<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10 - Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the quarterly period ended March 31, 2000
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the transition period from ____________ to ____________
Commission File Number 0-25996
TRANSWITCH CORPORATION
(Exact name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Delaware 06-1236189
(State of Incorporation) (I.R.S. Employer Identification Number)
</TABLE>
3 Enterprise Drive
Shelton, Connecticut 06484
(Address of Principal Executive Offices)
Telephone (203) 929-8810
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 ______
-----
Common stock, par value $.001 per share, outstanding at April 28, 2000:
40,211,226 shares.
Page 1 of 14
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TranSwitch Corporation
FORM 10-Q
March 31, 2000
Table of Contents
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<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 13
Signatures 14
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Page 2 of 14
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements
TranSwitch Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(in thousands, except share data) March 31, December 31,
Assets 2000 1999
------ ---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 57,191 $ 55,264
Short term investments 30,924 20,053
Accounts receivable, net 14,474 12,368
Inventories 10,247 7,900
Prepaid expenses and other current assets 5,453 4,919
-------- --------
Total current assets 118,289 100,504
Investments 36,834 36,003
Property and equipment, net 7,861 7,118
Deferred taxes, non-current 19,466 11,567
Product licenses, net 1,496 1,657
Other assets 2,080 3,045
-------- --------
Total Assets $186,026 $159,894
============= ======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 6,197 $ 3,700
Accrued expenses 1,102 1,454
Accrued compensation 3,054 1,628
Sales allowance reserve 1,569 1,494
Warranty reserve 425 425
-------- --------
Total current liabilities 12,347 8,701
Stockholders' equity:
Common Stock, $.001 par value; authorized 100,000,000 shares; issued and
outstanding 40,114,750 shares at March 31, 2000;
and 39,266,465 at shares December 31, 1999 40 39
Additional paid in capital 166,068 149,958
Retained earnings 7,571 1,196
-------- --------
Total stockholders' equity 173,679 151,193
-------- --------
Total Liabilities and Stockholders' Equity $186,026 $159,894
========================================== ======== ========
</TABLE>
See accompaning notes to unaudited consolidated financial statements.
Page 3 of 14
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TranSwitch Corporation
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Net Revenues $26,747 $14,461
Cost of Revenues 8,542 5,222
------- -------
Gross Profit 18,205 9,239
Operating Expenses:
Research and development 4,424 3,131
Marketing and sales 3,868 2,637
General and administrative 1,038 719
------- -------
Total Operating Expenses 9,330 6,487
------- -------
Operating Income 8,875 2,752
Interest Income, net 1,415 532
------- -------
Income before income taxes $10,290 $ 3,284
Provision for income taxes 3,915 160
------- -------
Net Income $ 6,375 $ 3,124
======= =======
Basic Earnings per Common Share $ 0.16 $ 0.09 *
Weighted Average Number of
Common Shares Outstanding 39,813 36,153 *
======= =======
Diluted Earnings per Common Share $ 0.15 $ 0.08 *
Weighted Average Number of
Common Shares and Equivalents Outstanding 43,103 38,894 *
======= =======
</TABLE>
* Restated to reflect the 3-for-2 stock splits on June 8, 1999 and January 11,
2000.
See accompaning notes to unaudited consolidated financial statements.
Page 4 of 14
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TranSwitch Corporation
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,375 $ 3,124
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 914 656
Deferred income taxes 2,741 --
Other non-cash items 165 --
Stock compensation expense -- 33
Changes in assets and liabilities:
(Increase) in accounts receivable (2,106) (1,891)
(Increase) in inventories (2,347) (673)
(Increase) in prepaids and other current assets (534) (869)
Increase in accounts payable 2,497 292
Increase (decrease) in accrued expenses and other liabilities 1,149 (271)
-------- --------
Total adjustments 2,479 (2,723)
-------- --------
Net cash provided by operating activities 8,854 401
Cash flows from investing activities:
Capital expenditures (1,496) (1,638)
Purchases of investments (96,079) (21,114)
Proceeds from investments 85,178 2,953
-------- --------
Net cash (used in) investing activities (12,397) (19,799)
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants 5,470 922
Proceeds from the issuance of common stock, net of issuance cost -- 68,181
Payments on product license obligations -- (303)
-------- --------
Net cash provided by financing activities 5,470 68,800
Increase in cash and cash equivalents 1,927 49,402
-------- --------
Cash and cash equivalents at beginning of period 55,264 24,243
Cash and cash equivalents at end of period $ 57,191 $ 73,645
======== ========
Supplemental disclosure of cash flows information:
Cash paid for interest $ 41 $ 23
Tax benefit realized from exercise of stock options $ 10,640 $ --
</TABLE>
See accompaning notes to unaudited consolidated financial statements.
Page 5 of 14
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TranSwitch Corporation
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the quarter ended March 31, 2000
Note 1. Interim Financial Statements
- -------------------------------------
The accompanying unaudited consolidated interim financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q. Accordingly, certain information
and footnotes required by generally accepted accounting principles for complete
financial statements are not included herein. The financial statements are
prepared on a consistent basis with and should be read in conjunction with the
statements and notes thereto contained in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999 filed with the Securities and
Exchange Commission on March 30, 2000.
In the opinion of management, these statements include all adjustments,
consisting of normal recurring adjustments, which are necessary for a fair
presentation for such periods. The results of operations for any interim period
are not necessarily indicative of the results that may be achieved for the
entire fiscal year ending December 31, 2000.
Note 2. Inventories
- --------------------
Inventories are carried at the lower of cost (on a first in, first out
basis) or estimated net realizable value. Inventories are summarized as follows
(in thousands):
March 31, 2000 December 31, 1999
-------------- -----------------
Raw Materials $ 769 $ 1,017
Work in Process 1,238 1,121
Finished Goods 8,240 5,762
------- -------
Total Inventories $10,247 $ 7,900
======= =======
Note 3. Stock Splits
- ---------------------
On each of April 14, 1999 and on December 15, 1999, the Board of Directors
announced a three for two stock splits of the Company's common stock in the form
of stock dividends. The effective date of the stock splits were June 8, 1999 and
January 11, 2000 for shareholders of record as of April 26, 1999 and December
31, 1999 respectively. Stockholders' equity has been restated to give
retroactive recognition to the stock splits in prior periods by reclassifying
from additional paid-in capital to common stock the par value of the additional
shares arising from the splits. In addition, all references in the financial
statements to number of shares and per share amounts have been restated to show
effect of the splits.
Page 6 of 14
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Note 4. Consolidated Statement of Stockholders' Equity
- -------------------------------------------------------
(in thousands, except share data)
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<CAPTION>
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 39,266,465 $ 39 $ 149,958 $ 1,196 $ 151,193
Shares of common stock issued upon exercise of stock options 848,285 1 5,470 5,471
Tax benefit on stock options -- -- 10,640 10,640
Net income -- -- -- 6,375 6,375
---------- ----- ---------- ---------- ----------
Balance at March 31, 2000 40,114,750 $ 40 $ 166,068 $ 7,571 $ 763,639
========== ===== ========== ========== ==========
</TABLE>
Page 7 of 14
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
General
TranSwitch, a Delaware corporation established in April 1988, designs,
develops, markets and supports highly integrated digital and mixed-signal
(analog and digital) semiconductor solutions for the telecommunications and data
communications markets. Our customers are original equipment manufacturers
(OEMs) who serve three communications market segments: worldwide public network
infrastructure that supports voice and data communications, internet
infrastructure and corporate wide area networks (WAN).
Our products are Very Large Scale Integrated (VLSI) semiconductor devices
that provide core functionality for communications network equipment. Our VLSI
solutions are programmable to provide high levels of functionality for high-
speed broadband communication networks. These products are incorporated into
OEMs' networking equipment. Our VLSI devices are compliant with SONET/SDH
(Synchronous Optical Network/Synchronous Digital Hierarchy), asynchronous/PDH
and ATM/IP (Asynchronous Transfer Mode/Internet Protocol) standards. Our mixed-
signal and digital design capability, together with our telecommunications
systems expertise, enables us to determine and implement optimal combinations of
design elements for enhanced functionality. We believe that this approach allows
our customers to achieve faster time to market and to introduce systems that
offer greater functionality, improved performance, lower power dissipation,
reduced system size and cost and greater reliability relative to discreet
solutions.
We believe that period-to-period comparisons of our financial results are
not necessarily meaningful and should not be relied upon as an indication of
future performance. In addition, our results of operations may fluctuate from
period to period in the future.
Three month periods ended March 31, 2000 and 1999
Revenues
We derive its revenues from product sales. Total revenues for the quarter
ended March 31, 2000 were $26.7 million, representing a 85% increase over the
$14.5 million recorded in the prior year comparable period. The increase in
revenue in the quarter is attributable to the increase in the revenue across all
three of its product lines, SONET/SDH, asynchronous/PDH, and ATM/IP.
Gross Profit
Page 8 of 14
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Gross profit was $18.2 million for the quarter ended March 31, 2000,
compared to $9.2 million in the corresponding period of the prior year. Gross
margin was 68.1% for the quarter ended March 31, 2000, compared to 63.9% for the
quarter ended March 31, 1999. The increase in gross profit and margin is
principally the result of lower costs resulting from improved pricing from our
vendors achieved as we purchased higher volumes of products.
Research and Development
Research and development expenses were 16.5% of total revenues for the
quarter ended March 31, 2000, compared to 21.7% of total revenues for the
quarter ended March 31, 1999; total spending increased 41.3%, to $4.4 million,
for the quarter ended March 31, 2000, compared to $3.1 million for the quarter
ended March 31, 1999. The increase in period-over-period expense was the result
of our continued investment in research and development activities. The decrease
as a percentage of total revenues in the quarter was attributable to the growth
in revenues from the comparable period in the prior year.
Marketing and Sales
Marketing and sales expenses were 14.5% of total revenues for the quarter
ended March 31, 2000, compared to 18.2% for the quarter ended March 31, 1999.
Marketing and sales expenses increased 46.7%, to $3.9 million, for the quarter
ended March 31, 2000, compared to $2.6 million for the quarter ended March 31,
1999. The increase in spending was primarily the result of the increase in
marketing and sales personnel, expansion of our distribution network as part of
our continued investment in its marketing and sales infrastructure and increased
commissions paid to manufacturer's representatives attributable to the higher
sales volumes. The decrease as a percentage of total revenues in the quarter was
attributable to the growth in revenues from the comparable period in the prior
year.
General and Administrative
General and administrative expenses for the quarter ended March 31, 2000
increased to $1.0 million from $719,000 for the same quarter in the prior year
and as a percentage of total revenues decreased to 3.9% for the quarter ended
March 31, 2000, compared to 5.0% for the quarter ended March 31, 1999. The
increase in period-over-period expense was the result of our continued
investment in the general and administrative area. The decrease as a percentage
of total revenues in the quarter was attributable to the growth in revenues from
the comparable period in the prior year.
Interest Income, net
Interest income, net of interest expense, was $1.4 million in the quarter
ended March 31, 2000, compared to $532,000 in the corresponding period in 1999
The increase in interest income, net of interest expense, was primarily the
result of the increase in cash and investment balances
Page 9 of 14
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between the two periods, due to the follow-on public offering of our common
stock that we completed in February and March 1999 as well as cash generated
from operations.
Income taxes
Our effective tax rate for the first quarter of 2000 was 38.0%, compared to
an effective tax rate of 5.0% for the first quarter of 1999. The effective tax
rate for the first quarter of 2000 is consistent with the full year expectation.
The 1999 rate reflects the benefit derived from the use of the Company's net
operating loss carry forwards to offset taxable income for federal and state
purposes.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations and met our capital requirements since
incorporation in 1988 primarily through private placements of preferred stock,
borrowings from a working capital line of credit and equipment financing line of
credit from Silicon Valley Bank, an initial public offering of our common stock
in June 1995 and cash generated from operations. In October 1997, we received
net proceeds of $13.7 million in cash in connection with a private placement of
Series A Convertible Preferred Stock. All such shares had been converted into
shares of common stock as of September 30, 1998. On February 9, 1999 and March
16, 1999, we completed a follow-on public offering and raised $68.4 million, net
of commissions, and issued 4,398,750 million shares of common stock (adjusted
for a 3 for 2 stock split on June 8, 1999 and a 3 for 2 stock split on January
11, 2000).
Our principal sources of liquidity as of March 31, 2000 consisted of $88.1
million in cash, cash equivalents and short-term investments, $36.8 million in
long term investments and $10.0 million available under our working capital line
of credit and equipment line of credit provided by Silicon Valley Bank. As of
March 31, 2000, we had no outstanding balance under these lines of credit.
Pursuant to the working capital and equipment financing agreements with Silicon
Valley Bank, we are restricted from further pledging our assets or granting
additional security interests in our assets.
In the first three months of 2000, we generated $8.9 million of cash from
operating activities, the result of net income of $6.4 million adjusted for non-
cash items of $3.8 million, offset by a net increase in working capital of $1.3
million. Capital expenditures during this period totaled $1.5 million, including
purchases of computer equipment and software. Net cash provided by financing
activities consists of proceeds from the exercise of stock options of $5.5
million.
We believe that existing cash resources and cash generated from operations
will fund necessary purchases of capital equipment and provide adequate working
capital at least through the end of 2000. However, there can be no assurance
that events in the future will not require us to seek additional capital in the
future or, if so required, that capital will be available on terms favorable or
acceptable us, if at all.
Page 10 of 14
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by us, statements made by our
employees, or information included in our filings with the Securities and
Exchange Commission (including this Form 10-Q) may contain statements which are
not historical facts, so-called "forward-looking statements," which involve
risks and uncertainties. Such forward-looking statements are made pursuant to
the safe harbor provisions of Section 21E of the Securities Exchange Act of
1934, as amended. Our actual future results may differ significantly from those
stated in any forward-looking statements. Factors that may cause such
differences include, but are not limited to, the factors discussed below. Each
of these factors, and others, are discussed from time to time in our filings
with the Securities and Exchange Commission.
Potential Fluctuations in Operating Results. Our quarterly and annual operating
revenues, expenses and operating results may fluctuate due to a number of
factors including:
-the timing and cancellation of customer orders;
-market acceptance our products and our customers' products;
-competitive pressures on selling prices; and
-general economic conditions.
Management of Growth and Dependence on Key Personnel. We must attract and retain
highly qualified and well-trained personnel, including senior managers.
Competition for such employees is intense, and it may become increasingly
difficult for us to hire and retain such personnel.
We Depend on a Few Outside Fabrication Facilities. We do not own or operate a
VLSI circuit fabrication facility and depends upon three foundries for most of
its semiconductor device requirements. We cannot be certain that we will be able
to renew or maintain contracts with these foundries on terms as favorable as
current contract terms. There are other significant risks associated with
reliance on a few outside foundries, including:
-the lack of assured semiconductor wafer supply and control over delivery
schedules;
-the unavailability of, or delays in obtaining access to, key process
technologies; and
-limited control over quality assurance, manufacturing yields and
production costs.
Dependence on Telecommunications, Internet and Data Communications Equipment
Markets. We
Page 11 of 14
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derive virtually all of our product revenues from sales of products for the
telecommunications, Internet and data communications equipment markets, which
are characterized by intense competition, rapid technological change and short
product life cycles. Although the telecommunications, Internet and data
communications equipment markets have grown rapidly in the last few years, they
may not continue to grow, or a significant slowdown in these markets may occur.
Dependence on New Products; Risk of Product Development Delays. The development
of new VLSI devices is highly complex, and from time to time, we have
experienced delays in completing the development of new products.
Customer Concentration. Historically, a relatively small number of customers
have accounted for a significant portion of our total revenues in any particular
period and probably will continue to do so.
Our Success Depends on Intellectual Property. Our success depends in part on our
ability to obtain patents and licenses and to preserve other intellectual
property rights covering our products and development and testing tools. We
cannot ensure that:
-patents be will issued from currently pending or future applications;
-existing patents or any new patents will be sufficient in scope or
strength to provide meaningful protection or any commercial advantage;
-foreign intellectual property laws will protect our intellectual property
rights; or
-others will not independently develop similar products, duplicate our
products or design around any patents issued to us.
In addition, we may be unknowingly infringing on the proprietary rights
of others and may be liable for that infringement, which could result in
significant liability.
Competition. The semiconductor industry is intensely competitive and is
characterized by factors likely to result in pricing pressures on our products.
Foreign Sales. We expect foreign sales to continue to account for a significant
percentage of revenues. A significant portion of total revenues, therefore, will
be subject to risks associated with foreign sales.
The Semiconductor Industry. We provide semiconductor devices to
telecommunications and data communications OEMs. The semiconductor industry is
highly cyclical and has been subject to significant economic downturns at
various times.
Page 12 of 14
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11, Statement re: computation of per share earnings.
Exhibit 27, Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 2000.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of changes in value of a financial
instrument, derivative or non-derivative, caused by fluctuations in
interest rates, foreign exchange rates and equity prices. We have no
financial instruments that give it exposure to changes in foreign
exchange rates or equity prices. We have investments in money market
accounts, government securities and commercial paper that earn interest
income that is a function of the market rates. As a result we do have
exposure to changes in interest rates. For example if interest rates
were to decrease by one percentage point from the current levels, our
potential interest income for the remainder of calendar 2000 would
decrease by approximately $93 thousand.
Page 13 of 14
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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.
TranSwitch Corporation
(Registrant)
Date: May 8, 2000
/s/ Dr. Santanu Das
----------------------------
Dr. Santanu Das
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Michael F. Stauff
-----------------------------
Michael F. Stauff
Senior Vice President and Chief
Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Page 14 of 14
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Exhibit 11:
TranSwitch Corporation
Computation of Earnings per Share (1)
(Unaudited)
(in thousands, except per share data)
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<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Basic earnings per share:
Net income $ 6,375 $ 3,124
======= =======
Weighted average number of common shares
outstanding during the period 39,813 36,153 *
Basic earnings per share $ 0.16 $ 0.09 *
======= =======
Diluted earnings per share:
Net income $ 6,375 $ 3,124
======= =======
Weighted average number of common shares
outstanding during the period 39,813 36,153 *
Common stock issuable with respect to:
Stock options and warrants 3,290 2,741 *
Convertible preferred stock -- --
------- -------
Adjusted weighted average number of shares 43,103 38,894 *
outstanding during the period
Diluted earnings per share $ 0.15 $ 0.08 *
======= =======
</TABLE>
- -------------
(1) This exhibit should be read in connection with "Consolidated Statement of
Stockholders' Equity" in Note 4 of the unaudited notes to consolidated
financial statements.
* Restated to reflect the 3-for-2 stock splits on June 8, 1999 and January 11,
2000.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 57,191
<SECURITIES> 67,758
<RECEIVABLES> 14,768
<ALLOWANCES> 294
<INVENTORY> 10,247
<CURRENT-ASSETS> 118,289
<PP&E> 18,947
<DEPRECIATION> 11,086
<TOTAL-ASSETS> 175,386
<CURRENT-LIABILITIES> 12,347
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 162,999
<TOTAL-LIABILITY-AND-EQUITY> 175,386
<SALES> 26,747
<TOTAL-REVENUES> 26,747
<CGS> 8,542
<TOTAL-COSTS> 9,330
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,290
<INCOME-TAX> 3,915
<INCOME-CONTINUING> 6,375
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,375
<EPS-BASIC> $0.16
<EPS-DILUTED> $0.15
</TABLE>