Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ------------ Exchange Act of 1934 for the quarterly period ended March 31, 1997
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 0-26734
SanDisk Corporation
(Exact name of registrant as specified in its charter)
Delaware 77-0191793
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
140 Caspian Court, Sunnyvale, California 94089
(Address of principal executive offices) (Zip code)
(408) 542-0500
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal year, if changed
since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed 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 the number of shares outstanding of each of the issuer's classes of
common stock as of March 31, 1997
Common Stock, $.01 par value 22,468,844
---------------------------- ----------
Class Number of shares
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SanDisk Corporation
Index
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 1997 and December 31, 1996........................ 3
Condensed Consolidated Statements of Income
Three months ended March 31, 1997 and 1996.................. 4
Condensed Consolidated Statement of Cash Flows
Three months ended March 31, 1997 and 1996.................. 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 18
Item 2. Changes in Securities.......................................... 18
Item 3. Defaults upon Senior Securities................................ 18
Item 4. Submission of Matters to a Vote of Security Holders............ 18
Item 5. Other Information.............................................. 18
Item 6. Exhibits and Reports on Form 8-K............................... 19
Signatures..................................................... 21
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PART I. FINANCIAL INFORMATION
SanDisk Corporation
Condensed Consolidated Balance Sheets
(In thousands)
ASSETS March 31, December 31,
1997 1996*
(unaudited)
Current Assets:
Cash and cash equivalents $ 13,875 $ 19,323
Short-term investments 55,401 54,965
Accounts receivable, net 13,634 11,885
Inventories, net 11,766 9,630
Prepaid expenses and other current assets 1,933 1,684
--------- ---------
Total current assets 96,609 97,487
Property and equipment, net 10,657 10,285
Deposits and other assets 505 496
--------- ---------
Total Assets $ 107,771 $ 108,268
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,721 $ 7,595
Accrued payroll and related expenses 2,486 2,857
Other accrued liabilities 3,688 4,354
Deferred revenue 4,401 5,652
--------- ---------
Total current liabilities 17,296 20,458
Stockholders' Equity:
Common stock 98,859 98,233
Accumulated deficit (8,384) (10,423)
--------- ---------
Total stockholders' equity 90,475 87,810
Total Liabilities and
--------- ---------
Stockholders' Equity $ 107,771 $ 108,268
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
* Information derived from the audited Consolidated Financial Statements.
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SanDisk Corporation
Condensed Consolidated Statements of Income
(In thousands, except per share data; unaudited)
Three months ended
March 31,
1997 1996
------- -------
Revenues:
Product $18,194 $19,489
Royalty 3,250 1,250
------- -------
Total revenues 21,444 20,739
Cost of sales 12,965 12,722
------- -------
Gross profits 8,479 8,017
Operating expenses:
Research and development 3,001 2,145
Sales and marketing 2,561 2,010
General and administrative 1,377 1,364
------- -------
Total operating expenses 6,939 5,519
Operating income 1,540 2,498
Interest and other income, net 955 751
------- -------
Income before taxes 2,495 3,249
Provision for income taxes 370 195
------- -------
Net income $ 2,125 $ 3,054
======= =======
Net income per share $ 0.09 $ 0.13
======= =======
Shares used in computing
net income per share 24,107 24,203
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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SanDisk Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands; unaudited)
Three months ended
March 31,
1997 1996
-------- ------
Cash flows used in operating activities:
Net income $ 2,125 $ 3,054
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 812 484
Accounts receivable, net (1,749) (2,748)
Inventory (2,136) (2,635)
Prepaids and other assets (258) (272)
Accounts payable (874) (327)
Accrued payroll and related expenses (371) (162)
Other accrued liabilities (666) (524)
Deferred revenue (1,251) (210)
-------- --------
Total adjustments (6,493) (6,394)
-------- --------
Net cash used in operating activities (4,368) (3,340)
Cash flows used in investing activities:
Purchases of short term investments (14,288) (20,156)
Proceeds from sale of short term investments 13,766 13,218
Acquisition of capital equipment (1,184) (1,134)
-------- --------
Net cash used in investing activities (1,706) (8,072)
Cash flows from financing activities:
Sale of common stock, net of repurchases 626 291
Principal payments under capital leases (61)
-------- --------
Net cash provided by financing activities 626 230
-------- --------
Net decrease in cash and cash equivalents (5,448) (11,182)
Cash and cash equivalents at beginning of period 19,323 27,255
-------- --------
Cash and cash equivalents at end of period $ 13,875 $ 16,073
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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SanDisk Corporation
Notes to Condensed Consolidated Financial Statements
1. These interim condensed consolidated financial statements are unaudited
but reflect, in the opinion of management, all normal recurring
adjustments necessary to present fairly the financial position of SanDisk
Corporation and Subsidiaries (the "Company") as of March 31, 1997,
including the results of operations and cash flows for the three month
periods ended March 31, 1997 and 1996. Because all the disclosures
required by generally accepted accounting principles are not included,
these interim condensed consolidated financial statements should be read
in conjunction with the audited financial statements and notes thereto in
the Company's annual report on Form 10-K as of, and for the year ended
December 31, 1996. The year-end condensed consolidated balance sheet data
as of December 31, 1996 was derived from the audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
The results of operations and cash flows for the three month period ended
March 31, 1997 are not necessarily indicative of results of operations
and cash flows for any future period.
2. The Company's fiscal year ends on the Sunday closest to December 31, and
each fiscal quarter ends on the Sunday closest to March 31, June 30, and
September 30. The first fiscal quarter of 1997 and 1996 ended on March
30, 1997 and March 31, 1996, respectively. Fiscal year 1996 ended on
December 29, 1996. For ease of presentation, the accompanying financial
statements have been shown as ending on the last day of the calendar
month.
3. The components of inventory consist of the following:
March 31, December 31,
1997 1996
--------- -----------
(In thousands)
Raw materials $ 4,167 $ 3,858
Work-in-process 5,846 3,475
Finished goods 1,753 2,297
--------- -----------
$ 11,766 $ 9,630
========= ===========
4. In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options will be
excluded. The impact is expected to result in no change in primary
earnings per share for the quarter ended March 31, 1997 and an increase
of $0.01 in primary earnings per share for the quarter ended March 31,
1996. The impact of Statement 128 on the calculation of fully diluted
earnings per share (which has not been materially different from primary
earnings per share for the periods presented) for these quarters is not
expected to be material.
5. The Company is party to various legal proceedings. In October 1995,
Samsung Electronics Company Ltd. filed a complaint against the Company in
the Northern District of California accusing the Company of infringing
two Samsung patents, seeking declaratory relief with respect to five
Company patents and alleging unspecified damages for certain other
related claims. As written, the complaint potentially implicates products
that comprised substantially all of the Company's revenues for 1997, 1996
and 1995. The Company has received opinions from its patent counsel that,
based
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on information currently known, the Company's products do not
infringe one of these Samsung patents and that, based on certain
assumptions as to how Samsung would claim infringement, the particular
patent claim in the other Samsung patent that Samsung has accused the
Company of infringing is invalid and that the Company's products do not
infringe any of the other claims of such patent. Nonetheless, the Company
anticipates that Samsung will continue to pursue litigation with respect
to such claims.
On January 11, 1996, the Company filed a complaint against Samsung with
the United States International Trade Commission alleging that Samsung
and its U.S. sales arm, are importing and selling products that infringe
two of the Company's patents. By its complaint, the Company seeks a
judgment by the International Trade Commission that Samsung is infringing
the Company's patents and an order precluding Samsung from importing
those infringing products into the United States. The U.S. International
Trade Commission initiated an investigation based upon the Company's
complaint against Samsung. On February 26, 1997, the Administrative Law
Judge assigned to the case issued an Initial Determination finding both
SanDisk patents valid and infringed and further finding a violation of
Section 337 of the Trade Act. On April 15, 1997, the Commission affirmed
the Administrative Law Judge's findings of validity with respect to both
patents and his finding of infringement with respect to one of the
patents. The Commission, having recognized that SanDisk's claims against
Samsung are meritorious, is now determining the scope of the exclusion
and/or cease and desist orders that will bar importation of Samsung flash
devices. A final decision is expected in May, 1997.
Litigation frequently involves substantial expenditures and can require
significant management attention, even if the Company ultimately
prevails. In addition, the results of any litigation matters are
inherently uncertain. Accordingly, there can be no assurance that any of
the foregoing matters, or any future litigation, will not have a material
adverse effect on the Company's business, financial condition and results
of operations.
6. The Company recorded a provision for income taxes at a 15% effective tax
rate for the first three months of 1997 compared to a 6% effective tax
rate for the same period of 1996. The effective tax rate for the first
quarter of 1997 is substantially below the federal statutory rate due to
the utilization of federal and state tax credit carryforwards, Foreign
Sales Corporation tax benefits and a reduction in the deferred tax asset
valuation allowance.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements in this discussion and analysis are forward looking
statements based on current expectations, and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward looking statements. Such risks and uncertainties are
discussed below and in the Company's Form 10-K for the year ended December 31,
1996, under the heading "Risk Factors". Readers are cautioned not to place undue
reliance on these forward looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to update these forward-looking
statements to reflect events or circumstances occurring after the date hereof.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto.
Results of Operations
Product Revenues. SanDisk's product revenues were $18.2 million in the
first quarter of 1997, down 7% from $19.5 million for the same period of 1996.
During the first quarter of 1997, unit shipments increased 86% from the
comparable period last year. The largest increase came from unit shipments of
the Company's 2MB and 4MB CompactFlash(TM) products. The shift in product mix to
low capacity CompactFlash cards contributed to a decline in average selling
prices of 52% in the first quarter of 1997 compared to the first quarter of
1996.
Over the last few quarters, the Company has experienced a shift in
product mix to lower capacity products. The Company anticipates that lower
capacity products will continue to represent a significant portion of its sales
as consumer applications such as digital cameras become more popular. Sales of
these lower capacity products generally have lower average selling prices and
gross margins than higher capacity products. The mix of products sold varies
from quarter to quarter and may vary in the future, affecting the Company's
overall average selling prices and gross margins.
The Company sells products to the industrial, communications, highly
portable computing and consumer markets. The mix of sales to these key markets
varies from quarter to quarter and will likely continue to vary in the future.
While SanDisk has been successful winning design-ins for many new applications,
it generally takes several quarters for these new customer products to reach the
market. It is difficult to predict the timing of related new product
introductions and future sales volumes from these design-ins as the success of
the customers' products is uncertain. As these markets develop, competition is
expected to increase, which will likely cause average selling prices and gross
margins to decline.
Order visibility continued to be weak into the first quarter of 1997.
Order backlog strengthened late in the quarter, however, the turns component of
the Company's business continues to be significant. If the Company is unable to
maintain its "turns" business, its results of operations will be materially
adversely affected. To adapt to these market conditions, the Company has shifted
to more in-house manufacturing to reduce costs and lead times and to position
itself to respond quickly to changes in customer demand. The current limited
visibility of orders could continue indefinitely until the new markets addressed
by the Company's products enter a more predictable growth phase and demand
begins to create longer lead times.
Export sales represented 44% of product revenue in the first quarter of
1997 compared with 53% for the same period of the previous year. Sales to Japan
decreased in the first quarter of 1997 due to a weak Japanese economy, a strong
dollar and increased competition. The Company expects international sales to
continue to constitute a significant portion of revenues. The Company's top ten
customers accounted for 66% of product revenue in the first quarter of 1997
compared to 77% for the first quarter of 1996. The company expects sales of its
products to a limited number of customers to continue to account for a
substantial portion of its revenues for the foreseeable future.
Royalty Revenues. Royalty revenues from patent cross license agreements
were $3.3 million in the first quarter of 1997 up from $1.3 million in 1996.
Total revenues from patent licenses and royalties increased to 15% of total
revenues in the first quarter of 1997, up from 6% in the same period of the
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previous year. In December 1996, the Company entered into a patent cross license
agreement with Sharp Corporation. The Company also entered into a patent cross
license agreement with Intel in October 1995. In the future, the Company will
receive royalties under these agreements based on sales of flash products.
Gross Profits. In the first quarter of 1997, gross profits increased to
$8.5 million or 39.5% of total revenues from $8.0 million or 38.7% of total
revenues for the same period in the previous year. Product gross margins
declined to 28.7% of product revenues in the first quarter of 1997 from 34.7% in
the first quarter of 1996 due to the shift in product mix to lower capacity
products with lower average selling prices and gross margins. Revenues from
patent cross-license royalties partially offset the lower product gross margins
in the first quarter of 1997.
The Company expects price competition to increase in the future, which
will likely result in decreased average selling prices and gross margins. As a
result, the Company expects gross margins to decline in the near term, and gross
margins are expected to be subject to fluctuation for the foreseeable future. To
remain competitive, the Company will be focusing on a number of programs to
lower its manufacturing costs. These programs include transitioning from single
to double density flash designs, from 0.5 to 0.35 micron manufacturing
processes, and utilizing 8 inch instead of 6 inch wafers. These transitions are
expected to occur over the next several quarters. The utilization of
semiconductor devices with greater memory capacity and the design and
implementation of new semiconductor manufacturing processes can entail a number
of problems, including lower yields associated with semiconductor device
production and production delays. There can be no assurance that such devices or
processes will be successfully developed by the Company or that development of
such processes will lower manufacturing costs.
Operating Expenses. Research and development, sales and marketing, and
general and administrative expenses increased by $1.4 million, or 26%, during
the first quarter of 1997 compared to the same period of 1996. Operating
expenses increased as a percentage of revenues to 32% from 27% for the three
months ended March 31, 1997 compared to the same period in 1996. The increase
was primarily due to increased salaries and payroll related expenses associated
with additional personnel in all organizations compared to the same period of
the previous fiscal year. Higher facilities expenses related to SanDisk's new
larger Sunnyvale facility also contributed to the overall growth in operating
expenses. Increased depreciation on capital equipment additions and project
related expenses contributed to the increase in research and development
expenses. Increased marketing communications related expenses, outside sales
commissions and travel expenses contributed to the increase in sales and
marketing expenses. General and administrative expenses were relatively
unchanged. A reduction in legal fees offset the increase in general and
administrative salary and payroll related expenses.
Interest and Other Income, Net. Interest and other income, net,
increased $204,000 for the three months ended March 31, 1997 compared to the
same period of 1996. This was primarily due to higher interest rates on short
term investments.
Provision for Income Taxes. The Company recorded a provision for income
taxes at a 15% effective tax rate for the first three months of 1997 compared to
a 6% effective tax rate for the same period of 1996. The effective tax rate for
the first quarter of 1997 is substantially below the federal statutory rate due
to the utilization of federal and state tax credit carryforwards, Foreign Sales
Corporation tax benefits and a reduction in the deferred tax asset valuation
allowance. The 1996 rate was lower primarily due to the availability of federal
net operating loss carryforwards. The Company utilized the remainder of its net
operating loss carryforwards in 1996.
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Liquidity and Capital Resources
As of March 31, 1997, the Company had working capital of $79.3 million,
which included $13.9 million in cash and cash equivalents and $55.4 million in
short term investments. The Company also has a line of credit with a commercial
bank under which it can borrow up to $10 million. The line of credit expires in
July 1997. The Company intends to either renew the agreement or negotiate a new
line of credit upon the expiration of the current line. As of March 31, 1997,
the Company had $6.2 million committed under the line of credit facility for
standby letters of credit.
Operating activities used $4.4 million of cash during the first three
months of 1997. Net income of $2.1 million was offset by increases in accounts
receivable and inventory of $1.7 and $2.1 million, respectively, and a decline
in deferred revenue of $1.3 million. Cash used in investing activities was $1.7
million for the three months ended March 31, 1997 which included capital
equipment additions of $1.2 million and net purchases of short term investments
of $0.5 million.
Depending on the demand for the Company's products, the Company may
decide to make substantial investments in manufacturing capacity to support its
business in the future. Management believes the existing cash and cash
equivalents, short term investments and available line of credit will be
sufficient to meet the Company's currently anticipated working capital and
capital expenditure requirements for the next twelve months.
Impact of Currency Exchange Rates
The Company currently purchases wafers from Matsushita under purchase
contracts denominated in yen. A portion of the Company's revenues are also
denominated in yen. Foreign exchange exposures arising from the Company's yen
denominated commitments and related accounts payable are offset to the extent
the Company has yen denominated accounts receivable and cash balances. To the
extent such foreign exchange exposures are not offset, the Company enters into
foreign exchange forward contracts to hedge against changes in foreign currency
exchange rates. At March 31, 1997, there were no forward contracts outstanding.
Future exchange rate fluctuations could have a material adverse effect on the
Company's business, financial condition and results of operations.
Risk Factors
Fluctuations in Operating Results. SanDisk's operating results are
subject to quarterly and annual fluctuations due to a variety of factors. The
Company has very limited visibility with respect to anticipated operating
results for any given quarter, even during the quarter in question.
Factors affecting the Company's operating results include volume of
product orders and sales, availability of foundry capacity, the timing of
significant orders, competitive pricing pressures, the ability of the Company to
match supply with demand or to accurately forecast future inventory levels,
fluctuations in product costs, fluctuation in manufacturing yields,
manufacturing utilization, changes in product and customer mix, changes in the
channels through which the Company's products are distributed, timing of new
product announcements and introductions by the Company and its competitors,
quality of the Company's products, increased research and development expenses
associated with new product introductions, exchange rate fluctuations and
customer qualification and acceptance of new or enhanced versions of the
Company's products. In addition, the Company expects to continue to increase its
operating expenses in connection with the hiring of additional personnel and the
development of new applications. If the Company does not achieve increased
levels of revenues commensurate with these increased levels of operating
expenses, the Company's business, financial condition and results of operations
will be materially adversely affected. All of these factors are difficult to
forecast and these or other factors can materially affect the Company's
quarterly or annual operating results.
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In 1996 and early 1997 order visibility weakened. SanDisk's OEM
customers in the emerging consumer markets are still experiencing difficulty
gauging the initial market demand for their new products. The Company is also
experiencing a shift in its customer order profile. The current market situation
of ready availability, coupled with rapidly declining prices of semiconductor
memories, has led customers to expect ever shorter lead-times. Consequently, the
turns component of the Company's quarterly business is increasing. To adapt to
these evolving market conditions, the Company shifted to more in-house
manufacturing in the third quarter of 1996 to reduce costs and manufacturing
lead times and to position itself to respond quickly to changes in customer
demand. Order backlog strengthened late in the first quarter of 1997; however,
the turns component of SanDisk's business remains large and visibility remains
limited.
Over the last two quarters, the Company experienced a shift in product
mix to lower capacity (2MB and 4MB) CompactFlash cards, which caused average
selling prices to decline. The Company anticipates that lower capacity products
will continue to represent a significant portion of its sales as consumer
applications such as digital cameras become more popular. Sales of these lower
capacity products generally have lower average selling prices and gross margins
than higher capacity products. The mix of products sold varies from quarter to
quarter and may vary in the future, affecting the Company's overall average
selling prices and gross margins.
Due to the emerging nature of the Company's markets and certain planned
product transitions, it is difficult for the Company to forecast future
inventory levels required to meet customer demand. As a result of both
contractual obligations and manufacturing cycle time, the Company is required to
order wafers from its foundries as much as six months in advance of the ultimate
shipment of its products. Under the Company's wafer supply agreements, there are
limits on the number of wafers the Company can order and the Company's ability
to change that quantity is restricted. Accordingly, the Company's ability to
react to significant fluctuations in demand for its products is limited. As a
result, the Company is not able to match its purchases of wafers to specific
customer orders and therefore, the Company may take write downs for potential
excess inventory purchased prior to the receipt of customer orders. These write
downs decrease gross margins in the quarter reported and can result in
significant fluctuations in gross margins on a quarter to quarter basis. As the
Company's manufacturing cycle time has decreased over the past 12 months, the
Company's ability to respond to changes in customer demand has improved.
However, there can be no assurance that future gross margin volatility will not
reoccur as a result of the Company's inability to match supply with demand or
for other reasons.
During 1996, the price of dynamic random access memory (DRAM) decreased
dramatically, in some cases by 75%. All DRAM suppliers were adversely impacted,
including the Company's two flash foundry suppliers, which now have excess
capacity of foundry wafers that can be made available to the Company at reduced
prices. Such reduced wafer prices have helped the Company to accelerate its cost
reduction efforts. However, because SanDisk values its inventory on a lower of
cost or market basis, these cost reductions may have an adverse effect on the
Company's gross margins and results of operations in the future as the Company's
inventory is written down to reflect the lower wafer costs. Due to the highly
competitive nature of the DRAM business, there can be no assurance that wafer
costs will remain low or that increased capacities will remain available.
Dependence on Third Party Foundries. All of the Company's products
require silicon wafers, which are currently supplied by Matsushita in Japan and
LG Semicon in Korea. The Company is dependent on Matsushita and LG Semicon to
produce wafers of acceptable quality and with acceptable manufacturing yields,
to deliver those wafers to the Company on a timely basis and to allocate to the
Company a portion of their foundry capacity sufficient to meet the Company's
needs. On occasion, the Company has experienced difficulties in each of these
areas. The loss or reduction of capacity from Matsushita and LG Semicon or the
inability to qualify or receive the anticipated level of capacity from
Matsushita and LG Semicon could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that Matsushita and LG Semicon will be
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able to maintain acceptable yields or that they will continue to deliver
sufficient quantities of wafers on a timely basis.
Under the Company's wafer supply agreements with Matsushita and LG
Semicon, the Company is obligated monthly to provide a rolling forecast of
anticipated purchase orders. Except in limited circumstances and subject to
acceptance by the foundries, the estimates for the first three months of each
forecast constitute a binding commitment and the estimates for the remaining
months may not increase or decrease by more than a certain percentage from the
previous month's forecast. This limits the Company's ability to react to any
significant fluctuations in demand for its products. To the extent the Company
inaccurately forecasts the number of wafers required, it may have either a
shortage or an excess supply of wafers, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The wafer supply agreements with Matsushita and LG Semicon each
include a target number of wafers to be delivered per month that is
substantially higher than the level of supply from either foundry as of March
31, 1997. To the extent the Company is unable to obtain scheduled quantities of
wafers from Matsushita or LG Semicon with planned yields, the Company's
business, financial condition and results of operations could be negatively
impacted.
The Company has entered into a joint development agreement with NEC for
the development of future generations of semiconductor devices to be used in the
manufacture of the Company's products. However, there can be no assurance that
future generations of the semiconductor devices will be successfully developed
or, if developed, that a wafer supply agreement will be entered into with NEC.
Because the lead time to qualify a new foundry is approximately 18 to 24 months,
in the event that the Company and NEC do enter into a wafer supply agreement,
the Company could not expect to receive volume shipments from NEC until 1998 at
the earliest.
Due to the unpredictable nature of the new markets for the Company's
products, the Company may periodically experience shortages in the future.
Because of the lengthy lead times required to qualify a new foundry, there is no
readily available alternative source of supply. The inability of the Company to
obtain expanded foundry capacity, to qualify other wafer manufacturers or to
correctly forecast the number of wafers required from its current suppliers, as
well as any inability to obtain timely and adequate deliveries from the
Company's current or future suppliers or any other circumstance that would
require the Company to seek alternative sources of supply, could delay shipments
of the Company's products and could have a material adverse effect on the
Company's business, financial condition and results of operations.
SanDisk has received recent indications from its foundries that
additional capacity is available. Finished goods inventory levels increased
throughout 1996 and during the first quarter of 1997 and the Company is now
quoting average delivery times of two to six weeks. Semiconductor supply and
demand tend to be cyclical, however, and it is unlikely that this situation will
continue over the long term.
Risks Associated with Transitioning to New Products and Processes.
Successive generations of the Company's products incorporate semiconductor
devices with greater memory capacity per chip. In addition, the Company is
continually involved in joint development with its foundries to produce
semiconductor devices based upon smaller geometry manufacturing processes. Both
the development of higher capacity semiconductor devices and the implementation
of smaller geometry manufacturing processes are important determinants of the
Company's ability to decrease the cost per megabyte of its flash data storage
products. The utilization of semiconductor devices with greater memory capacity
and the design and implementation of new semiconductor manufacturing processes
can entail a number of problems, including lower yields associated with
semiconductor device production, problems associated with design and manufacture
of products to incorporate such devices, and production delays. Any problems
experienced by the Company in its current or future transitions to higher
capacity memory devices or to new semiconductor manufacturing processes could
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that such devices or
processes will be successfully developed by the Company.
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On November 6, 1996, the Company announced its first 64Mbit products
based on double density flash ("D2 flash") technology, a new flash system
designed to store two bits in each flash memory cell. The Company believes that
D2 flash will be important to the Company's ability to increase the capacity and
decrease the cost of certain of its products, maintain its competitive
advantage, broaden its target markets and attract strategic partners. The
Company will not generate significant revenues from sales of 64Mbit products
until at least the second half of 1997. The implementation of D2 flash in a
production environment is currently planned for the second half of 1997. High
density flash memory, such as D2 flash, is a complex technology requiring tight
manufacturing controls and effective test screens. The production ramp up period
for a flash device is particularly prone to problems which can impact both
reliability and yields exposing the Company to increased manufacturing costs.
There can be no assurance that reliable and cost effective D2 flash products can
be manufactured in commercial volumes and with yields sufficient to result in a
lower cost per megabyte. Furthermore, flash data storage products designed with
D2 flash will initially exhibit approximately one quarter of the write
performance of the Company's existing products when writing data into memory.
This may preclude their use in certain applications. The failure of the Company
to successfully manufacture D2 flash devices could have a material adverse
effect on the Company's business, financial condition and results of operations.
Manufacturing Yields. The fabrication of the Company's products is a
complex and precise process requiring wafers that are produced in a highly
controlled and clean environment. Semiconductor companies supplying the Company
with wafers periodically have experienced problems in achieving acceptable wafer
manufacturing yields. Semiconductor manufacturing yields are a function both of
design technology, which is developed by the Company, and process technology,
which is typically proprietary to the foundry. Because low yields may result
from either design or process technology failures, yield problems may not be
effectively determined or improved until an actual product exists that can be
analyzed and tested to recognize process sensitivities in relation to the design
rules that were used. As a result, yield problems may not be identified until
well into the production process. This risk is increased due to the fact that
the Company receives its wafers from independent offshore foundries, increasing
the effort and time required to identify, communicate and resolve manufacturing
yield problems. There can be no assurance that the Company's foundries will
achieve or maintain acceptable manufacturing yields in the future. The inability
of the Company to achieve planned yields from its foundries could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Key and Sole Source Suppliers. The Company purchases
several key components from single or sole source vendors for which alternative
sources are not currently available. Even where alternative vendors are
available, a significant amount of time would be required to qualify an
additional vendor in the case of certain of the Company's other components. The
Company does not maintain long-term supply agreements with any of these vendors.
The inability to develop alternative sources for these single or sole source
components or to obtain sufficient quantities of these components could result
in delays or reductions in product shipments which could adversely affect the
Company's business, financial condition and results of operations. For example,
the Company relies on Motorola as the sole source of microcontrollers, which are
critical components in the Company's products. The sole source risk associated
with microcontrollers from Motorola is heightened during transitions from one
generation of microcontrollers to the next given the limited safety stock
available during these transitions. In the event Motorola were to stop shipment
of microcontrollers for any reason, the time to design and qualify an
alternative source would be approximately nine to twelve months. The Company's
reliance on Motorola as its sole source of microcontrollers exposes the Company
to interruptions of supply that could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
is continuing to identify and establish second sources for its key single and
sole source component vendors as sales volumes increase, although there can be
no assurance these efforts will be successful.
The Company uses, Alphatec in Manteca, California, to assemble a
majority of the memory components for its products and from time to time uses
other subcontractors to perform some assembly and
Page 13
<PAGE>
test functions . The Company has no long term agreement with Alphatec. As a
result of this reliance on third party subcontractors for assembly of a portion
its products, the Company cannot directly control product delivery schedules,
which can lead to product shortages or quality assurance problems that could
increase manufacturing costs of the Company's products. Any problems associated
with the delivery, quality or cost of the Company's products could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Patents, Proprietary Rights and Related Litigation. The Company relies
on a combination of patents, mask work protection, trademarks, copyright and
trade secret laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. There can be no assurance that there
will not be any disputes regarding the Company's intellectual property rights.
Specifically, there can be no assurance that any patents held by the Company
will not be invalidated, that patents will be issued for any of the Company's
pending applications or that any claims allowed from existing or pending patents
will be of sufficient scope or strength or be issued in the primary countries
where the Company's products can be sold to provide meaningful protection or any
commercial advantage to the Company. Additionally, competitors of the Company
may be able to design around the Company's patents.
From time to time the Company has been notified and its foundries may
in the future be notified, of claims that they may be infringing patents or
other intellectual property rights owned by third parties. If it is necessary or
desirable, the Company may seek licenses under such patents or intellectual
property rights. However, there can be no assurance that licenses will be
offered or that the terms of any offered licenses will be acceptable to the
Company. The failure to obtain a license from a third party for technology used
by the Company could cause the Company to incur substantial liabilities and to
suspend the manufacture of products or the use by the Company's foundries of
processes requiring the technology, or to expend substantial resources
redesigning its products to eliminate the infringement. There can be no
assurance that the Company would be successful in redesigning its products or
that such licenses would be available under reasonable terms, and any such
development or license could require substantial expenditures of time and other
resources by the Company.
The Company has notified IBM Microelectronics, Samsung Electronics
Company Ltd. ("Samsung") and Toshiba Corporation ("Toshiba") that the Company
believes certain of their existing or announced products infringe certain of the
Company's patents. In addition, from time to time, the Company has entered into
discussions with other companies regarding potential cross-license agreements
for the Company's patents.
In response to the Company's allegations of infringement of five of the
Company's patents, Samsung filed a complaint in October 1995 accusing the
Company of infringing two of its patents, seeking declaratory relief with
respect to these five Company patents and alleging unspecified damages for
certain other related claims. As written, the complaint potentially implicates
products that comprise substantially all of the Company's product revenues for
1997, 1996 and 1995. The Company has received opinions from its Patent Counsel
that, based on information currently known, the Company's products do not
infringe one of these Samsung patents and that, based on certain assumptions as
to how Samsung would claim infringement, the particular patent claim in the
other Samsung patent that Samsung has accused the Company of infringing is
invalid and that the Company's products do not infringe any of the other claims
of such patent. Nonetheless, the Company anticipates that Samsung will continue
to pursue litigation with respect to these claims. SanDisk filed its answer to
Samsung's complaint in March 1996. At that time, SanDisk asserted a number of
counterclaims based on Samsung's alleged infringement of three SanDisk patents.
On January 11, 1996, the Company filed a complaint against Samsung with
the United States International Trade Commission alleging that Samsung and its
U.S. sales arm, are importing and selling products that infringe two of the
Company's patents. By its complaint, the Company seeks a judgment by the
International Trade Commission that Samsung is infringing the Company's patents
and an order precluding Samsung from importing those infringing products into
the United States. The U.S.
Page 14
<PAGE>
International Trade Commission completed its hearing on this matter in October
1996. On February 26, 1997, the Administrative Law Judge assigned to the case
issued an Initial Determination finding both SanDisk patents valid and infringed
and further finding a violation of Section 337 of the Trade Act. On April 15,
1997, the Commission affirmed the Administrative Law Judge's findings of
validity with respect to both patents and his finding of infringement with
respect to one of the patents. The Commission, having recognized that SanDisk's
claims against Samsung are meritorious, is now determining the scope of the
exclusion and/or cease and desist orders that will bar importation of Samsung
flash devices. A final decision is expected in May, 1997.
As is common in the industry, the Company agrees to indemnify certain
of its suppliers and customers for alleged patent infringement. The scope of
such indemnity varies, but may, in some instances, include indemnification for
damages and expenses, including attorneys fees. The Company may from time to
time be engaged in litigation as a result of such indemnification obligations.
Third party claims for patent infringement are excluded from coverage under the
Company's insurance policies. There can be no assurance that any future
obligation to indemnify the Company's customers or suppliers, will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
To preserve its intellectual property rights, the Company believes it
may be necessary to initiate litigation with one or more third parties,
including but not limited to those the Company has notified of possible patent
infringement. In addition, one or more of these parties may bring suit against
the Company. Any litigation, whether as a plaintiff or as a defendant, would
likely result in significant expense to the Company and divert the efforts of
the Company's technical and management personnel, whether or not such litigation
is ultimately determined in favor of the Company. In the event of an adverse
result in any such litigation, the Company could be required to pay substantial
damages, cease the manufacture, use and sale of infringing products, expend
significant resources to develop non-infringing technology, discontinue the use
of certain processes or obtain licenses to the infringing technology.
Litigation frequently involves substantial expenditures and can require
significant management attention, even if the Company ultimately prevails. Legal
fees associated with the Samsung ITC hearings were approximately $2.9 million in
1996. While these expenses are expected to decline in the first half of 1997,
they will remain significant. In addition, the results of any litigation matters
are inherently uncertain. Accordingly, there can be no assurance that any of the
foregoing matters, or any future litigation, will not have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition to litigation, the Company may need to license some or all
of its patent portfolio to be able to obtain cross-licenses to the patents of
others. In October 1995, the Company entered into a cross-license agreement with
Intel Corporation ("Intel"). In December 1996, the Company entered into a
cross-license agreement with Sharp Electronics ("Sharp"). There can be no
assurance that any other licenses will be available on commercially reasonable
terms, or at all. Moreover, any such cross-licenses could result in more rapid
and intense competition for the Company's products, by much larger and better
financed competitors. Any such limitations on the Company's ability to market
its products, or delays and costs associated with redesigning its products, or
payments of license fees or licenses of Company rights to others could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Competition. The flash data storage markets in which the Company
competes are characterized by rapid technological change, evolving industry
standards, declining average selling prices and rapid product obsolescence. The
Company's competitors include many large domestic and international companies
that have greater access to foundry capacity, substantially greater financial,
technical, marketing and other resources, broader product lines and longer
standing relationships with customers than the Company. The Company expects
competition to increase in the future from existing competitors and from other
companies that may enter the Company's existing or future markets with similar
or alternative data storage solutions that may be less costly or provide
additional features. In addition, competition will increase to the extent that
the Company determines to license its patents to certain of its competitors in
Page 15
<PAGE>
order to gain licenses to their patents. For example, in October 1995 and in
December 1996, the Company entered into patent cross-license agreements with
Intel and Sharp, respectively, pursuant to which each party is entitled to
manufacture and sell products that incorporate technology covered by the other
party's patents related to flash memory devices. Increased competition could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Competing products include Intel's Miniature Card and Toshiba's
Solid-State Floppy Disk Card (SSFDC). Both products are aimed at the mass
storage market for consumer applications, such as digital filmless cameras. The
Company expects these products to compete against its CompactFlash product. A
manufacturer of digital cameras wishing to design any one of these three
alternatives as removable "digital film" will eliminate the other two from use
in their product, since all three are mechanically and electronically
incompatible with each other. Competition to win the initial design-in is
therefore expected to be fierce. Due to the high price sensitivity in the market
for consumer products, aggressive price competition has been experienced for
these applications. Such competition resulted in lower product gross margins in
the second half of 1996 and the first quarter of 1997, and is expected to result
in lower gross margins in future quarters, as the relative percentage of sales
of CompactFlash products increase.
In the third quarter of 1996, the Company began experiencing strong
competition from Toshiba's SSFDC 2 Mbyte product. The Company also believes that
Samsung has begun shipment of competing 32Mbit NAND flash products, as well as
samples of its 64Mbit NAND flash products. In the first quarter of 1997, Toshiba
announced availability of its SSFDC 4MB product.
Dependence on Emerging Markets and New Products. The Company's success
depends to a significant extent upon the development of emerging markets and new
applications for flash data storage systems, as well as on its ability to
introduce commercially attractive and competitively priced products on a timely
basis. There can be no assurance that new applications or markets for flash data
storage will develop as expected by the Company or that prospective customers
developing products for any such markets will design the Company's products into
their products and successfully introduce such products. Although the Company's
CompactFlash has achieved considerable initial success in several digital
cameras introduced during the first quarter of 1997, there can be no assurance
that this early success will result in large scale market acceptance. The
failure of new applications or markets to develop or the failure of new markets
to be receptive to the Company's products could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company believes that continued significant expenditures for
research and development will be required in the future. In particular, the
Company intends to develop new products with increased memory capacity at lower
prices, which the Company believes will be essential to its ability to remain
competitive. There can be no assurance that these products will be successfully
developed or will achieve market acceptance, or that the Company will be
successful in identifying new product opportunities and developing and bringing
new products to market in a timely manner, or that products or technologies
developed by others will not render the Company's products or technologies
obsolete or noncompetitive. The failure of any of the Company's new product
development efforts or lack of market acceptance of such products could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Customer Concentration. A limited number of customers have historically
accounted for a substantial portion of the Company's revenues. The Company
expects that sales of its products to a limited number of customers will
continue to account for a substantial portion of its revenues for the
foreseeable future. Sales to the Company's customers are generally made pursuant
to standard purchase orders rather than long-term contracts. The Company has
also experienced significant changes in the composition of its major customer
base from year to year and expects this variability to continue as certain
customers increase or decrease their purchases of the Company's products as a
result of fluctuations in market demand for such customers' products. Under a
joint cooperation agreement signed in January 1993, Seagate Corporation
("Seagate") has the option to market the Company's products beginning in 1999.
Under the amended
Page 16
<PAGE>
agreement, beginning in 1999, if Seagate exercises its option to market the
Company's products, the Company and Seagate will coordinate their efforts so
that up to one-third of the Company's worldwide net revenues could be generated
from sales of the Company's flash products through Seagate.
International Operations. All of the Company's wafers are, and for the
foreseeable future will be, produced by foreign foundries. Because the Company
currently purchases the majority of its flash wafers in Japanese Yen at a set
price, fluctuations in currencies could materially adversely affect the
Company's business, financial condition and results of operations. Due to its
reliance on export sales and its dependence on foundries outside the United
States, the Company is subject to the risks of conducting business
internationally, including foreign government regulation and general
geopolitical risks such as political and economic instability, potential
hostilities and changes in diplomatic and trade relationships. In addition,
since most of the Company's international sales are denominated in U.S. dollars,
the Company's products may be less competitive in countries with currencies
declining in value against the dollar. In 1996 export sales accounted for
approximately 55% of the Company's total revenues. Manufacturing and sales of
the Company's products may also be materially adversely affected by factors such
as unexpected changes in, or imposition of, regulatory requirements, tariffs,
import and export restrictions and other barriers and restrictions, longer
payment cycles, greater difficulty in accounts receivable collection,
potentially adverse tax consequences, the burdens of complying with a variety of
foreign laws and other factors beyond the Company's control. In addition, the
laws of certain foreign countries in which the Company's products are or may be
developed, manufactured or sold, including various countries in Asia, may not
protect the Company's intellectual property rights to the same extent as do the
laws of the United States and thus make piracy of the Company's products a more
likely possibility. There can be no assurance that these factors will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
Volatility of Stock Price. To date, the price of the Company's Common
Stock on the NASDAQ National Market has been volatile. The Company believes that
future announcements concerning the Company, its competitors or its principal
customers, including technological innovations, new product introductions,
governmental regulations, litigation or changes in earnings estimated by
analysts, may cause the market price of the Common Stock to fluctuate
substantially in the future. Sales of substantial amounts of the Company's
outstanding Common Stock in the public market could materially adversely affect
the market price of the Common Stock. Further, in recent years the stock market
has experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many high technology
companies and that often have been unrelated or disproportionate to the
operating performance of such companies. These fluctuations as well as general
economic, political and market conditions such as recessions or international
currency fluctuations, may materially adversely affect the market price of the
Common Stock.
Page 17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this item is set forth in Note 5 of the
Notes to the Condensed Consolidated Financial Statements on page 6 and 7 of this
Form 10-Q for the quarterly period ended March 31, 1997, and is hereby
incorporated by reference.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Page 18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
<S> <C>
3.1* Certificate of Incorporation of the Registrant, as amended to date.
3.2* Form of Amended and Restated Certificate of Incorporation of the Registrant
3.3* Bylaws of the Registrant, as amended.
3.4* Form of Amended and Restated Bylaws of the Registrant
4.1* Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.3* Amended and Restated Registration Rights Agreement, among the
Registrant and the investors and founders named therein,
dated March 3, 1995.
4.4* Amendment No. 1 to the Stock Purchase Agreements among the Registrant and the holders
of Series A, B and D Preferred Stock, and certain holders of Series E Preferred
Stock, dated January 15, 1993.
4.5* Series F Preferred Stock Purchase Agreement between Seagate Technology, Inc. and
the Registrant, dated January 15, 1993.
4.6* Amendment Agreement between Seagate Technology, Inc. and the Registrant, dated
August 23, 1995.
4.7* Form of Stock Purchase Agreement between the Registrant and Seagate Technology, Inc.
9.1* Amended and Restated Voting Agreement, among the Registrant and the investors
named therein, dated March 3, 1995.
10.1* Form of Indemnification Agreement entered into between the Registrant and its
directors and officers.
10.2*+ Foundry Agreement between Matsushita Electronics Corporation, Matsushita
Electronic Industrial Co., Ltd. and the Registrant, dated May 20, 1992.
10.3*+ Amendment No. 1 to MEC/SunDisk Foundry Agreement, between Matsushita Electronics
Corporation, Matsushita Electronic Industrial Co., Ltd. and the Registrant, dated
April 17, 1995.
10.4*+ Foundry Agreement between Goldstar Electron Co., Ltd. and the Registrant, dated
October 13, 1993.
10.5*+ Amendment No. 1 to the Foundry Agreement between Goldstar Electron Co., Ltd. and
the Registrant, dated May 10, 1994.
10.6*+ SanDisk/Goldstar Technical Collaboration Agreement between Goldstar Electron
Co., Ltd. and the Registrant, dated March 25, 1994.
10.7*+ Joint Development Agreement between NEC Corporation and the Registrant, dated
June 20, 1994.
10.8*+ Joint Cooperation Agreement between the Registrant and Seagate Technology, Inc.,
dated January 15, 1993.
10.9*+ Amendment and Termination Agreement between the Registrant
and Seagate Technology, Inc., dated October 28, 1994.
10.10* License Agreement between the Registrant and Dr. Eli Harari, dated September 6, 1988
10.13* 1989 Stock Benefit Plan.
10.14* 1995 Stock Option Plan.
10.15* Employee Stock Purchase Plan.
10.16* 1995 Non-Employee Directors Stock Option Plan.
10.17* Patent Cross License Agreement between the Registrant and Intel Corporation,
dated October 12, 1995.
10.18** Lease Agreement between the Registrant and G.F. Properties, dated March 1, 1996.
10.19# Business loan agreement between the Registrant and Union Bank of California, dated July 3,
1996.
10.20++ Patent Cross License Agreement between the Registrant and Sharp Corporation dated December 24,
1996.
11.1 Computation of Per Share of Earnings (three months ended March 31, 1997 and 1996).
21.1* Subsidiaries of the Registrant.
27.1 Financial Data Schedule for the three months ended March 31, 1997. (In EDGAR format only)
<FN>
- ----------
* Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-1 (No. 33-96298).
** Previously filed as an Exhibit to the Registrant's 1995 Annual Report on
Form 10-K.
# Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended June 30, 1996.
+ Confidential treatment granted as to certain portions of these exhibits.
++ Confidential treatment requested as to certain portions of these
exhibits.
</FN>
</TABLE>
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1997.
Page 20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SanDisk Corporation
(Registrant)
By: /s/ Cindy L. Burgdorf
----------------------
Cindy L. Burgdorf
Chief Financial Officer,
Senior Vice President, Finance
and Administration and Secretary
DATED: May 14, 1997
Page 21
SanDisk Corporation
Statement Regarding Computation of Per Share Earnings
(In thousands, except per share data; unaudited)
Three months ended,
March 31,
1997 1996
------- -------
Net income $ 2,125 $ 3,054
Computations of weighted average common
and common equivalent shares outstanding:
Weighted average common
shares outstanding 22,398 22,024
Common stock options 1,709 2,179
------- -------
Shares used in computing net income
per share 24,107 24,203
======= =======
Net income per share applicable
to common stockholders $ 0.09 $ 0.13
======= =======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SanDisk Financial Data Schedule, September 30, 1996
</LEGEND>
<CIK> 0001000180
<NAME> SanDisk Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 13,875
<SECURITIES> 55,401
<RECEIVABLES> 13,634
<ALLOWANCES> 0
<INVENTORY> 11,766
<CURRENT-ASSETS> 96,609
<PP&E> 10,657
<DEPRECIATION> 0
<TOTAL-ASSETS> 107,771
<CURRENT-LIABILITIES> 17,296
<BONDS> 0
0
0
<COMMON> 98,859
<OTHER-SE> (8,384)
<TOTAL-LIABILITY-AND-EQUITY> 107,771
<SALES> 18,194
<TOTAL-REVENUES> 21,444
<CGS> 12,965
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,939
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,495
<INCOME-TAX> 370
<INCOME-CONTINUING> 2,125
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,215
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
