percentage of our expenses are fixed in
the short term, any delay in generating or recognizing revenues or any decrease
in revenues could significantly harm our quarterly results of
operations. Other factors, many of which are more fully discussed in
other risk factors below, 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.
Uncertainty in the credit markets has
and may continue to impact the value and liquidity of our auction-rate
securities, or ARS.
Credit
concerns in the capital markets have significantly reduced our ability to
liquidate $16.1 million in ARS that we classify as current assets on our balance
sheet at December 31, 2009. All ARS we hold have failed to sell at
auction since February 2008 due to an insufficient number of bidders. As of
December 31, 2009, one of the issuers of the ARS completed seven partial calls
at par and we received settlement of $200,000 in
total. In November 2008, we accepted the right to require UBS to
repurchase our ARS investment at par value beginning on June 30, 2010, or the
“Right”. We cannot assure you that UBS will have the ability to
purchase our ARS at par or at any other price in the
future. Accordingly, we may not be able to exercise the Right or
liquidate these securities and use the cash to finance our
business. In future periods, the estimated fair value of our ARS and
the Right could decline based on market conditions, which could result in
impairment charges.
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:
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customer
unwillingness to implement our
products;
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any
delays or difficulties that we may incur in completing the development and
introduction of our planned products or product
enhancements;
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the
success of our customers;
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excess
inventory in the telecommunications
industry;
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new
product introductions by our
competitors;
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any
failure of our products to perform as expected;
or
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any
difficulty we may incur in meeting customers’ delivery requirements or
product specifications.
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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.
9
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., and Tyco Electronics
Corporation. We believe that we primarily compete with diversified
suppliers for the majority of our product line and to a lesser extent with niche
companies that offer a more limited product line. Competitors in any
portion of our business may also rapidly become competitors in other portions of
our business.
Many of
our current and potential competitors have significantly greater financial,
technical, marketing, purchasing, manufacturing and other resources than we
do. As a result, these competitors may be able to respond more
quickly to new or emerging technologies and to changes in customer requirements,
to devote greater resources to the development, promotion and sale of products,
to negotiate lower prices on raw materials and components, or to deliver
competitive products at lower prices.
Several
of our existing and potential customers are also current and potential
competitors of ours. These companies may develop or acquire
additional competitive products or technologies in the future and subsequently
reduce or cease their purchases from us. In light of the
consolidation in the optical networking industry, we also believe that the size
of suppliers will be an increasingly important part of a purchaser’s
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, 2009, we had a total of 39 full-time employees in Sunnyvale,
California, 318 full-time employees in Taiwan, and 513 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:
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improve
existing and implement new operational, financial and management controls,
reporting systems and procedures;
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hire,
train, motivate and manage additional qualified personnel, especially if
we experience a significant increase in demand for our
products;
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effectively
expand or reduce our manufacturing capacity, attempting to adjust it to
customer demand; and
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effectively
manage relationships with our customers, suppliers, representatives and
other third parties.
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In
addition, we will need to coordinate our domestic and international operations
and establish the necessary infrastructure to implement our international
strategy. If we are not able to manage our operations in an efficient
and timely manner, our business will be severely harmed.
Our
success also depends, to a large degree, on the efficient and uninterrupted
operation of our facilities. We have expanded our manufacturing
facilities in China and manufacture many of our products there. Our
facility in Taiwan also houses a substantial portion of our manufacturing
operations. There is significant political tension between Taiwan and
China. If there is an outbreak of hostilities between Taiwan and
China, our manufacturing operations may be disrupted or we may have to relocate
our manufacturing operations. Tensions between Taiwan and China may
also affect our facility in China. Relocating a portion of our
employees could cause temporary disruptions in our operations and divert
management’s attention.
Because
of the time it takes to develop fiber optic components, we incur substantial
expenses for which we may not earn associated revenues.
The
development of new or enhanced fiber optic products is a complex and uncertain
process. We may experience design, manufacturing, marketing and other
difficulties that could delay or prevent the development, introduction or
marketing of new products and enhancements. Development costs and
expenses are incurred before we generate revenues from sales of products
resulting from these efforts. Our total research and development
expenses were approximately $3.0 million and $3.3 million for the years ended
December 31, 2009 and 2008, 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 if we do not earn associated
revenues from such efforts.
If
we are unable to develop new products and product enhancements that achieve
market acceptance, sales of our fiber optic components could decline, which
could reduce our revenues.
The
communications industry is characterized by rapidly changing technology,
frequent new product introductions, changes in customer requirements, evolving
industry standards and, more recently, significant variations in customer
demand. Our future success depends on our ability to anticipate
market needs and develop products that address those needs. As a
result, our products could quickly become obsolete if we fail to predict market
needs accurately or develop new products or product enhancements in a timely
manner. Our failure to predict market needs accurately or to develop
new products or product enhancements in a timely manner will harm market
acceptance and sales of our products. If the development or
enhancement of these products or any other future products takes longer than we
anticipate, or if we are unable to introduce these products to market, our sales
will not increase. Even if we are able to develop and commercially
introduce them, these new products may not achieve the widespread market
acceptance necessary to provide an adequate return on our
investment.
Current
and future demand for our products depends on the continued growth of the
Internet and the communications industry, which is experiencing consolidation,
realignment, and fluctuations in product inventory and demand for fiber optic
products.
Our
future success depends on the continued growth of the Internet as a widely used
medium for communications and commerce, and the growth of optical networks to
meet the increased demand for capacity to transmit data, or
bandwidth. If the Internet does not continue to expand as a medium
for communications and commerce, the need to significantly increase bandwidth
across networks and the market for fiber optic components may not continue to
develop. If this growth does not continue, sales of our products may
continue to 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.
11
The
communications industry is experiencing continued consolidation and realignment,
as industry participants seek to capitalize on the rapidly changing competitive
landscape developing around the Internet and new communications technologies
such as fiber optic networks. As the communications industry
consolidates and realigns to accommodate technological and other developments,
our customers may consolidate or align with other entities in a manner that
results in a decrease in demand for our products.
We
are experiencing fluctuations in market demand due to overcapacity in our
industry and an economy that is stymied by the current financial and economic
crisis, international terrorism, war and political instability.
The
United States economy has experienced and continues to experience significant
fluctuations in consumption and demand. During the past several
years, telecommunication companies have mostly decreased their spending, which
has resulted in excess inventory, overcapacity and a decrease in demand for our
products. We may experience further decreases in the demand for our
products due to a weak domestic and international economy and the impact of the
current financial and economic crisis 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 has in the past, is now, and may in the
future, experience declining average selling prices, which could cause our gross
margins to decline.
The
optical networking component industry has in the past experienced declining
average selling prices as a result of increasing competition and greater unit
volumes as communication service providers continue to deploy fiber optic
networks. Average selling prices are currently decreasing and may
continue to decrease in the future in response to product introductions by
competitors, price pressures from significant customers, greater manufacturing
efficiencies achieved through increased automation in the manufacturing process
and inventory build-up due to decreased demand. Average selling price
declines may contribute to a decline in our gross margins which could harm our
results of operations.
We
will not attract new orders for our fiber optic components unless we can deliver
sufficient quantities of our products to optical communications equipment
manufacturers.
Communications
service providers and optical systems manufacturers typically require that
suppliers commit to provide specified quantities of products over a given period
of time. If we are unable to commit to deliver quantities of our
products to satisfy a customer’s anticipated needs, we will lose the order and
the opportunity for significant sales to that customer for a lengthy period of
time. In addition, we would be unable to fill large orders if we do
not have sufficient manufacturing capacity to enable us to commit to provide
customers with specified quantities of products. However, if we build
our manufacturing capacity and inventory in excess of demand, as we have done in
the past, we may produce excess inventory that may have to be reserved or
written off.
We
depend on a limited number of third parties to supply key materials, components
and equipment, such as ferrules, optical filters and lenses, and if we are not
able to obtain sufficient quantities of these items at acceptable prices, our
ability to fill orders would be limited and our operating results could be
harmed.
We depend
on third parties to supply the raw materials and components we use to
manufacture our products. To be competitive, we must obtain from our
suppliers, on a timely basis, sufficient quantities of raw materials and
components at acceptable prices. We obtain most of our critical raw
materials and components from a single or limited number of suppliers and
generally do not have long-term supply contracts with them. As a
result, our suppliers could terminate the supply of a particular material or
component at any time without penalty. Finding alternative sources
may involve significant expense and delay, if these sources can be found at
all. One component, GRIN lenses, is only available from one
supplier. Difficulties in obtaining raw materials or components in
the future may delay or limit our product shipments, which could result in lost
orders, increase our costs, reduce our control over quality and delivery
schedules and require us to redesign our products. If a supplier
became unable or unwilling to continue to manufacture or ship materials or
components in required volumes, we would have to identify and qualify an
acceptable replacement. A delay or reduction in shipments or any need
to identify and qualify replacement suppliers would harm our
business.
12
Because
we experience long lead times for materials and components, we may not be able
to effectively manage our inventory levels, which could harm our operating
results.
Because
we experience long lead times for materials and components and are often
required to purchase significant amounts of materials and components far in
advance of product shipments, we may not effectively manage our inventory
levels, which could harm our operating results. Alternatively, if we
underestimate our raw material requirements, we may have inadequate inventory,
which could result in delays in shipments and loss of customers. If
we purchase raw materials and increase production in anticipation of orders that
do not materialize or that shift to another quarter, we will, as we have in the
past, have to carry or write off excess inventory and our gross margins will
decline. Both situations could cause our results of operations to be
below the expectations of investors and public market analysts, which could, in
turn, cause the price of our common stock to decline. The time our
customers require to incorporate our products into their own can vary
significantly and generally exceeds several months, which further complicates
our planning processes and reduces the predictability of our
forecasts. Even if we receive these orders, the additional
manufacturing capacity that we add to meet our customer’s requirements may be
underutilized in a subsequent quarter.
We are exposed to risks and increased
expenses as a result of laws requiring companies to evaluate internal controls
over financial reporting.
Section
404 of the Sarbanes-Oxley Act of 2002 requires our management to perform an
assessment of our internal controls as of the end of each fiscal year, and our
independent auditors to attest to the effectiveness of our internal controls
over financial reporting beginning with our year ending December 31,
2010. We have implemented an ongoing program to perform the system
and process evaluation and testing we believe to be necessary to comply with
these requirements, however, we cannot assure you that we will be successful in
our efforts. We expect to incur increased expenses and to devote
additional management resources to Section 404 compliance. In the
event that our chief executive officer or acting chief financial officer
determines that our internal controls over financial reporting are not effective
as defined under Section 404, or our auditors are not able to provide us with an
unqualified report as to the effectiveness of our internal control over
financial reporting in the future, investor perceptions of our company may be
negatively affected and this could cause a decline in our stock
price.
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 Vice President, Sales and Marketing;
Wei-shin Tsay, our senior Vice President of Product Development; Anita Ho, our
Acting Chief Financial Officer, and other key engineering, sales, marketing,
finance, manufacturing and support personnel. In addition, we depend
upon the continued services of key management personnel at our Taiwanese and
Chinese subsidiaries. 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. In addition, 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 and impair our operating
results. We may not obtain acceptable yields in the
future.
13
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 supplier’s 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.
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:
14
|
·
|
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 new and 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 new and characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. Because this market is
new, it is difficult to predict its potential size or future growth
rate. Widespread adoption of optical networks, especially in the
metropolitan, last mile, and enterprise access segments of the networks, is
critical to our future success. Potential end-user customers who have
invested substantial resources in their existing copper lines or other systems
may be reluctant or slow to adopt a new approach, such as optical
networks. Our success in generating revenues in this market will
depend on:
|
·
|
the
education of potential end-user customers and network service providers
about the benefits of optical networks;
and
|
|
·
|
the
continued growth of the metropolitan, last mile, and enterprise access
segments of the communications
network.
|
If we
fail to address changing market conditions, sales of our products may decline,
which would adversely impact our revenues.
We
may be unable to successfully integrate acquired businesses or assets with our
business, which may disrupt our business, divert management’s attention and slow
our ability to expand the range of our proprietary technologies and
products.
To expand
the range of our proprietary technologies and products, we may acquire
complementary businesses, technologies or products, if appropriate opportunities
arise. We may be unable to identify other suitable
acquisitions at reasonable prices or on reasonable terms, or consummate future
acquisitions or other investments, any of which could slow our growth
strategy. We may have difficulty integrating the acquired products,
personnel or technologies of any company or acquisition that we may
make. Similarly, we may not be able to attract or retain key
management, technical or sales personnel of any other companies that we acquire
or from which we acquire assets. These difficulties could disrupt our
ongoing business, distract our management and employees and increase our
expenses.
If
our common stock is not relisted on the Nasdaq Global Market, we will be subject
to certain provisions of the California General Corporation Law that may affect
our charter documents and result in additional expenses.
Beginning
at the commencement of trading on November 8, 2002, the listing of our common
stock was transferred from the Nasdaq Global Market to the Nasdaq Capital
Market. As a result, we may become subject to certain sections of the
California General Corporation Law that will affect our charter documents if our
common stock is not returned to being listed on the Nasdaq Global
Market. A recent Delaware decision has called into question the
applicability of the California General Corporation Law to Delaware
corporations. However, if the California General Corporation Law
applies to our company, we will not be able to continue to have a classified
board or continue to eliminate cumulative voting by our stockholders. In
addition, certain provisions of our Certificate of Incorporation that call for
supermajority voting may need to be approved by stockholders every two years or
be eliminated. Also, in the event of reorganization, stockholders
will have dissenting stockholder rights under both California and Delaware
law. Any of these changes will result in additional expense as we
will have to comply with certain provisions of the California General
Corporation Law as well as the Delaware General Corporation Law. We
included these provisions in our charter documents in order to delay or
discourage a change of control or changes in our management. Because
of the California General Corporation Law, we may not be able to avail ourselves
of these provisions.
15
If
we are unable to maintain our listing on the Nasdaq Capital Market, the price
and liquidity of our common stock may decline.
There can
be no assurance that we will be able to satisfy all of the quantitative
maintenance criteria for continued listing on the Nasdaq Capital Market,
including a requirement that we maintain a continued minimum bid price of $1.00
per share. Accordingly, if the closing bid price of our common stock falls and
remains below $1.00 for 30 consecutive trading days, as it has for significant
periods of time in the past, our common stock may not remain listed on the
Nasdaq Capital Market. If we fail to maintain continued listing on the Nasdaq
Capital Market and must move to a market with less liquidity, our financial
condition could be harmed and our stock price would likely decline. If we are
delisted, it could have a material adverse effect on the market price of our
common stock as well as the liquidity of the trading market for our common
stock.
Many
companies that face delisting as a result of closing bid prices that are below
the Nasdaq Capital Market’s continued listing standards seek to maintain the
listing of their securities by effecting reverse stock splits. However, reverse
stock splits do not always result in a sustained closing bid price per share. We
may consider the merits of implementing a reverse split and evaluate other
courses of action as we believe may be appropriate.
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.
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.
16
Although
we are not aware of any intellectual property lawsuits filed against us, we may
be a party to litigation regarding intellectual property in the
future. We may not prevail in any such actions, given their complex
technical issues and inherent uncertainties. Insurance may not cover
potential claims of this type or may not be adequate to indemnify us for all
liability that may be imposed. If there is a successful claim of
infringement or we fail to develop non-infringing technology or license the
proprietary rights on a timely basis, our business could be harmed.
Because
our manufacturing operations are located in active earthquake fault zones in
California and Taiwan, and our Taiwan locations are susceptible to the effects
of a typhoon, we face the risk that a natural disaster could limit our ability
to supply products.
Two of
our primary manufacturing operations in Taiwan and our headquarters in
California are located in active earthquake fault zones. These
regions have experienced large earthquakes in the past and may likely experience
them in the future. In September 2001, a typhoon hit Taiwan causing
businesses, including our manufacturing facility, and the financial markets to
close for two days. Because the majority of our manufacturing
operations are located in Taiwan, a large earthquake or typhoon in Taiwan could
disrupt our manufacturing operations for an extended period of time, which would
limit our ability to supply our products to our customers in sufficient
quantities on a timely basis, harming our customer relationships.
Item
1B. Unresolved Staff Comments
None
Item
2. Properties
In the
United States, we lease a total of approximately 34,800 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 July 2010. We are currently in the process of evaluating our
future facility requirements in California, and we have begun lease negotiations
on specific properties.
In
Taiwan, we lease a total of approximately 38,800 square feet in one facility
located in Tu-Cheng City, Taiwan. This lease expires at various times
from May 2010 to December 2011. We intend to renew this
lease prior to its expiration date. In December 2000, the Company
purchased approximately 8,200 square feet of space immediately adjacent to the
leased facility for $0.8 million, bringing the total square footage to
approximately 47,000 square feet. Of this total, 33,400 square feet
is used for manufacturing and 13,600 square feet is used for administration and
product development.
In July
2007, we renewed the lease for our 62,000 square foot facility in the Shenzhen
area of China, which will expire in July 2012. In February 2007, we
entered into a lease for an 8,200 square foot facility in Shenzhen, which lease
will expire in January 2012.
In August
2009, we expanded our facility in the Shenzhen area of China. We
replaced the existing two leases with a new lease for a 132,993 square foot
facility in Shenzhen, which lease will expire in October 2014.
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.
17
Item
4. (Removed and Reserved)
Executive
Officers of the Registrant
Our
executive officers as of December 31, 2009 are as follows:
Peter C. Chang, 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, has
served as our Vice President, Sales and Marketing since October
1996. From February 1995 to September 1996, Mr. Hubbard was
Director of Marketing/Business Development at Tracor/AEL Industries. From 1985
to 1995 Mr. Hubbard held several product line and business management positions
at Tyco Electronics/ AMP inc. Mr. Hubbard received his
M.S. from University of Connecticut and his B.S. from State University of New
York.
Wei-Shin Tsay, Ph.D.,
has served as our Senior Vice President, Product Development since August
2000. From 1996 through August 2000, Dr. Tsay held various management
positions in engineering, operations, and marketing at JDS
Uniphase. From 1994 through 1996, Dr. Tsay held various product
management positions at Lucent Microelectronics/Optoelectronics Strategic
Business Unit. From 1982 through 1994, Dr. Tsay held various
engineering and technical management positions at Bell
Labs. Dr. Tsay received an M.S. in Manufacturing Systems
Engineering from Lehigh University, a Ph.D. in physics from the University of
Rochester and a B.S. in Physics at the National Tsing-Hua University in
Hsin-Chu, Taiwan.
Anita K. Ho, 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
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
The
Company’s common stock, par value $0.001, was traded on the Nasdaq Global Market
under the ticker symbol “AFOP” until November 8, 2002, when it began to trade on
the Nasdaq Capital Market under the same ticker symbol. The following
table summarizes the high and low closing prices for our common stock as
reported on the Nasdaq Capital Market.
|
High
|
Low
|
||||
|
2009
|
|||||
|
First
Quarter
|
$0.76
|
$0.62
|
|||
|
Second
Quarter
|
$1.25
|
$0.67
|
|||
|
Third
Quarter
|
$1.40
|
$1.00
|
|||
|
Fourth
Quarter
|
$1.28
|
$1.06
|
|||
|
2008
|
|||||
|
First
Quarter
|
$2.02
|
$1.19
|
|||
|
Second
Quarter
|
$1.63
|
$1.26
|
|||
|
Third
Quarter
|
$1.45
|
$0.98
|
|||
|
Fourth
Quarter
|
$1.00
|
$0.57
|
|||
As of
March 5, 2010, the Company’s common stock was held by 67 stockholders of record
(not including beneficial holders of common stock held in street
name). The Company has never declared or paid dividends on its
capital stock and does not anticipate paying any dividends in the foreseeable
future.
Securities
Authorized for Issuance Under Equity Compensation Plans
Information
regarding securities authorized for issuance under our equity compensation plans
can be found under Item 12 of this Annual Report on Form 10-K.
Item
6. Selected Financial Data
Not
required.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion should be read in conjunction with our Consolidated
Financial Statements and Notes thereto.
Recent
Accounting Pronouncements
See Note
1 to the Consolidated Financial Statements for a full description of recent
accounting pronouncements, including the expected dates of adoption and
estimated effects on results of operations and financial condition, which is
incorporated herein by reference.
Critical
Accounting Policies and Estimates
There
have been no significant changes in the Company’s critical accounting policies
during the twelve months ended December 31, 2009 as compared to what was
previously disclosed in the Company’s Form 10-K for the fiscal year ended
December 31, 2008 as filed with the SEC.
19
General
Management’s
discussion and analysis of our financial condition and results of operations are
based on our Consolidated Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates,
including those related to revenue recognition, bad debts, inventories, asset
impairments, income taxes, contingencies, and litigation. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values for assets and liabilities
that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
We
believe the following critical accounting policies affect management’s 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
On
January 1, 2006, we adopted Accounting for Stock-based Compensation, which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to our employees and directors including
employee stock options and employee stock purchases pursuant to our Employee
Stock Purchase Plan (“ESPP”) based on estimated fair values. We adopted ASC 718
“Share-Based Payment” using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006,
the first day of our 2006 fiscal year.
Stock-based
compensation expense recognized under ASC 718 were $0.1 million and $0.2 million
for the years ended December 31, 2009 and 2008, respectively, as determined by
the Binomial Lattice valuation model, and
represents stock-based compensation expense related to share based compensation
arrangements under our stock option plan and our ESPP.
Allowance for Doubtful
Accounts
Allowances
are provided for estimated returns and potential uncollectable trade receivable.
Provisions for return allowances are recorded at the time revenue is recognized
based on our historical returns, current economic trends and changes in customer
demand. Such allowances are adjusted periodically to reflect actual and
anticipated experience. Material differences may result in the amount and timing
of our revenue for any period if management made different judgments or utilized
different estimates.
Inventory
Inventories
are stated at the lower of cost or market, with cost being determined using
standard cost, which approximates actual cost on a first-in, first-out basis.
Market value is determined as the lower of replacement cost or net realizable
value. Provisions are made for excess and obsolete inventory based on historical
usage and management’s estimates of future demand. Inventory
reserves, once established, are only reversed upon sale or disposition of
related inventory.
Valuation
of Long-Lived Assets
We review
the valuation of long-lived assets and assess the impairment of the assets
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable due to: significant underperformance relative to expected
historical or projected future operating results; significant changes in the
manner of our use of the assets or the strategy for the overall business; and
significant negative industry or economic trends. When we determine
that the carrying value of long-lived assets may not be recoverable based on the
existence of one or more of the above indicators of impairment, we measure any
impairment based on a projected discounted cash flow method using a discount
rate determined by our management to be commensurate with the risk inherent in
our current business model. We did not record any asset impairment
charge for the years ended December 31, 2009 and 2008,
respectively.
20
Income
Taxes
We
adopted ASC 740, Accounting
for Uncertainty in Income Taxes on January 1, 2007. It is our
policy to record income tax interest and penalties in the income tax
provision. We did not have any material unrecognized tax benefits or
uncertain tax positions at December 31, 2009.
Overview
We were
founded in December 1995 and commenced operations to design, manufacture and
market fiber optic interconnect products, which we call our connectivity
products, or what we previously called our OPMS products. We have
broadened our connectivity product line to include attenuators, planar lightwave
circuit splitters, and fused fiber products. In early 1999, we
started forming a new product line based in part on our proprietary
technology. We started selling our optical passive products, or what
we previously called our DWDM products, and other wavelength management products
in July 2000. Since introduction, sales of optical passive products
have fluctuated with the overall market for these products.
We market
and sell our products predominantly through our direct sales
force. From our inception through December 31, 2009, we derived
the majority of our revenues from our connectivity product line. Our
optical passive products contributed as a percentage of revenues 37.5% and 36.9%
for the years ended December 31, 2009 and 2008, respectively. In the
years ended December 31, 2009 and 2008, our top 10 customers comprised 63%
and 62% of our revenues, respectively. Two customers accounted for
15.1% and 14.9% of our revenues in 2009, respectively. One customer
accounted for 15.7% of our revenues in 2008. 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 2010.
Sales and
marketing expenses consist primarily of salaries, commissions and related
expenses for personnel engaged in marketing, sales and technical support
functions, as well as the costs associated with trade shows, promotional
activities and travel expenses. We intend to continue to invest
amounts similar to our spending levels in 2009 in our sales and marketing
efforts, both domestically and internationally, in order to increase market
awareness and to generate sales of our products. However, we cannot
be certain that our expenditures will result in higher revenues. In
addition, we believe our future success depends upon establishing successful
relationships with a variety of key customers.
21
General
and administrative expenses consist primarily of salaries and related expenses
for executive, finance, administrative, accounting and human resources
personnel, insurance and professional fees for legal and accounting
support. We expect general and administrative expenses will remain
relatively flat due in part to continued emphasis on expense
control.
We own
98.5% of the outstanding common stock of Alliance Fiber Optic Products, Ltd
(formally named Transian Technology Ltd. Co.), a Taiwan
corporation. This majority owned subsidiary is engaged in design and
manufacturing of our products.
In
December 2000, we established a subsidiary, Alliance Fiber Optic Products, in
the People’s Republic of China, which we have developed as a manufacturing
facility. We commenced production at this facility in the third
quarter of 2003.
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,
|
|||||
|
2009
|
2008
|
||||
|
Revenues
|
100.0%
|
100.0%
|
|||
|
Cost
of revenues
|
68.7
|
68.6
|
|||
|
Gross profit
|
31.3
|
31.4
|
|||
|
Operating
expenses:
|
|||||
|
Research and development
|
10.0
|
8.6
|
|||
|
Sales and marketing
|
7.6
|
6.2
|
|||
|
General and administrative
|
11.2
|
9.0
|
|||
|
Total operating expenses
|
28.8
|
23.8
|
|||
|
Income
from operations
|
2.5
|
7.6
|
|||
|
Interest
and other income, net
|
2.6
|
3.4
|
|||
|
Net
income before tax
|
5.1
|
11.0
|
|||
|
Income
tax
|
0.3
|
0.5
|
|||
|
Net
income
|
4.8%
|
10.5%
|
|||
Comparison
of Fiscal Year 2009 and Fiscal Year 2008
Revenues. Revenues
were $29.8 million and $38.8 million for the years ended December 31, 2009
and 2008, respectively. Connectivity products revenue decreased to
$18.7 million in 2009 from $24.5 million in 2008. Optical passive
products revenue decreased to $11.2 million in 2009 from $14.3 million in 2008.
Revenues decreased mainly due to a softening in demand for both connectivity and
passive products. Revenues from sales to a significant customer
declined sequentially and on a year over year basis based on reduced order
levels and changing product allocations. Declines in average selling
prices were a secondary cause of the decrease in revenues and resulted from
pricing pressure from customers, competitive pricing by other suppliers and
general product maturity. We expect we may experience similar levels of average
selling price declines in the future.
Cost of
Revenues. Cost of revenues in fiscal year 2009
decreased to $20.5 million from $26.6 million in fiscal year
2008. Cost of revenues as a percentage of net revenues increased to
68.7% in fiscal year 2009 from 68.6% in fiscal year 2008. The
decrease of cost of revenues in 2009 was mainly due to lower
sales. The increase as a percentage of revenues was due to product
mixes for both connectivity and optical passive products.
Gross
Profit. Gross profit for the year ended December 31, 2009 was
$9.3 million, or 31.3% of revenues, compared with gross profit of $12.2 million,
or 31.4% of revenues in fiscal year 2008. The connectivity
products gross profit decreased to $6.2 million in 2009 from $8.4 million in
2008. The optical passive products gross profit decreased to $3.1
million from $3.8 million in 2008. For the year ended December 31,
2009, the utilization of our factories was reduced due to the decreased volume
shipments of our products, which contributed to lower gross
margins. We expect our gross profit as a percentage of revenues in
2010 to remain at levels similar to 2009 levels. However, our average
selling prices are declining, which we believe will negatively impact our gross
profit and may offset any benefits from improved absorption.
Research and Development
Expenses. Research and development expenses decreased to $3.0
million in fiscal year 2009 from $3.3 million in fiscal year
2008. As a percentage of revenues, research and development
expenses increased to 10.0% in 2009 from 8.6% in 2008 and the increase was a
result of decreased revenues. The decrease in absolute dollars was primarily due
to lower headcount and cost control measures. We expect research and
development expenses on our product development efforts may increase as we
intend to continue to invest in our research and product development
efforts.
Sales and Marketing
Expenses. Sales and marketing expenses decreased to $2.3
million in fiscal year 2009 from $2.4 million in fiscal year
2008. The decrease was mainly due to cost control
measures. As a percentage of revenues, sales and marketing expenses
increased to 7.6% in 2009 from 6.2% in 2008 and the increase was a result of
decreased revenues. We expect sales and marketing expenses will
remain relatively flat in dollars due in part to continued emphasis on expense
control.
General and Administrative
Expenses. General and administrative expenses decreased to
$3.3 million in fiscal year 2009 from $3.5 million in fiscal year
2008. The decrease was mainly due to cost control
measures. As a percentage of revenues, general and
administrative expenses increased to 11.2% in 2009 from 9.0% in 2008 and the
increase was a result of decreased revenues. We expect general and
administrative expenses will remain relatively flat in dollars due in part to
continued emphasis on expense control.
Stock-Based
Compensation. Total stock-based compensation was $0.1 million
and $0.2 million for the years ended December 31, 2009 and 2008,
respectively.
Interest and Other Income,
Net. Interest and other income, net, was $0.8 million and $1.3
million for the years ended December 31, 2009 and 2008,
respectively. These amounts consisted primarily of interest income,
which fluctuated based on cash balances and changes in interest
rates. The decrease in 2009 was due to lower interest income because
of lower interest rates. The amounts also included a loss of $0.8
million to reduce the value of our ARS investments classified as trading
securities, offset by a gain of $0.8 million from the estimated fair value of
the ARS Right as of December 31, 2009.
Provision for
Taxes. Our effective alternative minimum tax, or AMT, rate was
20% for federal and 6.7% for state in fiscal 2009. The tax expense was the
result of estimated income tax accruals for fiscal 2009 and 2008.
Under a
new California tax law, effective retroactively to the beginning of 2008, our
net operating loss deduction was suspended for 2008 and
2009. Beginning in 2008, the carryforward period for NOLs is extended
from 10 to 20 years. Beginning in 2011, we will be permitted to carry
back NOLs for two years. Carrybacks will be limited to 50% of NOLs
for 2011 and 75% for 2012. Full carrybacks will be allowed beginning
in 2013. In addition, our utilization of tax credits is limited to
50% of tax liability in 2008 and 2009 as a result of the new law.
As of
December 31, 2009, we had approximately $35.1 million and $20.4 million of
net operating loss carryforwards for federal and state tax purposes,
respectively, which will expire in 2022 for federal and in 2014 for state
purposes, if not utilized. We have provided a full valuation
allowance against our net deferred tax assets because realization of our
deferred tax assets is uncertain due to our history of losses.
Liquidity
and Capital Resources
Comparison
of Fiscal Year 2009 and Fiscal Year 2008
Net cash
provided by operating activities was $2.8 million and $4.4 million in 2009
and 2008, respectively. The decrease in our cash provided by
operations in 2009 was primarily due to decrease in net income of $2.6 million,
an increased in accounts receivable of $0.2 million, an increased in prepaid
expenses of $0.1 million, and a decrease in accrued liabilities of $0.3 million,
which was offset by a decrease in inventory of $0.6 million, an increase in
accounts payable of $0.1 million. The decrease in our cash provided
by operations in 2008 was primarily due to an increase in inventory of $0.6
million, a decrease in accounts payable of $1.0 million and a decrease in
accrued liabilities of $0.2 million, which was offset by an increase in net
income of $0.7 million and a decrease in accounts receivable of $0.7
million.
23
Cash used
in investing activities was $6.5 million in 2009 and cash provided by investing
activities was $2.2 million in 2008. In 2009, we spent $0.9 million
to acquire property and equipment and the net purchase of short-term securities
was $5.6 million. In 2008, we spent $1.2 million to acquire property
and equipment and the net proceeds from sale and maturity of short-term
securities was $3.4 million.
Cash
generated by financing activities was $0.2 million and $0.4 million in 2009
and 2008, respectively. Cash generated by financing activities in
2009 and 2008 was comprised of proceeds from the exercise of options to purchase
shares of our common stock and common stock issued through our
ESPP.
Between
November 2004 and September 2007, we entered into two mortgage loans of $0.7
million total with an interest rate of 3.20% and three equipment loans of $0.7
million total with an interest rate of 3.68% in Taiwan. The loans are
secured by the building and equipment we own in Taiwan.
Our
principal source of liquidity as of December 31, 2009 consisted of $26.2 million
in cash and cash equivalents and interest bearing marketable
securities. We also hold $16.1 million in ARS and associated Rights
which are not saleable by us at the date hereof. Accordingly, we do
not consider the ARS or the Rights as sources of liquidity at this
time. We believe that our current cash, cash equivalents and
short-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 holders of common stock,
and the terms of any debt facility could impose restrictions on our
operations. The sale of additional equity or debt securities could
result in additional dilution to our stockholders, and additional financing may
not be available in amounts or on terms acceptable to us, if at
all. If we are unable to obtain additional financing, we may be
required to reduce our research and development and marketing
expenses. Strategic arrangements, if necessary to raise additional
funds, may require us to relinquish our rights to certain of our technologies or
products. Our failure to raise capital when needed could harm our
business, financial condition and operating results.
Contractual
Obligations
Our
long-term debt obligations are for principal and interest on mortgage and
equipment loans from financial institutions in Taiwan.
In July
2004, we moved into our corporate headquarters in Sunnyvale,
California. The lease has a six-year term commencing on July 22,
2004. We are currently in the process of evaluating our future facility
requirements in California, and we have begun lease negotiations on specific
properties.
In
Taiwan, we lease a total of approximately 38,800 square feet in one facility
located in Tu-Cheng City, Taiwan. This lease expires at various times
from May 2010 to December 2011. In December 2000, we purchased
approximately 8,200 square feet of space immediately adjacent to the leased
facility for $0.8 million, bringing the total square footage to approximately
47,000 square feet.
In July
2007, we renewed the lease for our 62,000 square foot facility in the Shenzhen
area of China, which will expire in July 2012. In February 2007, we
entered into a lease for an 8,200 square feet facility in Shenzhen, which lease
will expire in January 2012.In
August 2009, we expanded our facility in the Shenzhen area of
China. We replaced the existing two leases with a new lease for a
132,993 square foot facility in Shenzhen, which lease will expire in October
2014.
24
The
following summarizes our contractual obligations at December 31, 2009 (in
thousands):
|
Payments Due by
Period
|
|||||||||
|
Total
|
Less
than
1 year
|
1-3 years
|
4-5
years
|
||||||
|
Contractual Obligations
|
|||||||||
|
Debt
obligations including interest payments
|
$
438
|
$
122
|
$
194
|
$
122
|
|||||
|
Operating
Lease Obligations
|
1,297
|
658
|
350
|
289
|
|||||
|
Total
|
$
1,735
|
$
780
|
$
544
|
$
411
|
|||||
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements, as such term is defined in rules
promulgated by the Securities and Exchange Commission, that have or are
reasonably likely to have a current or future material effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
Not
required.
Item
8. Financial Statements and Supplementary Data
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
Consolidated
Financial Statements
Report
of Stonefield Josephson, Inc., Independent Registered Public Accounting
Firm
|
26
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
27
|
|
Consolidated
Statements of Operations
|
28
|
|
Consolidated
Statements of Cash Flows
|
29
|
|
Consolidated
Statements of Stockholders’ Equity
|
30
|
|
Notes
to Consolidated Financial Statements
|
31
|
25
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
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. as of December 31, 2009 and 2008, and the related
statements of operations, stockholders’ equity, and cash flows for each of the
years in the two-year period ended December 31, 2009. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these 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 financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Alliance Fiber Optic
Products, Inc. as of December 31, 2009 and 2008, and the results of their
operations and its cash flows for each of the years in the two-year period ended
December 31, 2009 in conformity with accounting principles generally accepted in
the United States of America.
/s/Stonefield
Josephson, Inc.
Stonefield
Josephson, Inc.
San
Francisco, California
March 18,
2010
26
ALLIANCE FIBER
OPTIC PRODUCTS, INC.
Consolidated
Balance Sheets
(in thousands,
except share data)
|
December
31,
|
|||||||||
|
2009
|
2008
|
||||||||
|
Assets
|
|||||||||
|
Current
assets:
|
|||||||||
|
Cash and cash equivalents
|
$
|
8,525
|
$
|
12,185
|
|||||
|
Short-term
investments
|
31,968
|
11,769
|
|||||||
| Other current assets | 1,778 | - | |||||||
|
Accounts receivable, net
|
4,952
|
4,708
|
|||||||
|
Inventories
|
4,984
|
5,614
|
|||||||
|
Prepaid expense and other current assets
|
515
|
379
|
|||||||
|
Total current assets
|
52,722
|
34,655
|
|||||||
|
Long-term
investments
|
-
|
13,718
|
|||||||
|
Property
and equipment, net
|
4,434
|
4,653
|
|||||||
|
Other
assets
|
233
|
2,772
|
|||||||
|
Total
assets
|
$
|
57,389
|
$
|
55,798
|
|||||
|
Liabilities
and Stockholders' Equity
|
|||||||||
|
Current
liabilities:
|
|||||||||
|
Accounts payable
|
$
|
3,701
|
$
|
3,572
|
|||||
|
Accrued
expenses
|
3,822
|
3,237
|
|||||||
|
Current
portion of bank loan
|
114
|
137
|
|||||||
|
Total current liabilities
|
7,637
|
6,946
|
|||||||
|
Long-term
liabilities:
|
|||||||||
|
Bank loan
|
305
|
413
|
|||||||
|
Other long-term liabilities
|
508
|
478
|
|||||||
|
Total long-term liabilities
|
813
|
891
|
|||||||
|
Total liabilities
|
8,450
|
7,837
|
|||||||
|
Commitments
and contingencies (Note 9)
|
|
|
|||||||
|
Stockholders'
equity
|
|||||||||
|
Common
stock, $0.001 par value: 250,000,000 shares authorized;
|
|||||||||
|
42,447,112 and 42,001,635 shares issued and outstanding
at
|
|||||||||
|
December 31, 2009 and 2008, respectively
|
42
|
42
|
|||||||
|
Additional paid-in-capital
|
112,131
|
111,687
|
|||||||
|
Accumulated deficit
|
(63,796
|
)
|
(64,380
|
)
|
|||||
|
Accumulated other comprehensive income
|
562
|
621
|
|||||||
|
Total stockholders' equity
|
48,939
|
47,961
|
|||||||
|
Total liabilities and stockholders' equity
|
$
|
57,389
|
$
|
55,798
|
|||||
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
27
ALLIANCE FIBER
OPTIC PRODUCTS, INC.
Consolidated
Statements of Operations
(in thousands,
except per share data)
|
Years Ended
December 31,
|
|||||||||
|
2009
|
2008
|
||||||||
|
Revenues
|
$
|
29,834
|
$
|
38,754
|
|||||
|
Cost
of revenues
|
20,504
|
26,589
|
|||||||
|
Gross profit
|
9,330
|
12,165
|
|||||||
|
Operating
expenses:
|
|||||||||
|
Research and development
|
2,972
|
3,322
|
|||||||
|
Sales and marketing
|
2,276
|
2,406
|
|||||||
|
General and administrative
|
3,331
|
3,487
|
|||||||
|
Total operating expenses
|
8,579
|
9,215
|
|||||||
|
Income
from operations
|
751
|
2,950
|
|||||||
|
Interest
and other income, net
|
766
|
1,315
|
|||||||
|
Net
income before tax
|
1,517
|
4,265
|
|||||||
|
Income
tax
|
84
|
199
|
|||||||
|
Net
income
|
1,433
|
4,066
|
|||||||
|
Net
income per share:
|
|||||||||
|
Basic
|
$
|
0.03
|
$
|
0.10
|
|||||
|
Diluted
|
$
|
0.03
|
$
|
0.10
|
|||||
|
Shares
used in computing net income per share:
|
|||||||||
|
Basic
|
42,026
|
41,601
|
|||||||
|
Diluted
|
42,279
|
41,657
|
|||||||
The accompanying notes are an
integral part of these Consolidated Financial Statements.
28
ALLIANCE FIBER
OPTIC PRODUCTS, INC.
Consolidated
Statements of Cash Flows
(in
thousands)
|
Years Ended
December 31,
|
|||||||||
|
2009
|
2008
|
||||||||
|
Cash
flows from operating activities:
|
|||||||||
|
Net
income
|
$
|
1,433
|
$
|
4,066
|
|||||
|
Adjustments to reconcile net income to net cash provided
by
|
|||||||||
|
operating
activities:
|
|||||||||
|
Depreciation
|
1,049
|
1,060
|
|||||||
|
Amortization of stock based compensation
|
112
|
161
|
|||||||
|
Loss
on disposal of property and equipment
|
93
|
10
|
|||||||
|
Provision for inventory valuation
|
(18
|
)
|
(180
|
)
|
|||||
|
Provision (Credit) for doubtful accounts and sales returns
|
-
|
|
(42
|
)
|
|||||
|
Changes in assets and liabilities:
|
|||||||||
|
Accounts receivable
|
(244
|
) |
727
|
|
|||||
|
Inventories
|
648
|
|
(431
|
)
|
|||||
|
Prepaid expenses and other current assets
|
(136
|
) |
102
|
||||||
|
Other assets
|
(43
|
) |
36
|
|
|||||
|
Accounts payable
|
129
|
|
(951
|
) | |||||
|
Accrued
expense
|
(264
|
)
|
(151
|
) | |||||
|
Other long-term liabilities
|
30
|
29
|
|||||||
|
Net cash provided by operating activities
|
2,789
|
4,436
|
|||||||
|
Cash
flows from investing activities:
|
|||||||||
|
Purchase of short-term investments
|
(17,627
|
)
|
(34,889
|
)
|
|||||
|
Proceeds
from sales and maturities of short-term investments
|
12,023
|
38,343
|
|||||||
|
Purchase
of property and equipment
|
(895
|
)
|
(1,207
|
)
|
|||||
|
Net cash (used in) provided by investing activities
|
(6,499
|
) |
2,247
|
|
|||||
|
Cash
flows from financing activities:
|
|||||||||
|
Proceeds from issuance of common stock under ESPP
|
291
|
379
|
|||||||
|
Proceeds
from the exercise of common stock options
|
41
|
141
|
|||||||
|
Repayment of bank borrowings
|
(139
|
)
|
(141
|
)
|
|||||
|
Net cash provided by financing activities
|
193
|
379
|
|||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
(143
|
) |
178
|
||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(3,660
|
) |
7,240
|
||||||
|
Cash
and cash equivalents at beginning of year
|
12,185
|
4,945
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
8,525
|
$
|
12,185
|
|||||
| Supplemental disclosure of cash flow information: | |||||||||
| Cash paid for interest | $ | (11 | ) | (17 | ) | ||||
| Cash paid for income taxes | $ | (111 | ) | (50 | ) | ||||
| Supplemental disclosure of non-cash financing activities: | |||||||||
| Dividend payable to stockholders | $ | (849 | ) | $ | - | ||||
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
29
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Consolidated
Statements of Stockholder' Equity
(in
thousands)
|
Common Stock
Shares
Amount
|
Additional
Paid-in
Capital
|
Deferred
Stock-based
Compensation
|
Accumulated
Deficit
|
Accumulated
Other
Comprehensive
income/(loss)
|
Total
|
Comprehensive
Income
|
|||||||||||||||||||||
|
Balance
at December 31, 2007
|
41,367
|
$
|
41
|
$
|
110,310
|
$
|
696
|
$
|
(68,446)
|
$
|
306
|
$
|
42,907
|
||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||
|
upon
exercise of options
|
237
|
--
|
141
|
--
|
--
|
--
|
141
|
||||||||||||||||||||
|
Issuance
of common stock upon
|
|||||||||||||||||||||||||||
|
purchase
of ESPP
|
398
|
1
|
379
|
--
|
--
|
--
|
380
|
||||||||||||||||||||
|
Deferred
stock-based compensation
|
--
|
--
|
--
|
161
|
--
|
--
|
161
|
||||||||||||||||||||
|
Comprehensive
Income:
|
|||||||||||||||||||||||||||
|
Net income for the year
|
--
|
--
|
--
|
--
|
4,066
|
--
|
4,066
|
$
|
4,066
|
||||||||||||||||||
|
Unrealized
gain on
|
|||||||||||||||||||||||||||
|
short-term
investments
|
--
|
--
|
--
|
--
|
--
|
(12)
|
(12)
|
(12)
|
|||||||||||||||||||
|
Currency
translation adjustments
|
--
|
--
|
--
|
--
|
--
|
318
|
318
|
318
|
|||||||||||||||||||
|
Comprehensive income
|
$
|
4,372
|
|||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
42,002
|
$
|
42
|
$
|
110,830
|
$
|
857
|
$
|
(64,380)
|
$
|
612
|
$
|
47,961
|
||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||
|
upon
exercise of options
|
49
|
--
|
41
|
--
|
--
|
--
|
41
|
||||||||||||||||||||
|
Issuance
of common stock upon
|
|||||||||||||||||||||||||||
|
purchase
of ESPP
|
396
|
--
|
291
|
--
|
--
|
--
|
291
|
||||||||||||||||||||
|
Deferred
stock-based compensation
|
--
|
--
|
--
|
112
|
--
|
--
|
112
|
||||||||||||||||||||
| Issuance of stock dividends |
(849)
|
-- |
(849)
|
||||||||||||||||||||||||
|
Comprehensive
income :
|
|
||||||||||||||||||||||||||
|
Net income for the year
|
--
|
--
|
--
|
--
|
1,433
|
|
1,433
|
$
|
1,433
|
||||||||||||||||||
|
Unrealized loss on
|
|||||||||||||||||||||||||||
|
short-term
investments
|
--
|
--
|
--
|
--
|
--
|
(2)
|
(2)
|
(2)
|
|||||||||||||||||||
|
Currency
translation adjustments
|
--
|
--
|
--
|
--
|
--
|
(48)
|
(48)
|
(48)
|
|||||||||||||||||||
|
Comprehensive income
|
$
|
1,383
|
|||||||||||||||||||||||||
|
Balance
at December 31, 2009
|
42,447
|
$
|
42
|
$
|
111,162
|
$
|
969
|
$
|
(63,796)
|
$
|
562
|
$
|
48,939
|
||||||||||||||
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
30
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes
to Consolidated Financial Statements
1. The
Company and Summary of Significant Accounting Policies
The
Company
Alliance
Fiber Optic Products, Inc. (the “Company”) was incorporated in California on
December 12, 1995 and reincorporated in Delaware on October 19,
2000. The Company designs, manufactures and markets fiber optic
components for communications equipment manufacturers. The Company’s
headquarters are located in Sunnyvale, California, and it has operations in
Taiwan and China.
Use
of estimates
The
preparation of financial statements in accordance with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates involve those required in the
assessment of allowance for sales returns, doubtful accounts and/or potential
excess obsolete inventory. Actual results could differ from those
estimates.
Basis
of presentation
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All material intercompany accounts and transactions
have been eliminated in consolidation.
Foreign
currency translation
The
Company’s operations through foreign subsidiaries use the local currency as
their functional currency. All assets and liabilities of the
subsidiaries are translated at rates of exchange on the balance sheet
date. Revenues and expenses are translated at the average rate of
exchange for the period. Gains and losses resulting from foreign
currency translation are recorded as a separate component of other comprehensive
income in stockholders’ equity. Foreign currency transaction gains
and losses are recorded in interest and other income and have not been
material.
Cash,
cash equivalents, short-term investments 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 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 Company’s
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
Company’s financial instruments also include accounts receivable, accounts
payable and debts, and are carried at cost, which approximates their fair value
because of the short-term maturity of these instruments.
31
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes
to Consolidated Financial Statements
Fair
value of financial instruments
In
September 2006, the Financial Accounting Standards Board (“the FASB”) issued ASC
820 “Fair Value Measurements.” ASC 820 defines fair value,
establishes a framework for measuring fair value, and enhances fair value
measurement disclosure. In October 2008, the FASB issued Financial
Staff Position ASC 820 “Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active”. ASC 820 clarifies the
application of ASC 820 in a market that is not active, and provides guidance on
the key considerations in determining the fair value of a financial asset when
the market for that financial asset is not active. Effective January 1, 2008,
the Company adopted the measurement and disclosure requirements related to
financial assets and financial liabilities.
ASC 820
delayed the effective date for all nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually), until the
beginning of fiscal 2010.
In
February 2007, the FASB issued ASC 825, “The Fair Value Option for Financial
Assets and Financial Liabilities - Including an amendment of FASB Statement No.
115.” Under ASC 825, a company may choose, at specified election
dates, to measure eligible items at fair value and report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date. The Company adopted ASC 825 effective
January 1, 2008 and has elected the fair value option for its Auction Rate
Securities (“ARS”), as of December 1, 2008. In conjunction with the
adoption of ASC 825, the Company accounted for its unrealized loss on its
auction rate securities ARS of $0.8 million and $2.6 million in earnings in the
year ended December 31, 2009 and 2008, respectively. There is no cumulative
effect of a change in accounting principle as a result of adoption of ASC 825 as
there was no other comprehensive income/loss from Auction Rate Securities before
the adoption of ASC 825.
Allowance
for doubtful accounts
The
Company performs periodic credit evaluations of customers’ financial condition.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability or unwillingness of customers to make required
payments. When the Company becomes aware that a specific customer is
unable to meet its financial obligations, for example, as a result of bankruptcy
or deterioration in the customer’s operating results or financial position, the
Company records a specific allowance to reflect the level of credit risk in the
customer’s outstanding receivable balance. In addition, the Company
records additional allowances based on certain percentages of aged receivable
balances. These percentages are determined by a variety of factors including,
but not limited to, current economic trends, historical payment and bad debt
write-off experience. The Company is not able to predict changes in the
financial condition of customers, and if circumstances related to customers
deteriorate, estimates of the recoverability of trade receivables could be
materially affected and the Company may be required to record additional
allowances. Alternatively, if the Company provides more allowances than the
Company needs, the Company may reverse a portion of such provisions in future
periods based on actual collection experience.
Inventories
Inventories
are stated at the lower of cost or market, with cost being determined using
standard cost, which approximates actual cost on a first-in, first-out basis.
Market value is determined as the lower of replacement cost or net realizable
value. Provisions are made for excess and obsolete inventory based on historical
usage and management’s estimates of future demand. Inventory
reserves, once established, are only reversed upon sale or disposition of
related inventory.
Property
and equipment
Property
and equipment are stated at cost less accumulated depreciation and impairment
charges. Depreciation is computed using the straight-line method
using estimated useful lives of two to five years for machinery and equipment
and five years for furniture and fixtures. Amortization of leasehold
improvements is computed using the straight-line method over the shorter of the
estimated life of the assets, generally two to four years, or the lease
term. Depreciation and amortization expense was $1.0 million in 2009
and $1.1 million in 2008.
32
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes
to Consolidated Financial Statements
Revenue
recognition
The
Company recognizes revenue upon shipment of its products to its customers,
provided that the Company has received a purchase order, the price is fixed,
collection of the resulting receivable is reasonably assured and transfer of
title and risk of loss has occurred. Subsequent to the sale of its
products, the Company has no obligation to provide any modification or
customization upgrades, enhancements or post contract customer
support.
Allowances
are provided for estimated returns. A provision for estimated sales return
allowances is recorded at the time revenue is recognized based on historical
returns, current economic trends and changes in customer demand. Such allowances
are adjusted periodically to reflect actual and anticipated
experience. Such adjustments, which are recorded against revenue in
the period, could be material.
Shipping
and handling expenses
Shipping
and handling expenses are included in cost of revenue.
Research
and development expenses
Research
and development costs are expensed as incurred.
Advertising
expenses
Advertising
costs are expensed as incurred and have not been material.
Sales
taxes
The
Company accounts for taxes charged to our customers and collected on behalf of
the taxing authorities and recognize revenue on the sales on a net
basis.
Income
taxes
The
Company accounts for deferred income taxes under the liability approach whereby
the expected future tax consequences of temporary differences between the book
and tax basis of assets and liabilities are recognized as deferred tax assets
and liabilities. A valuation allowance is established for any
deferred tax assets for which realization is uncertain.
The
Company files income tax returns in the U.S. federal jurisdiction, and various
state and foreign jurisdictions. The Company is no longer subject to
U.S. federal, state and local, or non-U.S. income tax examinations by tax
authorities for years before 2005. As of December 31, 2009, the
Company was not under any examinations by nor had it received notices of
examination from tax authorities.
The
Company adopted ASC 740, Accounting for Uncertainty in Income Taxes on January 1,
2007. As a result of the implementation of ASC 740, the Company did
not recognize any unrecognized tax benefits. The components of income
tax provisions by jurisdiction are as follows (in thousands):
33
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes
to Consolidated Financial Statements
|
Years Ended December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Federal
|
$
|
16
|
$
|
80
|
||||
|
State
|
68
|
119
|
||||||
| Total |
$
|
84
|
$
|
199
|
||||
Stock-based
compensation
The
Company estimates the fair value of the share-based payment awards on the date
of grant using an option pricing model. The value of awards that are
ultimately expected to vest is recognized as expense over the requisite employee
service period.
Comprehensive
income
Comprehensive
income is defined as the change in equity of a company from transactions and
other events and circumstances excluding transactions resulting from investments
from owners and distributions to owners. Comprehensive income
consists of cumulative translation adjustments and unrealized gain on short-term
investments and is disclosed in the consolidated statements of stockholders’
equity.
Recent
accounting pronouncements
In June
2009, the FASB issued ASC 105, Generally Accepted Accounting Principles, which
establishes the FASB Accounting Standards Codification (the "Codification") as
the source of authoritative accounting principles to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. All guidance contained in the Codification carries an equal
level of authority. ASC 105 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. The Codification
will supersede all existing non-SEC accounting and reporting standards. All
other non-grandfathered, non-SEC accounting literature not included in the
Codification will become non-authoritative. Following ASC 105, the FASB will not
issue new standards in the form of Statements, FASB Staff Positions, or Emerging
Issues Task Force Abstracts. Instead, it will issue Accounting Standards
Updates. The FASB will not consider Accounting Standards Updates as
authoritative in their own right. Accounting Standards Updates will serve only
to update the Codification, provide background information about the guidance
and provide the bases for conclusions on the change(s) in the Codification. The
Company adopted ASC 105 in its Form 10-K for the year ended December 31,
2009. The adoption did not have an impact on the Company’s
consolidated results of operations and financial condition for the year ended
December 31, 2009.
In April
2009, the FASB issued guidance on determining fair value when the volume and
level of activity for an asset or liability has significantly decreased, and in
identifying transactions that are not orderly. Based on the guidance, if an
entity determines that the level of activity for an asset or liability has
significantly decreased and that a transaction is not orderly, further analysis
of transactions or quoted prices is needed, and a significant adjustment to the
transaction or quoted prices may be necessary to estimate fair value. The
guidance was effective on a prospective basis for interim and annual periods
ending after June 15, 2009. The adoption of this guidance had no material impact
on the Company’s financial results and results of operations.
In April
2009, the FASB issued additional requirements regarding interim disclosures
about the fair value of financial instruments which were previously only
disclosed on an annual basis. Entities are now required to disclose the fair
value of financial instruments which are not recorded at fair value in the
financial statements in both their interim and annual financial statements. The
new requirements were effective for interim and annual periods ending after June
15, 2009 on a prospective basis. There was no impact on the Company’s
financial results as this relates only to additional disclosures.
34
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes
to Consolidated Financial Statements
In May
2009, the FASB issued ASC 855, Subsequent Events. ASC 855 establishes accounting
principles and requirements for subsequent events. Specifically, ASC 855 sets
forth the following: (a) the period after the balance sheet date during which
management of an entity shall evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, (b) the
circumstances under which an entity shall recognize events or transactions
occurring after the balance sheet date in its financial statements and (c) the
disclosures that an entity shall make about events or transactions that occurred
after the balance sheet date. ASC 855 requires entities to recognize in the
financial statement, the effects of all subsequent events that provide
additional evidence about conditions that existed at the date of the balance
sheet, including estimates inherent in the process of preparing financial
statements. Conversely, entities shall not recognize subsequent events that
provide evidence about conditions that did not exist at the date of the balance
sheet but arose after the balance sheet date but before financial statements are
issued or are available to be issued. Entities shall disclose the date through
which subsequent events have been evaluated, as well as whether that date is the
date the financial statements were issued or the date the financial statements
were available to be issued. Entities shall also disclose the nature and
financial effect of nonrecognized subsequent events if such disclosure keeps the
financial statements from being misleading. The Company adopted ASC 855,
effective June 30, 2009.
In August
2009, the FASB issued Update No. 2009-05, “Fair Value Measurements and
Disclosures (Topic 820) – Measuring Liabilities at Fair Value” (“ASU 2009-05”).
ASU 2009-05 amends ASC 820, Fair Value Measurements and Disclosures to provide
further guidance on how to measure the fair value of a liability. It primarily
does three things: 1) sets forth the types of valuation techniques to be used to
value a liability when a quoted price in an active market for the identical
liability is not available, 2) clarifies that when estimating the fair value of
a liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability and 3) clarifies that both a quoted price
in an active market for the identical liability at the measurement date and the
quoted price for the identical liability when traded as an asset in an active
market when no adjustments to the quoted price of the asset are required are
Level 1 fair value measurements. This standard is effective beginning fourth
quarter of 2008 for the Company. The adoption of this standard update is not
expected to impact the Company’s financial results.
2.
Stock-based compensation
Effective
January 1, 2006, the Company adopted ASC 718, “Share-based Payment”, which
establishes accounting for share-based payment (“SBP”) awards exchanged for
employee services and requires companies to expense the estimated fair value of
these awards over the requisite employee service period.
ASC 718
requires companies to record compensation expense for stock options measured at
fair value, on the date of grant, using an option-pricing model. The fair value
of stock options is determined using the Binomial Lattice Model instead of the
Black-Scholes Model previously utilized under ASC 718. The Company believes that
the revised model represents a more likely projection of actual
outcomes.
As of
December 31, 2009, there were $0.03 million of total unrecognized compensation
cost related to share-based compensation arrangements granted under the
Company’s option plans.
At
December 31, 2009 the Company had two stock-based compensation plans. They are:
(a) 1997 Stock Option Plan and (b) 2000 Stock Incentive Plan, which are
described below.
(a) 1997
Stock Option Plan
In May
1997, the Company adopted its 1997 Stock Plan under which 3,000,000 shares of
common stock were reserved for issuance to eligible employees, directors and
consultants upon exercise of stock options and stock purchase
rights. During the year ended December 31, 2000, an additional
5,200,000 shares were reserved for issuance under the 1997 Stock
Plan. Incentive stock options are granted at a price not less than
100% of the fair market value of the Company’s common stock and at a price of
not less than 110% of the fair market value for grants to any person who owned
more than 10% of the voting power of all classes of stock on the date of
grant. Nonstatutory stock options are granted at a price not less
than 85% of the fair market value of the common stock and at a price not less
than 110% of the fair market value for grants to a person who owned more than
10% of the voting power of all classes of stock on the date of the
grant. Options granted under the 1997 Stock Plan generally vest over
four years and are exercisable for not more than ten years (five years for
grants to any person who owned more than 10% of the voting power of all classes
of stock on the date of the grant). In November 2000, the 1997 Stock
Plan was replaced by the 2000 Stock Incentive Plan.
35
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes
to Consolidated Financial Statements
(b) 2000
Stock Incentive Plan
In
November 2000, the Company adopted its 2000 Stock Incentive Plan under which
1,500,000 shares of common stock were reserved for issuance to eligible
employees, directors and consultants upon exercise of stock options and stock
purchase rights. On January 1 of each year,
beginning on January 1, 2001, the number of shares available for grant will
automatically increase by the lesser of: (i) 1,700,000 shares;
(ii) 5% of the fully diluted outstanding shares of stock on that date; or
(iii) a lesser amount as may be determined by the Board of
Directors. The Board of Directors determined not to increase the
number of shares available under the plan on January 1, 2009 and 2008,
respectively. Incentive stock options and nonstatutory stock options
are granted at 100% of the fair market value of the Company’s common stock on
the date of grant.
Options
granted under the 2000 Stock Incentive Plan generally vest over four years and
are exercisable for not more than ten years.
The
following information relates to stock option activity for the year ended
December 31, 2009:
|
Year
Ended
December 31,
2009
|
|||||||||
|
Options
|
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
|
Aggregate
Intrinstc
Value
|
|||||
|
Outstanding
at December 31, 2008
|
4,856,083
|
$
|
1.40
|
||||||
|
Granted
|
120,000
|
1.12
|
|||||||
|
Exercised
|
(49,750)
|
0.83
|
|||||||
|
Forfeited
|
(63,000)
|
1.32
|
|||||||
|
Outstanding
at December 31, 2009
|
4,863,333
|
$
|
1.40
|
4.9 Years
|
$
|
860,047
|
|||
|
Vested
and expected to vest at December 31, 2009
|
4,840,996
|
$
|
1.40
|
4.9
Years
|
$
|
858,130
|
|||
|
Exercisable
at December 31, 2009
|
4,637,600
|
$
|
1.40
|
4.7 Years
|
$
|
844,260
|
|||
The
aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between the Company’s closing stock price on the
last trading day of the fourth quarter of fiscal 2009 and 2008 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, 2009 and 2008. This amount changes based on the fair
market value of the Company’s stock. The total intrinsic value of options
exercised for the years ended December 31, 2009 and 2008 were $18,420 and
$286,000, respectively.
The
dividend rate was 0% for the year ended December 31, 2009 and 2008.
36
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes
to Consolidated Financial Statements
Cash
received from option exercises during the year ended December 31, 2009 and 2008
was $41,000 and $141,000, respectively, and is included within the financing
activities section in the accompanying consolidated statements of cash
flows.
Information
relating to stock options outstanding at December 31, 2009 is as
follows:
| Options Outstanding |
Options
Exercisable
|
||||||||||||||||
|
Range
of
Exercise
Price
|
Number
Outstanding
As
of 12/31/09
|
Weighted
Average
Remaining
Contractual
Life (in
Years)
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
As
of 12/31/09
|
Weighted
Average
Exercise
Price
|
||||||||||||
|
$
|
0.40
- $0.88
|
794,650
|
2.66
|
$
|
0.81
|
771,316
|
$
|
0.80
|
|||||||||
|
$
|
0.90
- $0.90
|
914,550
|
5.83
|
$
|
0.90
|
886,900
|
$
|
0.90
|
|||||||||
|
$
|
0.91
- $0.96
|
1,052,300
|
4.42
|
$
|
0.94
|
1,,052,300
|
$
|
0.94
|
|||||||||
|
$
|
1.00
- $1.74
|
832,750
|
5.09
|
$
|
1.52
|
732,501
|
$
|
1.56
|
|||||||||
|
$
|
1.83 -
$2.06
|
943,250
|
6.95
|
$
|
2.00
|
868,750
|
$
|
2.00
|
|||||||||
|
$
|
2.10
- $6.38
|
325,833
|
2.84
|
$
|
3.62
|
325,833
|
$
|
3.62
|
|||||||||
|
4,863,333
|
4.90
|
$
|
1.40
|
4,637,600
|
$
|
1.40
|
|||||||||||
Options
exercisable as of December 31, 2009 and 2008 were 4,637,600 and 4,563,897 at an
average exercise price of $1.40 and $1.39 per share, respectively.
Employee
Stock Purchase Plan
In
November 2000, the Company adopted its 2000 Employee Stock Purchase Plan (the
“Plan”). The Company reserved 1,500,000 shares of common stock for
issuance under the Plan. On the first day of January each year
beginning January 1, 2001, additional shares of common stock are reserved
for issuance under the Plan as determined by the Board of
Directors. The plan limits the annual increase to the lesser of 1% of
the Company’s issued and outstanding common stock or 1,000,000
shares. The Plan 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 Plan is structured as a qualified employee stock purchase
plan under Section 423 of the Internal Revenue Code of 1986, as
amended. However, the Plan 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 395,727 and 397,715 shares were issued under
the Plan in 2009 and 2008, respectively.
The
following information relates to the Plan:
|
Weighted
average fair value per share of shares purchased
|
$
|
0.87
|
|||
|
Total
compensation expense for ESPP
|
$
|
92,504
|
|||
|
Total
amount of cash received from the purchase of stock through
ESPP
|
$
|
290,859
|
|||
|
Total
intrinsic value of ESPP stock purchased as December 31,
2009
|
$
|
184,013
|
|||
There
were 395,768 shares available for future issuance under the Employee Stock
Purchase Plan as of December 31, 2009.
37
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes
to Consolidated Financial Statements
The
following table summarizes employee stock-based compensation expense resulting
from stock options and employee stock purchase plan (in thousands):
|
Years Ended December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Included
in cost of revenue
|
$
|
48
|
$
|
74
|
||||
|
Included
in operating expense:
|
|
|
||||||
| Research and development | 22 | 32 | ||||||
| Sales and marketing | 11 | 22 | ||||||
| General and administrative | 31 | 33 | ||||||
| Total | 64 | 87 | ||||||
| Total stock-based compensation expense |
$
|
112
|
$
|
161
|
||||
3. 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 Company’s 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,
|
||||||||
|
2009
|
2008
|
|||||||
|
Numerator:
|
||||||||
|
Net income attributable to common stockholders
|
$
|
1,433
|
$
|
4,066
|
||||
|
Denominator:
|
||||||||
|
Shares
used in computing net income per share:
|
||||||||
|
Weighted average of common shares outstanding
|
||||||||
|
Basic
|
42,026
|
41,601
|
||||||
|
Diluted
|
42,279
|
41,657
|
||||||
|
Net
income per share attributable to common stockholders:
|
||||||||
|
Basic
|
$
|
0.03
|
$
|
0.10
|
||||
|
Diluted
|
$
|
0.03
|
$
|
0.10
|
||||
The
following outstanding options were excluded from the computation of diluted net
income per share (in thousands) as the effect would have been
anti-dilutive:
|
Years Ended December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Options
to purchase common stock and shares
|
||||||||
|
subject
to repurchase
|
253
|
56
|
||||||
38
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes
to Consolidated Financial Statements
4. Balance
Sheet Components (in thousands)
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
and cash equivalents:
|
||||||||
|
Cash
|
$
|
4,274
|
$
|
3,217
|
||||
|
Money market instruments and funds
|
4,251
|
8,968
|
||||||
|
$
|
8,525
|
$
|
12,185
|
|||||
|
Accounts
receivable, net:
|
||||||||
|
Accounts receivable
|
$
|
5,073
|
$
|
4,829
|
||||
|
Less: Allowance for doubtful accounts and sales returns
|
(121
|
)
|
(121
|
)
|
||||
|
$
|
4,952
|
$
|
4,708
|
|||||
|
Allowance
for doubtful accounts and sales returns:
|
||||||||
|
Balance at beginning of year
|
$
|
121
|
$
|
163
|
||||
|
Utilized
|
-
|
|
(42
|
)
|
||||
|
Balance
at end of year
|
$
|
121
|
$
|
121
|
||||
|
Inventories:
|
||||||||
|
Finished goods
|
$
|
1,595
|
$
|
1,880
|
||||
|
Work-in-process
|
1,721
|
1,393
|
||||||
|
Raw materials
|
1,668
|
2,341
|
||||||
|
$
|
4,984
|
$
|
5,614
|
|||||
|
Accrued
expenses:
|
||||||||
|
Compensation
costs
|
$
|
2,135
|
$
|
1,983
|
||||
|
Professional fees
|
123
|
111
|
||||||
|
Outside commission
|
197
|
209
|
||||||
|
Royalties
|
40
|
43
|
||||||
|
ESPP
|
91
|
94
|
||||||
|
Deferred rent
|
34
|
89
|
||||||
|
Warranty
|
45
|
42
|
||||||
|
Operating related (Taiwan and China)
|
200
|
445
|
||||||
|
Income tax
|
(29
|
) |
101
|
|||||
| Dividend payable |
849
|
- | ||||||
|
Others
|
137
|
120
|
||||||
|
$
|
3,822
|
$
|
3,237
|
|||||
|
Other
long-term liabilities:
|
||||||||
|
Accrued
pension liability (Taiwan)
|
$
|
463
|
$
|
433
|
||||
|
Other liabilities
|
45
|
45
|
||||||
|
$
|
508
|
$
|
478
|
|||||
|
Accumulated
other comprehensive income:
|
||||||||
|
Cumulative translation adjustments
|
$
|
562
|
$
|
611
|
||||
|
Unrealized gain on short-term investments
|
-
|
1
|
||||||
|
$
|
562
|
$
|
612
|
|||||
39
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes
to Consolidated Financial Statements
5.
Property and Equipment, Net
|
December
31,
|
||||||||
|
(in
thousands)
|
2009
|
2008
|
||||||
|
Machinery
and equipment
|
$
|
9,574
|
$
|
9,778
|
||||
|
Furniture
and fixtures
|
524
|
523
|
||||||
|
Leasehold
improvements
|
1,000
|
967
|
||||||
|
Building
and equipment prepayments
|
1,240
|
928
|
||||||
|
$
|
12,338
|
$
|
12,196
|
|||||
|
Less:
Accumulated depreciation
|
(7,904
|
)
|
(7,543
|
)
|
||||
|
Total
property and equipment, net
|
$
|
4,434
|
$
|
4,653
|
||||
6. Income Taxes
The
components of income before income taxes are as follows (in
thousands):
|
Years Ended December
31,
|
||||||||
|
(in
thousands)
|
2009
|
2008
|
||||||
|
Income
subject to domestic income taxes only
|
$
|
743
|
$
|
2,774
|
||||
|
Income
subject to foreign income taxes only
|
774
|
1,491
|
||||||
| Total |
$
|
1,517
|
$
|
4,265
|
||||
The following is a reconciliation of the effective tax rates and the United States statutory federal income tax rate:
|
Years Ended December
31,
|
|||||||||
|
2009
|
2008
|
||||||||
|
Statutory
federal income tax rate
|
(34.0
|
)%
|
(34.0
|
)%
|
|||||
|
State
income tax
|
(5.9
|
)
|
(5.9
|
)
|
|||||
|
Stock
compensation
|
(2.9
|
)
|
(1.2
|
)
|
|||||
|
Net
operating loss carryforward
|
38.6
|
34.5
|
|||||||
|
Minimum
tax credit
|
(4.0
|
) |
0.3
|
||||||
|
Research
and development credits
|
0.5
|
0.2
|
|||||||
|
Manufacturers
investment credits
|
1.6
|
2.3
|
|||||||
|
Valuation
allowance
|
(0.5
|
) |
1.9
|
||||||
|
Other
taxes
|
1.1
|
|
(2.8
|
)
|
|||||
|
Effective
tax rate
|
(5.5)
|
%
|
(4.7
|
)%
|
|||||
Deferred
tax assets consisted of the following (in thousands):
40
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes
to Consolidated Financial Statements
|
December
31,
|
|||||||||
|
|
2009
|
2008
|
|||||||
|
Deferred
tax assets:
|
|||||||||
|
Net operating loss carryforwards
|
$
|
13,394
|
$
|
13,982
|
|||||
|
Credit carryforwards
|
2,251
|
2,297
|
|||||||
|
Depreciation
|
4
|
5
|
|||||||
|
Stock compensation
|
370
|
326
|
|||||||
|
Accruals and allowances
|
706
|
705
|
|||||||
| Total |
16,725
|
17,315
|
|||||||
|
Less:
valuation allowances
|
(16,725)
|
(17,315)
|
|||||||
|
Net
deferred tax assets
|
$
|
-
|
$
|
-
|
|||||
|
December
31,
|
|||||||||
|
2009
|
2008
|
||||||||
|
Valuation
allowances on deferred tax assets:
|
|||||||||
|
Balance at beginning of year
|
$
|
17,315
|
$
|
18,210
|
|||||
|
Addition
|
-
|
-
|
|||||||
|
Utilized
|
(590)
|
(895)
|
|||||||
|
Balance
at end of year
|
$
|
16,725
|
$
|
17,315
|
|||||
Based
upon the weight of available evidence, which includes the Company’s historical
operating performance and the accumulated deficit, the Company provided a full
valuation allowance against the net deferred tax assets.
As of
December 31, 2009, the Company had net operating loss carryforwards of
approximately $35.1 million for federal and $20.4 million for state tax
purposes. If not utilized, these carryforwards will begin to expire
in 2022 for federal and in 2014 for state purposes.
As of
December 31, 2009, the Company had research credit carryforwards of
approximately $1.2 million and $0.9 million for federal and state income tax
purposes, respectively. If not utilized, the federal carryforward
will expire in various amounts beginning in 2019. The California tax
credit can be carried forward indefinitely.
Internal
Revenue Code Section 382 limits the use of net operating loss and tax credit
carryforwards in certain 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.
7. 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
investments, long-term investment 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.
41
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes
to Consolidated Financial Statements
At
December 31, 2009, three customers accounted for 16.0%, 15.6% and 11.7% of the
Company’s accounts receivable, respectively. At December 31, 2008, two customers
accounted for 23.6% and 13.2% of the Company’s accounts receivable,
respectively.
Two
customers accounted for 15.1% and 14.9% of revenues in the year ended December
31, 2009, respectively. One customer accounted for 15.7% of revenues
in the year ended December 31, 2008. Certain components used in
manufacturing the Company’s products have relatively few alternative sources of
supply, and establishing additional or replacement suppliers for such components
cannot be accomplished quickly.
8. Geographic Segment
Information
The
Company operates in a single industry segment. This industry segment
is characterized by rapid technological change and significant
competition.
The
following is a summary of the Company’s revenues generated by geographic
segments, revenues generated by product lines and identifiable assets located in
these segments (in thousands):
|
Years Ended December
31,
|
|||||||||
|
2009
|
2008
|
||||||||
|
Revenue
|
|||||||||
|
North America
|
$
|
14,721
|
$
|
21,579
|
|||||
|
Europe
|
7,085
|
5,882
|
|||||||
|
Asia
|
8,028
|
11,293
|
|||||||
| Total |
$
|
29,834
|
$
|
38,754
|
|||||
|
Years Ended December
31,
|
|||||||||
|
2009
|
2008
|
||||||||
|
Revenue
|
|||||||||
|
Connectivity Products
|
$
|
18,658
|
$
|
24,455
|
|||||
|
Optical Passive Products
|
11,176
|
14,299
|
|||||||
| Total |
$
|
29,834
|
$
|
38,754
|
|||||
|
December
31,
|
|||||||||
|
2009
|
2008
|
||||||||
|
Property
and Equipment
|
|||||||||
|
United
States
|
$
|
93
|
$
|
133
|
|||||
|
Taiwan
|
2,321
|
2,793
|
|||||||
|
China
|
2,020
|
1,727
|
|||||||
| Total |
$
|
4,434
|
$
|
4,653
|
|||||
9. 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, 2009.
42
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes
to Consolidated Financial Statements
Indemnification and Product
Warranty: The Company indemnifies certain customers, suppliers
and subcontractors for attorney fees and damages and costs awarded against these
parties in certain circumstances in which products are alleged to infringe third
party intellectual property rights, including patents, trade secrets, trademarks
or copyrights. In all cases, there are limits on and exceptions to
the potential liability for indemnification relating to intellectual property
infringement claims. The Company cannot estimate the amount of
potential future payments, if any, that might be required to make as a result of
these agreements. As of December 31, 2009, 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.
Operating
Leases: The Company leases certain office space under
long-term operating leases expiring at various dates through
2014. Total rent expense under these operating leases was
approximately $0.8 million and $0.9 million for the years ended December 31,
2009 and 2008, respectively.
Total
future minimum lease payments under operating leases as of December 31,
2009 are summarized below (in thousands):
|
Years
ending December 31,
|
|||||
|
2010
|
658
|
||||
|
2011
|
184
|
||||
|
2012
|
166
|
||||
|
2013
|
165
|
||||
| 2014 | 124 | ||||
|
Total
|
$
|
1,297
|
|||
Letter of
Credit: The Company had a letter of credit of $0.4 million
which expired on April 12, 2009.
10. Bank
Loan
In
November 2004, the Company entered into a ten-year loan of $0.5 million in
Taiwan with an interest rate of 2.3% for the first two years and 3.6% for the
following years. In November 2006, the Company entered into a
seven-year loan of $0.2 million in Taiwan with an interest rate of
2.8%. Both loans are secured by the Company’s building in
Taiwan. The net book value of the building was $0.5 million as of
December 31, 2009.
In April
2005, the Company entered into a five-year equipment loan of $0.2 million in
Taiwan with an interest rate of 2.9% for the first year and 3.7% for the
following years. In September 2007, the Company entered into a
three-year equipment loan of $0.04 million and a five-year equipment loan of
$0.1 million with an interest rate of 3.68% for the first year for both
loans.
43
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes
to Consolidated Financial Statements
Payments
due under bank loans as of December 31, 2009 are as follows (in
thousands):
|
Years
ending December 31,
|
||||||
|
2010
|
$
|
122
|
||||
|
2011
|
100
|
|||||
|
2012
|
94
|
|||||
|
2013
|
74
|
|||||
|
2014
and after
|
48
|
|||||
|
Total
payment
|
438
|
|||||
|
Less:
Amounts representing interest
|
(19
|
)
|
|
|||
|
Present
value of net remaining payments
|
419
|
|||||
|
Less:
current portion
|
(114
|
)
|
|
|||
|
Long-term
portion
|
$
|
305
|
||||
11. Related
Party Transactions
As of
March 5, 2010, based on information filed with the SEC, Foxconn Holding Limited
was a holder of 18.9% of the Company’s common stock. In the normal
course of business, the Company sells products to and purchases raw materials
from Hon Hai Precision Company Limited, who is the parent company of Foxconn
Holding Limited. These transactions were made at prices and terms
consistent with those of unrelated third parties. Sales of products
to Hon Hai Precision Industry Company Limited were $0.01 and $1.1 million in the
years ended December 31, 2009 and 2008, respectively. Purchases of
raw materials from Hon Hai Precision Company Limited were $2.0 million and $3.9
million in the years ended December 31, 2009 and 2008
respectively. Amounts due from Hon Hai Precision Company Limited were
$0 and $0.01 million at December 31, 2009 and 2008,
respectively. Amounts due to Hon Hai Precision Company Limited were
$0.7 million and $0.3 million at December 31, 2009 and 2008,
respectively.
12.
Fair Value of Financial instruments
Effective
January 1, 2008, the Company adopted ASC 820 which provides a definition of
fair value, establishes a hierarchy for measuring fair value under generally
accepted accounting principles, and requires certain disclosures about fair
values used in the financial statements. ASC 820 does not extend the
use of fair value beyond what is currently required by other pronouncements, and
it does not pertain to stock-based compensation under ASC 718, Share-Based Payments or to
leases under ASC 840, Accounting for
Leases.
In
February 2008, FASB Staff Position ASC 820 was issued. This FSP
provides a one year deferral of the effective date of ASC 820 for non-financial
assets and non-financial liabilities, except those that are recognized or
disclosed in the financial statements at fair value at least
annually. Therefore, the Company has adopted the provisions of ASC
820 with respect to financial assets and liabilities only.
ASC 820
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. Valuation techniques
used to measure fair value under ASC 820 must maximize the use of observable
inputs and minimize the use of unobservable inputs. The standard
describes a fair value hierarchy based on three levels of inputs, of which the
first two are considered observable and the last unobservable, that may be used
to measure fair value, which are the following:
|
·
|
Level
1 – Quoted prices in active markets for identical assets or
liabilities.
|
44
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes
to Consolidated Financial Statements
|
·
|
Level
2 – Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
·
|
Level
3 — Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities.
|
The
Company measures the following financial assets at fair value on a recurring
basis. The fair value of these financial assets at December 31, 2009
(in thousands) was as follows:
|
Fair
Value Measurements at
Reporting
Date Using
|
||||||||||||
|
Balance
at
December 31,
2009
|
Quoted
Prices
in
Acive
Markets
for
Identical
Assets
(Level
1)
|
Significant
Other
Obsrvable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
|||||||||
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|||||
|
Money market mutual funds
|
$ |
4,251
|
$ |
4,251
|
$ |
-
|
$ |
-
|
||||
|
Marketable
Securities
|
|
|
|
|
||||||||
|
Time deposits
|
11,519
|
11,519
|
-
|
-
|
||||||||
| Corporate bonds | 6,127 | 6,127 | - | - | ||||||||
| Auction rate securities | 14,322 | - | 14,322 | |||||||||
| Auction rate securities - Rights | 1,778 | - | - | 1,778 | ||||||||
|
Total
|
$
|
37,997
|
$
|
21,897
|
$
|
-
|
$
|
16,100
|
||||
As of
December 31, 2009, the Company held investments in corporate bonds, certificates
of deposit, money market securities, and auction rate securities (“ARS”). The
Company’s cash and cash equivalents are comprised of investments with original
maturities of 90 days or less from the date of purchase and these investment
instruments are classified within Level 1 of the fair value hierarchy because
they are valued based on quoted market prices in active markets. The
Company’s short-term investments are comprised of corporate bonds, certificates
of deposit and ARS with original maturities of 91 days or more from the date of
purchase. These investment instruments are classified within Level 1
of the fair value hierarchy because they are valued based on quoted market
prices in active markets with the exception of ARS which are classified as Level
3.
As of
December 31, 2009, the Company held investments in ARS that are required to be
measured at fair value on a recurring basis. Since February 2008, all
ARS investments in the Company’s portfolio have experienced failed auctions. Due
to the lack of liquidity, the Company reclassified its ARS portfolio from
short-term available-for-sale to long-term available-for-sale investment
securities as of March 31, 2008. The Company’s ARS investments
have been classified within Level 3 as their valuation requires substantial
judgment and estimation of factors that are not currently observable in the
market due to the lack of trading. This valuation may be revised in future
periods as market conditions evolve. The Company estimated the fair
value of its ARS based on estimates contained in broker statements that were
compiled utilizing Level 3 inputs including, but not limited to factors such as
tax status, credit quality, duration, insurance wraps and the portfolio
composition of The Federal Family Education Loan Program loans.
As of
December 31, 2009, the Pennsylvania Higher Education Assistance Agency completed
seven partial calls of the ARS at par and the Company received settlement of
$200,000 in total. On June 30, 2009, the Company reclassified the ARS
and the related Right (as defined below) from long-term investments to
short-term investments and current other assets.
45
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes
to Consolidated Financial Statements
In
November 2008, the Company accepted an offer from UBS, the Company’s investment
advisor, granting the Company the right to require UBS to purchase the Company’s
ARS at their par value of $16.3 million anytime during the two-year period
beginning June 30, 2010 (“Right”). UBS has also established a program
which allows the Company to establish a no net cost line of credit and borrow up
to 75 percent of the market value of the ARS at interest rates equal to the
return the Company would receive on the underlying ARS
securities. Management reviewed the UBS offer, credit rating, and
financial stability and believed that UBS will purchase the Company’s ARS at par
value beginning on June 30, 2010. The Right represents an instrument
by which the Company may require UBS to repurchase its ARS at par value. The
Company has valued the Right as the difference between the par value and the
fair value of its ARS as adjusted for any bearer risk associated with UBS’
financial ability to repurchase the Company’s ARS beginning on June 30,
2010. Upon election for fair value option for the Right under ASC
825-10, the Company will continue to measure the value of the Right at the
difference between par value and fair value in subsequent periods.
In
conjunction with the adoption of ASC 825, the Company elected the fair value
option for its ARS and the Right. Since the Right is directly related
to the Company’s ARS investments, the Company elected the fair value option for
these financial assets and they have been classified within Level 3 as ARS
investments. In
conjunction with the adoption of ASC 825, the Company
elected a one-time transfer of ARS subject to settlements from
available-for-sale to the trading category. As of December 31, 2009, the Company
has recognized the Right as other current assets on the balance sheet and
recorded a gain of $0.8 million as other income.
The
following table provides a reconciliation of the beginning and ending balance
for the assets measured at fair value using significant unobservable inputs
(level 3) (in thousands):
|
Significant
Unobservable
Inputs
(Level
3)
|
||||
|
Fair
value December 31, 2008
|
$
|
16,300
|
||
|
Sales
of short-term investments
|
(200)
|
|||
|
Gain
on short-term investments
|
804
|
|||
|
Loss
on other assets
|
(804)
|
|||
|
Fair
value December 31, 2009
|
$ |
16,100
|
||
Item
9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
None
Item
9A (T). 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.
46
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes
to Consolidated Financial Statements
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.
Management’s 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 Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
As
part of this evaluation, we analyzed and tested our processes for control
effectiveness (controls which reasonably assure accurate and complete financial
information in accordance with GAAP), prevention of acts of fraud and
transactions being approved by management. When necessary, we confirmed that
appropriate corrective action (including process improvements) had been
undertaken.
Based
on the evaluation as of the end of the fiscal year 2009, the Company’s Chief
Executive Officer and Acting Chief Financial Officer have concluded that our
internal controls over financial reporting were effective.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this annual report.
Item
9B. Other Information
Not
Applicable.
47
PART
III
Item
10. Directors, Executive Officers and Corporate Governance
The
information required by this item is incorporated by reference from the
information under the caption “Election of Directors” contained in the Company’s
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the solicitation of proxies for the Company’s 2010 Annual
Meeting of Stockholders to be held on May 14, 2010 (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
Company’s Board of Directors adopted a Code of Ethics for all of its directors
and officers on March 24, 2004. The Company’s Code of Ethics is
available on the Company’s website at http://www.afop.com. To date, there have
been no waivers under the Company’s Code of Ethics. The Company will post any
waivers, if and when granted, under its Code of Ethics, on the Company’s 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 — Director Compensation,”
and “Executive Compensation,” contained in the Proxy Statement.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
information required by this item is incorporated by reference from the
information under the caption “Security Ownership of Certain Beneficial Owners
and Management” contained in the Proxy Statement.
Equity
Compensation Plan Information
Set forth
in the table below is certain information regarding the Company’s equity
compensation plans as of December 31, 2009:
|
Plan category
|
Number
of securities to
be
issued upon exercise
of
outstanding options,
warrants
and rights
(a)
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
||||
|
Equity
compensation plans approved by security holders
|
4,863,333
(1)
|
$
1.40
|
4,449,009 (2)
|
||||
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
||||
|
Total
|
4,863,333
|
$
1.40
|
4,449,009
|
||||
48
(1)
Includes shares to be issued upon exercise of outstanding options granted under
the 1997 Stock Plan and the 2000 Stock Incentive Plan. Options to
purchase shares of the Company’s Common Stock are no longer granted under the
1997 Stock Plan.
(2)
Includes:
(i)
4,053,241 shares reserved for issuance under the Company’s 2000 Stock Incentive
Plan. The number of shares reserved for issuance under the Company’s
2000 Stock Incentive Plan will be increased on the first day of the Company’s
fiscal year by the lesser of 1,700,000 shares, 5% of the fully diluted
outstanding shares of the Company’s common stock on that date or a lesser amount
determined by the Company’s Board of Directors. There was no increase
on January 1, 2008 because the Board determined there were enough shares
available for issuance in 2008 pursuant to the Plan. Stock options, restricted
stock, restricted stock units or stock appreciation rights may be awarded under
the 2000 Stock Incentive Plan.
(ii)
395,768 shares reserved for issuance under the Company’s 2000 Employee Stock
Purchase Plan (the “ESPP”). The number of shares reserved for
issuance under the ESPP increases on the first day of the Company’s fiscal year
by an amount as may be determined by the Board of Directors, or, if less, the
lesser of 1,000,000 shares or 1.0% of the outstanding common stock on that
date. The ESPP permits eligible employees to contribute up to 20% of
cash compensation toward the semi-annual purchase of the Company’s 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 “Certain Relationships and Related Party
Transactions”, and “Election of Directors – Director Independence” 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 the Appointment of
Independent Registered Public Accounting Firm—Principal Accountant Fees and
Services” and “Pre-Approval Policies and Procedures” in the Proxy
Statement.
PART
IV
Item 15. Exhibits and
Financial Statement Schedules
(a) The
following documents are filed as part of this report:
(1) Financial
Statements
Reference
is made to the index to Consolidated Financial Statements under Item 8 of Part
II hereof.
(2) Financial
Statement Schedules
Schedules
have been omitted because they are not applicable or the information required to
be set forth therein is included in the Consolidated Financial Statements or
Notes thereto.
(3) Exhibits
See the List of Exhibits, which follows the signature pages of this report and
is incorporated herein by reference.
49
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Date:
March 19, 2010
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
Peter C.
Chang
|
President,
Chief Executive Officer
(Principal
Executive Officer) and Chairman
|
March
19, 2010
|
|
/s/ Anita K.
Ho
Anita
K. Ho
|
Acting
Chief Financial Officer
(Principal
Financial and Accounting Officer)
|
March
19, 2010
|
|
/s/ Richard
Black
Richard
Black
|
Director
|
March
19, 2010
|
|
/s/
Gwong-Yih
Lee
Gwong-Yih
Lee
|
Director
|
March
19, 2010
|
|
/s/ Ray
Sun
Ray
Sun
|
Director
|
March
19, 2010
|
|
/s/
James C.
Yeh
James
C. Yeh
|
Director
|
March
19, 2010
|
50
EXHIBIT
INDEX
|
Exhibit
Number
|
Description of Document
|
|
3(i).1
|
Amended
and Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3(i).3 to the Company’s Registration Statement on
Form S-1 (File No. 333-45482)).
|
|
3(i).2
|
Certificate
of Designation of Series A Participating Preferred Stock (incorporated by
reference to Exhibit 3(i).2 to Company’s 10-K for year ended December 31,
2002).
|
|
3(ii).1
|
Restated
Bylaws of the Registrant (incorporated by reference to
Exhibit 3(ii).3 to the Company’s 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 Company’s 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
(incorporated by reference to Exhibit 4.2 to the Company’s
Registration Statement on Form S-1 (File
No. 333-45482)).
|
|
4.3
|
Rights
Agreement dated as of May 29, 2001 between the Company and Mellon Investor
Services, LLC (incorporated by reference to Exhibit 4.1 to the Company’s
Form 8-A (File No. 0-31857)).
|
|
10.1#
|
1997
Stock Plan and form of agreements thereunder (incorporated by reference to
Exhibit 10.1 to the Company’s Registration Statement on Form S-1
(File No. 333-45482)).
|
|
10.2#
|
Form
of Indemnification Agreement between the Company and its officers and
directors (incorporated by reference to Exhibit 10.2 to the Company’s
Registration Statement on Form S-1 (File
No. 333-45482)).
|
|
10.3#
|
Alliance
Fiber Optic Products, Inc. 2000 Stock Incentive Plan (incorporated by
reference to Exhibit 10.5 to Amendment No. 3 to the Company’s
Registration Statement on Form S-1 (File
No. 333-45482)).
|
|
10.4#
|
Alliance
Fiber Optic Products, Inc. Amended and Restated 2000 Employee Stock
Purchase Plan (incorporated by reference to Exhibit 10.6 to the Company’s
Quarterly Report on Form 10-QSB for the period ended March 31,
2004).
|
|
10.5#
|
Alliance
Fiber Optic Products, Inc. 1997 Stock Plan Stock Option Agreement dated
May 2, 2000 between Peter C. Chang and the Company (incorporated
by reference to Exhibit 10.7 to Amendment No. 1 to the Company’s
Registration Statement on Form S-1 (File
No. 333-45482)).
|
|
10.6#
|
Lease
Agreement dated April 5, 2004 by and between Moffett Office Park Investors
LLC and Alliance Fiber Optic Products, Inc. (incorporated by reference to
Exhibit 10.13 to Company’s Quarterly Report on Form 10-QSB for period
ended June 30, 2004).
|
|
10.7#
|
Form
of 2000 Stock Incentive Plan Option Agreement
|
|
21.1
|
Subsidiaries
of the Company (incorporated by reference to Exhibit 21.1 to the
Company’s Annual Report on Form 10-K for the year ended December 31,
2000).
|
|
23.1
|
Consent
of Stonefield Josephson, Inc., Independent Registered Public Accounting
Firm.
|
|
24.1
|
Power
of Attorney (see page 55 of this Form 10-K)
|
|
31.1
|
Rule
13a–14(a) certification of Chief Executive Officer.
|
|
31.2
|
Rule
13a–14(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).
|
_________________
** In
accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the
certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to
accompany this Form 10-K and will not be deemed “filed” for purpose of Section
18 of the Exchange Act. Such certifications will not be deemed to be
incorporated by reference into any filing under the Securities Act or the
Exchange Act, except to the extent that the registrant specifically incorporates
it by reference.
#
Indicates management contract or compensatory plan or arrangement.
51
Exhibit 23.1
CONSENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
We hereby
consent to the incorporation by reference in the Registration Statements on Form
S-8 (Nos. 333-141656, 333-158316, 333-50998, 333-50926, 333-54864, 333-54874,
333-119710, 333-119711, 333-123648, 333-123649 and 333-132801) of Alliance Fiber
Optic Products, Inc. of our report dated March 18, 2010, with
respect to the consolidated balance sheets of Alliance Fiber Optic Products,
Inc. as of December 31, 2009 and 2008, and the related consolidated statements
of operations, stockholder’s equity, and cash flows for each of the years in the
two-year period ended December 31, 2009.
/s/Stonefield
Josephson, Inc.
San
Francisco, California
March 18,
2010
52
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, 2009
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
registrant’s 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 registrant’s 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 registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting.
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial
reporting.
Date:
March 19, 2010
By /s/Peter C.
Chang
Peter C.
Chang
Chief
Executive Officer
(Principal
Executive Officer)
53
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, 2009
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
registrant’s 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 registrant’s 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 registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting.
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial
reporting.
Date:
March 19, 2010
By /s/Anita K.
Ho
Anita K.
Ho
Acting
Chief Financial Officer
(Principal
Accounting Officer)
54
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, 2009 (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 19, 2010
55
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, 2009 (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 19, 2010
56