Notes to Consolidated Financial
Statements
1. The Company and summary of
significant accounting policies
The Company
Alliance Fiber
Optic Products, Inc. (the Company) was incorporated in California on December
12, 1995 and reincorporated in Delaware on October 19, 2000. The Company
designs, manufactures and markets fiber optic components for communications
equipment manufacturers. The Companys headquarters are located in Sunnyvale,
California, and it has operations in Taiwan and China.
Use of estimates
The preparation of consolidated 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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Significant estimates involve those required in the assessment of the allowance
for sales returns, doubtful accounts and/or potential excess obsolete inventory.
Actual results could differ from those estimates.
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany accounts and transactions have
been eliminated in consolidation.
Foreign currency
translation
The Companys operations through foreign subsidiaries use the local
currency as their functional currency. All assets and liabilities of the
subsidiaries are translated at rates of exchange as of the balance sheet date.
Revenues and expenses are translated at the average rate of exchange for the
period. Gains and losses resulting from foreign currency translation are
recorded as a separate component of other comprehensive income in stockholders
equity. Foreign currency transaction gains and losses are recorded in interest
and other income and have not been material.
Cash, cash equivalents, short-term
and long-term investments
The Company considers all highly liquid instruments with a maturity of
three months or less when purchased to be cash equivalents. Cash and cash
equivalents consist of cash deposited in money market, certificate of deposit,
and checking accounts.
The Company accounts for its investments under the provisions of
Accounting Standards Codification (ASC) 320 Investments - Debt and Equity
Securities. Investments in highly liquid financial instruments with remaining
maturities greater than three months and maturities of less than one year are
classified as short-term investments. Financial instruments with remaining
maturities greater than one year are classified as long-term investments.
Investments in related party companies are included in Other Assets in the
Consolidated Balance Sheets. All investments are classified as
available-for-sale and are reported at fair value using the specific
identification method with net unrealized gain/(loss) reported, net of tax as
other comprehensive gain/(loss) in stockholders equity. The fair value of the
Companys available-for-sale securities are based on quoted market prices or
other methodologies for those investments with no quoted market prices at the
balance sheet dates.
The Companys financial instruments also include accounts receivable,
accounts payable and debts, and are carried at cost, which approximates the fair
value of these instruments.
32
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
Fair value of financial instruments
In September 2006, the Financial Accounting Standards Board (the FASB)
issued ASC 820 Fair Value Measurements. ASC 820 defines fair value,
establishes a framework for measuring fair value, and enhances fair value
measurement disclosure. In October 2008, the FASB issued Financial Staff
Position ASC 820 Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active. ASC 820 clarifies the application of ASC
820 in a market that is not active, and provides guidance on the key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. Effective January 1, 2008, the
Company adopted the measurement and disclosure requirements related to financial
assets and financial liabilities.
ASC 820 delayed the effective date for all nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually),
until the beginning of fiscal 2010.
Allowance for doubtful accounts
The Company performs periodic credit evaluations of its customers
financial condition. The Company maintains an allowance for doubtful accounts
for estimated losses resulting from the inability or unwillingness of customers
to make required payments. When the Company becomes aware that a specific
customer is unable to meet its financial obligations, for example, as a result
of bankruptcy or deterioration in the customers operating results or financial
position, the Company records a specific allowance to reflect the level of
credit risk in the customers outstanding receivable balance. In addition, the
Company records additional allowances based on historical sales returns. The
Company is not able to predict changes in the financial condition of customers,
and if circumstances related to customers deteriorate, estimates of the
recoverability of trade receivables could be materially affected and the Company
may be required to record additional allowances. Alternatively, if the Company
provides more allowances than the Company needs, the Company may reverse a
portion of such provisions in future periods based on actual collection
experience.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined using standard cost, which approximates actual cost on a first-in,
first-out basis. Market value is determined as the lower of replacement cost or
net realizable value. Provisions are made for excess and obsolete inventory
based on historical usage and managements estimates of future demand. Inventory
reserves, once established, are only reversed upon sale or disposition of
related inventory.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation
and impairment charges. Depreciation is computed using the straight-line method
using estimated useful lives of two to ten 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 $1.6 million in 2012 and $1.5 million in 2011.
33
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
Impairment of Long-lived Assets
The Company reviews its long-lived assets for impairment whenever events
or changes in business circumstances indicate that the carrying amount of assets
may not be fully recoverable or that the useful lives of these assets are no
longer appropriate. Each impairment test is based on a comparison of the
undiscounted future cash flows to the recorded value of the asset. If an
impairment is indicated, the asset is written down to its estimated fair value
based on quoted fair market values.
Revenue recognition
The Company recognizes revenue upon shipment of its products to its
customers, provided that the Company has received a purchase order, the price is
fixed, collection of the resulting receivable is reasonably assured and transfer
of title and risk of loss has occurred. Subsequent to the sale of its products,
the Company has no obligation to provide any modification or customization
upgrades, enhancements or post contract customer support.
Allowances are provided for estimated returns. A provision for estimated
sales return allowances is recorded at the time revenue is recognized based on
historical returns, current economic trends and changes in customer demand. Such
allowances are adjusted periodically to reflect actual and anticipated
experience. Such adjustments, which are recorded against revenue in the period,
could be material. The Company accrued $0.02 million for warranty reserves as of
December 31, 2012 and 2011, respectively.
Shipping and handling expenses
Shipping and handling expenses are included in cost of revenue.
Research and development expenses
Research and development costs are charged to expense as incurred.
Advertising expenses
Advertising costs are charged to expense as incurred and have not been
material.
Sales taxes
The Company accounts for taxes charged to its customers and collected on
behalf of taxing authorities on a net basis.
Income taxes
The Company accounts for income taxes in accordance with ASC 740 which
requires that the Company recognize deferred tax liabilities and assets based on
the differences between the financial statement carrying amounts and the tax
bases of assets and liabilities, using enacted tax rates in effect in the years
the differences are expected to reverse. Deferred income tax benefit (expense)
results from the change in net deferred tax assets or deferred tax liabilities.
A valuation allowance is recorded when it is more likely than not that some or
all deferred tax assets will not be realized.
The Company applies ASC 740 which utilizes a two-step approach wherein a
tax benefit is recognized if a position is more-likely-than-not to be sustained.
The amount of the benefit is then measured to be the highest tax benefit that is
greater than 50% likely to be realized. The Company has elected to include
interest and penalties related to its tax contingencies in income tax expense.
The Company files a U.S. federal tax return and a return with the State of
California. The Company has determined that its major tax jurisdictions are the
United States and California. The tax years of 2008 through 2012 remain open and
subject to examination by the appropriate governmental agencies in the United
States or California.
34
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
Stock-based compensation
The Company estimates the fair value of the share-based payment awards on
the date of grant using an option pricing model. The value of awards that are
ultimately expected to vest is recognized as an expense over the requisite
employee service period.
Comprehensive income
Comprehensive income is defined as the change in equity of a company from
transactions and other events and circumstances excluding transactions resulting
from investments from owners and distributions to owners. 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 February 2013, the FASB issued guidance requiring presentation of
amounts reclassified from each component of accumulated other comprehensive
income. In addition, disclosure is required of the effects of significant
reclassifications on income statement line items either on the face of the
statement where net income is presented or as a separate disclosure in the notes
to the financial statements. For public entities, this guidance is effective
prospectively for reporting periods beginning after December 15, 2012. The
Company does not expect the adoption of this guidance will have a material
impact on its consolidated financial statements.
In January 2012, the Company adopted Accounting Standards Update (ASU)
2011-12
Comprehensive Income
(topic 220) which required additional disclosures for
comprehensive income. As permitted under this standard, the Company has elected
to present comprehensive income in two separate but consecutive financial
statements, consisting of a statement of income followed by a separate statement
of comprehensive income. This standard is required to be applied retrospectively
beginning January 1, 2012, except for certain provisions for which adoption was
delayed.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (ASU
2011-04), which amended ASC 820, Fair Value Measurements, providing a
consistent definition and measurement of fair value, as well as similar
disclosure requirement between U.S. GAAP and International Financial Reporting
Standards. ASU 2011-04 changes certain fair value measurement principles,
clarifies the application of existing fair value measurement and expands the
disclosure requirements. ASU 2011-04 is effective for the Company beginning
January 1, 2012. The adoption of ASU 2011-04 did not have a material effect on
the Companys consolidated financial statements.
2. Stockholders Equity
Preferred Stock.
The Company is
authorized to issue 5,000,000 shares of preferred stock, none of which was
outstanding as of December 31, 2012. The Board of Directors may determine the
rights, preferences and privileges of any preferred stock issued in the future.
Common Stock.
On April 28, 2011,
the Company amended its Amended and Restated Certificate of Incorporation to
decrease the number of shares of common stock authorized for issuance from
80,000,000 to 20,000,000. On August 27, 2010, the Company effected a 1-for-5
reverse split of its outstanding common stock, pursuant to previously obtained
stockholder authorization. The number of authorized shares of common stock was
not changed. The reverse stock split reduced the Companys issued and
outstanding shares of common stock as of August 27, 2010 from approximately
42,928,188 shares to approximately 8,585,633 shares. All share and per share
numbers reflect the reverse split and were applied on a retroactive
basis.
35
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
Stock Repurchase Program.
On
November 30, 2011, the Company announced a program to repurchase up to $6.0
million worth of the Companys outstanding common stock. Repurchases under the
program may be made in open market and privately negotiated transactions in
compliance with Securities and Exchange Commission Rule 10b-18, subject to
market conditions, applicable legal requirements and other factors. The Company
is not required to repurchase any amount of common stock in any period and the
program may be modified or suspended at any time. The duration of the repurchase
program is open-ended. As of December 31, 2012, an aggregate of 542,873 shares
of common stock had been repurchased under the program.
Dividends.
On October 25, 2012,
the Company announced it had declared an annual cash dividend of twenty five
cents per share, and one-time special cash dividend of one dollar per share,
both of which were payable on December 11, 2012 to holders of record on November
30, 2012.
Stockholder Rights Plan.
On March
10, 2011, the Board of Directors entered into an Amended and Restated Rights
Agreement (the Restated Rights Plan), which amended and restated the original
rights agreement dated as of May 29, 2001 (the Original Agreement). In
connection with the adoption of the Original Agreement, one preferred stock
purchase right (a Right) was distributed for each outstanding share of common
stock. Since the occurrence of a one-for-five reverse split of the common stock
at the close of business on August 7, 2010, five Rights had been associated with
each outstanding share of common stock. The Restated Rights Plan restores the
initial one Right per share of common stock ratio of the Original Agreement, but
is also subject to adjustment as provided in the Restated Rights Plan. Rights
continue to be attached to all outstanding shares of common stock, and no
separate Rights certificates have been distributed.
Rights will separate from the common stock and a "Distribution Date" will
occur upon the earliest of the following: (i) a public announcement that a
person, entity or group of affiliated or associated persons and/or entities (an
"Acquiring Person") has acquired, or obtained the right to acquire, beneficial
ownership of fifteen percent (15%) or more of the outstanding shares of common
stock (other than (A) as a result of repurchases of stock by the Company or
certain inadvertent actions by institutional or certain other stockholders, (B)
the Company, any subsidiary of the Company or any employee benefit plan of the
Company or any subsidiary, (C) Foxconn Holding Limited (which owned in excess of
fifteen percent (15%) of the outstanding shares of common stock when the
Original Agreement was implemented), so long as such entity, together with its
affiliated or associated persons and/or entities, does not increase its
beneficial ownership by more than one percent (1%) of the outstanding shares of
common stock above the percentage held in May 2001 (or such lesser percentage as
may result following any transfer of securities after such date until Foxconn
beneficially owns less than fifteen percent (15%) of the outstanding shares of
common stock)) and (D) certain other instances set forth in the Restated Rights
Plan); or (ii) ten (10) business days (unless such date is extended by the Board
of Directors) following the commencement of a tender offer or exchange offer
which would result in any person, entity or group of affiliated or associated
persons and/or entities becoming an Acquiring Person (unless such tender offer
or exchange offer is a Permitted Offer as defined in the Restated Rights Plan).
As soon as practicable following the Distribution Date, separate certificates
evidencing the Rights ("Rights Certificates") will be mailed to holders of
record of the common stock as of the close of business on the Distribution Date,
and the separate Rights Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on the earliest of (i) May 29, 2021, (ii) consummation of a merger
transaction with a person, entity or group who (x) acquired common stock
pursuant to a Permitted Offer and (y) is offering in the merger the same price
per share and form of consideration paid in the Permitted Offer or (iii)
redemption or exchange of the Rights by the Company as described in the Amended
Rights Plan.
3. Stock-based Compensation
The Accounting Standards Codification (ASC) 718 requires companies to
record compensation expense for stock options measured at fair value, on the
date of grant, using an option-pricing model. The fair value of stock options
granted and stock purchased pursuant to the 2000 Employee Stock Purchased Plan
(ESPP) prior to June 30, 2010 was determined using the Binomial Lattice Model.
The Company adopted the Black-Scholes valuation model for stock options granted
and stock purchased pursuant to the ESPP after June 30, 2010. The Company
believes that the Black-Scholes model is more appropriate in determining fair
value of its stock-based compensation and does not differ materially from the
previous valuation model used.
36
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
At December 31, 2012, the Company had one stock-based compensation plan,
the 2000 Stock Incentive Plan, which is described below.
In November 2000, the Company adopted its 2000 Stock Incentive Plan under
which 300,000 shares of common stock were reserved for issuance to eligible
employees, directors and consultants upon exercise of stock options and stock
purchase rights. The number of shares reserved for issuance under the Companys
2000 Stock Incentive Plan may be increased on the first day of the Companys
fiscal year by the lesser of 340,000 shares, 5% of the fully diluted outstanding
shares of the Companys common stock on that date or a lesser amount determined
by the Companys Board of Directors. There was no increase on January 1, 2012,
because the Board determined there were enough shares available for issuance in
2012 pursuant to the Plan. Stock options, restricted stock, restricted stock
units (RSUs) or stock appreciation rights may be awarded under the 2000 Stock
Incentive Plan.
The plan was amended and restated in 2010 to, among other things, extend
the term under which awards may be granted under the plan until March 17, 2020,
eliminate a 10 million share ceiling on the aggregate number of shares of common
stock that may be issued under the plan, and to include certain qualifying
performance criteria and annual award limits so that awards granted under the
plan qualify as performance-based compensation" under the requirements of
Section 162(m) of the Internal Revenue Code of 1986, as amended.
Under the 2000 Stock Incentive Plan, participants may be granted RSUs,
representing an unfunded, unsecured right to receive common stock on the date
specified in the recipients award. The RSUs granted under the plan generally
vest over two years at a rate of 50 percent per year or five years at a rate of
20 percent per year. The Company recognizes compensation expense on a
straight-line basis over the applicable vesting term of the award.
During the year ended December 31, 2011, the Company granted 273,000 RSUs
with a total grant-date fair value of $2.5 million. The resulting compensation
expense recorded in the year ended December 31, 2012 was approximately $0.7
million. At December 31, 2012, there was $1.4 million of unrecognized
compensation cost related to RSUs, of which $0.1 million is expected to be
realized over one year and $1.3 million is expected to be realized over four
years.
Options granted under the 2000 Stock Incentive Plan generally vest over
four years and are exercisable for not more than ten years. However, most
options granted in the past four years have been fully vested at the time of
grant.
37
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
The following information relates to stock option activity for the year
ended December 31, 2012:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
Options
|
Shares
|
|
Price
|
|
Life
|
|
Value
|
Outstanding at December 31, 2011
|
824,280
|
|
|
$
|
7.26
|
|
|
|
|
|
Granted
|
143,000
|
|
|
|
8.51
|
|
|
|
|
|
Exercised
|
(206,600
|
)
|
|
|
5.63
|
|
|
|
|
|
Forfeited
|
(42,500
|
)
|
|
|
9.72
|
|
|
|
|
|
Outstanding at December 31, 2012
|
718,180
|
|
|
$
|
7.83
|
|
5.26 Years
|
|
$
|
3,008,583
|
Vested and
expected to vest at December 31, 2012
|
691,271
|
|
|
$
|
7.81
|
|
5.13
Years
|
|
$
|
2,907,815
|
Exercisable at December 31, 2012
|
489,110
|
|
|
$
|
7.59
|
|
3.61 Years
|
|
$
|
2,166,367
|
The aggregate intrinsic value in the table above represents the total
pre-tax intrinsic value (the difference between the closing stock price on the
last trading day of the fourth quarter of fiscal 2011 and 2012 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, 2012 and 2011. This amount changes based on the fair market value
of the Companys common stock. The total intrinsic value of options exercised
for the years ended December 31, 2012 and 2011 were $1.3 million and $0.2
million, respectively.
The dividend rate was 1.25% and zero for the years ended December 31,
2012 and 2011, respectively.
Cash received from option exercises during the year ended December 31,
2012 and 2011 was approximately $0.9 million and $0.4 million, 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, 2012 is
as follows:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
Range of
|
|
Number
|
|
Remaining
|
|
Average
|
|
Number
|
|
Average
|
Exercise
|
|
Outstanding
|
|
Contractual
|
|
Exercise
|
|
Exercisable
|
|
Exercise
|
Price
|
|
As of 12/31/12
|
|
Term
|
|
Price
|
|
As of 12/31/12
|
|
Price
|
$3.15 - $4.80
|
|
160,080
|
|
2.51
|
|
$
|
4.57
|
|
160,080
|
|
$
|
4.57
|
$7.75 - $7.80
|
|
131,900
|
|
3.80
|
|
$
|
7.78
|
|
85,700
|
|
$
|
7.80
|
$7.81 - $7.81
|
|
11,200
|
|
9.01
|
|
$
|
7.81
|
|
-
|
|
$
|
-
|
$7.95 - $7.95
|
|
147,500
|
|
7.56
|
|
$
|
7.95
|
|
68,998
|
|
$
|
7.95
|
$8.25 - $9.60
|
|
124,100
|
|
8.64
|
|
$
|
9.01
|
|
30,932
|
|
$
|
8.94
|
$10.10 - $12.05
|
|
143,400
|
|
4.10
|
|
$
|
10.37
|
|
143,400
|
|
$
|
10.37
|
|
|
718,180
|
|
5.26
|
|
$
|
7.83
|
|
489,110
|
|
$
|
7.59
|
38
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
Options
exercisable as of December 31, 2012 and 2011 were 489,110 and 676,461 at an
average exercise price of $7.59 and $7.09 per share, respectively.
There were 308,625 shares available for future issuance under the Plan as
of December 31, 2012.
Employee Stock Purchase Plan
In November 2000, the Company adopted its ESPP. The Company reserved
300,000 shares of common stock for issuance under the ESPP. The ESPP was amended
and restated in 2010. On April 29, 2011, the stockholders approved an increase
by 300,000 in the number of shares of common stock available for issuance. On
the first day of January of each year beginning January 1, 2001 through December
31, 2010, additional shares of common stock were reserved for issuance under the
ESPP as determined by the Board of Directors. The ESPP limited the annual
increase to the lesser of 1% of the Companys issued and outstanding common
stock or 200,000 shares. The ESPP provides eligible employees with the
opportunity to acquire shares of common stock at a price of 85% of the lower of
the fair market value of the common stock on the first day of the offering
period or the last day of the offering period, whichever is lower. The ESPP is
structured as a qualified employee stock purchase plan under Section 423 of the
Internal Revenue Code of 1986, as amended. However, the ESPP is not intended to
be a qualified pension, profit sharing or stock bonus plan under Section 401(a)
of the 1986 Code and is not subject to the provisions of the Employee Retirement
Security Act of 1974. The Board may amend, suspend, or terminate the Plan at any
time without notice. A total of 58,960 and 55,184 shares were issued under the
ESPP in 2012 and 2011, respectively.
There were 245,506 shares available for future issuance under the ESPP as
of December 31, 2012.
The
following information relates to the ESPP:
|
2012
|
|
2011
|
Weighted average fair
value per share of shares purchased
|
$
|
7.07
|
|
$
|
7.51
|
Total compensation expense for
ESPP
|
$
|
139,595
|
|
$
|
168,660
|
Total amount of cash
received from the purchase of stock through ESPP
|
$
|
416,741
|
|
$
|
414,465
|
Total intrinsic value of ESPP stock
purchased at December 31st
|
$
|
291,958
|
|
$
|
8,244
|
The following table summarizes employee stock-based compensation expense
resulting from stock options, RSUs, and the ESPP (in thousands):
|
Years Ended December 31,
|
|
2012
|
|
2011
|
Included in cost of
revenue
|
$
|
119
|
|
$
|
99
|
Included in operating
expenses:
|
|
|
|
|
|
Research and
development
|
|
125
|
|
|
75
|
Sales and marketing
|
|
255
|
|
|
177
|
General and
administrative
|
|
567
|
|
|
411
|
Total
|
|
947
|
|
|
663
|
Total stock-based
compensation expense
|
$
|
1,066
|
|
$
|
762
|
4. Net Income per
Share
Basic net
income per share is computed by dividing net income for the period by the
weighted average number of shares of common stock outstanding during the period.
Diluted net income per share is computed by dividing the net income for the
period by the combination of dilutive common share equivalents, comprised of
shares issuable under the Companys stock-based
compensation plans, and the weighted average number of common shares outstanding
during the period. There were no incremental dilutive common share equivalents
in the periods presented.
39
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
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,
|
|
2012
|
|
2011
|
Numerator:
|
|
|
|
|
|
Net income attributable to common stockholders
|
$
|
9,641
|
|
$
|
4,431
|
|
Denominator:
|
|
|
|
|
|
Shares used in computing net income per share:
|
|
|
|
|
|
Weighted average of common shares outstanding
|
|
|
|
|
|
Basic
|
|
8,798
|
|
|
8,867
|
Diluted
|
|
8,931
|
|
|
9,109
|
|
Net income per share
attributable to common stockholders:
|
|
|
|
|
|
Basic
|
$
|
1.10
|
|
$
|
0.50
|
Diluted
|
$
|
1.08
|
|
$
|
0.49
|
The following outstanding options that were out-of-the money were
excluded from the computation of diluted net income per share (in thousands) as
the effect would have been anti-dilutive:
|
Years Ended December 31,
|
|
2012
|
|
2011
|
Options to purchase
common stock
|
133
|
|
242
|
40
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
5. Balance Sheet Components (in
thousands)
|
December 31,
|
|
2012
|
|
2011
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
Cash
|
$
|
3,392
|
|
|
$
|
1,338
|
|
Money market instruments
and funds
|
|
1,401
|
|
|
|
12,482
|
|
|
$
|
4,793
|
|
|
$
|
13,820
|
|
|
Accounts receivable,
net:
|
|
|
|
|
|
|
|
Accounts receivable
|
$
|
8,167
|
|
|
$
|
6,751
|
|
Less: Allowance for
doubtful accounts and sales returns
|
|
(121
|
)
|
|
|
(121
|
)
|
|
$
|
8,046
|
|
|
$
|
6,630
|
|
|
Allowance for
doubtful accounts and sales returns:
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
121
|
|
|
$
|
121
|
|
Utilized
|
|
-
|
|
|
|
-
|
|
Balance at end of year
|
$
|
121
|
|
|
$
|
121
|
|
|
Inventories, net:
|
|
|
|
|
|
|
|
Finished goods
|
$
|
1,824
|
|
|
$
|
2,263
|
|
Work-in-process
|
|
2,546
|
|
|
|
2,475
|
|
Raw materials
|
|
2,563
|
|
|
|
2,025
|
|
|
$
|
6,933
|
|
|
$
|
6,763
|
|
|
Accrued
expenses:
|
|
|
|
|
|
|
|
Compensation costs
|
$
|
2,976
|
|
|
$
|
2,547
|
|
Professional
fees
|
|
62
|
|
|
|
50
|
|
Outside commissions
|
|
90
|
|
|
|
215
|
|
Royalities
|
|
32
|
|
|
|
39
|
|
ESPP
|
|
107
|
|
|
|
104
|
|
Deferred rent
|
|
74
|
|
|
|
85
|
|
Warranty
|
|
21
|
|
|
|
19
|
|
Operating related
(Taiwan and China)
|
|
529
|
|
|
|
312
|
|
Income tax
|
|
55
|
|
|
|
56
|
|
Others
|
|
169
|
|
|
|
197
|
|
|
$
|
4,115
|
|
|
$
|
3,624
|
|
|
Other long-term
liabilities:
|
|
|
|
|
|
|
|
Accrued pension liability (Taiwan)
|
$
|
591
|
|
|
$
|
541
|
|
Other
liabilities
|
|
25
|
|
|
|
21
|
|
|
$
|
616
|
|
|
$
|
562
|
|
|
|
|
|
|
|
|
|
Accumulated other
comprehensive Income:
|
|
|
|
|
|
|
|
Cumulative translation adjustments
|
$
|
2,800
|
|
|
$
|
2,008
|
|
Unrealized gain on
short-term investments
|
|
(6
|
)
|
|
|
(7
|
)
|
|
$
|
2,794
|
|
|
$
|
2,001
|
|
41
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
6. Property and Equipment,
Net
|
December 31,
|
(in thousands)
|
2012
|
|
2011
|
Machinery and
equipment
|
$
|
15,678
|
|
|
$
|
14,204
|
|
Furniture and fixtures
|
|
618
|
|
|
|
619
|
|
Leasehold
improvements
|
|
901
|
|
|
|
770
|
|
Building and equipment
prepayments
|
|
1,098
|
|
|
|
1,187
|
|
|
$
|
18,295
|
|
|
$
|
16,780
|
|
Less: Accumulated
depreciation
|
|
(10,587
|
)
|
|
|
(9,062
|
)
|
Total property and
equipment, net
|
$
|
7,708
|
|
|
$
|
7,718
|
|
7. Income Taxes
The components
of income (loss) before income taxes are as follows (in thousands):
|
Years Ended December 31,
|
|
2012
|
|
2011
|
Income subject to
domestic income taxes only
|
$
|
4,000
|
|
$
|
4,419
|
|
Income (loss) subject to foreign income
taxes only
|
|
2,456
|
|
|
(52
|
)
|
Total
|
$
|
6,456
|
|
$
|
4,367
|
|
The following
is a reconciliation of the effective tax rates and the United States statutory
federal income tax rate:
|
Years Ended December 31,
|
|
2012
|
|
2011
|
Statutory federal
income tax rate
|
(34.0
|
)
|
%
|
|
(34.0
|
)
|
%
|
State income tax
|
(5.8
|
)
|
|
|
(5.9
|
)
|
|
Stock
compensation
|
2.4
|
|
|
|
0.9
|
|
|
Deferred compensation
|
(1.5
|
)
|
|
|
(1.6
|
)
|
|
Net operating loss
carryforward
|
29.8
|
|
|
|
37.0
|
|
|
Minimum tax
|
(1.4
|
)
|
|
|
(2.2
|
)
|
|
Foreigh tax
differential
|
(4.4
|
)
|
|
|
3.1
|
|
|
Research and development
credits
|
1.1
|
|
|
|
1.7
|
|
|
Investment
credits
|
0.3
|
|
|
|
4.6
|
|
|
Change in Valuation allowance
|
58.9
|
|
|
|
(4.9
|
)
|
|
Other
|
4.0
|
|
|
|
2.8
|
|
|
Effective tax rate
|
49.3
|
|
%
|
|
1.5
|
|
%
|
42
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
Deferred tax assets consisted of the
following (in thousands):
|
Years Ended December 31,
|
|
2012
|
|
2011
|
Deferred tax
assets:
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
$
|
8,230
|
|
|
$
|
10,481
|
|
Credit
carryforwards
|
|
2,245
|
|
|
|
1,879
|
|
Depreciation and amortization
|
|
-
|
|
|
|
(4
|
)
|
Stock
compensation
|
|
649
|
|
|
|
487
|
|
Accruals and allowances
|
|
788
|
|
|
|
554
|
|
|
|
11,912
|
|
|
|
13,397
|
|
|
Less: valuation
allowance
|
|
(8,210
|
)
|
|
|
(13,397
|
)
|
Net deferred tax assets
|
$
|
3,702
|
|
|
$
|
-
|
|
|
Years Ended December 31,
|
|
2012
|
|
2011
|
Valuation allowances
on deferred tax assets:
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
13,397
|
|
|
$
|
15,249
|
|
Addition
|
|
-
|
|
|
|
-
|
|
Utilized
|
|
(5,187
|
)
|
|
|
(1,852
|
)
|
Balance at end
of year
|
$
|
8,210
|
|
|
$
|
13,397
|
|
The income tax
provision (benefit) is composed of the following (in thousands):
|
Years Ended December 31,
|
|
2012
|
|
2011
|
Current:
|
|
|
|
|
|
|
|
Federal
|
$
|
107
|
|
|
$
|
85
|
|
State
|
|
-
|
|
|
|
(220
|
)
|
Foreign
|
|
409
|
|
|
|
71
|
|
|
$
|
516
|
|
|
$
|
(64
|
)
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
$
|
(3,160
|
)
|
|
$
|
-
|
|
State
|
|
(541
|
)
|
|
|
-
|
|
Foreign
|
|
-
|
|
|
|
-
|
|
Total benefit for income
taxes
|
$
|
(3,185
|
)
|
|
$
|
(64
|
)
|
43
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
As of December
31, 2012, the Company has a net operating loss carryforward of approximately
$22.5 million for federal and $17.7 million for state income tax purposes. If
not utilized, these carryforwards will begin to expire after 2022 for federal
and after 2016 for state purposes.
As of December 31, 2012, the Company has research credit carryforwards of
approximately $1.2 million and $0.9 million for federal and state income tax
purposes, respectively. If not utilized, the federal carryforward will expire in
various amounts beginning in 2019. The California tax credit can be carried
forward indefinitely.
Internal Revenue Code Section 382 limits the use of net operating loss
and tax credit carryforwards in certain situations where changes occur in the
stock ownership of a company. In the event the Company has had a change in
ownership, utilization of the carryforwards could be restricted. The Company has
concluded no change in stock ownership has occurred during 2012.
The Company adopted ASC 740, Accounting for Uncertainty in Income Taxes
on January 1, 2007. As per ASC 740, a tax benefit from an uncertain tax position
may be recognized when it is more likely than not that the position will be
sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits. The Company did not have
any material unrecognized tax benefits or uncertain tax positions at December
31, 2012. There are no penalties or interest associated with unrecognized tax
benefits in these financial statements.
8. Concentrations of Certain Risks
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents,
short-term and long-term investments and accounts receivable. The Company limits
the amount of deposits in any one financial institution and any one financial
instrument. The Company invests its excess cash principally in certificates of
deposit, debt instruments issued by high-credit quality financial institutions
and corporations and money market accounts with financial institutions in the
United States.
The Company performs periodic credit evaluations of its customers
financial condition, and limits the amount of credit extended when deemed
necessary, but generally does not require collateral.
Two customers accounted for 18.0% of the Companys accounts receivable at
December 31, 2012. One customer accounted for 16.3% of the Companys accounts
receivable at December 31, 2011.
One customer accounted for 10.0% and 14.3% of revenues in the year ended
December 31, 2012 and 2011, respectively.
Certain components used in manufacturing the Companys products have
relatively few alternative sources of supply, and establishing additional or
replacement suppliers for such components cannot be accomplished quickly.
9. Geographic Segment
Information
The Company operates in a single industry segment. This industry segment
is characterized by rapid technological change and significant competition.
44
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
The following
is a summary of the Companys revenues generated by geographic segments,
revenues generated by product lines and identifiable assets located in these
segments (in thousands):
|
Years Ended December 31,
|
|
2012
|
|
2011
|
Revenues
|
|
|
|
|
|
North America
|
$
|
27,299
|
|
$
|
22,929
|
Europe
|
|
8,933
|
|
|
7,470
|
Asia
|
|
10,379
|
|
|
11,621
|
|
$
|
46,611
|
|
$
|
42,020
|
|
|
Years Ended December 31,
|
|
2012
|
|
2011
|
Revenues
|
|
|
|
|
|
Connectivity Products
|
$
|
32,622
|
|
$
|
31,411
|
Optical Passive
Products
|
|
13,989
|
|
|
10,609
|
|
$
|
46,611
|
|
$
|
42,020
|
|
|
Years Ended December 31,
|
|
2012
|
|
2011
|
Property and
Equipment, net
|
|
|
|
|
|
United States
|
$
|
43
|
|
$
|
91
|
Taiwan
|
|
3,473
|
|
|
3,491
|
China
|
|
4,192
|
|
|
4,136
|
|
$
|
7,708
|
|
$
|
7,718
|
10. Commitments and
Contingencies
Litigation
From time to time, the Company may be involved in litigation in the
normal course of business. As of the date of these financial statements, the
Company is not aware of any material legal proceedings pending or threatened
against the Company.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements as of December 31, 2012
and 2011, respectively.
Indemnification and Product Warranty
The Company indemnifies certain customers, suppliers and subcontractors
for attorney fees and damages and costs awarded against these parties in certain
circumstances in which products are alleged to infringe third party intellectual
property rights, including patents, trade secrets, trademarks or copyrights. In
all cases, there are limits on and exceptions to the potential liability for
indemnification relating to intellectual property infringement claims. The
Company cannot estimate the amount of potential future payments, if any, that it
might be required to make as a result of these
agreements. As of December 31, 2012, 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.
45
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
The Company
generally warrants products against defects in materials and workmanship and
non-conformance to specifications for varying lengths of time. If there is a
material increase in customer claims compared with historical experience, or if
costs of servicing warranty claims are greater than expected, the Company may
record a charge against cost of revenues. The Company accrued $0.02 million
warranty reserves as of December 31, 2012 and 2011, respectively.
Operating Leases
The Company leases certain office space under long-term operating leases
expiring at various dates through 2016. Total rent expense under these operating
leases was approximately $0.7 million and $0.6 million for the years ended
December 31, 2012 and 2011, respectively.
Total future minimum lease payments under operating leases as of December
31, 2012 are summarized below (in thousands):
Years ending December 31,
|
|
|
2013
|
$
|
682
|
2014
|
|
609
|
2015
|
|
220
|
2016
|
|
19
|
2017 and
after
|
|
1
|
Total
|
$
|
1,531
|
11. Bank Loans
In November 2004, the Company entered into a ten-year loan of $0.5
million in Taiwan with an interest rate of 2.3% for the first two years and 3.6%
for the following years. In November 2006, the Company entered into a seven-year
loan of $0.2 million in Taiwan with an interest rate of 2.8%. Both loans were
secured by the Companys building in Taiwan. In September 2007, the Company also
entered a five-year equipment loan of $0.1 million with an interest rate of
3.68%. In July 2012, the Company paid off all of the loans.
12. Related Party Transactions
As of December 31, 2012, based on information filed with the Securities
and Exchange Commission on January 4, 2002 for the year ended December 31, 2000,
Foxconn Holding Limited and Hon Hai Precision Industry Co., Ltd. hold 18.53% of
the Companys common stock. In the normal course of business, the Company sells
products to and purchases raw materials from Hon Hai Precision Co., Ltd., 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 Co., Ltd. were $0.06 million and $0.02 million in
the years ended December 31, 2012 and 2011, respectively. Purchases of raw
materials from Hon Hai Precision Co., Ltd. were $1.0 million and $1.3 million in
the years ended December 31, 2012 and 2011 respectively. Amounts due from Hon
Hai Precision Co., Ltd. were $0 at December 31, 2012 and 2011, respectively.
Amounts due to Hon Hai Precision Co., Ltd. were $0.3 million and $0.4 million at
December 31, 2012 and 2011, respectively.
46
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
13. Fair Value of Financial
instruments
Effective
January 1, 2008, the Company adopted ASC 820 which provides a definition of fair
value, establishes a hierarchy for measuring fair value under generally accepted
accounting principles, and requires certain disclosures about fair values used
in the financial statements. ASC 820 does not extend the use of fair value
beyond what is currently required by other pronouncements, and it does not
pertain to stock-based compensation under ASC 718,
Share-Based Payments
or to leases
under ASC 840,
Accounting for
Leases
.
In February 2008, FASB Staff Position ASC 820 was issued. This FSP
provided a one year deferral of the effective date of ASC 820 for non-financial
assets and non-financial liabilities, except those that are recognized or
disclosed in the financial statements at fair value at least annually.
Therefore, the Company has adopted the provisions of ASC 820 with respect to
financial assets and liabilities only.
ASC 820 defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Valuation techniques used
to measure fair value under ASC 820 must maximize the use of observable inputs
and minimize the use of unobservable inputs. The standard describes a fair value
hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value,
which are the following:
-
Level 1 Inputs are based upon quoted prices in
active markets for identical assets or liabilities.
-
Level 2 Are based upon inputs other than Level 1
that are observable, either directly or indirectly, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active;
or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.
-
Level 3 Inputs are generally unobservable inputs
that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities.
The Company measures the following financial assets at fair value on a
recurring basis. The fair value of these financial assets at December 31, 2012
and December 31, 2011 (in thousands) were as follows:
|
Fair
Value Measurements at
|
|
Reporting Date
Using
|
|
|
|
|
Quoted
Prices
|
|
Significant
|
|
|
|
|
|
|
|
in
Active
|
|
Other
|
|
Significant
|
|
Balance
at
|
|
Markets
for
|
|
Observable
|
|
Unobservable
|
|
December 31,
|
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
|
2012
|
|
(Level 1)
|
|
(level 2)
|
|
(Level 3)
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
$
|
1,401
|
|
$
|
1,401
|
|
$
|
-
|
|
$
|
-
|
Marketable
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
19,378
|
|
|
19,378
|
|
|
-
|
|
|
-
|
Corporate
bonds
|
|
9,104
|
|
|
-
|
|
|
9,104
|
|
|
-
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits
|
|
10,274
|
|
|
10,274
|
|
|
-
|
|
|
-
|
Total
|
$
|
40,157
|
|
$
|
31,053
|
|
$
|
9,104
|
|
$
|
-
|
47
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial
Statements
|
Fair Value
Measurements at
|
|
Reporting Date Using
|
|
|
|
|
Quoted
Prices
|
|
Significant
|
|
|
|
|
|
|
|
in Active
|
|
Other
|
|
Significant
|
|
Balance at
|
|
Markets for
|
|
Observable
|
|
Unobservable
|
|
December
31,
|
|
Identical
Assets
|
|
Inputs
|
|
Inputs
|
|
2011
|
|
(Level 1)
|
|
(level 2)
|
|
(Level 3)
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
$
|
12,482
|
|
$
|
12,482
|
|
$
|
-
|
|
$
|
-
|
Marketable
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
21,112
|
|
|
21,112
|
|
|
-
|
|
|
-
|
Corporate
bonds
|
|
4,656
|
|
|
-
|
|
|
4,656
|
|
|
-
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
10,098
|
|
|
10,098
|
|
|
-
|
|
|
-
|
Total
|
$
|
48,348
|
|
$
|
43,692
|
|
$
|
4,656
|
|
$
|
-
|
As of December
31, 2012, the Company held investments in corporate bonds, certificates of
deposit, and money market securities. The Companys cash and cash equivalents
are comprised of investments with original maturities of 90 days or less from
the date of purchase. The Companys short-term investments are comprised of
corporate bonds and certificates of deposit with original maturities of 91 days
or more from the date of purchase. The Companys long-term investments are
comprised of certificates of deposit with original maturities of 365 days or
more from the date of purchase.
14. Subsequent Event
The Company has evaluated subsequent events through the time of the
filing of this Annual Report on Form 10-K. The Company is not aware of any
significant events that occurred subsequent to the balance sheet date prior to
the filing of this report that would have a material impact on the Companys
condensed consolidated financial statements.
48