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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER: 0-31857
ALLIANCE FIBER OPTIC PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0554122
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
735 NORTH PASTORIA AVENUE, SUNNYVALE, CA 94085 (408) 736-6900
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA
CODE)
SECURITIES REGISTERED TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 (Section 229.405 of this chapter) is not contained herein,
and 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. [ ]
The aggregate market value of Common Stock held by non-affiliates (based
upon the closing sale price on the Nasdaq National Market on March 1, 2001) was
approximately $95,356,632.
As of March 1, 2001 there were 34,735,625 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 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
2001 Annual Meeting of Stockholders to be held on May 18, 2001.
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ALLIANCE FIBER OPTIC PRODUCTS, INC.
TABLE OF CONTENTS
2000 FORM 10-K
PAGE
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PART I................................................................... 1
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 7
Item 3. Legal Proceedings........................................... 7
Item 4. Submission of Matters to a Vote of Security Holders......... 8
PART II.................................................................. 10
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 10
Item 6. Selected Consolidated Financial Data........................ 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 28
Item 8. Financial Statements and Supplementary Data................. 29
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 48
PART III................................................................. 49
Item 10. Directors and Executive Officers of the Registrant.......... 49
Item 11. Executive Compensation...................................... 50
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 50
Item 13. Certain Relationships and Related Transactions.............. 50
PART IV.................................................................. 50
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 50
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PART I
ITEM 1. BUSINESS
When used in this Report, the words "expects," "anticipates," "believes,"
"estimates," "plans," and similar expressions are intended to identify
forward-looking statements. These are statements that relate to future periods
and include statements as to the Company's marketing and commercialization of
products under development, plans for enhancements of existing products, plans
for future products, features and uses of our products under development, our
patent applications and intellectual property, expansion of our domestic sales
force, the establishment of an international distribution network, our
competitive advantages, our ability to compete, the source of our competition,
consolidation in our industry, and the use of our net proceeds from our initial
public offering. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to, those
risks discussed below, as well as risks related to the development of the
metropolitan and last mile access networks, risks related to the acceptance of
our products by our customers, risks related to the development of new products
by us and our competitors, our ability to retain and obtain customers, increased
competition in our markets, and our ability to license intellectual property on
commercially reasonable terms and the risks set forth below under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Results." 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.
In the sections of this report entitled "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Results," 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.
OPIS is our trademark. We 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. 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 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, which connect cities, metropolitan
networks, which connect areas within cities, and last mile access networks,
which connect to individual businesses and homes.
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.
INDUSTRY BACKGROUND
The popularity of the Internet and the rapidly growing number of data
intensive Internet-based applications and services have 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
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voice traffic. To meet this demand, many communications service providers 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.
Optical fiber is currently being deployed across the following segments of
communications networks: long-haul, metropolitan and last mile access.
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 significant 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. Established and new 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.
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 separate, or demultiplex, 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 guide, mix, filter, route, adjust and stabilize optical
signals transmitted through an optical network.
PRODUCTS
Our passive optical products support the needs of current and next
generation optical network systems applications. Our Optical Path Integration
Solution, or OPIS, product family provides a comprehensive line of optical
interconnect devices, couplers and splitters and related optical amplifier
products, as well as customized integrated modules incorporating these devices.
Our wavelength management products include WDM and DWDM components and modules
that utilize thin film filter technologies to
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separate optical signals. Our advanced optical devices include our all-fiber
optical depolarizer, which reduces the degree of polarization of a light source,
our automatic variable optical attenuator, which controls the amount of power in
an optical fiber, and our switchable optical drop/add module, which integrates
the switching and add/drop functions into one component module.
The following is a discussion of our product offerings and the products we
are developing.
OPIS 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 OPIS 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.
OPIS 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 OPIS components to provide
integrated modules for our customers. Our integrated modules 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 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 Fiber Optical Splitters and Couplers. Fused fiber optical splitters
and couplers are branching devices which 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 power of optical signals. These devices enable more effective monitoring and
management of optical networks.
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 attenuated
fiber that reduces power while preserving performance characteristics, including
optical signal quality and reliability.
Optical Backplane Connection Systems. Backplanes provide the internal
interface, or connection, between various components of optical communication
systems. As data transmission rates increase, optical backplanes will be
required to ensure that the routing of signals between elements within an
optical network is performed at the same rate. We are currently developing
interconnection solutions to meet these needs.
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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.
Our fused fiber WDM couplers provide a cost effective way to minimize loss and
maximize wavelength isolation.
Gain Flattening Filters. Gain flattening filters are used to ensure that
signals are amplified in equal amounts. By equalizing the increase, gain
flattening filters can significantly improve the performance of amplifiers in
multi-channel networks. We are currently developing these products.
FILTER-BASED WAVELENGTH MANAGEMENT PRODUCTS. In recent years, wavelength
division multiplexing 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. Our wavelength management 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.
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 more narrow 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 wavelength amplification.
DWDMs. Dense wave division multiplexers, or DWDMs, are integrated optical
modules which 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. Our DWDMs directly address the scalable channel plans found in
metropolitan and last mile access network applications.
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.
ADVANCED OPTICAL DEVICES. As the capacity and complexity of optical
networks increases, future systems face significant challenges. Performance
characteristics such as stability, channel balance and power loss due to
polarization become difficult to manage without the addition of optical control
devices. Our advanced optical devices serve to add further control in next
generation networks and network measurement equipment.
All-Fiber Depolarizers. Depolarizers are devices that reduce the degree of
polarization of a light source. As polarization effects become a more
significant limiting factor in next generation network performance,
depolarization becomes an increasingly important tool in developing solutions to
design constraints. We have developed and patented an all-fiber depolarizer
which can significantly depolarize light from a range of sources, including
those used in communications networks and fiber optic test and measurement
equipment.
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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.
Non Reciprocal Optical Devices. Non reciprocal optical devices provide non
reversible light direction control. These products allow light to travel through
fiber in only one direction, blocking light from travelling in the reverse
direction. These devices are used in amplifier design and optical add/drop
multiplexing. We are currently developing the following products: optical
circulators that are used to direct signal paths in optical fibers with low
insertion loss and through multiple ports that require wavelength isolation;
optical isolator taps that combine wavelength isolation and tap functions of
discrete devices in a single compact device; and optical isolator filter WDMs
that combine the wavelength isolation and filter wavelength division
multiplexing functions of discrete devices in a single compact device.
Switchable Optical Drop/Add (SODA) Modules. Our switchable optical drop/add
(SODA) modules will integrate both the switching and add/drop functions in a
DWDM system. These products address the need to allocate bandwidth at various
locations in advancing network architectures. We are currently developing these
products.
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, 2000, we had
nine U.S. patents, three additional U.S. patents allowed or partially allowed
and 14 U.S. patents pending. The nine U.S. patents expire between September 8,
2013 and October 27, 2018. We also had two foreign patents issued, six foreign
patents allowed and 19 foreign patents pending. Our foreign patents issued will
expire in March 2006 and April 2018. We also utilize unpatented proprietary
know-how and trade secrets and employ various methods to protect them.
To date we have been advised that we may infringe a patent and may owe
royalties on sales of one or more products. We are currently evaluating this
allegation. 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 functioning of products overlaps. 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 and financial condition.
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, 2000, we sold our products to more than 180 customers. In the year
ended December 31, 2000, no one
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customer accounted for more than 10% of our revenues. In 1998, two customers
accounted for 13% and 10% of our revenues, respectively, and in 1999 one
customer accounted for 11% of our revenues.
Information regarding geographic areas is included in Note 11 to the
Consolidated Financial Statements.
SALES, MARKETING AND TECHNICAL SUPPORT
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. We are planning to expand our sales force in the United
States and to establish an international distribution network.
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 Web site
and direct mail.
Technical Support. We maintain a technically knowledgeable support staff
that is critical to our development of long-term customer relationships. Our
technical support 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. Based
on our assessment of the performance and price of similar competitive offerings,
we believe that our products compare favorably, although we cannot assure that
they will continue to do so.
Our principal competitors in the components market include Avanex
Corporation, Corning, DiCon Fiberoptics, Inc., Gould Electronics Inc., JDS
Uniphase, which recently acquired E-TEK Dynamics and SDL, Lucent Technologies
Inc., Luminent, Inc., New Focus, Inc., Nortel Networks Corporation, Oplink,
Inc., Stratos Lightwave, 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 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
recently experienced significant consolidation, and we anticipate that further
consolidation will occur. This consolidation has further increased competition.
We expect significant pricing pressure from our competitors, which may
negatively affect our margins. We cannot assure you that we will be able to
compete successfully with existing or future competitors or that competitive
pressures will not seriously harm our business, operating results and financial
condition.
PRODUCT DEVELOPMENT
As of December 31, 2000, we had 50 engineers and technicians directly
involved in research and development of our products both in the United States
and in Taiwan. Our engineering team has extensive design, packaging, processing
and software experience in optical components, interfaces and systems. Prior to
June 30, 2000, costs associated with the manufacturing start-up and sample
production activities of our DWDM product line were included in research and
development, after which they were included in manufacturing costs.
Our primary product development center is located in Sunnyvale, California,
where we opened our Photonics Technology Center in March 2001. We also maintain
a product development capacity in our
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Taiwan subsidiary. Our research and development expense, excluding non-cash
compensation expense, was $1.5 million, $1.5 million and $4.3 million for the
years ended December 31, 1998 and 1999 and 2000, respectively. We have
increased, and intend to continue to increase, our research and development
budget and staff to enhance our current product lines and to develop new
technologies and products to serve the next generation communication markets.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company makes significant purchases of key materials, components and
equipment, including ferrules, graded index lenses, or GRIN lenses, filters and
other components from third party suppliers. The Company obtains most of its
critical raw materials and components from a single or limited number of
suppliers. When possible, the Company also develops and maintains alternative
sources for essential materials and components, however, there is only one
supplier of GRIN lenses.
EMPLOYEES
As of December 31, 2000, the Company had 572 full-time employees, including
201 located in the United States, 331 in Taiwan and 40 in mainland China. The
employees in the United States included 39 engaged in product development, 128
in manufacturing production, 5 in quality, 16 in sales, marketing, application
support and customer service, and 13 in general and administration. In Taiwan,
our full-time employees included 11 engaged in product development, 281 in
manufacturing, 16 in quality, and 23 in sales, general and administration. In
mainland China, the 40 employees included 23 in manufacturing, 2 in quality and
15 in administration. None of the Company's employees are represented by a labor
union. The Company has not experienced any work stoppages and it considers its
relations with its employees to be good.
ITEM 2. PROPERTIES
In the United States, the Company leases a total of approximately 32,800
square feet in three buildings located in Sunnyvale, California. Of the 32,800
square feet:
- the Company leases 11,700 square feet of administrative, sales,
marketing, and manufacturing space pursuant to a lease that expires in
May 2004;
- the Company leases a 10,500 square foot manufacturing facility pursuant
to a lease that expires in July 2004; and
- the Company entered into an agreement to lease an additional 10,600
square feet of space near its current headquarters in Sunnyvale,
California in December 2000. The lease commenced in February 2001 and the
Company uses the facility for product development activities.
In Taiwan, the Company leases a total of approximately 38,800 square feet
in one facility located in Tu-Cheng City, Taiwan. The leases for these
facilities expire at various times from April 2001 to May 2003. Additionally, in
December 2000, the Company purchased approximately 8,200 square feet of space
immediately adjacent to the leased facility for $797,000, 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 mainland China, the Company leases a total of approximately 27,000
square feet in one facility located near Shenzhen, China, substantially all of
which is used for manufacturing and support. This lease expires in July 2002.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company 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 the Company or, to
the best of its knowledge, threatened against it.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
1. On October 18, 2000, we held our 2000 Annual Meeting of Stockholders, at
which meeting our stockholders approved the following:
(a) Election of the following directors:
Common Class:
Peter C. Chang
R. David Dicioccio
Gwong-Yih Lee
Series A and Series B Preferred Class:
James C. Yeh
Michael Tung
Series C Preferred Class:
Peter C. Morris
Common Class:
FOR AGAINST ABSTAIN
- ---------- ------- -------
7,190,000 0 0
Series A and Series B Preferred Classes:
FOR AGAINST ABSTAIN
- ---------- ------- -------
16,275,000 0 0
Series C Preferred Class:
FOR AGAINST ABSTAIN
- ---------- ------- -------
4,918,000 0 0
(b) Approval of the Reincorporation and Name Change. Approval of the
Reincorporation and the name change required a majority vote of (i) the
Common Stock voting as a class, (ii) the Series A, Series B and Series C
Preferred Stock voting together as a class and (iii) the Series C Preferred
Stock voting as a class.
Common Class:
FOR AGAINST ABSTAIN
- ---------- ------- -------
7,149,000 0 0
Series A, Series B and Series C Preferred Classes:
FOR AGAINST ABSTAIN
- ---------- ------- -------
21,193,000 0 0
Series C Preferred Class:
FOR AGAINST ABSTAIN
- ---------- ------- -------
4,918,000 0 0
(c) Approval of an Amendment to the 1997 Stock Plan to increase the
number of shares reserved for grant. Approval of the Amendment to the 1997
Stock Plan to increase the number of shares under the plan required the
affirmative vote of the holders of two-thirds (66 2/3%) of the
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outstanding shares of Common Stock, Series A, Series B and Series C
Preferred Stock voting together as a class.
All Stockholders voting as a single class:
FOR AGAINST ABSTAIN
- ---------- ------- -------
28,383,000 0 0
(d) Approval of an Amendment to the 1997 Stock Plan to provide for the
grant of options to non-employee directors. Approval of an Amendment to the
1997 Stock Plan to provide for the grant of options to non-employee
directors required a majority vote of the Common Stock, Series A, Series B
and Series C Preferred Stock voting as a class.
All Stockholders voting as a single class:
FOR AGAINST ABSTAIN
- ---------- ------- -------
28,383,000 0 0
(e) Approval of the Amended and Restated Articles of Incorporation.
Approval of the Amended and Restated Articles of Incorporation required a
majority vote of (i) the Common Stock voting as a class, (ii) the Series A,
Series B and Series C Preferred Stock, voting together as a class, and
(iii) the Series C Preferred Stock voting as a class.
Common Class:
FOR AGAINST ABSTAIN
- ---------- ------- -------
7,190,000 0 0
Series A, Series B and Series C Preferred Classes:
FOR AGAINST ABSTAIN
- ---------- ------- -------
21,193,000 0 0
Series C Preferred Class:
FOR AGAINST ABSTAIN
- ---------- ------- -------
4,918,000 0 0
(f) Authorization of the Form of Indemnification Agreement.
Authorization of the Form of Indemnification Agreement required a majority
vote of (i) the Common Stock held by "disinterested shareholders," voting
as a class and (ii) the Series A, Series B and Series C Preferred Stock
held by "disinterested shareholders" voting as a class.
Disinterested Common Class:
FOR AGAINST ABSTAIN
- ---------- ------- -------
965,000 0 0
Disinterested Series A, Series B and Series C Preferred Classes:
FOR AGAINST ABSTAIN
- ---------- ------- -------
7,703,500 0 0
9
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $0.001, is traded on the Nasdaq
National Market under the symbol "AFOP." The following table sets forth, for the
periods indicated, the range of high and low sales prices for our common stock
on Nasdaq, since November 21, 2000, the date of the Company's initial public
offering, as reported in its consolidated transaction reporting system.
HIGH LOW
------- ------
Fourth Quarter 2000....................... $11.375 $4.625
First Quarter 2001........................ 14.00 5.75
As of March 1, 2001, the Company's common stock was held by 95 stockholders
of record. The Company has never declared or paid dividends on its capital stock
and does not anticipate paying any dividends in the foreseeable future.
On various dates during the year ended December 31, 2000, the Company
issued 3,420,750 shares of its common stock to 21 employees, consultants and
directors pursuant to the exercise of options granted under its 1997 Stock Plan.
The exercise prices per share ranged from $.005 to $2.00, for an aggregate
consideration of $2,017,000. Options granted under the 1997 Stock Plan generally
become exercisable at the rate of 1/4 of the total number of shares subject to
the options 12 months after the vesting commencement date, and 1/4 of the total
number of shares subject to the options every 12 months thereafter. The sales of
these securities were considered to be exempt from registration under the
Securities Act in reliance on Rule 701 promulgated under Section 3(b) of the
Securities Act, as transactions under compensatory benefit plans and contracts
relating to compensation as provided under Rule 701.
In January 2000, the Company issued 140,000 shares of Series B convertible
preferred stock at $2.00 per share for aggregate consideration of $280,000 to
one accredited investor. The sale of these securities was considered exempt from
registration under the Securities Act in reliance of Section 4(2) of the
Securities Act or Regulation D promulgated thereunder. Each share of Series B
convertible preferred stock was converted into one share of the Company's common
stock in connection with its initial public offering.
In July and August 2000, the Company issued 5,000,000 shares of Series C
convertible preferred stock at $5.50 per share for aggregate consideration of
$27,500,000 to 28 accredited investors, including certain of our directors and
executive officers. The sale of these securities was considered exempt from
registration under the Securities Act in reliance of Section 4(2) of the
Securities Act or Regulation D promulgated thereunder. Each share of Series C
convertible preferred stock was converted into one share of the Company's common
stock in connection with its initial public offering.
The recipients of the securities in each of the transactions above
represented their intention to acquire the securities for investment only and
not with a view to or for sale with any distribution thereof, and appropriate
legends were affixed to the share certificates and instruments issued in these
transactions. All recipients had adequate access, through relationships with the
Company, to information about the Company.
In November 2000, the Company completed the sale of a total of 4,500,000
shares of its common stock, par value $0.001 per share, at a price of $11.00 per
share in a firm commitment underwritten public offering. The offering was
effected pursuant to a Registration Statement on Form S-1 (File No. 333-45482),
which the Securities and Exchange Commission declared effective on November 20,
2000. Merrill Lynch, Pierce, Fenner & Smith Incorporated, U.S. Bancorp Piper
Jaffray Inc., Wit SoundView Corporation and SG Cowen Securities Corporation were
the lead underwriters for the offering.
10
13
Of the $49,500,000 in aggregate proceeds raised by us in the offering:
1. approximately $3,465,000 was paid to the underwriters in connection
with the underwriting discount;
2. approximately $1,625,000 was used to pay for other costs directly
associated with the offering;
3. approximately $694,000 was used to repay the outstanding balance
under two loan facilities;
4. approximately $782,000 was used to repurchase 76,450 shares under
the terms of the agreement with Merrill Lynch & Co., U.S. Bancorp Piper
Jaffray, Wit SoundView Corporation and SG Cowen;
5. approximately $797,000 was used to purchase 8,200 square feet of
space in Tu-Cheng City, Taiwan; and
6. the balance of the proceeds from the offering, $42,137,000, are
being used to fund working capital increases, for research and development,
for sales and marketing and general corporate purposes. Until used, the
remaining cash balance is being invested in short-term, interest-bearing,
investment-grade securities.
We do not have more specific plans for the remainder of the net proceeds
from the initial public offering. The amounts and timing of expenditures will
vary depending on the amount of cash generated by our operations, competitive
and technological developments and the rate of growth, if any, of our business.
We will retain broad discretion in the allocation of the net proceeds from the
initial public offering.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
our consolidated statements of operations data for each of the three years in
the period ended December 31, 2000, and with respect to our consolidated balance
sheet at December 31, 1999 and 2000 are derived from our Consolidated Financial
Statements and related Notes that have been audited by PricewaterhouseCoopers
LLP, independent accountants, which are included in this Form 10-K. The selected
consolidated statements of operations data for the years ended December 31, 1996
and 1997 and our consolidated balance sheet data at December 31, 1996, 1997 and
1998 are derived from our audited consolidated financial statements not included
in this Form 10-K. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes included
in this Form 10-K.
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------ ------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues........................... $ 4,774 $ 5,263 $4,906 $ 7,551 $ 22,223
======= ======= ====== ======= ========
Gross profit....................... $ 751 $ 1,701 $2,149 $ 2,640 $ 7,899
======= ======= ====== ======= ========
Net income (loss) attributable to
common stockholders.............. $ 126 $ 68 $ (388) $(1,271) $(22,869)
======= ======= ====== ======= ========
Net income (loss) per share
attributable to common
stockholders(1):
Basic............................ $ 0.04 $ 0.02 $(0.11) $ (0.31) $ (2.71)
======= ======= ====== ======= ========
Diluted.......................... 0.01 -- (0.11) (0.31) (2.71)
======= ======= ====== ======= ========
Shares used in computing net income
(loss) per share(1):
Basic............................ 3,600 3,600 3,600 4,080 8,452
======= ======= ====== ======= ========
Diluted.......................... 19,972 19,972 3,600 4,080 8,452
======= ======= ====== ======= ========
Pro forma net loss per share
attributable to common
stockholders (unaudited)(2):
Basic and diluted................ $ (0.07) $ (0.90)
======= ========
Shares used in computing pro forma
net loss per share
(unaudited)(2):
Basic and diluted................ 19,480 25,502
======= ========
DECEMBER 31,
------------------------------------------------
1996 1997 1998 1999 2000
------ ------ ------ ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments......................... $1,422 $2,820 $3,985 $ 6,139 $66,677
Working capital....................... 2,760 2,986 4,881 7,875 73,761
Total assets.......................... 2,939 5,139 8,107 12,142 88,525
Long-term liabilities, less current
portion............................. -- -- 68 317 181
Mandatorily redeemable convertible
preferred stock..................... 3,416 3,416 6,115 9,835 --
Total stockholders' equity............ 99 565 994 396 82,499
12
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
When used in this discussion, the words, "expects," "anticipates,"
"believes," "estimates," "plans," and similar expressions are intended to
identify forward-looking statements. These statements, which include statements
as to our profitability, statements as to our net losses, our sources of revenue
and anticipated revenue, our ability to obtain raw materials and components and
maintain and develop supplier relationships, the fluctuation of our cost of
revenues as a percentage of revenues, the impact of the power crisis in
California, our plans to expand our product development efforts, our plans to
expand our operations domestically and internationally, our plans to hire
additional employees, our exposure to currency rate fluctuations, the amount and
mix of our anticipated expenditures, our need for additional financing, our
ability to establish and maintain relationships with key customers, the
accelerated amortization of our deferred stock-based compensation, our plans to
expand our manufacturing capacity, our ability to maintain appropriate
inventory, and factors that affect a customer's decision to chose a supplier,
are subject to risks and uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties include, but are
not limited to, those risks discussed below, as well as the competition from
other entities including the impact of competitive products and pricing, timely
design acceptance by our customers, our success attracting new customers, our
customers adopting our new products, timely introduction of new technologies,
our ability to ramp new products into volume production, our ability to attract
and retain highly skilled personnel, industry wide shifts in supply and demand
for optical components and modules, industry overcapacity, financial stability
in foreign markets and the matters discussed in "Factors That May Affect
Results." 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.
The following discussion should be read in conjunction with our
Consolidated Financial Statements and Notes thereto.
OVERVIEW
We were founded in December 1995 and commenced operations to design,
manufacture and market fiber optic interconnect products, which we term our
Optical Path Integration Solution, or OPIS, products. We also distributed a
cable television transmission product line, which we discontinued in 1997. Since
1997, we have broadened our OPIS product line which now includes attenuators and
fused fiber products. Most of these new products were introduced between 1997
and 1999. In early 1999, we started developing our dense wavelength division
multiplexing, or DWDM, and other wavelength management products, forming a new
product line based in part on our proprietary technology. We started selling our
DWDM devices in limited production quantities in July 2000.
From our inception through December 31, 2000, we derived substantially all
of our revenues from our OPIS product line. In the third and fourth quarters of
2000, our DWDM product line contributed revenues of $440,000 and $1.4 million,
respectively. In the year ended December 31, 2000, our top 10 customers
comprised 45.5% of our revenues and no customer accounted for more than 10% of
our revenues. Two customers accounted for more than 10% of our revenues in the
year ended December 31, 1998. One customer accounted for 11.2% of our revenues
in the year ended December 31, 1999.
We market and sell our products predominantly through our direct sales
force, which we began building in early 1998. Although we derived a significant
portion of our revenues between 1996 and 1998 from overseas customers, an
increasing percentage of our sales since early 1999 have been in North America.
The percentages of our revenues derived from sales outside of North America were
61.2%, 28.7% and 20.9% in the years ended December 31, 1998, 1999 and 2000,
respectively.
We recognize revenues upon the shipment of our products to our customers
provided that we have received a purchase order, the price is fixed, and the
collection of the resulting receivable is probable.
13
16
Subsequent to the sale of the products, we have no obligation to provide any
modification or customization, upgrades, enhancements, or post-contract customer
support.
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;
- mix of products sold;
- changes in our pricing and pricing from our competitors;
- mix of sales channels through which our products are sold; and
- mix of domestic and international sales.
The increased cost of power in California, where we manufacture some of our
products, may negatively impact our cost of revenues. We may also suffer lost
revenues resulting from possible power outages. We cannot predict the frequency
or severity of power shortages or blackouts, but if we do experience any
shortages or blackouts, our ability to develop new products, manufacture our
existing products or provide services may be effected.
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 plan to significantly expand our product development efforts,
and expect our research and development expenses to increase in absolute dollars
in the foreseeable future.
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 costs associated with trade shows, promotional activities
and travel expenses. We intend to expand 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 any increased
expenditures will result in higher revenues. In addition, we believe our future
success depends upon establishing successful relationships with a variety of key
customers. We believe that continued investment in sales and marketing functions
is critical to our success and expect these expenses to increase in absolute
dollars in the foreseeable future.
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 these expenses to increase in absolute dollars as we continue
to add personnel and incur costs related to the growth of our business and our
operations as a public company.
In connection with the grant of stock options to employees and consultants,
we recorded deferred stock-based compensation of approximately $30.9 million
through December 31, 2000, representing the difference between the estimated
fair market value of the common stock and the exercise price of these options at
the date of grant. Deferred stock-based compensation is being amortized using
the graded vesting method, under which each option grant is separated into
portions based on its vesting terms which results in acceleration of
amortization expense for the overall award. We expect that the deferred stock-
based compensation balance of $20.8 million as of December 31, 2000 will be
amortized on an accelerated basis over the vesting periods, which are generally
four years. Accordingly, we expect non-cash compensation expense, which was $9.1
million in the year ended December 31, 2000, to decrease in future periods.
In July 2000, we issued 4,700,000 shares of Series C convertible preferred
stock at a price of $5.50 per share. The difference between the issuance price
and the deemed fair value of the common stock on
14
17
the date of the transaction resulted in a deemed preferred stock dividend, which
was fully recognized in the quarter ended September 30, 2000.
In November 2000, we completed our initial public offering by issuing
4,500,000 shares of common stock at a price of $11.00 per share. The proceeds of
the offering, net of costs associated with the registration and issuance of the
shares, totaled $44.4 million. Subsequent to the offering and in accordance with
the terms of the agreement with the underwriters, we repurchased approximately
76,000 shares of common stock at an aggregate purchase price of $782,000.
In October 1997, we acquired 97% of the outstanding common stock of
Transian Technology Ltd. Co., a Taiwan corporation, for $512,000 to expand our
design and manufacturing capacity. In April 1998, we invested an additional
$152,000 in cash in Transian, increasing our ownership to 98.5% of the common
stock of Transian.
In December 2000, we established a subsidiary, Alliance Fiber Optic
Products, under the laws of the People's Republic of China. The subsidiary is
based in Shenzhen, China where it leases a manufacturing facility which will
support our expanding manufacturing operations for both our OPIS and DWDM
product lines.
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.
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999 2000
----- ----- -----
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues.................................................... 100.0% 100.0% 100.0%
Cost of revenues:
Cost of revenues.......................................... 56.2 64.7 60.2
Non-cash compensation expense............................. 0.0 0.3 4.3
----- ----- -----
Total cost of revenues............................ 56.2 65.0 64.5
----- ----- -----
Gross profit.............................................. 43.8 35.0 35.5
----- ----- -----
Operating expenses:
Research and development:
Research and development............................... 30.3 20.3 19.3
Non-cash compensation expense.......................... 0.0 0.8 10.3
----- ----- -----
Total research and development.................... 30.3 21.1 29.6
Sales and marketing:
Sales and marketing.................................... 12.0 12.8 8.9
Non-cash compensation expense.......................... 1.2 1.0 2.0
----- ----- -----
Total sales and marketing......................... 13.2 13.8 10.9
General and administrative:
General and administrative............................. 12.1 12.9 10.3
Non-cash compensation expense.......................... 3.3 6.4 24.5
----- ----- -----
Total general and administrative.................. 15.4 19.3 34.8
----- ----- -----
Total operating expenses.......................... 58.9 54.2 75.3
----- ----- -----
Loss from operations........................................ (15.1) (19.2) (39.8)
Interest and other income, net.............................. 5.6 1.5 5.0
----- ----- -----
Loss before income taxes.................................... (9.5) (17.7) (34.8)
Income taxes provision (benefit)............................ (1.6) (0.9) 1.7
----- ----- -----
Net loss.................................................... (7.9)% (16.8)% (36.5)%
===== ===== =====
15
18
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
Revenues. Revenues were $4.9 million, $7.6 million and $22.2 million for
the years ended December 31, 1998, 1999 and 2000, respectively. Revenues
increased 54% from 1998 to 1999 due to higher volume sales and expansion of our
OPIS product line. Revenues increased 194% from 1999 to 2000 because of an
increase of $12.7 million in sales of our OPIS products, as well as $1.9 million
of initial sales of our wavelength management products.
Gross Profit. Gross profit, including non-cash compensation expense,
increased from $2.1 million, or 43.8% of revenues, in 1998 to $2.6 million, or
35.0% of revenues, in 1999 and to $7.9 million, or 35.5% of revenues, in 2000.
Excluding non-cash compensation expense, gross profit increased from $2.1
million, or 43.8% of revenues in 1998, to $2.7 million, or 35.3% of revenues, in
1999 and to $8.8 million, or 39.8% of revenues, in 2000. As a percentage of
revenues, the decrease in gross profit from 1998 to 1999 was primarily due to
start-up manufacturing costs associated with the introduction of new products,
the expansion of our manufacturing facilities in Taiwan and reductions in
average selling prices. The increase in gross profit as a percentage of revenues
from 1999 to 2000, excluding non-cash compensation expense, was primarily the
result of manufacturing economies of scale resulting from higher production
volumes of our OPIS products, partially offset by start-up manufacturing costs
of our recently introduced DWDM products. We expect our gross profit as a
percentage of revenues to continue to be negatively impacted in the near term
due to low production volumes and ramp up costs associated with our DWDM product
line.
Research and Development Expenses. Research and development, including
non-cash compensation expense, increased from $1.5 million, or 30.3% of
revenues, in 1998 to $1.6 million, or 21.1% of revenues, in 1999 to $6.6
million, or 29.6% of revenues, in 2000. Excluding non-cash compensation expense,
research and development increased from $1.5 million, or 30.3% of revenues, in
1998 to $1.5 million, or 20.3% of revenues, in 1999 to $4.3 million, or 19.3% of
revenues, in 2000. Excluding non-cash compensation expense, these increases in
absolute dollars were primarily due to costs related to the development of
additional OPIS products, increases in the number of research and development
personnel and related costs, and development and pilot production costs for our
DWDM product line. The decreases in research and development expenses as a
percentage of revenues were primarily the result of increases in our revenues.
We expect our research and development expenses to continue to increase in
absolute dollars in the foreseeable future.
Sales and Marketing Expenses. Sales and marketing expenses, including
non-cash compensation expense, increased from $646,000, or 13.2% of revenues, in
1998 to $1.0 million, or 13.8% of revenues, in 1999 to $2.4 million, or 10.9% of
revenues, in 2000. Excluding non-cash compensation expense, sales and marketing
expenses increased from $591,000, or 12.0% of revenues, in 1998 to $968,000, or
12.8% of revenues, in 1999 to $2.0 million, or 8.9% of revenues, in 2000. These
increases in absolute dollars, and the increase in sales and marketing expenses
as a percentage of revenues from 1998 to 1999, were attributable primarily to
hiring additional direct sales and marketing personnel and expanding our sales
and marketing efforts, resulting in increases in marketing and advertising
expenses. The decrease in sales and marketing expenses as a percentage of
revenue from 1999 to 2000 was primarily due to economies of scale. We expect our
sales and marketing expenses to continue to increase in absolute dollars in the
foreseeable future.
General and Administrative Expenses. General and administrative expenses,
including non-cash compensation expense, increased from $758,000, or 15.4% of
revenues, in 1998 to $1.5 million, or 19.3% of revenues, in 1999 to $7.7
million, or 34.8% of revenues, in 2000. Excluding non-cash compensation, general
and administrative expenses increased from $593,000, or 12.1% of revenues, in
1998 to $975,000, or 12.9% of revenues, in 1999 to $2.3 million, or 10.3% of
revenues, in 2000. These increases in absolute dollars were primarily due to
hiring additional personnel and associated expenses necessary to manage and
support our increased scale of operations. The decrease in general and
administrative expenses as a percentage of revenue from 1999 to 2000 was
primarily due to economies
16
19
of scale. We expect our general and administrative expenses to continue to
increase in absolute dollars, but to decrease as a percentage of revenues, in
the foreseeable future.
Interest and Other Income, Net. Interest and other income, net was
$275,000, $117,000 and $1.1 million for the years ended December 31, 1998, 1999
and 2000, respectively. These amounts consisted primarily of interest income,
which fluctuated based on cash balances. The increase from 1999 to 2000 was the
result of significantly higher average cash balances resulting from proceeds
from two private rounds of preferred stock financing and our initial public
offering of common stock.
Income Taxes. Income taxes included benefits of $79,000 in 1998 and $67,000
in the years ended December 31, 1998 and 1999, respectively and expense of
$396,000 in the year ended December 31, 2000. The income tax benefits in 1998
and 1999 were based primarily on recovering income taxes paid in previous years.
The income tax expense in 2000 was the result of non-cash compensation charges
which are not deductible for income tax purposes resulting in taxable income.
As of December 31, 2000, we had approximately $370,000 of federal net
operating loss carryforwards for tax purposes and $138,000 of federal and
$52,000 of state tax credit carryforwards available to offset future taxable
income. The carryforwards will expire at various dates from 2013 through 2020,
if not utilized. We have not recognized any benefit from the use of loss
carryforwards for these periods or for any other periods since inception.
Financial Accounting Standards Board Statement No. 109 provides for the
recognition of deferred tax assets if realization of the assets is more likely
than not. Based upon the weight of available evidence, which included our
historical operating performance and our cumulative net losses, we have provided
a full valuation allowance against our net deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of convertible preferred stock and bank debt. Additionally, in November
2000, we completed our initial public offering of common stock, raising $44.4
million. At December 31, 2000, we had cash and cash equivalents of $42.5 million
and short-term investments of $24.1 million net of costs and expenses.
Net cash used in operating activities was $409,000 in 1998, $1.0 million in
1999 and $3.6 million in 2000. Net cash used in 1998 and 1999 was primarily the
result of our net losses, which were partially offset by non-cash charges, and
an increase in working capital requirements caused by increasing revenue and the
related expansion of our operations. In 2000, our net loss of $8.1 million
included non-cash charges of $10.1 million, primarily related to non-cash
compensation expense of $9.1 million and depreciation of $957,000, which
resulted in a net cash contribution of $2.0 million. This contribution was
offset by an increase in working capital of $5.4 million. Our accounts
receivable increased by $3.6 million in 2000 due to continued growth of our
revenues, and our inventories increased by $5.4 million in the same period
primarily due to increases in DWDM inventories. The cash required to fund the
increase in inventories was partially financed by an increase in accounts
payable of $2.2 million and accrued expenses and other liabilities of $1.7
million.
Cash used in investing activities was $1.7 million in 1998, $862,000 in
1999 and $31.2 million in 2000. In 1998 and 1999, all of the cash was used to
acquire property and equipment. In 2000, $7.0 million was used to acquire
property and equipment and $24.2 million was invested in high-grade, short-term
securities.
Cash generated by financing activities was $3.3 million in 1998, $4.1
million in 1999 and $71.1 million in 2000. Cash generated by financing
activities in 1998 resulted from the sale of Series A convertible preferred
stock. Cash generated by financing activities in 1999 resulted primarily from
the sale of Series B convertible preferred stock and borrowings of $295,000
under our bank lending facility. Cash generated by financing activities in 2000
included $27.4 million generated by the sale of Series C preferred stock and
$44.4 million from the sale of common stock in our initial public offering.
17
20
We entered into loan facilities in July 1999 and January 2000 with Silicon
Valley Bank for a maximum of $800,000, which was fully drawn down during the
course of fiscal year 2000. We repaid these loans with a portion of the proceeds
of our initial public offering. In July 2000, we arranged additional facilities
with Silicon Valley Bank: a $750,000 equipment lease line which is fully
available, and a $1 million line of credit under which we have obtained a
$641,000 letter of credit to secure a building lease. Certain equipment we own
secures the existing loan facilities. In addition, Silicon Valley Bank holds a
general lien on our assets.
We expect to incur approximately $17.0 million of capital expenditures in
2001, primarily to purchase equipment and expand our operations and
manufacturing capacity in the United States, Taiwan and China. In July and
December 2000, we entered into leases for an additional 10,500 and 10,600 square
feet of space, respectively, near our existing facility in Sunnyvale,
California. Additionally, in December 2000, the Company purchased approximately
8,200 square feet of space immediately adjacent to our leased facility in
Tu-Cheng City, Taiwan for $797,000 and leased 27,000 square feet of space for
manufacturing in Shenzen, China.
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 or additional credit facilities. 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 the scope of our planned product
development and marketing efforts, which could harm our business, financial
condition and operating results.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 established new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS No. 133 requires that all derivatives be recognized at fair
value in the statement of financial position, and that the corresponding gains
or losses be reported either in the income statement or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
In July 1999, the FASB deferred the effective date of SFAS No. 133 until the
first quarter for fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued SFAS No. 138, "Accounting for Derivative Instruments and Hedging
Activities -- An Amendment of FASB Statement No. 133." SFAS No. 138 amends the
accounting and reporting standards for certain derivatives and hedging
activities such as net settlement contracts, foreign currency transactions and
intercompany derivatives. The Company does not currently hold derivative
instruments or engage in hedging activities. The Company has adopted SFAS No.
133 in the first quarter of fiscal year 2001 and management does not expect that
the requirements of SFAS No. 133 and SFAS No. 138 will have a material effect on
the Company's Consolidated Financial Statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. In June 2000, the SEC issued SAB No. 101B to defer the effective
date of implementation of SAB No. 101 until the fourth quarter of fiscal 2000.
The Company adopted the provisions of SAB No. 101 in its Consolidated Financial
Statements for all years presented in this Report, and the adoption did not have
a material effect on the Company's Consolidated Financial Statements.
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In March 2000, the FASB issued Interpretation ("FIN") No. 44, "Accounting
for Certain Transactions Involving Stock Compensation -- an Interpretation of
APB No. 25." This Interpretation clarifies (a) the definition of employee for
purposes of applying APB No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The adoption of FIN No. 44 did not have a significant effect on the
results of the Company's consolidated financial position, results of operations
for cash flows.
FACTORS THAT MAY AFFECT RESULTS
WE HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NOT BE ABLE TO
GENERATE SUFFICIENT REVENUES IN THE FUTURE TO ACHIEVE AND SUSTAIN PROFITABILITY.
We have incurred losses for the last three fiscal years and expect that our
net losses and negative cash flow will continue for the foreseeable future as we
continue to invest in our business. We incurred net losses of $388,000 in 1998,
$1.3 million in 1999, and $8.1 million in 2000. As of December 31, 2000, we had
an accumulated deficit of approximately $9.6 million.
We have recently expanded our manufacturing facilities, and we expect to
continue to incur significant and increasing expenses for expansion of our
manufacturing operations, research and development, sales and marketing, and
administration, and in developing direct sales and distribution channels. In
particular, given our early stage of development, our increasing operating
expenses and the rate at which competition in our industry is intensifying, we
may not be able to adequately control our costs and expenses or achieve or
maintain adequate operating margins. As a result, to achieve and 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 achieve and sustain profitability on a quarterly or an annual basis.
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, the timing and extent of product sales,
and the mix of products sold 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 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 which 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.
OUR OPTICAL PATH INTEGRATION SOLUTION PRODUCTS HAVE HISTORICALLY REPRESENTED
SUBSTANTIALLY ALL OF OUR REVENUES, AND IF WE ARE UNSUCCESSFUL IN COMMERCIALLY
SELLING OUR THIN-FILM FILTER-BASED DWDM PRODUCTS, OUR BUSINESS WILL BE SERIOUSLY
HARMED.
Sales of our Optical Path Integration Solution, or OPIS, products accounted
for over 90% of our revenues in the year ended December 31, 2000 and
substantially all of our historical revenues. We expect to substantially depend
on these products for our near-term revenues. Any significant decline in the
price of, or demand for, these products, or failure to increase their market
acceptance, would seriously harm our business. In addition, we believe that our
future growth and a significant portion of our future revenues will depend on
the commercial success of our thin-film filter-based DWDM products, which we
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began shipping commercially in July 2000. If our target customers do not widely
adopt and purchase our DWDM products, our revenues may not grow significantly
and our business will be seriously harmed.
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. Our manufacturing operations in Taiwan are currently
operating near capacity, and we are presently able to fill substantially all of
our customers' orders. However, if we do not increase our manufacturing capacity
to meet the future production requirements of our customers, growth of our
business will be negatively impacted. We have received orders for commercial
quantities of our DWDM products and we are increasing our manufacturing capacity
for those products. 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. In addition, if we build our
manufacturing capacity and inventory in excess of demand, we may produce excess
inventory that may have to be written off.
WE DEPEND ON A LIMITED NUMBER OF THIRD PARTIES TO SUPPLY KEY MATERIALS,
COMPONENTS AND EQUIPMENT, SUCH AS FERRULES 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. 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. In this regard, we are
experiencing difficulties in obtaining ferrules used in our OPIS line of
products. The difficulties have typically resulted from demand for ferrules
within the industry exceeding the capacity of suppliers. We believe shortages of
ferrules have limited our growth. In the future, if we are unable to obtain
sufficient ferrules to meet increasing demand for products incorporating these
ferrules, potential growth of our business will be impeded. In addition, all of
our graded index, or GRIN, lenses, which are incorporated into substantially all
of our filter-based DWDM products, are obtained from one supplier, Nippon Sheet
Glass.
We also depend on a limited number of manufacturers and vendors that make
and sell the complex equipment we use in our manufacturing process. In periods
of high market demand, the lead times from order to delivery of this equipment
could be significant. Delays in the delivery of this equipment or increases in
the cost of this equipment could harm our operating results.
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
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the continued services of our executive officers, particularly Peter Chang, our
Chief Executive Officer, David Hubbard, our Vice President, Sales and Marketing,
and other key engineering, sales, marketing, finance, manufacturing and support
personnel. In addition, we depend upon the continued services of key management
personnel at our Taiwanese subsidiary. 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.
In order to continue to expand our product offerings both in the U.S. and
abroad, we must hire a number of research and development personnel. In
addition, in order to expand our manufacturing capabilities in China, we must
hire a significant number of additional manufacturing and research development
personnel. Hiring technical sales personnel in our industry is very competitive
due to the limited number of people available with the necessary technical
skills and understanding of our technologies. 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. Competition for highly skilled
personnel is intense, particularly in Northern California. We may also have
difficulty hiring skilled engineers at our manufacturing facility in Taiwan. If
we are not successful in attracting, assimilating or retaining qualified
personnel to fulfill our current or future needs, our business may be harmed.
THE MARKET FOR FIBER OPTIC COMPONENTS IS HIGHLY 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 Avanex, Corning, DiCon Fiberoptics, Gould, JDS
Uniphase, which recently acquired E-TEK Dynamics and SDL, Lucent, Luminent, New
Focus, Nortel, Oplink, Stratos Lightwave and Tyco Electronics. 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. In addition, our industry has
recently experienced significant consolidation, and we anticipate that further
consolidation will occur. This consolidation has further increased competition.
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. Three of our top ten customers, Avanex, JDS
Uniphase and Tyco Electronics, are also competitors and accounted for 15.3% of
our revenues in the year ended December 31, 2000. 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, nor can we 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 and our business would suffer.
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IF WE CANNOT ATTRACT MORE OPTICAL COMMUNICATIONS EQUIPMENT MANUFACTURERS TO
PURCHASE OUR PRODUCTS, WE MAY NOT BE ABLE TO INCREASE OR SUSTAIN OUR REVENUES.
Our future success will depend on our ability to migrate existing customers
to our new products and our ability to attract additional customers. Many of our
present customers are relatively new companies. The growth of our customer base
could be adversely affected by:
- customer unwillingness to implement our products;
- any delays or difficulties that we may incur in completing the
development and introduction of our planned products or product
enhancements;
- the success of our customers;
- new product introductions by our competitors;
- any failure of our products to perform as expected; or
- any difficulty we may incur in meeting customers' delivery requirements
or product specifications.
IF WE ARE NOT ABLE TO ACHIEVE ACCEPTABLE MANUFACTURING YIELDS AND SUFFICIENT
PRODUCT RELIABILITY IN THE PRODUCTION OF OUR FIBER OPTIC COMPONENTS, WE MAY
INCUR INCREASED COSTS AND DELAYS IN SHIPPING PRODUCTS TO OUR CUSTOMERS, WHICH
COULD IMPAIR OUR OPERATING RESULTS.
Complex and precise processes are required for the manufacture of our
products. Changes in our manufacturing processes or those of our suppliers, or
the inadvertent use of defective materials, could significantly reduce our
manufacturing yields and product reliability. Because the majority of our
manufacturing costs are relatively fixed, manufacturing yields are critical to
our results of operations. Lower than expected production yields could delay
product shipments and impair our operating results. We may not obtain acceptable
yields in the future.
In some cases, 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 will need to develop new manufacturing processes and techniques
that will involve higher levels of automation to increase our gross margins. We
may not achieve adequate manufacturing cost efficiencies.
Because we plan to introduce new products and product enhancements
regularly, 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.
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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.
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, excluding non-cash
compensation expenses, were approximately $1.5 million in 1998, $1.5 million in
1999, and $4.3 million in 2000. We intend to continue to invest a substantial
amount of funds in our research and product development efforts, which could
have a negative impact on our earnings in future periods.
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 to be deployed in large and complex optical
networks. Because of the nature of these products, they can only be fully tested
for reliability when deployed in networks for long periods of time. Our fiber
optic products may contain undetected defects when first introduced or as new
versions are released, and our customers may discover defects in our products
only after they have been fully deployed and operated under peak stress
conditions. In addition, our products are combined with products from other
vendors. As a result, should problems occur, it may be difficult to identify the
source of the problem. If we are unable to fix defects or other problems, we
could experience, among other things:
- loss of customers;
- damage to our reputation;
- failure to attract new customers or achieve market acceptance;
- diversion of development and engineering resources; and
- legal actions by our customers.
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The occurrence of any one or more of the foregoing factors could cause our
net income to decline.
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.
IF WE FAIL TO EFFECTIVELY MANAGE THE RAPID EXPANSION OF OUR OPERATIONS,
INCLUDING THE GROWTH IN OUR MANUFACTURING FACILITIES AND THE ANTICIPATED
SIGNIFICANT INCREASE IN THE NUMBER OF EMPLOYEES, OUR OPERATING RESULTS COULD BE
HARMED.
We have rapidly expanded our operations domestically and internationally in
recent periods and expect to continue to do so. As of December 31, 2000, we had
a total of 201 full-time employees in Sunnyvale, California, 331 full-time
employees in Taiwan, and 40 full-time employees in China. We plan to hire a
significant number of employees over the next several quarters in connection
with the expansion of our manufacturing operations. The growth in employees and
our operations, 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. Some of our existing senior
management personnel joined us within the last 12 months, including a number of
key managerial, technical and operations personnel whom we have not yet fully
integrated. Our Chief Financial Officer and our Senior Vice President, Product
Development, have both joined us since July 2000. To manage the expected growth
of our operations and personnel, we will be required to:
- improve existing and implement new operational, financial and management
controls, reporting systems and procedures;
- hire, train, motivate and manage additional qualified personnel;
- expand our manufacturing capacity; and
- effectively manage relationships with our customers, suppliers,
representatives and other third parties.
In addition, we will need to coordinate our domestic and international
operations and establish the necessary infrastructure to implement our
international strategy. For example, in the last quarter of 2000, we established
a manufacturing facility in mainland China. If we are not able to manage our
growth 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. Our current facilities will not be
sufficient to accommodate our anticipated growth. We recently expanded our
manufacturing facilities in Taiwan and manufacture many of our products there.
We also established a manufacturing facility in mainland China where we have
begun to manufacture some of our products. 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 new manufacturing operations in China. We plan to lease
additional facilities, as necessary, to support our growth. Relocating a portion
of our employees could cause temporary disruptions in our operations and divert
management's attention. Because of acute shortages of office and manufacturing
space in Northern California, we cannot assure you that we will be able to
locate suitable space on acceptable terms or at all in the future.
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IF WE ARE UNABLE TO DEVELOP NEW PRODUCTS AND PRODUCT ENHANCEMENTS THAT ACHIEVE
MARKET ACCEPTANCE, SALES OF OUR FIBER OPTIC COMPONENTS COULD DECLINE, WHICH
COULD REDUCE OUR REVENUES.
The communications industry is characterized by rapidly changing
technology, frequent new product introductions, changes in customer requirements
and evolving industry standards. 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 these new products, the new
products may not achieve widespread market acceptance necessary to provide an
adequate return on our investment.
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 U.S. law. Our
competitors 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.
IF WE FAIL TO INCREASE SALES OF OUR PRODUCTS TO OPTICAL COMMUNICATIONS EQUIPMENT
MANUFACTURERS OUTSIDE OF NORTH AMERICA, GROWTH OF OUR BUSINESS MAY BE HARMED.
For the years ended December 31, 1998, 1999 and 2000, sales to customers
located outside of North America were 61.2%, 28.7% and 20.9% of our revenues,
respectively. In order to expand our business, we must increase our sales to
customers located outside of North America. We have limited experience in
marketing and distributing our products internationally and in developing
versions of our products that comply with local standards. Our international
sales will be limited if we cannot establish relationships with international
distributors, establish additional foreign operations, expand international
sales channels, hire additional personnel and develop relationships with
international communications equipment manufacturers. Even if we are able to
successfully continue international operations, we may not be able to maintain
or increase international market demand for our products.
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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. In anticipation of market demand
for our DWDM products, we have been, and intend to continue, building inventory.
If we underestimate our 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 have to carry or write off
excess inventory and our gross margins will decline. Either situation 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.
In order to facilitate the rapid deployment of anticipated projects, our
customers have in the past, and may in the future build, significant inventory.
If, after building a significant inventory of our products, these projects are
delayed, our customers will be required to maintain a significant inventory of
our products for longer periods than they originally anticipated, which would
reduce further purchases by these customers of our products until deployment of
the delayed projects commences. These reductions, in turn, could cause
fluctuations in our future results of operations and severely harm our business
and financial condition.
We are in the process of implementing automated manufacturing management
systems in California and in Taiwan. We may experience problems implementing our
new automated manufacturing management systems. As we grow, we will need to
implement additional systems, which we may fail to do on a timely basis.
WE MAY EXPERIENCE POWER BLACKOUTS AND HIGHER ELECTRICITY PRICES AS A RESULT OF
CALIFORNIA'S CURRENT ENERGY CRISIS, WHICH COULD DISRUPT OUR MANUFACTURING
OPERATIONS AND INCREASE OUR EXPENSES.
California is in the midst of an energy crisis that could disrupt our
manufacturing operations and increase our expenses. We rely on the major
Northern California public utility, Pacific Gas & Electric Company, or PG&E, to
supply electric power to our facilities in Northern California. Due to problems
associated with the deregulation of the power industry in California and
shortages in wholesale electricity supplies, customers of PG&E have been faced
with increased electricity prices, power shortages and rolling blackouts.
Increased energy prices will increase our expenses incurred in manufacturing
which will increase our cost of revenues and decrease our gross profits. If
blackouts interrupt our power supply, we may be temporarily unable to continue
our manufacturing operations at our facilities. Any such interruption in our
ability to continue our manufacturing operations could delay our ability to
develop new products, manufacture our existing products or provide services.
Such disruptions could damage our reputation and result in lost revenue, either
of which could substantially harm our business and results of operations.
BECAUSE OUR MANUFACTURING OPERATIONS ARE LOCATED IN ACTIVE EARTHQUAKE FAULT
ZONES IN CALIFORNIA AND TAIWAN, WE FACE THE RISK THAT A NATURAL DISASTER COULD
LIMIT OUR ABILITY TO SUPPLY PRODUCTS.
Our primary manufacturing operations are located in Sunnyvale, California
and Tu-Cheng City, Taiwan, both active earthquake fault zones. These regions
have experienced large earthquakes in the past and may likely experience them in
the future. Because the majority of our manufacturing operations are located in
Taiwan, a large earthquake in Taiwan could disrupt our manufacturing operations
for an
26
29
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.
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 additional intellectual property
protection is obtained by participants in our industry, 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 may in the future
enter into agreements to indemnify our customers for any expenses or liabilities
resulting from claimed infringements of patents, trademarks or copyrights of
third parties. Any litigation arising from claims asserting that our products
infringe or may infringe the proprietary rights of third parties, whether the
litigation is with or without merit, could be time-consuming, resulting in
significant expenses and diverting the efforts of our technical and management
personnel. We do not have insurance against our alleged or actual infringement
of intellectual property of others. These claims could cause us to stop selling
our products which incorporate the challenged intellectual property and could
also result in product shipment delays or require us to redesign or modify our
products or to enter into licensing agreements. These licensing agreements, if
required, would increase our product costs and may not be available on terms
acceptable to us, if at all.
Although we are not aware of any intellectual property lawsuits filed
against us, we have been advised that we may infringe a patent and may owe
royalties. We may be a party to litigation regarding this or other matters in
the future. We may not prevail in any such actions, given their complex
technical issues and inherent uncertainties. Insurance may not cover potential
claims of this type or may not be adequate to indemnify us for all liability
that may be imposed. If there is a successful claim of infringement or we fail
to develop non-infringing technology or license the proprietary rights on a
timely basis, our business could be harmed.
WE DEPEND ON THE CONTINUED GROWTH AND SUCCESS OF THE INTERNET AND THE
COMMUNICATIONS INDUSTRY, WHICH IS EXPERIENCING RAPID CONSOLIDATION AND
REALIGNMENT AND MAY NOT CONTINUE TO DEMAND FIBER OPTIC PRODUCTS, THEREBY
REDUCING DEMAND FOR OUR PRODUCTS.
Our future success depends on the continued growth of the Internet as a
widely used medium for communications and commerce, and the growth of optical
networks to meet the increased demand for capacity to transmit data, or
bandwidth. If the Internet does not continue to expand as a medium for
communications and commerce, the need to significantly increase bandwidth across
networks and the market for fiber optic components may not continue to develop.
If this growth does not continue, sales of our products may decline, which would
adversely affect our revenues. Future demand for our products is uncertain and
will depend heavily on the continued growth and upgrading of optical networks,
especially in the metropolitan and last mile access segments of the networks.
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.
The communications industry is also experiencing rapid 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
harms our business.
27
30
THE MARKET FOR FIBER OPTIC COMPONENTS IS NEW AND UNPREDICTABLE AND CHARACTERIZED
BY RAPID TECHNOLOGICAL CHANGES AND EVOLVING STANDARDS, AND IF THIS MARKET DOES
NOT DEVELOP AND EXPAND AS WE ANTICIPATE, DEMAND FOR OUR PRODUCTS MAY DECLINE,
WHICH COULD ADVERSELY 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 and last mile
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 emerging
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 and last mile 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
We currently maintain our funds primarily in money market funds and highly
liquid marketable securities. We do not have any derivative financial
instruments. As of December 31, 2000, $41.5 million, or 63.2% of our
investments, matured in less than three months. We will continue to invest a
significant portion of our existing cash in interest bearing, investment grade
securities, with maturities of less than 12 months. We do not believe that our
investments, in the aggregate, have significant exposure to interest rate risk.
EXCHANGE RATE SENSITIVITY
We currently have operations in the United States, Taiwan and China. The
functional currency of our subsidiaries in Taiwan and China are the local
currencies, and we are subject to foreign currency exchange rate fluctuations
associated with translation to U.S. dollars. Though some expenses are incurred
by our Taiwan and China operations, substantially all of our sales are made in
U.S. dollars; hence, we have minimal exposure to foreign currency rate
fluctuations relating to sales transactions.
While we expect our international revenues to continue to be denominated
predominately in U.S. dollars, an increasing portion of our international
revenues may be denominated in foreign currencies in the future. In addition, we
plan to continue to expand our overseas operations. As a result, our operating
results may become subject to significant fluctuations based upon changes in
exchange rates of certain currencies in relation to the U.S. dollar. We will
analyze our exposure to currency fluctuations and may engage in financial
hedging techniques in the future to attempt to minimize the effect of these
potential fluctuations; however, exchange rate fluctuations may adversely affect
our financial results in the future.
28
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants......................... 30
Consolidated Balance Sheets as of December 31, 1999 and
2000................................................... 31
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 2000...... 32
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended December 31,
2000................................................... 33
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2000...... 34
Notes to Consolidated Financial Statements................ 35
29
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Alliance Fiber Optic Products, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the consolidated financial
position of Alliance Fiber Optic Products, Inc. and its subsidiaries at December
31, 1999 and 2000, and the results of their consolidated operations and their
consolidated cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedules listed in the accompanying index present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. 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 of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit 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, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 30, 2001
30
33
ALLIANCE FIBER OPTIC PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
-------------------
1999 2000
------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,139 $ 42,548
Short-term investments.................................... -- 24,129
Accounts receivable, net.................................. 1,755 5,302
Inventories............................................... 1,433 6,792
Prepaid expenses and other current assets................. 142 835
------- --------
Total current assets.............................. 9,469 79,606
Property and equipment, net................................. 2,561 8,590
Other assets................................................ 112 329
------- --------
Total assets...................................... $12,142 $ 88,525
======= ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,010 $ 3,234
Income tax payable........................................ -- 401
Accrued expenses and other liabilities.................... 494 2,210
Current portion of long-term liabilities.................. 90 --
------- --------
Total current liabilities......................... 1,594 5,845
Long-term liabilities....................................... 317 181
------- --------
Total liabilities................................. 1,911 6,026
------- --------
Commitments and contingencies (Note 12)
Mandatorily redeemable convertible preferred stock, $0.001
par value; 22,400,000 shares authorized and 17,260,000
shares issued and outstanding at December 31, 1999;
5,000,000 shares authorized and nil outstanding at
December 31, 2000......................................... 9,835 --
------- --------
Stockholders' equity:
Common stock, $0.001 par value; 50,000,000 shares
authorized and 4,400,000 shares issued and outstanding
at December 31, 1999; 250,000,000 shares authorized and
34,644,300 shares issued and outstanding at December
31, 2000............................................... 4 35
Additional paid-in capital................................ 2,681 114,984
Receivables from stockholders............................. -- (1,950)
Deferred stock-based compensation......................... (810) (20,813)
Accumulated deficit....................................... (1,465) (9,576)
Accumulated other comprehensive losses.................... (14) (181)
------- --------
Total stockholders' equity........................ 396 82,499
------- --------
Total liabilities, mandatorily redeemable
convertible preferred stock and stockholders'
equity.......................................... $12,142 $ 88,525
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
31
34
ALLIANCE FIBER OPTIC PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1999 2000
------ ------- --------
Revenues.................................................. $4,906 $ 7,551 $ 22,223
Cost of revenues:
Cost of revenues........................................ 2,757 4,885 13,374
Non-cash compensation expense........................... -- 26 950
------ ------- --------
Total cost of revenues.......................... 2,757 4,911 14,324
------ ------- --------
Gross profit............................................ 2,149 2,640 7,899
------ ------- --------
Operating expenses:
Research and development:
Research and development............................. 1,487 1,532 4,280
Non-cash compensation expense........................ -- 63 2,309
------ ------- --------
Total research and development.................. 1,487 1,595 6,589
------ ------- --------
Sales and marketing:
Sales and marketing.................................. 591 968 1,982
Non-cash compensation expense........................ 55 77 433
------ ------- --------
Total sales and marketing....................... 646 1,045 2,415
------ ------- --------
General and administrative:
Sales and marketing.................................. 593 975 2,285
Non-cash compensation expense........................ 165 480 5,439
------ ------- --------
Total general and administrative................ 758 1,455 7,724
------ ------- --------
Total operating expenses........................ 2,891 4,095 16,728
------ ------- --------
Loss from operations...................................... (742) (1,455) (8,829)
Interest and other income, net............................ 275 117 1,114
------ ------- --------
Loss before income taxes.................................. (467) (1,338) (7,715)
Income tax provision (benefit)............................ (79) (67) 396
------ ------- --------
Net loss.................................................. (388) (1,271) (8,111)
Deemed preferred stock dividend........................... -- -- (14,758)
------ ------- --------
Net loss attributable to common stockholders.............. $ (388) $(1,271) $(22,869)
====== ======= ========
Net loss per share attributable to common stockholders:
Basic and diluted....................................... $(0.11) $ (0.31) $ (2.71)
====== ======= ========
Shares used in computing net loss per share attributable
to common stockholders:
Basic and diluted....................................... 3,600 4,080 8,452
====== ======= ========
Pro forma net loss per share attributable to common
stockholders (unaudited)................................ $ (0.07) $ (0.90)
======= ========
Shares used in computing pro forma net loss per share
(unaudited)............................................. 19,480 25,502
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
32
35
ALLIANCE FIBER OPTIC PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
RETAINED ACCUMULATED
COMMON STOCK ADDITIONAL RECEIVABLES DEFERRED EARNINGS OTHER
--------------- PAID-IN FROM STOCK-BASED (ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICITS) LOSSES TOTAL
------ ------ ---------- ------------ ------------ ------------ ------------- --------
BALANCE AT JANUARY 1, 1998... 3,600 $ 4 748 -- (360) 194 (21) $ 565
Deferred stock-based
compensation............... -- -- 14 -- (14) -- -- --
Issue of warrants............ -- -- 577 -- -- -- -- 577
Amortization of deferred
stock-based compensation... -- -- -- -- 220 -- -- 220
Comprehensive loss:
Net loss for the year...... -- -- -- -- -- (388) -- (388)
Currency translation
adjustments.............. -- -- -- -- -- -- 20 20
Comprehensive loss...
------ --- ------- ------ ------- ------ ---- --------
BALANCE AT DECEMBER 31,
1998....................... 3,600 $ 4 1,339 -- (154) (194) (1) $ 994
Issuance of Common Stock upon
exercise of warrants....... 800 -- 40 -- -- -- -- 40
Deferred stock-based
compensation............... -- -- 1,302 -- (1,302) -- -- --
Amortization of deferred
stock-based compensation... -- -- -- -- 646 -- -- 646
Comprehensive loss:
Net loss for the year...... -- -- -- -- -- (1,271) -- (1,271)
Currency translation
adjustments.............. -- -- -- -- -- -- (13) (13)
Comprehensive loss...
------ --- ------- ------ ------- ------ ---- --------
BALANCE AT DECEMBER 31,
1999....................... 4,400 $ 4 2,681 -- (810) (1,465) (14) $ 396
Issuance of Common Stock upon
exercise of options........ 3,420 3 2,014 (1,950) -- -- -- 67
Issuance of common stock upon
completion of initial
public offering............ 4,500 5 44,405 -- -- -- -- 44,410
Conversion of preferred stock
upon completion of initial
public offering............ 22,400 23 37,533 -- -- -- -- 37,556
Stock repurchased............ (76) -- (782) -- -- -- -- (782)
Deferred stock-based
compensation............... -- -- 27,255 -- (27,255) -- -- --
Stock-based compensation for
Series C Preferred Stock... -- -- 1,878 -- -- -- -- 1,878
Allocation of discount on
preferred stock............ -- -- 14,758 -- -- -- -- 14,758
Deemed preferred stock
dividend................... -- -- (14,758) -- -- -- -- (14,758)
Amortization of deferred
stock-based compensation... -- -- -- -- 7,252 -- -- 7,252
Comprehensive loss:
Net loss for the year...... -- -- -- -- -- (8,111) -- (8,111)
Unrealized loss on
short-term investments... -- -- -- -- -- -- (77) (77)
Currency translation
adjustments.............. -- -- -- -- -- -- (90) (90)
Comprehensive loss...
------ --- ------- ------ ------- ------ ---- --------
BALANCE AT DECEMBER 31,
2000....................... 34,644 $35 114,984 (1,950) (20,813) (9,576) (181) $ 82,499
====== === ======= ====== ======= ====== ==== ========
COMPREHENSIVE
INCOME/(LOSS)
-------------
BALANCE AT JANUARY 1, 1998...
Deferred stock-based
compensation...............
Issue of warrants............
Amortization of deferred
stock-based compensation...
Comprehensive loss:
Net loss for the year...... $ (388)
Currency translation
adjustments.............. 20
-------
Comprehensive loss... $ (368)
=======
BALANCE AT DECEMBER 31,
1998.......................
Issuance of Common Stock upon
exercise of warrants.......
Deferred stock-based
compensation...............
Amortization of deferred
stock-based compensation...
Comprehensive loss:
Net loss for the year...... $(1,271)
Currency translation
adjustments.............. (13)
-------
Comprehensive loss... $(1,284)
=======
BALANCE AT DECEMBER 31,
1999.......................
Issuance of Common Stock upon
exercise of options........
Issuance of common stock upon
completion of initial
public offering............
Conversion of preferred stock
upon completion of initial
public offering............
Stock repurchased............
Deferred stock-based
compensation...............
Stock-based compensation for
Series C Preferred Stock...
Allocation of discount on
preferred stock............
Deemed preferred stock
dividend...................
Amortization of deferred
stock-based compensation...
Comprehensive loss:
Net loss for the year...... $(8,111)
Unrealized loss on
short-term investments... (77)
Currency translation
adjustments.............. (90)
-------
Comprehensive loss... $(8,278)
=======
BALANCE AT DECEMBER 31,
2000.......................
The accompanying notes are an integral part of these consolidated financial
statements.
33
36
ALLIANCE FIBER OPTIC PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------
1998 1999 2000
------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss:............................................... $ (388) $(1,271) $ (8,111)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation......................................... 397 519 957
Amortization of deferred stock-based compensation and
stock based compensation for Series C Preferred
Stock.............................................. 220 646 9,131
Changes in assets and liabilities:
Accounts receivable, net........................... (69) (1,201) (3,563)
Inventories........................................ (366) (278) (5,434)
Prepaid expenses and other assets.................. (42) (39) (922)
Accounts payable................................... (118) 338 2,175
Income tax payable................................. -- -- 401
Accrued expenses and other liabilities............. (73) 236 1,684
Other long-term liabilities........................ 30 45 50
Minority interest.................................. -- -- 19
------- ------- --------
Net cash used in operating activities........... (409) (1,005) (3,613)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments...................... -- -- (24,206)
Purchase of property, plant and equipment............... (1,707) (862) (6,986)
------- ------- --------
Net cash used in investing activities........... (1,707) (862) (31,192)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings........................... -- 295 459
Repayments of bank borrowings........................... -- -- (754)
Proceeds from issuance of Series A preferred stock and
warrants............................................. 3,276 -- --
Proceeds from issuance of Series B preferred stock...... -- 3,720 280
Proceeds from issuance of Series C preferred stock...... -- -- 27,441
Proceeds from issuance of common stock upon the exercise
of warrants.......................................... -- 40 --
Proceeds from the exercise of common stock options...... -- -- 67
Proceeds from issuance of stock upon completion of
initial public offering.............................. -- -- 44,410
Stock repurchase........................................ -- -- (782)
------- ------- --------
Net cash provided by financing activities....... 3,276 4,055 71,121
------- ------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................. 5 (34) 93
------- ------- --------
Net increase in cash and cash equivalents................. 1,165 2,154 36,409
Cash and cash equivalents at beginning of year............ 2,820 3,985 6,139
------- ------- --------
Cash and cash equivalents at end of year.................. $ 3,985 $ 6,139 $ 42,548
======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid....................................... $ 81 $ -- $ --
======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
34
37
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 principal business
location is Sunnyvale, California.
In October 1997, the Company acquired 97% of the outstanding common stock
of Transian Technology Ltd. Co. ("Transian"), a Taiwan corporation, for $512,000
in cash, an amount that was approximately equal to the value of the tangible
assets of Transian at the time. In April 1998, the Company invested an
additional $152,000 in cash increasing its ownership to 98.5% of the outstanding
common stock of Transian.
In December 2000, the Company established a subsidiary, Alliance Fiber
Optic Products, in the People's Republic of China, which will manufacture some
of the Company's products.
PUBLIC OFFERING
In November 2000, the Company sold 4,500,000 shares of common stock in an
underwritten initial public offering for net proceeds of approximately $44.4
million. Simultaneously with the closing of the public offering, all 22,400,000
outstanding mandatorily redeemable convertible preferred shares were converted
to common shares on a one for one basis.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles 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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of the Company
and its subsidiaries, Transian and our Chinese subsidiary Alliance Fiber Optic
Products. All material intercompany accounts and transactions have been
eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
The Company's operations in foreign subsidiaries use the local currency as
their functional currencies. 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 stockholders' equity. Foreign currency transaction gains and losses are
recorded in interest and other income.
FINANCIAL INSTRUMENTS
The Company considers all highly liquid instruments with a maturity of
three months or less when purchased to be cash equivalents. Cash equivalents
consist primarily of market rate accounts, municipal bonds, and highly rated
commercial paper that are stated at cost, which approximates fair value.
Investments include high-grade corporate debt obligations that have maturities
greater than three months but
35
38
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
less than one year. As of the date of the balance sheet, all investments are
classified as short-term investments. Short-term investments are classified as
available-for-sale as of the balance sheet date in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" and are reported at fair value, with
unrealized gains and losses recorded in stockholders' equity.
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.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
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.
IMPAIRMENT OF LONG-LIVED ASSETS
Pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," the Company reviews
long-lived assets based upon a gross cash flow basis and will record for
impairment whenever events or changes in circumstances indicate the carrying
amount of the assets may not be fully recoverable. The Company did not have any
impairment charge against the value of the property, plant and equipment as of
December 31, 2000.
REVENUE RECOGNITION
The Company recognizes revenue upon the shipment of its products to the
customer, provided that the Company has received a purchase order, the price is
fixed and collection of resulting receivable is probable. Subsequent to the sale
of its products, the Company has no obligation to provide any modification or
customization upgrades, enhancements or postcontract customer support.
Provisions for return allowances and warranties are recorded at the time revenue
is recognized based on the Company's historical experience.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
ADVERTISING EXPENSES
Advertising costs are expensed as incurred.
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
36
39
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
tax assets for which realization is uncertain. The Company does not record a
deferred tax provision on unremitted earnings of its subsidiaries to the extent
that such earnings are considered permanently invested.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations
thereof. Under APB Opinion No. 25, compensation cost is, in general, recognized
based on the excess, if any, of the fair market value of the Company's stock on
the date of grant over the amount an employee must pay to acquire the stock. In
addition, the Company complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Equity instruments issued to
non-employees are accounted for in accordance with the provision of SFAS No. 123
and Emerging Issues Task Force ("EITF") Issue No. 96-18.
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic net loss per share is computed by dividing net loss attributable to
common stockholders for the period by the weighted average number of shares of
common stock outstanding during the period. Diluted net loss per share is
computed by dividing the net loss for the period by the weighted average number
of common and potential common equivalent shares outstanding during the period.
The calculation of diluted net loss per share excludes potential common shares
if the effect is anti-dilutive. Potential common shares are composed of shares
of common stock subject to repurchase rights, common stock issuable upon the
exercise of stock options and common stock issuable upon conversion of
mandatorily redeemable convertible preferred stock.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Basic and diluted pro forma net loss per share for the years ended December
31, 1999 and 2000 is computed using the weighted average number of common shares
outstanding, including the conversion of the Company's mandatorily redeemable
convertible preferred stock into common stock effective upon the closing of the
Company's initial public offering, as if such conversion occurred at the
beginning of the periods presented or the date of issuance of the mandatorily
redeemable convertible preferred stock, whichever is later.
The calculation of basic and diluted pro forma net loss per share excludes
incremental common stock subject to repurchase rights and common stock issuable
upon the exercise of stock options as the effect would be anti-dilutive.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) 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 (loss) is disclosed in the consolidated statement of
stockholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 established new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS No. 133 requires that all derivatives
be recognized at fair value in the statement of financial position, and that the
corresponding
37
40
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
gains or losses be reported either in the income statement or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
In July 1999, the FASB deferred the effective date of SFAS No. 133 until the
first quarter for fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued SFAS No. 138, "Accounting for Derivative Instruments and Hedging
Activities -- An Amendment of FASB Statement No. 133." SFAS No. 138 amends the
accounting and reporting standards for certain derivatives and hedging
activities such as net settlement contracts, foreign currency transactions and
intercompany derivatives. The Company does not currently hold derivative
instruments or engage in hedging activities. The Company has adopted SFAS No.
133 in the first quarter of fiscal year 2001 and management does not expect that
the requirements of SFAS No. 133 and SFAS No. 138 will have a material effect on
the Company's Consolidated Financial Statements and related disclosures.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB No. 101B to defer the effective date of
implementation of SAB No. 101 until the fourth quarter of fiscal 2000. The
Company adopted the provisions of SAB No. 101 in its Consolidated Financial
Statements included in this Report for all years presented and the adoption did
not have a material effect on the Company's Consolidated Financial Statements.
In March 2000, the FASB issued Interpretation ("FIN") No. 44, "Accounting
for Certain Transactions Involving Stock Compensation -- an Interpretation of
APB No. 25." This Interpretation clarifies (a) the definition of employee for
purposes of applying APB No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The adoption of FIN No. 44 did not have a significant effect on the
results of the Company's consolidated financial position, results of operations
or cash flows.
38
41
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET COMPONENTS (IN THOUSANDS)
DECEMBER 31,
------------------
1999 2000
------- -------
ACCOUNTS RECEIVABLE, NET:
Accounts receivable....................................... $ 2,074 $ 5,839
Less: Allowance for doubtful accounts and sales returns... (319) (537)
------- -------
$ 1,755 $ 5,302
======= =======
INVENTORIES:
Finished goods............................................ $ 698 $ 2,107
Work-in-process........................................... 104 2,471
Raw materials............................................. 631 2,214
------- -------
$ 1,433 $ 6,792
======= =======
PROPERTY AND EQUIPMENT, NET:
Machinery and equipment................................... $ 2,791 $ 7,269
Furniture and fixtures.................................... 434 1,306
Leasehold improvements.................................... 341 612
Building and equipment prepayments........................ -- 1,365
------- -------
3,566 10,552
Less: Accumulated depreciation............................ (1,005) (1,962)
------- -------
$ 2,561 $ 8,590
======= =======
ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued compensation costs................................ $ 422 $ 1,345
Provision for warranty.................................... -- 214
Accrued professional fees................................. -- 175
Other accruals............................................ 72 476
------- -------
$ 494 $ 2,210
======= =======
LONG-TERM LIABILITIES:
Long-term portion of bank borrowings...................... $ 205 $ --
Minority interest......................................... 16 35
Other long-term liabilities............................... 96 146
------- -------
$ 317 $ 181
======= =======
39
42
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SHORT-TERM INVESTMENTS
As of December 31, 2000, the following investments are classified as cash
equivalents (in thousands):
GROSS
UNREALIZED ESTIMATED
INVESTMENT TYPE AMORTIZED COST LOSS FAIR VALUE
--------------- -------------- ---------- ----------
Corporate debt obligations....................... $12,085 $ -- $12,085
Municipal bonds.................................. 26,123 -- 26,123
Money Market Instruments and Funds............... 3,319 -- 3,319
------- ---- -------
$41,527 $ -- $41,527
======= ==== =======
As of December 31, 2000, the following investments are classified as
short-term investments (in thousands):
GROSS
UNREALIZED ESTIMATED
INVESTMENT TYPE AMORTIZED COST LOSS FAIR VALUE
--------------- -------------- ---------- ----------
Corporate debt obligations....................... $24,206 $(77) $24,129
======= ==== =======
4. DEBT
In July 1999, the Company entered into an agreement for an equipment loan
facility for a maximum of $300,000. Loans under this facility bear interest at
prime plus 1.25%. In January 2000, the Company amended this agreement to include
a second equipment loan facility for a maximum of $500,000. Loans under the
second facility bear interest at prime plus 1%. In July 2000, the Company
amended this agreement to include a revolving line of credit up to a maximum of
$1 million and a third equipment loan facility up to a maximum of $750,000.
Loans under these two additional facilities will bear interest at prime plus
0.5% and prime plus 1.0%, respectively. Certain equipment of the Company secures
each of the equipment loan facilities and certain receivables secure the
revolving line of credit. During the year ended December 31, 2000, the Company
borrowed $795,000 under the first two equipment loan facilities, all of which
was fully repaid as of December 31, 2000.
5. INCOME TAXES
The components of loss before income taxes are as follows (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1999 2000
----- ------- -------
Loss subject to domestic income taxes only....... $(621) $(1,161) $(9,336)
Income (loss) subject to foreign income taxes
only........................................... 154 (177) 1,621
----- ------- -------
$(467) $(1,338) $(7,715)
===== ======= =======
40
43
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The income tax provision (benefit) is composed of the following (in
thousands):
YEARS ENDED DECEMBER 31,
--------------------------
1998 1999 2000
------ ------ ------
Current
Federal................................................... $(86) $(67) $125
State..................................................... -- -- 3
Foreign................................................... 7 -- 268
---- ---- ----
(79) (67) 396
Deferred.................................................... -- -- --
---- ---- ----
Total provision (benefit)......................... $(79) $(67) $396
==== ==== ====
The following is a reconciliation of the effective tax rates and the United
States statutory federal income tax rate:
YEARS ENDED DECEMBER 31,
--------------------------
1998 1999 2000
------ ------ ------
Statutory federal income tax rate.......................... (34.0)% (34.0)% (34.0)%
State income taxes, net of federal tax..................... -- -- (5.8)
Foreign taxes, at lower rate............................... (11.8) 5.2 3.4
Permanent differences -- stock compensation................ 16.1 15.8 40.3
Research and development credits........................... (23.6) (2.2) (0.8)
Valuation allowance........................................ 36.4 9.0 (0.9)
Other...................................................... -- 1.2 2.9
----- ----- -----
Effective tax rate......................................... (16.9)% (5.0)% 5.1%
===== ===== =====
Deferred tax assets consisted of the following (in thousands):
YEARS ENDED DECEMBER 31,
--------------------------
1998 1999 2000
------ ------ ------
Deferred tax assets:
Net operating loss carryforwards....................... $ -- $ 89 $ 146
Credit carryforwards................................... 110 140 190
Depreciation........................................... -- -- (198)
Accruals and allowances................................ 100 101 278
----- ----- -----
210 330 416
Less: valuation allowance................................ (210) (330) (416)
----- ----- -----
Net deferred tax assets.................................. $ -- $ -- $ --
===== ===== =====
Based upon the weight of available evidence, which included the historical
operating performance and the accumulated deficit, the Company provided a full
valuation allowance against net deferred tax assets.
As of December 31, 2000, the Company had approximately $370,000 of federal
net operating loss carryforwards for tax purposes and $138,000 of federal and
$52,000 of state credit carryforwards available to reduce future income taxes.
The net operating loss carryforwards will expire at various dates beginning in
2013 through 2020, if not utilized.
Under current tax rules, the amounts of and benefits from net operating
loss carryforwards may be impaired or limited in certain circumstances. Events
which cause limitations in the amount of net
41
44
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
operating loss that the Company may utilize in any year include, but are not
limited to, a cumulative change in control of more than 50%, as defined, within
a three-year period.
6. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share for the years indicated (in thousands, except per share amounts):
YEARS ENDED DECEMBER 31,
------------------------------
1998 1999 2000
------- ------- --------
Numerator:
Net loss attributable to common stockholders............ $ (388) $(1,271) $(22,869)
======= ======= ========
Denominator:
Shares used in computing net loss per share:............ 3,600 4,080 9,524
Weighted average of common shares outstanding
Less: Weighted average of shares subject to
repurchase right................................... -- -- (1,072)
------- ------- --------
Basic................................................ 3,600 4,080 8,452
Add: Effect of dilutive securities, including
options, warrants and mandatorily redeemable
convertible preferred stock........................ -- -- --
------- ------- --------
Diluted.............................................. 3,600 4,080 8,452
======= ======= ========
Net loss per share attributable to common stockholders:
Basic and diluted:...................................... $ (0.11) $ (0.31) $ (2.71)
======= ======= ========
Anti-dilutive securities, including options, warrants and
mandatorily redeemable convertible preferred stock, not
included in net loss per share calculation.............. 16,818 17,392 21,260
======= ======= ========
Pro forma (unaudited):
Shares used above....................................... 4,080 8,452
Pro forma adjustment to reflect weighted average effect of
the assumed conversion of mandatorily redeemable
convertible preferred stock............................. 15,400 17,050
------- --------
Shares used in computing pro forma loss per share
attributable to common stockholders:
Basic and diluted....................................... 19,480 25,502
======= ========
Pro forma loss per share attributable to common
stockholders:
Basic and diluted....................................... $ (0.07) $ (0.90)
======= ========
The following outstanding options and mandatorily redeemable convertible
preferred stock were excluded from the computation of diluted net loss per share
(in thousands):
YEARS ENDED DECEMBER 31,
--------------------------
1998 1999 2000
------ ------ ------
Options to purchase common stock...................... 1,418 1,992 4,211
Mandatorily redeemable convertible preferred stock.... 15,400 15,400 17,049
------ ------ ------
16,818 17,392 21,260
====== ====== ======
42
45
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEEMED PREFERRED STOCK DIVIDEND
In July 2000, the Company issued 4,700,000 shares of Series C preferred
stock at a price of $5.50 per share. The difference between that price and the
deemed fair value of the common stock on the date of the transaction resulted in
a beneficial conversion feature in the amount of $14,758,000. The value of this
beneficial conversion feature was recognized immediately as a deemed preferred
stock dividend in the quarter ended September 30, 2000 as the preferred
stockholders have the right to immediately convert their preferred shares.
8. AMENDED CERTIFICATE OF INCORPORATION
The Company amended its Certificate of Incorporation upon the completion of
its initial public offering. Upon the adoption of the amended Certificate of
Incorporation, the Company is authorized to issue 250,000,000 shares of common
stock, $0.001 par value per share, and 5,000,000 undesignated shares of
preferred stock, $0.001 par value per share.
9. STOCK-BASED COMPENSATION PLANS
1997 STOCK OPTION PLAN
In May 1997, the Company adopted a 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 Plan and all shares available for grant under the
1997 Stock Plan were transferred to the 2000 Stock Incentive Plan.
2000 STOCK INCENTIVE PLAN
In November 2000, the Company adopted a 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. In addition, 1,397,867 shares available for grant under the
1997 Stock Incentive Plan at the time of its termination were transferred to and
became reserved for issuance under the 2000 Stock Incentive Plan. 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. 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 2000 Stock Incentive Plan
generally vest over four years and
43
46
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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).
The following table summarizes option activity under the Plans:
OPTIONS OUTSTANDING WEIGHTED
-------------------------- AVERAGE
AVAILABLE NUMBER OF EXERCISE EXERCISE
FOR GRANT SHARES PRICE PRICE
---------- ---------- ------------- --------
Balance at December 31, 1997.... 1,502,000 1,498,000 $0.05 $0.05
Canceled........................ 14,000 (14,000) $0.05 $0.05
---------- ----------
Balance at December 31, 1998.... 1,516,000 1,484,000 $0.05 $0.05
Granted......................... (1,402,000) 1,402,000 $0.20 $0.20
Canceled........................ 733,000 (733,000) $0.05 $0.05
---------- ----------
Balance at December 31, 1999.... 847,000 2,153,000 $0.05 - $0.20 $0.12
Amendment of the 1997 Plan...... 5,200,000 --
Adoption of the 2000 Plan....... 1,500,000 --
Options granted under the 1997
Plan and canceled after the
adoption of the 2000 Plan..... (13,200) --
Granted......................... (4,947,266) 4,947,266 $0.20 - $5.75 $1.63
Canceled........................ 132,333 (132,333) $0.20 - $4.50 $2.07
Exercised....................... -- (3,420,750) $0.05 - $2.00 $0.59
---------- ----------
Balances at December 31, 2000... 2,718,867 3,547,183 $0.05 - $5.75 $1.70
========== ==========
Information relating to stock options outstanding at December 31, 2000 is
as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------ -----------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------- ----------- --------------- -------------- ----------- --------------
$0.05 595,000 5.61 $0.05 595,000 $0.05
$0.20 851,917 8.38 $0.20 164,250 $0.20
$0.50 356,900 9.18 $0.50 11,250 $0.50
$1.00 326,300 9.54 $1.00 -- --
$2.00 362,450 9.55 $2.00 2,125 $2.00
$2.50 100,250 9.68 $2.50 -- --
$4.00 115,000 9.73 $4.00 -- --
$4.50 660,366 9.80 $4.50 -- --
$4.88 113,000 10.00 $4.88 -- --
$5.75 66,000 9.96 $5.75 -- --
--------- -------
3,547,183 8.65 $1.70 772,625 $0.09
========= =======
EMPLOYEE STOCK PURCHASE PLAN
In November 2000, the Company adopted its 2000 Employee Stock Purchase
Plan. The Company has reserved 1,500,000 shares of common stock for issuance
under the Plan and there was no issuance as of December 31, 2000. On the first
day of January each year beginning January 1, 2001, additional shares of common
stock shall be reserved for issuance under the Plan as determined by the Board
of
44
47
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 2000
Plan, effective November 21, 2000, provides eligible employees with the
opportunity to acquire an ownership interest in the Company through a program of
periodic payroll deductions applied every six months to the purchase of the
common stock. The Plan is structured as a qualified employee stock purchase plan
under Section 423 of the amended Internal Revenue Code of 1986. 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 Income Security Act of 1974. The Plan will terminate
on October 31, 2002.
STOCK-BASED COMPENSATION UNDER APB OPINION NO. 25
During the years ended December 31, 1999 and 2000 the Company recorded
deferred compensation of $1,302,000 and $27,255,000, respectively. This deferred
compensation represents the difference between the grant price and the deemed
fair value for financial statement reporting purposes of the Company's common
stock options granted during this period. Deferred compensation is being
amortized using the graded vesting method, in accordance with SFAS No. 123 and
FASB Interpretation No. 28, over the vesting period of each respective option,
generally four years. Under the graded vesting method, each option grant is
separated into portions based on their vesting terms which results in
acceleration of amortization expense for the overall award. The accelerated
amortization pattern results in expensing approximately 52% of the total award
in year one, 27% in year two, 15% in year three and 6% in year four.
SFAS NO. 123 COMPENSATION TO CONSULTANTS
In the years ended December 31, 1997 and 2000, the Company granted options
to purchase common stock of 80,000 shares and 173,333 shares, respectively, to
consultants and an advisor under the 1997 Plan. The aggregate exercise prices
amounted to $4,000 and $96,000, respectively. These options vest over periods of
one to four years. The Company will be required to record the change in the fair
value of these options at each reporting date prior to vesting and then finally
at the vesting date of the option. Deferred stock-based compensation expense in
accordance with SFAS No. 123 and EITF Issue No. 96-18 related to these options
totaled $115,000 and $1,238,000 at December 31, 1999 and 2000, respectively.
Amortization of the deferred stock-based compensation balance amounted to
$26,000, $22,000 and $940,000 for the years ended December 31, 1998, 1999 and
2000, respectively.
STOCK-BASED COMPENSATION ARISING FROM SERIES C MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK
The Company sold 5.0 million shares of Series C mandatorily redeemable
convertible preferred stock during the third quarter of 2000 at $5.50 per share.
As 300,000 of these shares were sold to employees and related parties in a
second closing when the value of the stock was deemed to be $11.76 per share,
the Company recorded a one-time general and administrative expenses of $1.9
million related to the sale of these shares.
PRO FORMA DISCLOSURE UNDER SFAS NO. 123
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS No. 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options
granted under the fair value method. The fair value of these options was
estimated using the Black-Scholes option pricing model. The Company calculated
the fair value of each
45
48
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
option on the date of grant using the Black-Scholes option pricing model, as
prescribed by SFAS No. 123, using the following assumptions:
Risk free interest rate................................ 5.00 - 5.96%
Expected life (years).................................. 3 - 4
Volatility............................................. 70%
Dividend yield......................................... 0%
The weighted average fair value on the grant date of options in the years
ended December 31, 1999 and 2000 was $1.27 and $6.19, respectively.
Had compensation cost been determined based upon the fair value on the
grant date, consistent with the methodology prescribed under SFAS No. 123, the
Company's pro forma net loss and pro forma basic and diluted net loss per share
under SFAS No. 123 would have been as follows (in thousands, except per share
data):
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1999 2000
------ ------- --------
Net loss attributable to common stockholders:
As reported....................................... $ (388) $(1,271) $(22,869)
Pro forma......................................... (413) (1,330) (23,562)
Net loss per share attributable to common
stockholders:
As reported
Basic and diluted................................. $(0.11) $ (0.31) $ (2.71)
Pro forma net loss per share attributable to common
stockholders:
Basic and diluted................................. $(0.11) $ (0.33) $ (2.79)
10. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents,
short-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 U.S.
The Company performs ongoing credit evaluations of its customers' financial
condition, and limits the amount of credit extended when deemed necessary, but
generally does not require collateral.
At December 31, 1999, two customers accounted for 10% and 20% of accounts
receivable, respectively. At December 31, 2000, one customer accounted for 10%
of accounts receivable.
For the year ended December 31, 1998, two customers accounted for 13% and
10% of revenues, respectively. For the year ended December 31, 1999, one
customer accounted for 11% of revenues. For the year ended December 31, 2000 no
customer accounted for more than 10% of revenues.
11. GEOGRAPHIC SEGMENT INFORMATION
The Company operates in a single industry segment. This industry segment is
characterized by rapid technological change and significant competition. 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.
46
49
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the Company's revenues generated from and
identifiable assets situated in geographic segments (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------
1998 1999 2000
------ ------ -------
REVENUES
United States..................................... $4,470 $6,724 $20,248
Taiwan............................................ 436 827 1,975
------ ------ -------
Total..................................... $4,906 $7,551 $22,223
====== ====== =======
DECEMBER 31,
------------------
1999 2000
------- -------
IDENTIFIABLE ASSETS
United States............................................. $ 9,398 $80,548
Taiwan.................................................... 2,744 7,771
China..................................................... -- 206
------- -------
Total............................................. $12,142 $88,525
======= =======
12. COMMITMENTS AND CONTINGENCIES
From time to time, the Company may be involved in litigation in the normal
course of business. Management believes that the outcome of such matters to date
will not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
The Company leases certain office space under long-term operating leases
expiring at various dates through December 2004. Total lease expenses under
these operating leases were approximately $526,000 for the year ended December
31, 2000.
Total future minimum lease payments under operating leases as of December
31, 2000, for the years ending December 31, are summarized below (in thousands):
2001....................................................... $1,668
2002....................................................... 1,729
2003....................................................... 1,754
2004....................................................... 1,005
------
Total...................................................... $6,156
======
13. ACCUMULATED OTHER COMPREHENSIVE LOSSES
The Company adopted the SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 established standards for the reporting and disclosure of
comprehensive income and its components; however, the disclosure had no impact
on the Company's consolidated results of operations, financial position or cash
flows. Comprehensive income is defined as the change in equity of a company
during a period resulting from transactions and other events and circumstances,
excluding transactions resulting from investments by owners and distributions to
owners. The difference between net loss and comprehensive loss for the Company
is from foreign exchange translations adjustments and unrealized losses on
available-for-sale securities.
47
50
ALLIANCE FIBER OPTIC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of accumulated other comprehensive losses for the years
ended December 31, 1999 and 2000, respectively, are as follows (in thousands):
DECEMBER 31,
-------------
1999 2000
---- -----
Cumulative translation adjustments.......................... $(14) $(104)
Unrealized loss on short-term investments................... -- (77)
---- -----
Accumulated other comprehensive losses............ $(14) $(181)
==== =====
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The following table contains selected unaudited consolidated statements of
operations data for each quarter of fiscal years 1999 and 2000 (in thousands,
except per share data).
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 2000 2000 2000 2000
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues.............................. $1,349 $1,326 $2,375 $2,501 $3,143 $4,271 $ 5,961 $ 8,848
Gross profit.......................... 415 274 1,060 891 1,346 1,823 2,079 2,651
Net loss attributable to common
stockholders(1)..................... (268) (464) (203) (336) (814) (920) (17,686) (3,449)
Net loss per share attributable to
common stockholders(2)(3)(4)
Basic and diluted................... $(0.07) $(0.12) $(0.05) $(0.07) $(0.17) $(0.17) $ (3.34) $ (0.20)
====== ====== ====== ====== ====== ====== ======== =======
- ---------------
(1) The diluted net loss per share attributable to common stockholders
computation excludes potential shares of common stock (convertible preferred
stock, options to purchase common stock and shares of common stock issued
upon exercise of stock options which are subject to repurchase rights held
by us), if their effect would be anti-dilutive. See Note 1 to the
Consolidated Financial Statements for a detailed explanation of the
determination of the shares used in computing basic and diluted net loss per
share.
(2) The number of shares of common stock used to compute net loss per share
attributable to common stockholders includes the weighted average number of
shares resulting from the assumed conversion of all outstanding shares of
mandatorily redeemable convertible preferred stock as if the conversion
occurred at the beginning of the periods presented or the date of issuance
of the mandatorily redeemable convertible preferred stock, whichever is
later.
(3) Net loss per share is computed independently for each quarter presented.
Therefore, the aggregate of the quarterly information may not equal the
annual loss per share.
(4) Net loss attributable to common stockholders in the quarter ended September
30, 2000 includes a charge of $14,758,000 related to a deemed preferred
stock dividend. See Note 7 to the Consolidated Financial Statements for a
detailed explanation of the determination of this dividend.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
48
51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item (with respect to Directors) 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 2001 Annual Meeting of Stockholders to be held on May
18, 2001 (the "Proxy Statement").
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 executive officers of the Company are as follows:
Peter C. Chang, 43, has served as our Chairman of the Board, Chief
Executive Officer, President and Secretary since our formation in December 1995.
From 1990 to 1995, Mr. Chang was Division Manager at Hon Hai Holding. From 1984
to 1988, he was an engineer at AlliedSignal Inc. and from 1988 to 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.
Gregory W. Barnes, 52, has served as our Vice President, U.S. Operations
since March 2000. From February 1994 to March 2000, he served as a General
Manager at Xerox Corporation. Mr. Barnes received an M.B.A. and a B.S. in
Engineering from California State University Pomona.
John M. Harland, 49, has served as our Vice President, Finance and Chief
Financial Officer since July 2000. Mr. Harland has also served as our Assistant
Secretary since September 2000. From April 2000 to July 2000, Mr. Harland served
as Vice President, Finance, Chief Financial Officer and Secretary of
Medpool.com, an internet-based trading exchange between hospitals and suppliers.
From January 1998 to January 2000, Mr. Harland was Vice President, Finance and
Administration, Chief Financial Officer and Secretary of Biometric Imaging,
Inc., a cell-analysis diagnostic company acquired by Becton Dickinson in
February 1999. From October 1996 to December 1997, he was Vice President,
Finance and Administration, Chief Financial Officer and Treasurer of Influence,
Inc. From May 1995 to October 1996, he was Vice President, Finance and
Administration, Chief Financial Officer and Secretary of Indigo Medical,
Incorporated, which was acquired by Johnson & Johnson in August 1996. Mr.
Harland received his M.A. from Cambridge University in Business Studies and
Natural Sciences, his M.B.A. from Golden Gate University and is a Certified
Public Accountant.
David A. Hubbard, 41, 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. Mr. Hubbard
received his M.S. from University of Connecticut and his B.S. from State
University of New York.
James Lee, 38, has served as our Vice President and General Manager, Asian
Operations since March 1996. From August 1993 to February 1996, Mr. Lee served
as General Manager of mainland China Operations at Seagull Group Corporation, a
manufacturer of stone products. Mr. Lee holds a B.S. in Industrial Management
from the National Taiwan University of Technology.
Wei-Shin Tsay, Ph.D., 49, has served as our Senior Vice President, Product
Development since August 2000. From May 1999 to August 2000, Dr. Tsay served as
a Director of Marketing for the Asia/ Pacific region for the Transmission
Systems Division of JDS Uniphase. From July 1997 to March 1999, he was a
Director of Engineering for the Transmission Systems Division at JDS Uniphase.
From February 1997 to July 1997, Dr. Tsay was the Director of Operations at
Uniphase Telecom Products. From May 1996 to February 1997, he was a Director of
Digital Transmission at Uniphase Telecom Products. From February 1994 to May
1996, Dr. Tsay was the Product Manager of High Performance Lasers for the
Optoelectronics Strategic Business Unit at AT&T/Lucent Microelectronics. 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.
49
52
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,"
"Executive Compensation," and "Report of the Compensation Committee of the Board
of Directors on Executive Compensation -- Compensation Committee Interlocks and
Insider Participation" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the captions "Election of Directors -- Director Compensation,"
"Executive Compensation," and "Report of the Compensation Committee of the Board
of Directors on Executive Compensation -- Compensation Committee Interlocks and
Insider Participation" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information contained under the caption "Certain Relationships and Related Party
Transactions" contained in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Consolidated Financial Statements
Reference is made to the Index to Consolidated Financial Statements
of Alliance Fiber Optic Products, Inc., under Item 8 on Page 29 of this
report.
(2) Financial Statement Schedules
Not applicable.
All other financial statement schedules have been omitted because they are
not applicable or not required or because the information is included elsewhere
in the Consolidated Financial Statements or the Notes thereto.
(3) Exhibits
See Item 14(c) below. Each management contract or compensatory plan
or arrangement required to be filed has been identified.
(b) REPORTS ON FORM 8-K.
The Company filed no reports on Form 8-K during the quarter ended
December 31, 2000.
(c) EXHIBITS
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(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 Amendment No. 1 to the Company's
Registration Statement on Form S-1 (File No. 333-45482)).
4.2 Amended and Restated Rights Agreement dated as of August 31,
200 (incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-1 (File No.
333-45482)).
50
53
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- -----------------------
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 Lease Agreement dated April 6, 1999 by and between North
Pastoria Partners and the Company (incorporated by reference
to Exhibit 10.3 to the Company's Registration Statement on
Form S-1 (File No. 333-45482)).
10.4 Lease dated June 26, 2000 by and between Renault & Handley
Employees Investment Co. and the Company (incorporated by
reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (File No. 333-45482)).
10.5# 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)).
10.6# Alliance Fiber Optic Products, Inc. 2000 Employee Stock
Purchase Plan (incorporated by reference to Exhibit 10.6 to
Amendment No. 4 to the Company's Registration Statement on
Form S-1 (File No. 333-45482)).
10.7# 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)).
10.8# Alliance Fiber Optic Products, Inc. 1997 Stock Plan Stock
Option Agreement dated June 15, 2000 between R. David
Dicioccio and the Company (incorporated by reference to
Exhibit 10.8 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (File No. 333-45482)).
10.9# Form of Full Recourse Promissory Note (incorporated by
reference to Exhibit 10.9 to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (File No.
333-45482)).
10.10# Alliance Fiber Optic Products, Inc. 1997 Stock Plan Stock
Option Agreement dated July 25, 2000 between John M. Harland
and the Company (incorporated by reference to Exhibit 10.10
to Amendment No. 3 to the Company's Registration Statement
on Form S-1 (File No. 333-45482)).
21.1* Subsidiaries of the Company.
23.1* Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (see page 52 of this Form 10-K).
- ---------------
* Filed herewith.
# Indicates management contract or compensatory plan or arrangement.
(d) FINANCIAL STATEMENTS.
Reference is made to Item 14(a)(1) and 14(a)(2) above.
51
54
SIGNATURES
Pursuant to the requirements of 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 30, 2001
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 John M. Harland, and each of
them, his true and lawful attorneys-in-fact, each with full power of
substitution, for him or her in any and all capacities, to sign any amendments
to this report on Form 10-K and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or their substitute or substitutes may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ PETER C. CHANG President, Chief Executive March 30, 2001
- --------------------------------------------------- Office
Peter C. Chang (Principal Executive Officer)
and Chairman
/s/ JOHN M. HARLAND Chief Financial Officer April 2, 2001
- --------------------------------------------------- (Principal Financial and
John M. Harland Accounting Officer)
Director
- ---------------------------------------------------
R. David Dicioccio
/s/ PETER T. MORRIS Director March 30, 2001
- ---------------------------------------------------
Peter T. Morris
Director
- ---------------------------------------------------
Gwong-Yih Lee
/s/ JAMES C. YEH Director March 30, 2001
- ---------------------------------------------------
James C. Yeh
/s/ MICHAEL TUNG Director March 28, 2001
- ---------------------------------------------------
Michael Tung
52
55
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(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 Amendment No. 1 to the Company's
Registration Statement on Form S-1 (File No. 333-45482)).
4.2 Amended and Restated Rights Agreement dated as of August 31,
200 (incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-1 (File No.
333-45482)).
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 Lease Agreement dated April 6, 1999 by and between North
Pastoria Partners and the Company (incorporated by reference
to Exhibit 10.3 to the Company's Registration Statement on
Form S-1 (File No. 333-45482)).
10.4 Lease dated June 26, 2000 by and between Renault & Handley
Employees Investment Co. and the Company (incorporated by
reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (File No. 333-45482)).
10.5# 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)).
10.6# Alliance Fiber Optic Products, Inc. 2000 Employee Stock
Purchase Plan (incorporated by reference to Exhibit 10.6 to
Amendment No. 4 to the Company's Registration Statement on
Form S-1 (File No. 333-45482)).
10.7# 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)).
10.8# Alliance Fiber Optic Products, Inc. 1997 Stock Plan Stock
Option Agreement dated June 15, 2000 between R. David
Dicioccio and the Company (incorporated by reference to
Exhibit 10.8 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (File No. 333-45482)).
10.9# Form of Full Recourse Promissory Note (incorporated by
reference to Exhibit 10.9 to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (File No.
333-45482)).
10.10# Alliance Fiber Optic Products, Inc. 1997 Stock Plan Stock
Option Agreement dated July 25, 2000 between John M. Harland
and the Company (incorporated by reference to Exhibit 10.10
to Amendment No. 3 to the Company's Registration Statement
on Form S-1 (File No. 333-45482)).
21.1* Subsidiaries of the Company.
23.1* Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (see page 52 of this Form 10-K).
- ---------------
* Filed herewith.
# Indicates management contract or compensatory plan or arrangement.
53