FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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: 0-23110
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DIGITAL LINK CORPORATION
(Exact name of registrant as specified in its charter)
California 77-0067742
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
217 Humboldt Court, Sunnyvale, CA 94089
(Address of principal executive offices, including zip code)
(408) 745-6200
Registrant's telephone number, including area code
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Sections 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 | |
The number of shares outstanding of the registrant's Common Stock as of
September 30, 1999, was 8,028,741 shares.
<PAGE>
DIGITAL LINK CORPORATION
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION:
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 1999 3
and December 31, 1998
Consolidated Statements of Operations for the quarters 4
and nine months ended September 30, 1999 and September 30, 1998
Consolidated Statements of Cash Flows for the nine 5
months ended September 30, 1999 and September 30, 1998
Notes to Consolidated Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
ITEM 3 - Quantitative and Qualitative Disclosure About 19
Market Risk
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 20
ITEM 2 - Changes in Securities and Use of Proceeds 21
ITEM 3 - Defaults Upon Senior Securities 21
ITEM 4 - Submission of Matters to a Vote of Security Holders 21
ITEM 5 - Other Information 21
ITEM 6 - Exhibits and Reports on Form 8-K 21
SIGNATURE(S) 22
2
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PART I. FINANCIAL INFORMATION
<TABLE>
ITEM 1. Financial Statements
DIGITAL LINK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share amounts)
- ----------------------------------------------------------------------------------------------
<CAPTION>
September 30, December 31,
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,154 $ 296
Short-term marketable securities 4,993 15,738
Accounts receivable, less allowance for doubtful accounts of $337 at
9/30/99 and $540 at 12/31/98 6,343 4,767
Inventories 3,099 4,306
Prepaid and other current assets 1,045 998
Income taxes receivable -- 2,501
Deferred income taxes 3,069 3,069
-------- --------
Total current assets 23,703 31,675
Long-term marketable securities 28,210 18,696
Property and equipment at cost, net 2,173 2,582
Deferred income taxes 1,560 1,560
Other assets 50 393
-------- --------
TOTAL ASSETS $ 55,696 $ 54,906
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,781 $ 2,365
Accrued payroll expense 2,611 2,168
Other accrued expenses 4,890 4,764
Income taxes payable 288 243
-------- --------
Total current liabilities 10,570 9,540
-------- --------
CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value:
Authorized: 5,000,000 shares;
Issued and outstanding: None
Common stock, no par value:
Authorized: 25,000,000 shares;
Issued and outstanding: 8,028,741 shares at 9/30/99 and 8,490,472
shares at 12/31/98 31,470 33,311
Accumulated other comprehensive income / (loss) (309) 52
Retained earnings 13,965 12,003
-------- --------
Total shareholders' equity 45,126 45,366
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 55,696 $ 54,906
======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
3
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<TABLE>
DIGITAL LINK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE QUARTERS AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998
(Amounts in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Net sales $ 16,400 $ 13,271 $ 47,254 $ 40,587
Cost of sales 7,057 10,168 21,400 24,203
-------- -------- -------- --------
Gross profit 9,343 3,103 25,854 16,384
-------- -------- -------- --------
EXPENSES:
Research and development 2,978 3,856 8,163 10,245
Selling, general and administrative 4,802 4,413 14,646 14,401
Purchased in-process research and development 0 0 0 2,299
Restructuring charges (424) 2,506 (424) 2,506
-------- -------- -------- --------
Total operating expenses 7,356 10,775 22,385 29,451
-------- -------- -------- --------
Operating income / (loss) 1,987 (7,672) 3,469 (13,067)
Other income 464 551 1,404 1,619
-------- -------- -------- --------
Income / (loss) before provision / (benefit) for
income taxes 2,451 (7,121) 4,873 (11,448)
Provision / (benefit) for income taxes 613 (2,848) 1,218 (4,538)
-------- -------- -------- --------
NET INCOME / (LOSS) $ 1,838 $ (4,273) $ 3,655 $ (6,910)
======== ======== ======== ========
COMPREHENSIVE INCOME / (LOSS) $ 1,811 $ (4,252) $ 3,294 $ (6,930)
======== ======== ======== ========
EARNINGS PER SHARE (Basic)
Net income / (loss) per share $ 0.23 $ (0.47) $ 0.45 $ (0.74)
======== ======== ======== ========
Shares used in computing per share amounts 8,013 9,129 8,122 9,311
======== ======== ======== ========
EARNINGS PER SHARE (Diluted)
Net income / (loss) per share $ 0.22 $ (0.47) $ 0.44 $ (0.74)
======== ======== ======== ========
Shares used in computing per share amounts 8,255 9,129 8,258 9,311
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
4
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<TABLE>
DIGITAL LINK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Amounts in thousands)
- ------------------------------------------------------------------------------------------
<CAPTION>
Nine Months Ended
September 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income / (loss) $ 3,655 $ (6,910)
Adjustments to reconcile net income / (loss) to net cash flows
provided by operating activities:
Depreciation and amortization 1,203 2,759
Reduction in allowance for doubtful accounts (165) (76)
Provision for excess and obsolete inventories 1,114 2,944
Purchased research and development -- 2,299
Deferred tax on acquisition -- (1,399)
Changes in:
Accounts receivable (1,411) 613
Inventories 93 256
Prepaid and other assets 296 629
Accounts payable 416 1,898
Accrued payroll and other accrued expenses 569 263
Income taxes payable / (receivable) 2,546 (2,336)
-------- --------
Net cash flows provided by operating activities 8,316 940
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (16,308) (25,664)
Maturities of marketable securities 17,178 35,199
Payment in connection with Acquisition of Semaphore Corporation -- 182
Acquisition of property and equipment (794) (1,075)
-------- --------
Net cash flows provided by investing activities 76 8,642
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock
purchase plan 451 421
Repurchase of common stock (3,985) (6,402)
-------- --------
Net cash flows used in financing activities (3,534) (5,981)
-------- --------
Net increase in cash and cash equivalents 4,858 3,601
Cash and cash equivalents at beginning of year 296 2,504
-------- --------
Cash and cash equivalents at end of period $ 5,154 $ 6,105
======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
5
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DIGITAL LINK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
by the Company without audit in accordance with generally accepted
accounting principles for interim financial information and pursuant to
rules and regulations of the Securities and Exchange Commission. In the
opinion of management, all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation
have been included. These financial statements should be read in
conjunction with the Company's consolidated financial statements and
notes thereto contained in the Company's Annual Report on Form 10-K,
which was filed with the Securities and Exchange Commission on March
29, 1999.
The year-end balance sheet at December 31, 1998 was derived from
audited financial statements, but does not include all disclosures
required by generally accepted accounting principles.
Operating results for the three months and nine months ended September
30, 1999 may not necessarily be indicative of the results to be
expected for any other interim period or for the full year.
<TABLE>
2. COMPUTATION OF NET INCOME / (LOSS) PER SHARE
Basic and diluted net income per share is computed in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128").
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Basic (in thousands, except per share data) (in thousands, except per share data)
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 8,013 9,129 8,122 9,311
for the period
Shares used in computing per share amounts 8,013 9,129 8,122 9,311
Net income / (loss) $ 1,838 $ (4,273) $ 3,655 $ (6,910)
Net income / (loss) per share $ 0.23 $ (0.47) $ 0.45 $ (0.74)
</TABLE>
6
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<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Diluted (in thousands, except per share data) (in thousands, except per share data)
<S> <C> <C> <C> <C>
Weighted average number of shares outstanding 8,013 9,129 8,122 9,311
for the period
Common equivalent shares from conversion of stock 242 -- 136 --
options under treasury stock method
Shares used in computing per share amounts 8,255 9,129 8,258 9,311
Net income / (loss) $ 1,838 $ (4,273) $ 3,655 $ (6,910)
Net income / (loss) per share $ 0.22 $ (0.47) $ 0.44 $ (0.74)
</TABLE>
3. INVENTORIES
Inventories are valued at the lower of cost (determined using the
first-in, first-out method) or market. Inventories consisted of (in
thousands):
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited)
Raw materials $1,002 $1,349
Work-in-process 1,091 1,456
Finished goods 1,006 1,501
------ ------
$3,099 $4,306
====== ======
4. RESTRUCTURING CHARGES
During the three and nine months ended September 30, 1999 the Company
had an expense recovery of $424,000 due to the reversal of a portion of
the restructuring charge that was originally included in the
three-month and nine-month periods ended September 30, 1998. The 1998
restructuring charge was originally recorded as a result of the
termination of the DL7100 and the Virtual Private Network product
lines, including the termination of 25 project employees and the
abandonment of a leased facility. The partial reversal in 1999 of the
1998 restructuring charge was due to the favorable resolution of
certain legal contingencies that were included in the original charge.
5. OUTSTANDING TENDER OFFER
On September 3, 1999 the Company and DLZ Corp., a corporation formed by
Vinita Gupta, the founder, chief executive officer and holder of
approximately 50% of the outstanding shares of the Company, announced
that they had executed a definitive merger agreement. Under the terms
of the merger agreement, DLZ made a tender offer for all
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outstanding shares of the Company's stock not owned by DLZ for $10.30
per share. The tender offer commenced on September 10, 1999 and was set
to expire at 12:00 midnight on October 15, 1999. The merger and tender
offer were subject to certain conditions, including a minimum condition
in the tender offer that DLZ own an aggregate of 90% of the outstanding
stock following the tender offer.
The original tender offer has been extended several times. As of 12:00
midnight on October 29, 1999, 2,690,031 shares of Digital Link stock
had been tendered which, together with shares held by DLZ and its
affiliates, constituted approximately 83.5% of the outstanding Company
stock. On November 1, 1999, the tender offer price was increased to
$10.85 and the offer was extended to 12:00 midnight on November 15,
1999.
The merger agreement provides that the offer, if consummated, will be
followed by a merger of DLZ Corp. and the Company. In connection with
the merger, all remaining outstanding shares of the Company's Common
Stock would be converted into the right to receive $10.85 per share in
cash.
6. CONTINGENCIES
Certain third parties have expressed their belief that certain of the
Company's products may infringe patents held by them and have suggested
that the Company acquire licenses to such patents. The Company believes
that licenses, to the extent required, will be available; however, no
assurance can be given that the terms of any offered licenses would be
favorable to the Company. Management, after review and consultation
with counsel, believes that the ultimate resolution of these matters is
uncertain and there can be no assurance that these assertions will be
resolved without costly litigation or in a manner that is not adverse
to the Company. While the Company has accrued approximately $950,000
for these matters deemed probable in prior years, it is currently
unable to estimate the ultimate range of loss regarding these matters.
Therefore, it is reasonably possible that the ultimate resolution of
these matters could result in final settlement that could exceed or be
less than the amounts accrued and that the settlement of these matters
could be material to the Company's results of operations. Adjustment to
amounts accrued will take place in the period in which such matters are
resolved.
In April 1996, a class action complaint was filed against the Company
and certain of its officers and directors in the Santa Clara Superior
Court of the State of California, alleging violations of the California
Corporations Code and California Civil Code. In October 1996, a similar
parallel lawsuit against the Company and the same individuals was filed
in the United States District Court for the Northern District of
California alleging violations of the federal securities laws. The
class period in both of these lawsuits runs from September 12, 1994
through December 29, 1995, and both complaints allege that the
defendants concealed and/or misrepresented material adverse information
about the Company and that the individual defendants sold shares of the
Company's stock based upon material nonpublic information. The
complaints seek unspecified monetary damages. Discovery to date has
been limited in the state court action, and the Superior Court has not
set a trial date. In the parallel Federal proceedings, the Court on
September 11, 1997 granted the Company's motion to dismiss the federal
complaint with leave to amend, and plaintiff filed an amended
complaint. The Company moved to dismiss the
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amended complaint, the hearing on which was scheduled to take place in
September 1999. Plaintiff has attempted to dismiss the Federal
proceedings without prejudice but has maintained his right to pursue
the State action. The Company has objected to this procedure and has
requested an opportunity to brief the issue in the Federal Court.
The Company believes that both actions are without merit and intends to
defend both actions vigorously. However, litigation is subject to
inherent uncertainties and, thus, there can be no assurance that these
lawsuits will be resolved favorably to the Company or that they will
not have a material adverse effect on the Company's financial condition
and results of operations. No provision for any liability that may
result upon adjudication has been made in the accompanying financial
statements.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use." This standard requires companies to capitalize qualifying
computer software costs which are incurred during the application
development stage and amortize them over the software's estimated
useful life. SOP 98-1 was effective for the Company's current fiscal
year. The adoption of SOP 98-1 had no impact on the Company's financial
statements.
In April 1998, the AICPA issued Statement of Position 98-5 ("SOP
98-5"), "Reporting on the Costs of Start-Up Activities." This standard
requires companies to expense the costs of start-up activities and
organization costs as incurred. SOP 98-5 was effective for the
Company's current fiscal year. The adoption of SOP 98-5 had no impact
on the Company's results of operations.
In September 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities." SFAS
133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133 requires that
all derivatives be recognized at fair value in the statement of
financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship
that exists. SFAS 133 will be effective for the first quarter of 2000.
The Company does not currently hold derivative instruments or engage in
hedging activities.
9
<PAGE>
DIGITAL LINK CORPORATION
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Except for the historical statements contained herein, this Form 10-Q contains
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking
statements involve a number of risks, known and unknown, and uncertainties, such
as the loss of, or difference in actual from anticipated levels of purchases
from, the Company's major customers, the impact of competitive products and
pricing, the ability to retain and attract key personnel and other risks which
are described throughout the Company's reports filed with the Securities and
Exchange Commission ("SEC"), including its Form 10-K for the year ended December
31, 1998 and within "Management's Discussion and Analysis of Financial Condition
and Results of Operations," including under the title "Other Factors That May
Affect Future Operating Results." The actual results that the Company achieves
may differ materially from any forward-looking statements due to such risks and
uncertainties.
When used in this Form 10-Q words such as "believes," "anticipates," "expects,"
"intends," and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's reports filed with the SEC
that attempt to advise interested parties of the risks and factors that may
affect the Company's business.
Due to all the foregoing factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as an indication of future performance. Similarly,
past performances are not necessarily indicative of future results. It is
possible, in some future quarters that the Company's operating results will be
below the expectations of stock market analysts and investors. In such event,
the price of the Company's Common Stock would likely be materially adversely
affected. Consequently, the purchase or holding of the Company's Common Stock
involves an extremely high degree of risk.
Net Sales
Net sales are primarily derived from the sale of wide-area network access
equipment. Net sales increased 24% to $16,400,000 in the third quarter of 1999
compared to $13,271,000 in the third quarter of 1998 and increased 16% to
$47,254,000 for the nine months ended September 30, 1999 compared to $40,587,000
for the corresponding period in 1998.
The Company has two major products, broadband products (i.e., transmission rates
in excess of T1/E1) and narrowband products (i.e., transmission rates up to
T1/E1). Increased demand for broadband products continued to generate a very
strong increase in sales of these products, particularly in the inverse
multiplexer product line. The increase in broadband sales was partially offset
by a decline in sales for narrowband products. Narrowband sales decreased due
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to the anticipated decline in sales of the Company's T1 OEM product and to
decreased demand for lower-end narrowband products.
During the third quarter of 1999, narrowband sales in absolute dollars decreased
by 22% and decreased to 41% of net sales as compared to 65% of net sales in the
third quarter of 1998. Broadband sales increased in absolute dollars by 107% and
grew to 59% of total sales in the third quarter of 1999 as compared to 35% of
net sales in the third quarter of 1998. During the first nine months of 1999,
narrowband sales in absolute dollars decreased by 6% and decreased to 50% of
total sales as compared to 62% of total sales in the first nine months of 1998.
Broadband sales increased in absolute dollars by 52% and increased to 50% of net
sales for the first nine months of 1999 as compared to 38% of net sales for the
same period in 1998. The changes in narrowband sales and broadband sales as a
percentage of net sales were primarily due to higher sales of broadband products
to certain domestic carrier customers and the decline in sales of the T1-OEM
product.
Net sales continued to be impacted by lower average selling prices on certain
narrowband and broadband products as a result of price reductions made in 1998
and in the first part half of 1999. The Company anticipates that the pricing
pressure will continue during the remainder of 1999.
International sales, including Canada, represented 24% of net sales in the third
quarter of 1999 and 1998, compared to 20% for the same period of 1998.
International sales for the nine months ended September 30, 1999, were 26% as
compared to 22% for the same period of the prior year. These increases were
primarily due to an increased sales presence in Asia and Europe and increased
demand for broadband products. International sales are subject to inherent
risks, including difficulties in homologating products in other countries,
difficulties in staffing and managing foreign operations, greater difficulty in
accounts receivable collection, unexpected changes in regulatory requirements
and tariffs, and potentially adverse tax consequences, which may in the future
contribute to fluctuations in the Company's business and operating results.
Gross Profit
During the third quarter of 1999, gross profit increased 201% to $9,343,000 from
$3,103,000 for the same period of the prior year. Gross margin increased to
57.0% of net sales in the third quarter of 1999 as compared to 23.4% in the
third quarter of 1998. The net increase in gross margin from the third quarter
1998 to the third quarter of 1999 was due to a combination of factors. Cost of
goods sold for the third quarter of 1998 included a charge amounting to
approximately $3.2 million for inventory write-downs and warranty reserves which
related to the discontinuance of certain of the Company's products in connection
with the Company's restructuring. Also, there was a shift in the mix of products
sold in the third quarter of 1999 to include more broadband products, which
generally have higher gross margins than narrowband products. In addition, there
was a significant reduction in sales of the T1 OEM units, which have relatively
low margins.
During the nine months ended September 30, 1999, gross profit increased 57.8% to
$25,854,000 from $16,384,000 for the same period of the prior year. Gross
margins increased to 54.7% of net sales for the first nine months of 1999 as
compared to 40.4% for the same period of the prior year. This gross margin
increase also reflects the shift in the mix of products sold to include more
broadband products as well as the previously mentioned restructuring adjustment.
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Gross profits may vary significantly from quarter to quarter depending on many
factors, including competitive pricing pressures and changes in the mix of
products sold. A significant portion of the Company's business is very price
competitive, which has in the past and will in the future require the Company to
lower its prices, resulting in fluctuations in the Company's business and
operating results. The Company anticipates that this pricing pressure will
continue for the foreseeable future. In addition, the mix of products sold may
change to include a higher percentage of narrowband products that generally have
lower gross margins and would therefore adversely affect the Company's overall
gross profits.
Research and Development
The primary types of expenses included in research and development expenses are
personnel, consulting, prototype materials and professional services. During the
third quarter of 1999, R&D expenses decreased 23% to $2,978,000 from $3,856,000
for the third quarter of 1998. For the nine months ended September 30, 1999, R&D
expenses decreased 20% to $8,163,000 from $10,245,000 for the same period of the
prior year. The decrease in expenses during both the third quarter and first
nine months of 1999 is primarily due to a reduction in headcount because of
discontinued or de-emphasized products resulting from restructuring activities
in September 1998.
As a percentage of net sales, R&D expenses decreased to 18.2% for the third
quarter of 1999 as compared to 29.1% for the same period of the prior year. R&D
expenses were 17.3% of net sales for the nine months ended September 30, 1999 as
compared to 25.2% for the same period of 1998. The decrease in R&D expenses as
percentage of net sales for the third quarter and the first nine months of 1999
is the result of higher net sales combined with lower costs as a result of
discontinued or de-emphasized products.
All of the Company's R&D expenditures to date have been expensed as incurred. In
the future, the Company may be required to capitalize a portion of its software
development costs pursuant to Statement of Financial Accounting Standards No.
86, "Accounting for Costs of Computer Software to be Sold, Leased or Otherwise
Marketed."
Selling, General and Administrative
The primary types of expenses included in selling, general and administrative
("SG&A") expenses are personnel, advertising, other promotional, and travel and
entertainment. SG&A expense increased 9% in the third quarter of 1999 to
$4,802,000 from $4,413,000 for the same period of the prior year. This increase
in SG&A expense was attributable to an increase in advertising and promotional
activities and increased personnel costs due to headcount increases. SG&A
expense increased 2% to $14,646,000 for the first nine months of 1999 from
$14,401,000 for the comparable period in 1998. This increase in SG&A expense was
primarily attributable to increased marketing costs such as advertising offset
by reduced travel and bad debt expenses.
As a percentage of net sales, SG&A expenses decreased to 29.3% and 31.0%
respectively, for the third quarter and first nine months of 1999, compared to
33.3% and 35.5% for the same periods
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of 1998. The decrease in SG&A expense as a percentage of net sales during both
the quarter and nine months ended September 30, 1999 was primarily the result of
higher sales volume, offset in part by the increased SG&A expense mentioned
above.
Purchased In-Process Research and Development
In the nine months ended September 30, 1998, the Company incurred an expense of
$2.3 million related to purchased research and development for which
technological feasibility had not been achieved related to the acquisition of
Semaphore. Such in-process technology was valued, along with other acquired
assets, in accordance with valuation techniques commonly used in the technology
industry and was expensed upon acquisition in accordance with Financial
Accounting Standards No. 2, "Accounting for Research and Development Costs".
Other Income
Other income is derived primarily from interest income. Other income decreased
16% to $464,000 during the third quarter of 1999 as compared to $551,000 during
the same period of 1998. Other income decreased 13% to $1,404,000 during the
first nine months of 1999 as compared to $1,619,000 for the first nine months of
1998. These decreases were primarily due to lower interest income due to reduced
interest rates and lower investment balances.
Provision for Income Taxes
The Company's effective tax rate decreased to 25.0% for the third quarter and
first nine months of 1999 compared to 40% for the same periods in 1998. The 1998
rate assumed a carryback of the then-current year losses compared to the
effective tax rate applicable if the Company were profitable. The Company's 1999
tax rate reflects the resolution of prior contingencies.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $8.3 million for the first nine
months of 1999 and $0.9 million for the same period in 1998. Cash provided by
operating activities during the first nine months of 1999 resulted primarily
from net income and a refund of income taxes. The major components of cash
provided by operating activities for the nine months ended September 30, 1998
were an increase in the provision for excess and obsolete inventories,
depreciation and amortization, and purchased research and development, offset by
a net loss and an increase in income tax receivable.
Net cash provided by investing activities was $76,000 for the nine months ended
September 30, 1999, compared to $8.6 million for the same period in 1998. The
1999 provision of cash resulted from the maturity of $17.2 million of marketable
securities offset by the purchase of $16.3 million in marketable securities and
$794,000 of capital equipment. The net cash provided by investing activities
during the nine months ended September 30, 1998 resulted primarily from the
maturity of $35.2 million of marketable securities offset by the purchase of
$25.7 million of marketable securities and $1,075,000 of capital equipment.
13
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Financing activities consumed $3.5 million of cash during the nine months ended
September 30, 1999 and $6.0 million during the comparable period of 1998. The
use of cash during both periods was primarily due to the Company's repurchase of
$4.0 million and $6.4 million, respectively, worth of its Common Stock, offset
by the proceeds from the exercise of stock options and the Employee Stock
Purchase Plan.
During the nine months ended September 30, 1999 working capital decreased 41% to
$13,133,000 from $22,135,000 at December 31, 1998. The decrease of $9,002,000
was primarily due to the shift from cash and short-term investments to long-term
investments.
In October 1996, the Company's Board of Directors announced the authorization
for the Company to repurchase up to 500,000 shares of common stock for cash from
time to time at market prices and as market and business conditions warrant, in
open market, negotiated or block transactions, at which time the stock will be
retired. The Board authorized additional repurchases of up to 1,000,000 shares
in May 1998, 500,000 shares in December 1998 and 500,000 in April 1999. No time
limit was set for completion of the repurchase program. The Company purchased
584,000 shares of common stock during the first nine months of 1999, 1,372,000
shares in 1998, and 142,000 shares in 1997 under this program at a cost of
$3,986,000, $9,364,000 and $2,422,000 for 1999, 1998 and 1997, respectively.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This standard
requires companies to capitalize qualifying computer software costs which are
incurred during the application development stage and amortize them over the
software's estimated useful life. SOP 98-1 was effective for the Company's
current fiscal year. The adoption of SOP 98-1 had no impact on the Company's
financial statements.
In April 1998, the AICPA issued Statement of Position 98-5 ("SOP 98-5"),
"Reporting on the Costs of Start-Up Activities." This standard requires
companies to expense the costs of start-up activities and organization costs as
incurred. SOP 98-5 was effective for the Company's current fiscal year. The
adoption of SOP 98-5 had no impact on the Company's results of operations.
In September 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the statement
of financial position, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133 will be
effective for the first quarter of 2000. The Company does not currently hold
derivative instruments or engage in hedging activities.
14
<PAGE>
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
In addition to the factors set forth above in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations," there are a number
of other factors that may affect the Company's future operating results. Most of
the following discussion consists of forward-looking statements and accompanying
risks.
The loss of, or difference in actual from anticipated levels of purchases from,
the Company's major customers have in the past adversely affected the Company
and could in the future adversely affect operating results. A significant
portion of the Company's business is derived from substantial orders placed by
large end users and telephone companies. The timing of such orders, including
the completion of the build out of carrier and network service providers'
infrastructures, could cause material fluctuations in the Company's business and
operating results. For example, in the fourth quarter of 1997 and in the third
quarter of 1998, the Company had lower operating results than expected due in
part to a weaker than expected demand from certain domestic carrier customers,
including MCI. In addition, none of the Company's customers are contractually
obligated to purchase any quantity of products in any particular period, and
product sales to major customers have varied widely from quarter to quarter and
year to year. There can be no assurance that the Company's current customers
will continue to place orders with the Company, that orders from existing
customers will continue at the levels of previous periods or that the Company
will be able to obtain orders from new customers. Other factors that may cause
fluctuations in the Company's operating results include, but are not limited to,
the timing of new product announcements and introductions by the Company and its
competitors, market acceptance of new or enhanced versions of the Company's
products, changes in the product mix sold toward narrowband products that yield
lower gross margins, seasonal capital spending patterns of large domestic
customers, changes in sales volumes through the Company's distribution channels,
availability and cost of components from the Company's suppliers and economic
conditions generally or in various geographic areas. In addition, the Company's
expense levels are based in part on its expectations of future revenue. The
Company operates with limited order backlog, and a substantial majority of its
revenues in each quarter result from orders booked in that quarter. If revenue
levels are below expectations, the Company may be unable to adjust spending in a
timely manner which would adversely affect operating results.
The market for the Company's products is highly competitive. 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. In addition,
the Company faces competition from suppliers of internetworking equipment, such
as routers, and telephone equipment, such as switches, which are including a
direct WAN interface in certain of their products. An increased reliance by
customers on such suppliers for WAN access would reduce demand for the Company's
products. This would have a material adverse affect on the Company's business
and operating results. As discussed above, increased competition has also placed
increasing pressures on the pricing of the Company's products, which has
resulted in lower operating results. The Company anticipates that this pricing
pressure will continue for the foreseeable future.
15
<PAGE>
The Company's success and ability to compete are dependent on its ability to
develop and maintain the proprietary aspects of its technology. It relies on a
combination of trademark, trade secret and copyright law and contractual
restrictions to protect these rights. Despite its efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of its
products or to obtain and use information that it regards as proprietary.
Unauthorized use or misappropriation of the Company's intellectual property
could seriously harm its business. To enforce its proprietary rights, the
Company may be required to bring legal action against third parties. For
example, on June 1, 1999, the Company filed a suit in Santa Clara County
Superior Court against Tiara Networks, Inc., its three corporate officers and
certain of its personnel, all of whom are former Digital Link employees
regarding Tiara's business and products being based on the improper disclosure
and use of Digital Link's proprietary and confidential information by its former
employees. See Part II, Item 1 of this Form 10-Q for additional information
regarding this proceeding. There can be no assurance that the Company will
prevail in this or any other legal proceeding. In addition, any legal action
that the Company may bring to protect its intellectual property rights,
including the suit against Tiara, could be expensive and distract management
from day-to-day operations.
The Company's future prospects will depend in part on its ability to enhance the
functionality of its existing WAN access products in a timely manner. It will
also depend on the Company's ability to identify, develop and achieve market
acceptance of new products that address new technologies and meet customer needs
in the WAN access market. Any failure by the Company to anticipate or to respond
adequately to competitive solutions, technological developments in its industry,
changes in customer requirements, or changes in regulatory requirements or
industry standards, or any significant delays in the development, introduction
or shipment of products, could have a material adverse effect on the Company's
business and operating results. There can be no assurance that the Company's
product development efforts will result in commercially successful products or
that product delays will not result in missed market opportunities. In addition,
customers could refrain from purchasing the Company's existing products in
anticipation of new product introductions by the Company or its competitors. New
products could also render certain of the Company's existing products obsolete.
Either of these events could materially adversely affect the Company's business
and operating results.
The Company believes that its future success will depend in large part upon the
continued contributions of members of the Company's senior management and other
key personnel, and upon its ability to attract and retain highly skilled
managerial, engineering, sales, marketing and operations personnel, the
competition for whom is intense. Certain of the Company's key management
personnel have only recently joined the Company and certain personnel have only
limited experience in the Company's industry. For example, in December 1998,
Lana Vaysburd was hired as Vice President, Engineering, in March 1999, Sherman
Silverman was hired as Vice President, Sales and Marketing, Worldwide and in
June 1999, Naresh C. Kapahi was hired as Vice President, Finance and Operations
and Chief Financial Officer. In addition, in March 1998 Vinita Gupta was
reappointed as the Company's interim President and Chief Executive Officer,
which position she accepted on a full-time basis in January 1999. The current
availability of qualified sales and engineering personnel is quite limited, and
competition among companies for such personnel is intense. The Company is
currently attempting to hire a number of sales and engineering personnel and has
experienced delays in filling such positions. There can be no
16
<PAGE>
assurance that the Company will be successful in attracting and retaining
skilled personnel to hold these important positions.
The Company utilizes management information systems and software technology that
may be affected by Year 2000 issues throughout its businesses. During 1998, the
Company began to implement plans for certain of its internal operating systems
to ensure these systems continue to meet its internal and external requirements.
The Year 2000 compliance efforts encompassed:
o All Digital Link products. The incurred cost of this effort was
approximately $250,000 and was financed through working capital
and the use of internal engineering resources.
o All Digital Link major operational systems (including ASK MANMAN,
databases, spreadsheets, word processing, and CAD). The cost of
these initiatives is estimated to be $200,000. The Company
contracted with a third party to perform the MANMAN compliance
work and has used a combination of consultants and internal
resources to address the compliance issues with other internal
operational systems.
In addition, the Company has developed questionnaires and contacted key
suppliers and customers regarding their Year 2000 compliance to determine any
impact on its operations. The initiatives to address vendor and customer
compliance were completed by the end of September 1999. In general, the
Company's suppliers and customers have advised it that they have developed or
are in the process of developing plans to address Year 2000 issues. The Company
will continue to monitor and evaluate the progress of its suppliers and
customers on this critical matter. The Company is also reviewing its
non-information technology systems to determine the extent of any changes that
may be necessary and believes that there will be minimal changes necessary for
compliance.
To date, the Company has incurred approximately $450,000 in expenses related to
Year 2000 compliance of its products and internal operating systems. All current
active products meet the Company's Year 2000 compliance requirements. Currently,
all critical internal systems are Year 2000 compliant and in excess of 99% of
the internal operating systems of the Company are Year 2000 compliant. The
Company plans to complete Year 2000 compliance for its internal operating
systems by November 1999.
Based on the progress the Company has made in addressing its Year 2000 issues
and the Company's plan and timeline to complete its compliance program, the
Company does not foresee significant risks associated with its Year 2000
compliance at this time. As the Company's plan is to address its significant
Year 2000 issues prior to being affected by them, it has not developed a
comprehensive contingency plan. However, if the Company identifies significant
risks related to its Year 2000 compliance or its progress deviates from the
anticipated timeline, the Company will develop contingency plans as deemed
necessary at that time.
The Company is concerned that many enterprises and carriers will be devoting a
substantial portion of their information systems spending to addressing the Year
2000 issue. This expense may result in spending being diverted from networking
solutions in the near future. This diversion of information technology spending
could have a material adverse impact on the Company's future sales volume.
However, to date, no significant impact has been experienced.
17
<PAGE>
The foregoing statements regarding the Company's Year 2000 compliance are based
upon management's best estimates at the present time, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. There can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, the nature and amount of programming
required to upgrade or replace each of the affected programs, the rate and
magnitude of related labor and consulting costs and the success of the Company's
external customers and suppliers in addressing the Year 2000 issue. The
Company's evaluation is on going and it expects that new and different
information will become available to it as that evaluation continues.
Consequently, there is no guarantee that all material elements will be Year 2000
ready in time.
In April 1996, a class action complaint was filed against the Company and
certain of its officers and directors in the Santa Clara Superior Court of the
State of California, alleging violations of the California Corporations Code and
California Civil Code. In October 1996, a similar parallel lawsuit against the
Company and the same individuals was filed in the United States District Court
for the Northern District of California alleging violations of the federal
securities laws. See paragraphs two and three in Note 6 of Notes to Consolidated
Financial Statements in Part I of this Form 10-Q.
Since the public announcement of the merger agreement on September 3, 1999, a
number of lawsuits have been filed in the Superior Court of Santa Clara County,
California. See paragraph one in Legal Proceedings in Part II of this Form 10-Q.
The telecommunications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. For example, a third party has, on several occasions, expressed
its belief that certain of the Company's products, including its DSU/CSUs, may
infringe upon patents held by it. The third party has suggested on such
occasions that the Company acquire a license to such patents. The Company
believes that a license, to the extent required, will be available; however, no
assurance can be given that the terms of any offered license would be favorable
to the Company. Should a license be unavailable, the Company could be required
to discontinue the sale of or to redesign certain of its products. In addition,
Larscom, a competitor of the Company, has continued to express its belief that
the Company's inverse multiplexer products may infringe a patent jointly owned
by Larscom and a third party and has suggested that the Company acquire a
license to the patent. The Company does not believe that there is merit to
Larscom's claim. Management, after review and consultation with counsel,
believes that the ultimate resolution of both these allegations is uncertain and
there can be no assurance that these assertions will be resolved without costly
litigation or in a manner that is not adverse to the Company. See paragraph one
in 6 of Notes to Consolidated Financial Statements in Part I of this Form 10-Q.
There can be no assurance that other third parties will not assert infringement
claims against the Company in the future, that any such claims will not result
in costly litigation or that the Company will prevail in any such litigation or
be able to license any valid and infringed patents from third parties on
commercially reasonable terms.
18
<PAGE>
On September 3, 1999, the Company announced the execution of a merger agreement
with DLZ Corp., a corporation formed by Vinita Gupta, the founder, chief
executive officer and holder of approximately 50% of the outstanding shares of
Digital link. Pursuant to the merger agreement, DLZ Corp. made a cash tender
offer for all of the issued and outstanding shares of the Company's Common
Stock, which, if successful, is to be followed by a merger of the Company with
DLZ Corp. See Note 6 of Notes to Condensed Consolidated Financial Statements in
Item 1 of this Form 10-Q. This intended acquisition by DLZ Corp. may result in
the diversion of management's attention from other business concerns, the
disruption of the Company's business, the loss of key employees, the loss of
orders for the Company's products from its customers and the loss of key
distributors, supplier or other business partner relationships. There can be no
assurance that the Company will succeed in overcoming these or any other
significant risks encountered in connection with the proposed acquisition.
The risks outlined herein are difficult for the Company to forecast, and these
or other factors can materially affect the Company's operating results and stock
price for one quarter or a series of quarters. Further, in recent years the
stock market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of securities of many high technology
companies, for reasons frequently unrelated to the operating performance of the
specific companies. These fluctuations, as well as general economic, political
and market conditions, may materially adversely affect the market price of the
Company's common stock.
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
The Company has limited exposure to financial market risks, including changes in
interest rates. The Company does not use derivative financial instruments in its
investment portfolio. The Company's investment portfolio is generally comprised
of government agency securities that mature within three years. The Company
places investments in instruments that meet high credit quality standards. These
securities are subject to interest rate risk, and could decline in value if
interest rates increase. Due to the duration and conservative nature of the
Company's investment portfolio, the Company does not expect any material loss
with respect to its investment portfolio. The Company does not have any
significant foreign operations and thus is not materially exposed to foreign
currency fluctuations. The Company does not currently hedge against foreign
currency rate fluctuations.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On September 3, 1999, the Company and DLZ Corp. commenced that they had executed
a definitive merger agreement and DLZ Corp. subsequently issued a tender offer
for all outstanding shares of the Company's stock not owned by DLZ Corp. for
$10.30 per share. Since the public announcement of the merger agreement on
September 3, 1999, a number of purported class actions have been filed in the
Superior Court of Santa Clara County, California. The complaints allege that the
Company's directors breached their fiduciary duties by failing to maximize the
value of the shares of the Company's Common Stock, that the value of the shares
of the Company's Common Stock is materially greater than the offer price and, in
one action, that the director defendants failed to disclose material non-public
information concerning the Company's financial condition and prospects. Each
complaint seeks certification of a plaintiff class, declaratory and injunctive
relief preventing the offer and the merger, unspecified compensatory damages,
and attorneys' fees and costs. The plaintiffs have filed a motion to consolidate
these cases, and the hearing on this motion is scheduled to take place on
December 2, 1999. On October 13, 1999, the Superior Court denied an application
for a temporary restraining order filed by plaintiffs in two purported class
actions challenging DLZ's tender offer. The court also denied plaintiffs'
application for expedited discovery. The court set a hearing for December 2,
1999 on the plaintiffs' threatened application for a preliminary injunction. If
the tender is consummated and the related short-form merger is completed, there
will be no hearing on plaintiff's motion for a preliminary injunction. DLZ
Corp., the defendant members of the Gupta Family, the Company, and the members
of the Special Committee believe that the actions are without merit, and intend
to defend them vigorously.
The Company and certain of its officers and directors are parties to various
lawsuits described in paragraphs two and three in Note 6 of Notes to
Consolidated Financial Statements in Part I of this Form 10-Q. See also prior
disclosures contained in the Company's reports on Form 10Q filed for the
quarters ended March 31, 1999 and June 30, 1999.
The Company on June 1, 1999 filed a lawsuit in Santa Clara County Superior Court
against San Jose-based Tiara Networks, Inc., its three corporate officers and
certain of its personnel, all of whom are former Digital Link employees. The
suit charges that Tiara's business and products are based upon the improper
disclosure and use of Digital Link's proprietary and confidential information by
its former employees. Digital Link's complaint alleges the named defendants are
liable for violating confidentiality agreements, fiduciary obligations to the
Company and engaging in unfair business practices. The Company is seeking
damages and injunctive relief. A demurrer as to the second, third, and fourth
causes of action alleging breach of fiduciary duty, conversion and unfair
business practice is pending as of November 12, 1999. See also prior disclosure
contained n the Company's reports on Form 10-Q filed for the quarter ended June
30, 1999.
20
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
On September 3, 1999 the Company and DLZ Corp., a corporation formed by Vinita
Gupta, the founder, chief executive officer and holder of approximately 50% of
the outstanding shares of the Company, announced that they had executed a
definitive merger agreement. Under the terms of the merger agreement, DLZ made a
tender offer for all outstanding shares of the Company's stock not owned by DLZ
for $10.30 per share. The tender offer commenced on September 10, 1999 and was
set to expire at 12:00 midnight on October 15, 1999. The merger and tender offer
were subject to certain conditions, including a minimum condition in the tender
offer that DLZ own an aggregate of 90% of the outstanding stock following the
tender offer.
The original tender offer has been extended several times. As of 12:00 midnight
on October 29, 1999, 2,690,031 shares of Digital Link stock had been tendered
which, together with shares held by DLZ and its affiliates, constituted
approximately 83.5% of the outstanding Company stock. On November 1, 1999, the
tender offer price was increased to $10.85 and the offer was extended to 12:00
midnight on November 15, 1999.
The merger agreement provides that the offer, if consummated, will be followed
by a merger of DLZ Corp. and the Company. In connection with the merger, all
remaining outstanding shares of the Company's Common Stock would be converted
into the right to receive $10.85 per share in cash.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger dated as of September 3, 1999 by
and among DLZ Corp. and Digital Link Corporation (incorporated
by reference to Exhibit 2.1 to the Company's Report on Form
8-K (File No. 0-223110) dated September 7, 1999).
27.01 Financial Data Schedule.
(b) The Company filed a report on Form 8-K dated September 3, 1999 in
connection with the proposed merger with DLZ Corp.
21
<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.
DIGITAL LINK CORPORATION
Date: November 12, 1999 /s/ N. C. Kapahi
---------------------------------------
Naresh C. Kapahi
Vice President, Finance and Operations,
Chief Financial Officer and Secretary
(Duly Authorized Officer and
Principal Financial Officer)
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of income and consolidated
statement of cash flows included in the Company's Form 10-Q for the period
ending September 30, 1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,154
<SECURITIES> 4,993
<RECEIVABLES> 6,343
<ALLOWANCES> 337
<INVENTORY> 3,099
<CURRENT-ASSETS> 23,703
<PP&E> 8,496
<DEPRECIATION> 6,323
<TOTAL-ASSETS> 55,696
<CURRENT-LIABILITIES> 10,570
<BONDS> 0
0
0
<COMMON> 31,470
<OTHER-SE> 13,656
<TOTAL-LIABILITY-AND-EQUITY> 55,696
<SALES> 47,254
<TOTAL-REVENUES> 47,254
<CGS> 21,400
<TOTAL-COSTS> 43,785
<OTHER-EXPENSES> (1,404)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,873
<INCOME-TAX> 1,218
<INCOME-CONTINUING> 3,655
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,655
<EPS-BASIC> 0.45
<EPS-DILUTED> 0.44
</TABLE>
