Notes to
Consolidated Financial Statements
1. The Company
and Summary of Significant Accounting Policies
The Company
Alliance Fiber Optic Products, Inc. (the "Company") was
incorporated in California on December 12, 1995 and reincorporated in Delaware on
October 19, 2000. The Company designs, manufactures and markets fiber optic components
for communications equipment manufacturers. The Company's headquarters are located in
Sunnyvale, California, and it has operations in Taiwan and China.
Use of estimates
The preparation of financial statements in accordance
with generally accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting
period. Significant estimates involve those required in the assessment of allowance for
sales returns, doubtful accounts and/or potential excess obsolete inventory. Actual results
could differ from those estimates.
Basis of presentation
The consolidated financial statements include the
accounts of the Company and its subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
Foreign currency translation
The Company's operations through foreign subsidiaries
use the local currency as their functional currency. All assets and liabilities of the
subsidiaries are translated at rates of exchange on the balance sheet date. Revenues and
expenses are translated at the average rate of exchange for the period. Gains and losses
resulting from foreign currency translation are recorded as a separate component of other
comprehensive income (loss) in stockholders' equity. Foreign currency transaction gains and
losses are recorded in interest and other income and have not been material.
Cash, cash equivalents and short-term investments
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
less than one year. As of December 31, 2007 and 2006, all investments are classified as
short-term investments. Short-term investments are classified as available-for-sale and are
reported at fair value, with unrealized gains and losses recorded in stockholders' equity
as a component of other comprehensive income/loss. Realized gains and losses on sales of
all investments are reported in results of operations and computed using the specific
identification method.
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.
Fair
v
alue
of
f
inancial
i
nstruments
The carrying value of the Company's cash and cash
equivalents, accounts receivable, accounts payable,
debt and foreign exchange contracts
approximate fair value due to the relatively short
period of time to maturity.
33
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes to
Consolidated Financial Statements
Allowance for
d
oubtful
a
ccounts
The Company performs credit evaluations of customers'
financial condition. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability or unwillingness of customers to make required
payments. When the Company becomes aware that a specific customer is unable to meet its
financial obligations, for example, as a result of bankruptcy or deterioration in the
customer's operating results or financial position, the Company records a specific
allowance to reflect the level of credit risk in the customer's outstanding receivable
balance. In addition, the Company records additional allowances based on certain
percentages of aged receivable balances. These percentages are determined by a variety of
factors including, but not limited to, current economic trends, historical payment and bad
debt write-off experience. The Company is not able to predict changes in the financial
condition of customers, and if circumstances related to customers deteriorate, estimates of
the recoverability of trade receivables could be materially affected and the Company may be
required to record additional allowances. Alternatively, if the Company provides more
allowances than the Company needs, the Company may reverse a portion of such provisions in
future periods based on actual collection experience.
Inventories
Inventories are stated at the lower of cost or market,
with cost being determined using standard cost, which approximates actual cost on a
first-in, first-out basis. Market value is determined as the lower of replacement cost or
net realizable value. Provisions are made for excess and obsolete inventory based on
historical usage and management's estimates of future demand. Inventory reserves, once
established, are only reversed upon sale or disposition of related inventory.
Property and equipment
Property and equipment are stated at cost less
accumulated depreciation and impairment charges. Depreciation is computed using the
straight-line method using estimated useful lives of two to five years for machinery and
equipment and five years for furniture and fixtures. Amortization of leasehold improvements
is computed using the straight-line method over the shorter of the estimated life of the
assets, generally two to four years, or the lease term. Depreciation and amortization
expense was $1.2 million in 2007, $1.3 million in 2006 and $1.6 million in 2005.
Revenue recognition
The Company recognizes revenue upon shipment of its
products to its customers, provided that the Company has received a purchase order, the
price is fixed, collection of the resulting receivable is reasonably assured and transfer
of title and risk of loss has occurred. Subsequent to the sale of its products, the Company
has no obligation to provide any modification or customization upgrades, enhancements or
post contract customer support.
Allowances are provided for estimated returns. A
provision for estimated sales return allowances is recorded at the time revenue is
recognized based on historical returns, current economic trends and changes in customer
demand. Such allowances are adjusted periodically to reflect actual and anticipated
experience. Such adjustments, which are recorded against revenue in the period, could be
material.
Shipping and handling expenses
Shipping and handling expenses are included in
cost of revenue.
Research and development expenses
Research and development costs are expensed as
incurred.
Advertising expenses
Advertising costs are expensed as incurred and have not
been material.
34
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes to
Consolidated Financial Statements
Sales taxes
The Company
accounts
for
taxes charged to our customers and collected on behalf of the taxing authorities and
recognize
revenue on the sales
on a net basis.
Income taxes
The Company accounts for deferred income taxes under the liability approach whereby the
expected future tax consequences of temporary differences between the book and tax basis of
assets and liabilities are recognized as deferred tax assets and liabilities. A valuation
allowance is established for any deferred tax assets for which realization is
uncertain.
The Company files income tax returns in the U.S. federal jurisdiction, and various state
and foreign jurisdictions. The Company is no longer subject to U.S. federal, state and
local, or non-U.S. income tax examinations by tax authorities for years before 2003. The
Company is currently not under any examinations by nor has received notices of examination
from tax authorities.
The Company adopted the provisions of FASB
Interpretation No. 48,
"Accounting for
Uncertainty in
Income Taxes" ("FIN
48"),
on
January 1, 2007. As a result of the implementation of
FIN
48, the
Company recognized no increase in the liability for unrecognized tax benefits. A
reconciliation of the beginning and ending amount of unrecognized tax benefit is as
follows:
|
|
|
|
|
|
(thousands)
|
|
Balance at January 1,
2007
|
|
|
$
|
-
|
|
Additions
based on tax positions related to current year
|
|
|
|
-
|
|
Additions for
tax positions of prior years
|
|
|
|
-
|
|
Reductions for tax
positions of prior years
|
|
|
|
-
|
|
PenSettlements
|
|
|
|
-
|
|
|
|
|
Balance at
December 31, 2007
|
|
|
$
|
-
|
|
|
|
Stock-based compensation
Effective January 1, 2006, the Company adopted the provisions of FASB Statement
No. 123 (revised 2004), "Share-Based Payment" and the Securities and Exchange
Commission Staff Accounting Bulletin No. 107 (collectively, "Statement
No. 123(R)"), which establish accounting for share-based payment ("SBP") awards
exchanged for employee services and requires companies to expense the estimated fair value
of these awards over the requisite employee service period.
Prior to January 1, 2006, the Company accounted for
stock-based compensation arrangements in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees".
In addition, the Company complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure." Equity instruments issued to non-employees are
accounted for in accordance with the provisions of SFAS No. 123, SFAS 148 and
the Emerging Issue Task Force ("EITF")
Issue No. 96-18, which require the award to be recorded
at its fair value. See Note 2 to the Consolidated Financial Statement for a further
discussion on stock-based compensation.
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) consists of cumulative translation adjustments and unrealized
gain (loss) on short-term investments and is disclosed in the consolidated statements of
stockholders' equity.
35
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes to
Consolidated Financial Statements
Recent
a
ccounting
p
ronouncements
In June 2007, the
Financial Accounting Standards Board
("FASB")
ratified EITF Issue No.
07-3,
"Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and
Development Activities"
(EITF
07-3).
EITF 07-3 requires
non-refundable advance payments for goods and services to be used in future research and
development (R&D) activities to be recorded as assets and the payments to be expensed
when the R&D activities are performed. EITF 07-3 applies prospectively for new
contractual arrangements entered into beginning in the first quarter of fiscal year 2008.
The Company is currently evaluating the impact of EITF 07-3, but does not expect the
adoption of EITF 07-3 to have a material impact on its consolidated financial
position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, "The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS
159)".
SFAS
159 permits entities to elect to measure
many financial instruments and certain other items at fair value that are not currently
required to be measured at fair value. This election is irrevocable. SFAS 159 will be
effective for the Company on January 1, 2008. The Company is currently assessing the
potential impact that the adoption of SFAS 159 will have on its financial
statements.
In September 2006, the FASB issued SFAS No. 157, "Fair
Value Measurements" (SFAS 157), which defines fair value, establishes guidelines for
measuring fair value and expands disclosures regarding fair value measurements. SFAS 157
does not require any new fair value measurements but rather eliminates inconsistencies in
guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal
years beginning after November 15, 2007. Earlier adoption is permitted, provided the
Company has not yet issued financial statements, including for interim periods, for that
fiscal year. The Company is currently evaluating the impact of SFAS 157, but does not
expect the adoption of SFAS 157 to have a material impact on its consolidated financial
position, results of operations or cash flows.
In July 2006, the FASB issued FIN 48 ¡X an
interpretation of FASB No. 109, "Accounting for Income Taxes." FIN 48 prescribes a
comprehensive model for recognizing, measuring, presenting and disclosing in the financial
statements tax positions taken or expected to be taken on a tax return, including a
decision on whether or not to file in a particular jurisdiction. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes." The
provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this
standard. Only tax positions that meet a "more-likely-than-not" recognition threshold at
the effective date may be recognized or
continue to be recognized upon adoption
of FIN 48.
The Company adopted the
provisions of
FIN
48
on January
1, 2007. As a result of the implementation of Interpretation 48, the Company recognized no
increase in the liability for unrecognized tax benefits.
In June 2006, EITF
issued EITF issue No.06-03, "How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus
Net Presentation)" (EITF 06-03). EITF 06-03 provides guidance regarding accounting for
certain taxes assessed by a governmental authority that are imposed on a revenue-producing
transactions between a seller and a customer. These taxes may include, but are not limited
to, sales, use, value added, and some excise taxes. The Company has historically presented
and plans to continue to present on a net basis in the accompanying Consolidated Statement
of Operations and record as a liability until amounts are remitted to the respective taxing
authority. EITF 06-3 is effective for interim and annual reporting periods beginning after
December 15, 2006, with earlier application permitted. The Company adopted EITF 06-3
effective January 1, 2007. Adoption of this issue had no effect on the consolidated
financial statements and related disclosures.
2. Stock-based compensation
Statement No. 123(R) requires
companies to record compensation expense for stock options measured at fair value, on the
date of grant, using an option-pricing model. The fair value of stock options is determined
using the Binomial Lattice Model instead of the Black-Scholes Model previously utilized
under Statement No. 123. The Company believes that the former represents a more likely
projection of actual outcomes.
36
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes to
Consolidated Financial Statements
The Company adopted the modified
prospective transition method provided for under Statement No. 123(R) and, accordingly, has
not restated prior period amounts. Under this transition method, compensation expense for
the year ended December 31, 2007 includes compensation expense for all SBP awards granted
prior to, but not yet vested as of, January 1, 2006 based on the grant date fair value
estimated in accordance with the original provisions of Statement No. 123. Stock-based
compensation expense for all SBP awards granted after January 1, 2006 is based on the
grant date fair value estimated in accordance with the provisions of Statement
No. 123(R). Stock-based compensation expense includes an estimate for forfeitures and
is recognized over the expected term of the award on a straight-line basis. The Company
evaluated the need to record a cumulative effect adjustment relating to estimated
forfeitures for unvested previously issued awards, and the impact was not deemed to be
material.
As a result of adopting Statement
No. 123(R), on January 1, 2006, the Company's income before income tax and net income
for the year ended December 31, 2007 was $3.4 million, or $0.4 million lower than if it had
continued to account for share-based compensation under APB Opinion 25. The adoption of
Statement No. 123(R) did not impact basic and diluted income and loss per share for the
year ended December 31, 2007.
Statement No. 123(R) requires that
the realized tax benefit related to the excess of the deductible amount over the
compensation expense recognized be reported as a financing cash flow rather than as an
operating cash flow, as required under previous accounting guidance. The Company does not
recognize any tax benefit related to this based on Company's historical operating
performance, lack of taxable income and the accumulated deficit.
As of December 31, 2007, there was $0.6
million of total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the Company's various option plans. The cost is
expected to be recognized over a period of 2 years.
The following table presents the
Company's pro forma net income and basic and diluted net income per share for the year
ended December 31, 2005 had compensation expense been determined in accordance with the
fair value method of accounting at the grant dates for awards under the Company's various
stock-based compensation plans:
|
|
|
|
|
|
|
|
Year Ended December 31,
2005
|
|
|
Net loss as
reported
|
|
|
$
|
(2,617
|
)
|
|
|
|
|
|
|
|
|
Add:
Stock-based employee compensation expense included
|
|
|
|
|
|
|
|
|
|
in
reported net loss
|
|
|
|
-
|
|
|
|
|
|
Deduct: Total
stock-based employee compensation expense
|
|
|
|
|
|
|
|
|
|
determined
under fair value based method for all awards, net of related taxes
|
|
|
|
(796
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net
loss
|
|
|
$
|
(3,413
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per
share
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted - as reported
|
|
|
$
|
(0.07
|
)
|
|
|
|
|
Basic
and Diluted - pro forma
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
Shares used in
EPS calculation (basic and diluted)
|
|
|
|
39,330
|
|
|
37
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes to
Consolidated Financial Statements
For the year ended December 31, 2005,
the fair value of
stock-based
plan
awards was estimated using the
Black-Scholes valuation model, with the following weighted-average assumptions and fair
values as follows:
|
Year Ended December 31,
2005
|
|
Volatility
(percent)*
|
|
|
|
|
46.2
|
|
|
|
|
|
|
Expected term
(in years)**
|
|
|
|
|
4
|
|
|
|
|
|
|
Risk-free
interest rate (precent)***
|
|
|
|
|
4.40
|
|
|
|
|
|
|
Expected
dividend rate (precent)
|
|
|
|
|
-
|
|
|
|
|
|
|
Weighted-average fair value per
option granted
|
|
|
$
|
|
0.90
|
*
Volatility is measured using historical
daily price changes of the Company's common stock over the expected life of the option
** The expected term represents the weighted average period the option is expected to be
outstanding and is based primarily on the historical exercise behavior of employees.
*** The risk free interest rate is based on the U.S. Treasury zero-coupon yield with a
maturity that approximates the expected life of the option.
For the year ended December 31, 2007
and 2006, the fair value of
stock-based
plan
awards was estimated using the Binomial
Lattice valuation model, with the following weighted-average assumptions and fair values as
follows:
|
|
|
|
|
Years Ended December
31,
|
|
2007
|
2006
|
Volatility
(percent)*
|
|
|
$
|
37.7
|
|
$
|
|
36.7
|
|
|
|
Expected term
(in years)**
|
|
|
|
4
|
|
|
|
4
|
|
|
|
Risk-free
interest rate (precent)***
|
|
|
|
3.52
|
|
|
|
4.60
|
|
|
|
Expected
dividend rate (precent)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Forfeiture rate (percent)****
|
|
|
|
6
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value per
option granted
|
|
|
$
|
1.34
|
|
$
|
|
1.28
|
* Volatility is projected using
Industry Analysis forecasts for earnings, earnings per share, and stock price, and the
Company's earning forecast.
** The expected term represents the weighted average period the option is expected to be
outstanding and is based primarily on the historical exercise behavior of employees.
*** The risk free interest rate is based on the U.S. Treasury zero-coupon yield with a
maturity that approximates the expected life of the option.
**** Forfeiture rate is the estimated percentage of options forfeited by employees by
leaving or being terminated before vesting.
At December 31, 2007, the Company had two stock-based compensation plans. They are: (a)
1997 Stock Option Plan and (b) 2000 Stock Incentive Plan, which are described below.
38
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes to
Consolidated Financial Statements
(a) 1997 Stock Option Plan
In May 1997, the Company adopted its
1997 Stock Plan under which 3,000,000 shares of common stock were reserved for issuance to
eligible employees, directors and consultants upon exercise of stock options and stock
purchase rights. During the year ended December 31, 2000, an additional 5,200,000
shares were reserved for issuance under the 1997 Stock Plan. Incentive stock options are
granted at a price not less than 100% of the fair market value of the Company's common
stock and at a price of not less than 110% of the fair market value for grants to any
person who owned more than 10% of the voting power of all classes of stock on the date of
grant. Nonstatutory stock options are granted at a price not less than 85% of the fair
market value of the common stock and at a price not less than 110% of the fair market value
for grants to a person who owned more than 10% of the voting power of all classes of stock
on the date of the grant. Options granted under the 1997 Stock Plan generally vest over
four years and are exercisable for not more than ten years (five years for grants to any
person who owned more than 10% of the voting power of all classes of stock on the date of
the grant). In November 2000, the 1997 Stock Plan was replaced by the 2000 Stock Incentive
Plan.
(b) 2000 Stock Incentive Plan
In November 2000, the Company adopted its 2000 Stock
Incentive Plan under which 1,500,000 shares of common stock were reserved for issuance to
eligible employees, directors and consultants upon exercise of stock options and stock
purchase rights. On January 1 of each year, beginning on January 1, 2001, the number
of shares available for grant will automatically increase by the lesser of:
(i) 1,700,000 shares; (ii) 5% of the fully diluted outstanding shares of stock on
that date; or (iii) a lesser amount as may be determined by the Board of Directors.
The Board of Directors determined not to increase the number of shares available under the
Plan on January 1, 2007 and 2006, respectively. Incentive stock options and nonstatutory
stock options are granted at 100% of the fair market value of the Company's common stock on
the date of grant.
Options granted under the 2000 Stock
Incentive Plan generally vest over four years and are exercisable for not more than ten
years.
The following information relates to
the stock option activity for the year ended December 31, 2007:
|
|
|
|
Year Ended
December 31, 2007
|
Options
|
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
|
Aggregate
Intrinstc
Value
|
Outstanding at
December 31, 2006
|
|
|
5,046,083
|
$
|
1.24
|
|
|
|
|
Granted
|
|
|
375,500
|
|
2.13
|
|
|
|
|
Exercised
|
|
|
(381,625)
|
|
0.71
|
|
|
|
|
Forfeited
|
|
|
(72,500)
|
|
1.54
|
|
|
|
|
Outstanding at
December 31, 2007
|
|
|
4,967,458
|
$
|
1.34
|
|
6.5 Years
|
$
|
3,884,493
|
Vested and expected
to vest at December 31, 2007
|
|
|
4,894,338
|
$
|
1.34
|
|
6.5 Years
|
$
|
3,832,260
|
Exercisable at
December 31, 2007
|
|
|
4,465,772
|
$
|
1.34
|
|
6.3 Years
|
$
|
3,562,414
|
39
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes to
Consolidated Financial Statements
The following information relates to
the stock option activity for the year ended December 31, 2006:
|
Year Ended
December 31, 2006
|
Options
|
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
|
Aggregate
Intrinstc
Value
|
Outstanding at
December 31, 2005
|
|
|
4,840,383
|
$
|
1.12
|
|
|
|
|
Granted
|
|
|
640,000
|
|
1.91
|
|
|
|
|
Exercised
|
|
|
(286,600)
|
|
0.72
|
|
|
|
|
Forfeited
|
|
|
(147,700)
|
|
1.14
|
|
|
|
|
Outstanding at
December 31, 2006
|
|
|
5,046,083
|
$
|
1.24
|
|
7.2 Years
|
$
|
4,033,478
|
Vested and expected
to vest at December 31, 2006
|
|
|
4,989,357
|
$
|
1.24
|
|
7.2 Years
|
$
|
3,971,513
|
Exercisable at
December 31, 2006
|
|
|
4,478,825
|
$
|
1.28
|
|
7.0 Years
|
$
|
3,413,824
|
The aggregate intrinsic value in the
table above represents the total pre-tax intrinsic value (the difference between the
Company's closing stock price on the last trading day of the fourth quarter of fiscal 2007
and 2006 and the exercise price, multiplied by the number of in-the-money options) that
would have been received by the option holders had all option holders exercised their
options on December 31, 2007 and 2006. This amount changes based on the fair market value
of the Company's stock. The total intrinsic value of options exercised for the year ended
December 31, 2007 and 2006 was $470,000 and $348,000, respectively.
The expected dividend rate is 0% for years ended December 31, 2007 and 2006,
respectively.
Cash received from option exercises
during the year ended December 31, 2007 and 2006 was $272,000 and $206,000, respectively,
and is included within the financing activities section in the accompanying consolidated
statements of cash flows.
Information relating to stock options outstanding at
December 31, 2007 is as follows
:
Options Outstanding
|
|
Options Exercisable
|
|
Exercise
Price
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
$
|
0.20 - $0.86
|
|
|
1,027,025
|
|
|
4.29
|
|
$
|
0.75
|
|
|
1,002,725
|
|
$
|
0.75
|
|
$
|
0.90 - $0.90
|
|
|
964,050
|
|
|
7.83
|
|
$
|
0.90
|
|
|
791,850
|
|
$
|
0.90
|
|
$
|
0.91 - $0.96
|
|
|
1,083,800
|
|
|
6.44
|
|
$
|
0.94
|
|
|
1,006,200
|
|
$
|
0.94
|
|
$
|
1.00 - $2.02
|
|
|
1,388,250
|
|
|
7.35
|
|
$
|
1.78
|
|
|
1,255,666
|
|
$
|
1.77
|
|
$
|
2.10 - $5.75
|
|
|
476,333
|
|
|
6.52
|
|
$
|
2.87
|
|
|
381,331
|
|
$
|
3.02
|
|
$
|
6.38 - $6.38
|
|
|
28,000
|
|
|
3.03
|
|
$
|
6.38
|
|
|
28,000
|
|
$
|
6.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,967,458
|
|
|
6.51
|
|
$
|
1.34
|
|
|
4,465,772
|
|
$
|
1.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of December 31, 2007, 2006, and
2005 were 4,465,772, 4,478,825, and
4,338,221 at
an average exercise price of $1.34, $1.28, and $1.14 per share, respectively.
40
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes to
Consolidated Financial Statements
Accelerated Vesting of Options
On December 30, 2005, the Board of Directors of the
Company approved accelerating the vesting of all the currently unvested stock options
awarded to employees at the director level and above, including executive officers. The
unvested options to purchase up to approximately 1.9 million additional shares became
immediately exercisable as a result of the vesting acceleration. Typically, stock options
granted by the Company vest over a four year period. The number of shares and exercise
prices of the options subject to the acceleration remain unchanged. No additional
compensation expense was taken based on historical employee turnover rates and
forfeitures.
The purpose of the accelerated vesting was to enable the
Company to avoid recognizing in its statement of operations non-cash compensation expense
associated with these options in future periods, upon the expected implementation of FASB
Statement of Financial Accounting Standards No. 123 (Revised 2004), "Share-Based Payment"
in January 2006. As a result of the acceleration, the Company expects to avoid recognition
of up to approximately $1.5 million of compensation expense over the course of the original
vesting periods. Approximately $0.7 million and $0.4 million of such compensation expenses
were avoided in 2007 and 2006, respectively.
Restrictions have been imposed upon the sale of any
shares received through the exercise of acceleration options, which restrictions will
prevent the sale of any shares received from the exercise of an accelerated option prior to
the original vesting date of the option. This restriction does not affect the fair value of
the options at the grant date.
Employee Stock Purchase Plan
In November 2000, the Company adopted its 2000 Employee
Stock Purchase Plan (the "Plan"). The Company reserved 1,500,000 shares of common stock for
issuance under the Plan. On the first day of January each year beginning January 1,
2001, additional shares of common stock are reserved for issuance under the Plan as
determined by the Board of Directors. The plan limits the annual increase to the lesser of
1% of the Company's issued and outstanding common stock or 1,000,000 shares. The Plan
provides eligible employees with the opportunity to acquire shares of common stock at a
price of 85% of the lower of the fair market value of the common stock on the first day of
the offering period or the last day of the offering period, whichever is lower. The Plan is
structured as a qualified employee stock purchase plan under Section 423 of the 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 Security Act of 1974. The Board may amend,
suspend, or terminate the Plan at any time without notice. A total of 444,792,
534,177 and 560,780 shares were issued under the Plan in
2007, 2006, and 2005, respectively.
The following information relates to the
Plan:
|
|
Weighted average fair value per share of shares purchased
|
|
|
$
|
1.22
|
|
Total
compensatin expense for ESPP
|
|
|
$
|
202,140
|
|
Total
amount of cash received from the purchase of stock through ESPP
|
|
|
$
|
543,648
|
|
Total
intrinsic value of ESPP stock purchased as December 31, 2007
|
|
|
$
|
426,089
|
|
There were 355,529 shares available for future
issuance under the Employee Stock Purchase Plan as of December 31, 2007.
41
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes to
Consolidated Financial Statements
3. Net income/(loss) per share
Basic net income/(loss) per share is computed by
dividing net income/(loss) for the period by the weighted average number of shares of
common stock outstanding during the period. Diluted net income/(loss) per share is computed
by dividing the net loss for the period by the combination of dilutive common share
equivalents, comprised of shares issuable under the Company's stock-based compensation
plans, and the weighted average number of common shares outstanding during the period.
There were no incremental dilutive common share equivalents in the periods
presented.
The following table sets forth the computation of basic
and diluted net income/(loss) per share for the years indicated (in thousands, except per
share amounts):
|
Years Ended December
31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
attributable to common stockholders
|
|
|
$
|
3,363
|
|
$
|
657
|
|
$
|
(2,617
|
)
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in
computing net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
40,897
|
|
|
40,118
|
|
|
39,330
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
44,720
|
|
|
44,914
|
|
|
39,330
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$
|
0.08
|
|
$
|
0.02
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
$
|
0.08
|
|
$
|
0.01
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The following outstanding options were excluded from the
computation of diluted net income/loss per share (in thousands) as the effect would have
been anti-dilutive:
|
Years Ended December
31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Options to purchase common
stock and shares
|
|
|
|
|
|
|
|
|
|
|
|
subject
to repurchase
|
|
|
|
3,823
|
|
|
4,796
|
|
|
4,840
|
|
|
|
|
|
|
|
|
|
|
|
|
42
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes to
Consolidated Financial Statements
4. Balance Sheet Components
(in thousands)
|
December 31,
|
|
2007
|
2006
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
|
Cash
|
|
|
$
|
4,042
|
|
$
|
3,276
|
|
Money market
instruments and funds
|
|
|
|
903
|
|
|
1,045
|
|
|
|
|
|
|
|
|
|
$
|
4,945
|
|
$
|
4,321
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net:
|
|
|
Accounts
receivable
|
|
|
$
|
5,556
|
|
$
|
4,231
|
|
Less:
Allowance for doubtful accounts and sales returns
|
|
|
|
(163
|
)
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
$
|
5,393
|
|
$
|
4,009
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts and sales returns:
|
|
|
Balance at
beginning of year
|
|
|
$
|
222
|
|
$
|
146
|
|
Change
|
|
|
|
(42
|
)
|
|
83
|
|
Utilized
|
|
|
|
(17
|
)
|
|
(7
|
)
|
|
|
|
|
|
Balance at
end of year
|
|
|
$
|
163
|
|
$
|
222
|
|
|
|
|
|
|
|
|
|
Inventories:
|
|
|
Finished
goods
|
|
|
$
|
1,599
|
|
$
|
1,415
|
|
Work-in-process
|
|
|
|
1,877
|
|
|
1,751
|
|
Raw
materials
|
|
|
|
1,527
|
|
|
1,299
|
|
|
|
|
|
|
|
|
|
$
|
5,003
|
|
$
|
4,465
|
|
|
|
|
|
|
|
|
|
Accrued
expenses:
|
|
|
Compensation
costs
|
|
|
$
|
1,872
|
|
$
|
1,483
|
|
Professional
fees
|
|
|
|
622
|
|
|
421
|
|
Outside
commission
|
|
|
|
90
|
|
|
79
|
|
Royalties
|
|
|
|
127
|
|
|
57
|
|
ESPP
|
|
|
|
106
|
|
|
124
|
|
Deferred
rent
|
|
|
|
130
|
|
|
158
|
|
Warranty
|
|
|
|
48
|
|
|
57
|
|
Operating
related (Taiwan and China)
|
|
|
|
275
|
|
|
229
|
|
Others
|
|
|
|
118
|
|
|
207
|
|
|
|
|
|
|
|
|
|
$
|
3,388
|
|
$
|
2,815
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities:
|
|
|
Accrued
pension liability (Taiwan)
|
|
|
$
|
411
|
|
$
|
369
|
|
Other
liabilities
|
|
|
|
38
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
449
|
|
$
|
385
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income/(loss):
|
|
|
Cumulative
translation adjustments
|
|
|
$
|
292
|
|
$
|
(101
|
)
|
Unrealized
gain (loss) on short-term investments
|
|
|
|
14
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
$
|
306
|
|
$
|
(121
|
)
|
|
|
|
|
43
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes to
Consolidated Financial Statements
5. Marketable
Securities
|
December 31,
2007
|
December 31,
2006
|
|
|
|
|
Available-for-Sale
Securities
|
Available-for-Sale
Securities
|
|
|
|
(in thousands)
|
Cost
|
Gross
Unrealized
Losses
|
Fair Value
|
Cost
|
Gross
Unrealized
Losses
|
Fair Value
|
Money market funds
|
|
|
$
|
903
|
|
$
|
--
|
|
$
|
903
|
|
$
|
1,045
|
|
$
|
--
|
|
$
|
1.045
|
|
Auction rate
securities
|
|
|
|
16,150
|
|
|
--
|
|
|
16,150
|
|
|
7,800
|
|
|
--
|
|
|
7,800
|
|
US Treasury
and Federal
|
|
|
|
|
Agency
Securities
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
500
|
|
|
-
|
|
|
500
|
|
Corporate
bonds
|
|
|
|
15,371
|
|
|
14
|
|
|
15,385
|
|
|
18,577
|
|
|
(20
|
)
|
|
18,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale securities
|
|
|
$
|
32,424
|
|
$
|
14
|
|
$
|
32,438
|
|
$
|
27,922
|
|
$
|
(20
|
)
|
$
|
27,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in:
|
|
|
Cash and cash
equivalents
|
|
|
|
|
$
|
903
|
|
|
|
$
|
1,045
|
|
Short-term
investments
|
|
|
|
|
|
31,535
|
|
|
|
|
26,857
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
32,438
|
|
|
|
$
|
27,902
|
|
|
|
|
|
|
|
|
|
Approximately $0.4 million of the short term investments
above are pledged as collateral for a stand-by letter of credit issued by a commercial
bank.
6. Property and Equipment,
Net
|
December 31,
|
(in thousands)
|
2007
|
2006
|
Machinery and
equipment
|
|
|
$
|
9,116
|
|
$
|
8,964
|
|
Furniture and
fixtures
|
|
|
|
469
|
|
|
447
|
|
Leasehold
improvements
|
|
|
|
811
|
|
|
767
|
|
Building and
equipment prepayments
|
|
|
|
972
|
|
|
1,214
|
|
|
|
|
|
|
|
|
|
$
|
11,368
|
|
$
|
11,392
|
|
Less:
Accumulated depreciation
|
|
|
|
(6,995
|
)
|
|
(7,128
|
)
|
|
|
|
|
|
Total property
and equipment, net
|
|
|
$
|
4,373
|
|
$
|
4,264
|
|
|
|
|
|
|
|
|
|
7. Income Taxes
The components of income (loss) before income taxes are
as follows
(in thousands):
|
Years Ended December
31,
|
|
(in thousands)
|
2007
|
|
2006
|
|
2005
|
|
Income (loss) subject to
domestic income taxes only
|
|
|
$
|
1,953
|
|
$
|
987
|
|
$
|
(1,493
|
)
|
Income (loss)
subject to foreign income taxes only
|
|
|
|
1,410
|
|
|
(330
|
)
|
|
(1,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,363
|
|
$
|
657
|
|
$
|
(2,617
|
)
|
|
|
|
|
|
|
|
44
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes to
Consolidated Financial Statements
The following is a
reconciliation of the effective tax rates and the United States statutory federal income
tax rate:
|
Years Ended December
31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Statutory federal income tax
rate
|
|
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
State income
tax
|
|
|
|
(5.9
|
)
|
|
(5.9
|
)
|
|
(6.2
|
)
|
Stock
compensation
|
|
|
|
(4.7
|
)
|
|
(18.0
|
)
|
|
-
|
|
Net operating
loss carryforward
|
|
|
|
44.4
|
|
|
14.0
|
|
|
-
|
|
Research
expenses excluded from income
|
|
|
|
-
|
|
|
-
|
|
|
1.0
|
|
Research and
development credits
|
|
|
|
-
|
|
|
-
|
|
|
(2.8
|
)
|
Valuation
allowance
|
|
|
|
1.6
|
|
|
41.5
|
|
|
41.0
|
|
Other
|
|
|
|
(1.4
|
)
|
|
2.4
|
|
|
1.0
|
|
|
|
|
|
|
|
|
Effective tax
rate
|
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax
assets consisted of the following
(in
thousands):
|
December 31,
|
|
(in thousands)
|
2007
|
|
2006
|
|
2005
|
|
Deferred tax
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
|
$
|
15,335
|
|
$
|
16,677
|
|
$
|
17,100
|
|
Credit
carryforwards
|
|
|
|
1,803
|
|
|
1,803
|
|
|
2,140
|
|
Depreciation
|
|
|
|
2
|
|
|
10
|
|
|
401
|
|
Stock
compensation
|
|
|
|
274
|
|
|
118
|
|
|
-
|
|
Accruals
and allowances
|
|
|
|
769
|
|
|
849
|
|
|
1,057
|
|
|
|
|
|
|
|
|
|
|
|
|
18,210
|
|
|
19,457
|
|
|
20,698
|
|
Less: valuation
allowances
|
|
|
|
(18,210)
|
|
|
(19,457)
|
|
|
(20,698)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
2007
|
|
2006
|
|
2005
|
|
Valuation allowances on
deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
$
|
19,457
|
|
$
|
20,698
|
|
$
|
19,499
|
|
Addition
|
|
|
|
-
|
|
|
-
|
|
|
1,199
|
|
Utilized
|
|
|
|
(1,247)
|
|
|
(1,241)
|
|
|
-
|
|
|
|
|
|
|
|
|
Balance at end of
year
|
|
|
$
|
18,210
|
|
$
|
19,457
|
|
$
|
20,698
|
|
|
|
|
|
|
|
|
|
|
|
|
Based upon the weight of available evidence, which
includes the Company's historical operating performance and the accumulated deficit, the
Company provided a full valuation allowance against the net deferred tax assets.
As of December 31, 2007, the Company had net
operating loss carryforwards of
approximately
$38.5
million for
federal and $20.4 million
for state tax purposes. If not utilized, these
carryforwards will begin to expire
in 2021 for
federal and in 2011 for
state
purposes.
As of December 31, 2007, the Company had research credit
carryforwards of approximately $1.2
million
and
$0.9
million
for federal and state income tax purposes, respectively.
If not utilized, the federal carryforward will expire in various amounts beginning
in
2021.
The California tax credit can be carried forward
indefinitely.
45
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes to
Consolidated Financial Statements
Internal Revenue Code Section 382 limits the use of net
operating loss and tax credit carryforwards in certain situations where changes occur in
the stock ownership of a company. In the event the Company has had a change in ownership,
utilization of the carryforwards could be restricted.
8. Concentrations of Certain Risks
Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist primarily of cash, cash
equivalents, short-term investments and accounts receivable. The Company limits the amount
of deposits in any one financial institution and any one financial instrument. The Company
invests its excess cash principally in certificates of deposit, debt instruments issued by
high-credit quality financial institutions and corporations and money market accounts with
financial institutions in the United States.
The Company performs 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, 2007, one customer accounted for
20.0% of the Company's accounts receivable. At December 31, 2006, two customers accounted
for 14.6% and 12.3% of the Company's accounts receivable, respectively.
One customer accounted for 17.4% of revenues in the year
ended December 31, 2007. At December 31, 2006, two customers accounted for 15.1% and 10.0%
of revenue, respectively. At December 31, 2005, one customer accounted for 10.2% of
revenue. 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.
9. Geographic Segment Information
The Company operates in a single industry segment. This
industry segment is characterized by rapid technological change and significant
competition.
The following is a summary of the Company's revenues
generated by geographic segments, revenues generated by product lines and identifiable
assets located in these segments (in thousands):
|
Years Ended December
31,
|
|
2007
|
2006
|
2005
|
Revenues
|
|
North America
|
|
|
$
|
20,204
|
|
$
|
18,594
|
|
$
|
15,677
|
|
Europe
|
|
|
|
2,707
|
|
|
1,930
|
|
|
867
|
|
Asia
|
|
|
|
10,875
|
|
|
6,268
|
|
|
4,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,786
|
|
$
|
26,792
|
|
$
|
20,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December
31,
|
|
2007
|
2006
|
2005
|
Revenues
|
|
Connectivity
Products
|
|
|
$
|
22,463
|
|
$
|
16,413
|
|
$
|
14,092
|
|
Optical
Passive Products
|
|
|
|
11,323
|
|
|
10,379
|
|
|
6,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,787
|
|
$
|
26,792
|
|
$
|
20,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2007
|
2006
|
|
|
|
|
|
Property and
Equipment
|
|
|
|
|
|
|
|
|
United
States
|
|
|
$
|
93
|
|
$
|
144
|
|
Taiwan
|
|
|
|
2,800
|
|
|
3,015
|
|
China
|
|
|
|
1,480
|
|
|
1,105
|
|
|
|
|
|
|
|
|
|
$
|
4,373
|
|
$
|
4,264
|
|
|
|
|
|
|
46
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Notes to Consolidated Financial Statements
10. Commitments and Contingencies
Litigation
:
From time to time, the Company may be
involved in litigation in the normal course of business. As of the date of these financial
statements, the Company is not aware of any material legal proceedings pending or
threatened against the Company.
Off-Balance Sheet
Arrangements
: The Company had no off-balance
sheet arrangements as of December 31, 2007.
Indemnification and Product Warranty:
The Company indemnifies certain customers, suppliers and
subcontractors for attorney fees and damages and costs awarded against these parties in
certain circumstances in which products are alleged to infringe third party intellectual
property rights, including patents, trade secrets, trademarks or copyrights. In all cases,
there are limits on and exceptions to the potential liability for indemnification relating
to intellectual property infringement claims. The Company cannot estimate the amount of
potential future payments, if any, that might be required to make as a result of these
agreements. To date, the Company has not paid any claim or been required to defend any
action related to indemnification obligations, and accordingly, the Company has not accrued
any amounts for such indemnification obligations. However, the Company may record charges
in the future as a result of these indemnification obligations.
The Company generally warrants products against defects
in materials and workmanship and non-conformance to specifications for varying lengths of
time. If there is a material increase in customer claims compared with historical
experience, or if costs of servicing warranty claims are greater than expected, the Company
may record a charge against cost of revenues.
Operating Leases:
The Company leases certain office space under long-term
operating leases expiring at various dates through 2013. Total rent expense under these
operating leases were approximately $0.9 million, $0.8 million, and $0.6 million for the
years ended December 31, 2007, 2006, and 2005, respectively.
Total future minimum lease payments under operating
leases as of December 31, 2007 are summarized below (in thousands):
Years ending December 31,
|
|
2008
|
|
|
$
|
960
|
|
2009
|
|
|
|
639
|
|
2010
|
|
|
|
424
|
|
2011
|
|
|
|
185
|
|
2012
|
|
|
|
129
|
|
2013
|
|
|
|
51
|
|
|
|
|
Total
|
|
|
$
|
2,388
|
|
|
|
|
Letter of Credit:
The Company had a letter of credit of $0.4 million
outstanding as of December 31, 2007. The letter of credit is collateralized by short term
investments of $0.4 million.
11. Bank Loan
In November 2004, the Company entered into a ten-year
loan of $0.5 million in Taiwan with an interest rate of 2.3% for the first two years and
3.6% for the following years. In November 2006, the Company entered into a seven-year loan
of $0.2 million in Taiwan with an interest rate of 2.8%.
Both loans are secured by the Company's building in
Taiwan. The net book value of the building was $0.6 million as of December 31,
2007.
In April 2005, the Company entered into a five-year
equipment loan of $0.2 million in Taiwan with an interest rate of 2.9% for the first year
and 3.7% for the following years. In September 2007, the Company entered into a three-year
equipment loan of $0.04 million and a five-year equipment loan of $0.1 million with an
interest rate of 3.68% for the first year for both
loans.
47
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes to
Consolidated Financial Statements
Payments due under bank loans as of December 31,
2007 are as follows (in thousands):
Years ending December
31,
|
|
2008
|
|
|
$
|
153
|
|
2009
|
|
|
|
153
|
|
2010
|
|
|
|
125
|
|
2011
|
|
|
|
103
|
|
2012
|
|
|
|
97
|
|
2013and
after
|
|
|
|
125
|
|
|
|
|
Total
payment
|
|
|
|
756
|
|
Less: Amounts
representing interest
|
|
|
|
(67
|
)
|
|
|
|
Present value
of net remaining payments
|
|
|
|
689
|
|
Less: current
portion
|
|
|
|
(132
|
)
|
|
|
|
Long-term
portion
|
|
|
$
|
557
|
|
|
|
12. Related Party Transactions
As of March 7, 2008, Foxconn Holding Limited was a
holder of 19.3% of the Company's common stock. In the normal course of business, the
Company sells products to and purchases raw materials from Hon Hai Precision Company
Limited, who is the parent company of Foxconn Holding Limited. These transactions were made
at prices and terms consistent with those of unrelated third parties. Sales of products to
Hon Hai Precision Industry Company Limited were $1.1 million, $0.5 million, and $0.8
million in the years ended December 31, 2007, 2006, and 2005 respectively. Purchases of raw
materials from Hon Hai Precision Company Limited were $3.2 million, $2.5 million, and $2.3
million in the years ended December 31, 2007, 2006, and 2005 respectively. Amounts due from
Hon Hai Precision Company Limited were $0.2 million and $0.1 million at December 31, 2007
and 2006, respectively. Amounts due to Hon Hai Precision Company Limited were $1.1 million
and $0.6 million at December 31, 2007 and 2006, respectively.
1
3.
Subsequent Event
At January 31, 2008, the Company's
short-term investments included $16.4 million of auction rate securities. Subsequent to
January 31, 2008,
six
auctions have failed totaling
$8.1
million
related to these auction rate
securities. All of these investments are AAA/Aaa rated securities collateralized by student
loans, with approximately 92% of such collateral in the aggregate being guaranteed by the
U.S. government under the Federal Family Education Loan Program.
While each failed auction will be
assessed individually,
the
Company
does not
believe that any of the underlying
issuers of its auction rate securities
were
at risk or that these securities are
otherwise impaired
as of the
date hereof. If the issuers are unable to successfully close future auctions,
their credit ratings
deteriorate,
the U.S. government
fails to support its guarantees
of the obligations or there is
continued uncertainty in the credit markets,
the Company may be required to record
an impairment charge on these investments in the future. The Company may
not be able to liquidate any of these
securities in the short term and may instead
have to wait until the maturity of the
underlying notes (between
2032
and
2046) to redeem them.
48
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
Notes to
Consolidated Financial Statements