FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from Not Applicable to
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Commission File Number 0-17840
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NEW HORIZONS WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2941704
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1231 East Dyer Road, Santa Ana, California 92705
------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(714) 432-7600
--------------
(Registrant's telephone number, including area code)
_____________________________________________________________
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
-- --
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Number of shares of common stock outstanding at March 31, 2000: 9,692,438
1
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PART I: FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
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Condensed Consolidated Balance Sheets
New Horizons Worldwide, Inc. and Subsidiaries
March 31, 2000 and December 31, 1999
(Dollars in thousands)
March December
31,2000 31, 1999
------- --------
(unaudited)
-----------
Assets
- ------
Current assets:
Cash and cash equivalents ........................... $ 3,808 $ 2,868
Accounts receivable, less allowance for doubtful
accounts of $931 in 2000 and $943 in 1999 ....... 23,059 20,991
Inventories ......................................... 1,364 1,226
Prepaid expenses .................................... 1,601 1,438
Deferred income tax assets .......................... 2,526 2,526
Other current assets ................................ 709 791
-------- --------
Total current assets ............................ 33,067 29,840
Property, plant and equipment, net ....................... 15,339 14,797
Excess of cost over net assets of acquired companies,
net of accumulated amortization of $3,955 in 2000
and $3,420 in 1999 .................................. 55,177 55,718
Cash surrender value of life insurance ................... 1,070 1,070
Other assets ............................................. 3,683 3,659
-------- --------
Total Assets ............................................. $108,336 $105,084
======== ========
See accompanying notes to condensed consolidated financial statements
2
<PAGE>
Condensed Consolidated Balance Sheets
New Horizons Worldwide, Inc. and Subsidiaries
March 31, 2000 and December 31, 1999
(Dollars in thousands)
March December
31,2000 31, 1999
------- --------
(unaudited)
-----------
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Current portion of long-term obligations ......... $ 171 $ 189
Accounts payable ................................. 2,743 2,155
Income taxes payable ............................. 935 918
Accounts payable to franchises ................... 4,369 3,882
Other current liabilities ........................ 17,390 16,686
------ ------
Total current liabilities .................... 25,608 23,830
Long-term obligations, excluding current portion ...... 4,510 6,730
Deferred income tax liability ......................... 835 835
Deferred rent ......................................... 871 885
Other long-term liabilities ........................... 118 127
--------- --------
Total liabilities ............................ 31,942 32,407
--------- --------
Stockholders' equity:
Preferred stock without par value, 2,000,000 shares
authorized, no shares issued .................. -- --
Common stock, $.01 par value, 15,000,000 shares
authorized; issued and outstanding 9,877,438
shares in 1999 and 9,788,583 shares in 1999 ... 99 97
Additional paid-in capital ........................ 38,109 37,098
Retained earnings ................................. 39,484 36,780
Treasury stock at cost - 185,000 shares in 2000
and 1999 ...................................... (1,298) (1,298)
--------- --------
Total stockholders' equity ................... 76,394 72,677
--------- --------
Total Liabilities & Stockholders' Equity .............. $ 108,336 $105,084
========= ========
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
Condensed Consolidated Statements of Earnings
New Horizons Worldwide, Inc. and Subsidiaries
Three Months ended March 31, 2000 and March 31, 1999
(unaudited)
-----------
(Dollars in thousands except Earnings Per Share)
Three Months Ended
----------------------
March March
31, 2000 31, 1999
-------- --------
Revenues
Franchising
Franchise fees ............................. $ 501 $ 388
Royalties .................................. 5,453 4,732
Other ...................................... 1,117 580
-------- --------
Total franchising revenues ................. 7,071 5,700
Company-owned training centers ................. 26,954 16,402
-------- --------
Total revenues ............................. 34,025 22,102
Cost of revenues .................................... 15,773 9,751
Selling, general and administrative expenses ........ 13,706 9,941
-------- --------
Operating income .................................... 4,546 2,410
Investment income (expense), net .................... (40) 197
-------- --------
Income before income taxes .......................... 4,506 2,607
Provision for income taxes .......................... 1,802 988
-------- --------
Net income .......................................... $ 2,704 $ 1,619
======== ========
$ 0.28 $ 0.17
======== ========
Basic Earnings Per Share
Diluted Earnings Per Share .......................... $ 0.27 $ 0.16
======== ========
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
Condensed Consolidated Statements of Cash Flows
New Horizons Worldwide, Inc. and Subsidiaries
\
Three Months ended March 31, 2000 and March 31, 1999
(unaudited)
-----------
(Dollars in thousands)
Three Months Ended
----------------------
March March
31, 2000 31, 1999
-------- --------
Cash flows from operating activities
Net income ............................................ $ 2,704 $ 1,619
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................... 1,832 1,183
Deferred compensation ........................... -- 158
Cash provided (used) from the change in
(net of effects of acquisitions):
Accounts receivable, net ..................... (2,068) (66)
Inventories .................................. (138) (204)
Prepaid expenses and other current assets .... (81) (358)
Other assets ................................ (24) 6
Accounts payable ............................. 588 1,332
Other current liabilities .................... 1,237 313
Income taxes payable ......................... 270 601
Deferred rent ................................ (14) (8)
-------- --------
Net cash provided by operating activities 4,306 4,576
-------- --------
Cash flows from investing activities
Purchase of marketable securities ................ -- (169)
Redemption of marketable securities .............. -- 7,578
Additions to property, plant and equipment ....... (1,831) (1,702)
Cash paid for acquired companies, net of cash
acquired ....................................... -- (2,762)
-------- --------
Net cash (used) provided by investing activities (1,831) 2,945
-------- --------
Cash flows from financing activities
Proceeds from issuance of common stock ........... 712 25
Proceeds from debt obligations ................... 21 (2,859)
Principal payments on debt obligations ........... (2,268) (344)
-------- --------
Net cash used by financing activities .......... (1,535) (3,178)
-------- --------
Net increase in cash and cash equivalents ............ 940 4,343
Cash and cash equivalents at beginning of period ...... 2,868 6,873
-------- --------
Cash and cash equivalents at end of period ............ $ 3,808 $ 11,216
======== ========
Supplemental disclosure of cash flow information
Cash was paid for:
Interest ..................................... $ 118 $ 22
======== ========
Income taxes ................................. $ 1,392 $ 280
======== ========
5
<PAGE>
Condensed Consolidated Statements of Cash Flows
New Horizons Worldwide, Inc. and Subsidiaries
Three Months ended March 31, 2000 and March 31, 1999
(unaudited)
(Dollars in thousands)
Supplemental Disclosure of Noncash Transactions -
Three Months Ended
----------------------
March March
31, 2000 31, 1999
-------- --------
Noncash investing and financing activities:
Income tax benefit from exercise of stock
options and warrants $253 $ 8
==== ====
During the three months ended March 31, 2000, the Company issued common stock
with a value of $46 at the date of issuance as additional consideration for a
previous acquisition. During the three months ended March 31, 1999, the Company
issued common stock with a value of $791 at the date of issuance for the
acquisition of the Albuquerque, New Mexico franchise.
6
<PAGE>
Notes to Condensed Consolidated Financial Statements
New Horizons Worldwide, Inc. and Subsidiaries
For the Three Months ended March 31, 2000 and March 31, 1999
(unaudited)
-----------
(Dollars in thousands except Earnings Per Share)
Note 1 In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (all of
which are normal and recurring) necessary to present fairly the
financial position of the Company at March 31, 2000 and the results of
operations for the three month periods ended March 31, 2000 and March
31, 1999. The statements and notes should be read in conjunction with
the financial statements and notes thereto included in the Company's
annual report for the year ended December 31, 1999.
Note 2 Certain items on the 1999 financial statements have been
reclassified to conform to the 2000 presentation.
Note 3 Effective January 1, 1998, the Company adopted SFAS No. 130
"Reporting Comprehensive Income." The Company's comprehensive income
for the three months ended March 31, 2000 and 1999 is presented below:
Three Months Ended
----------------------
March March
31, 2000 31, 1999
-------- --------
Net income .................................. $ 2,704 $ 1,619
Other comprehensive income, net of tax:
Unrealized holding gains/(losses) on
available for sale securities arising
during the year ........................ -- 80
-------- --------
Comprehensive income ........................ $ 2,704 $ 1,699
======== ========
Note 4 In June 1997 the Financial Accounting Standards Board issued SFAS
No. 131 "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 was adopted by the Company for the fiscal
year ended December 31, 1998.
The Company operates in two business segments - company-owned training
centers and franchising operations. The company-owned training centers
segment operates wholly-owned computer training centers in the United
States and derives its revenues from the operating revenues of those
centers. The franchising segment franchises computer training centers
domestically and internationally and supplies systems of instruction
and sales and management concepts concerning computer training to
independent franchisees. The franchising segment revenues are from the
initial franchise fees and royalties from the franchise operations and
other revenue such as from the Corporate Education Solutions program.
The two segments are identified on the basis of the source of revenues
and the services offered. Information on the Company's segments is as
follows:
7
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<TABLE>
<CAPTION>
Company-owned Executive
Centers Franchising Office Consolidated
------------- ----------- --------- ------------
For the three months ended March 31, 2000
<S> <C> <C> <C> <C>
Revenues from external customers ........................... $ 26,954 $ 7,071 $ -- $ 34,025
Depreciation and amortization expense ...................... 1,616 216 -- 1,832
Income tax expense ......................................... 904 898 -- 1,802
Net income ................................................. 1,336 1,368 -- 2,704
Total assets ............................................... 86,348 18,223 3,765 108,336
Capital expenditures ....................................... 1,728 103 -- 1,831
For the three months ended March 31, 1999
Revenues from external customers ........................... $ 16,402 $ 5,700 $ -- $ 22,102
Depreciation and amortization expense ...................... 995 188 -- 1,183
Income tax expense ......................................... 475 513 -- 988
Net income ................................................. 776 843 -- 1,619
Total assets ............................................... 50,982 19,390 18,738 89,110
Capital expenditures ....................................... 980 722 -- 1,702
</TABLE>
Note 5 The Company computes earnings per share based on SFAS No. 128,
"Earnings Per Share" (EPS). SFAS No. 128 requires the Company to
report Basic EPS, as defined therein, which assumes no dilution from
outstanding stock options, and Diluted EPS, as defined therein, which
assumes dilution from the outstanding stock options. Earnings per
share amounts for all periods presented have been calculated to
conform to the requirements of SFAS No. 128.
The computation of Basic EPS is based on the weighted average number
of shares actually outstanding during each year. The computation of
Diluted EPS is based upon the weighted average number of shares
actually outstanding, plus the shares that would be outstanding
assuming the exercise of all outstanding options and warrants,
computed using the treasury stock method.
Three Months Ended
----------------------
March March
31, 2000 31, 1999
-------- --------
Basic EPS 9,646,175 9,390,740
Diluted EPS 10,116,784 9,921,043
The difference between the shares used for calculating Basic EPS and
Diluted EPS relates to common stock equivalents consisting of stock
options and warrants outstanding during the respective periods.
8
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands)
GENERAL
The Company operates computer training centers in the United States and
franchises computer training centers in the United States and abroad.
Corporate revenues are defined as revenues from company-owned training centers,
initial franchise fees and royalties from franchised operations. System-wide
revenues are comprised of total revenues from all centers, both company-owned
and franchised. System-wide revenues are used to gauge the growth rate of the
entire New Horizons training network.
Revenues from company-owned training centers operated by New Horizons consist
primarily of training fees and fees derived from the sale of courseware
development. Cost of revenues consists primarily of instructor costs, courseware
costs, rent, utilities, classroom equipment, and computer hardware, software and
peripheral expenses. Included in selling, general and administrative expenses
are personnel costs associated with technical and facilities support,
scheduling, training, accounting and finance, and sales.
Revenues from franchising consist primarily of initial franchise fees paid by
franchisees for the purchase of specific franchise territories and franchise
rights, training royalty and advertising fees based on a percentage of gross
training revenues realized by the franchisees, percentage royalty fees received
on the sale of courseware, and revenue earned from Corporate Education
Solutions. Cost of revenues consists primarily of costs associated with
courseware development and franchise support personnel who provide system
guidelines and advice on daily operating issues including sales, marketing,
instructor training, and general business problems. Included in selling, general
and administrative expenses are technical support, accounting and finance
support, Corporate Education Solutions support, advertising expenses, and
franchise sales expenses.
REVENUES
Revenues increased $11,923 or 53.9% to $34,025 for the first quarter of 2000
compared to $22,102 for the first quarter of 1999. This was primarily due to
improved revenues at company-owned locations, additional revenues resulting from
the acquisition of the Charlotte, Sacramento, Stockton, San Antonio, and Denver
franchises since the first quarter of 1999, revenue increases at franchises that
were open more for than twelve months, and additional franchises added to the
system. System-wide revenues for the first quarter were $123,152, up 20.2% from
$102,452 for the same period in 1999. Revenues from locations open more than 12
months, both franchised and company-owned, grew 15.8% in the first quarter of
2000 compared to the same period in 1999.
COST OF REVENUES
Cost of revenues increased $6,022 or 61.8% for the first quarter of 2000
compared to the same period in 1999. As a percentage of revenues, cost of
revenues increased to 46.4% in the first quarter of 2000 from 44.1% in the first
quarter of 1999. The increase in the cost of revenues in absolute dollars was a
result of the increase in the revenues for the quarter as discussed above. The
increase as a percentage of revenues was due to increased franchise support, and
higher training, courseware, and overhead expenses in and associated with the
acquisition of the Charlotte, Sacramento, Stockton, San Antonio, and Denver
franchises.
9
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SELLING,GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $3,765 or 37.9% for the
first quarter of 2000 as compared to the first quarter of 1999. As a percentage
of revenues, selling, general and administrative expenses decreased to 40.3% for
the first quarter of 2000 from 45.0% for the same period in 1999. The increase
in selling, general and administrative expenses in absolute dollars was due to
increased spending in the areas of sales and marketing, national advertising,
and additional expenses resulting from the acquisition of the five franchises.
The decrease in selling, general and administrative expenses as a percentage of
revenues was primarily due to the increase in revenue and control over the
addition of non-revenue producing employees.
INVESTMENT INCOME, NET
Investment income decreased $133 or 56.6% for the first quarter of 2000 compared
to the same period in 1999. As a percentage of revenues, investment income
decreased to 0.3% for the first quarter of 2000 when compared to 1.1% for the
first quarter of 1999. The decrease in investment income in absolute dollars was
due mainly to the use of funds to purchase the Albuquerque, Charlotte,
Sacramento, Stockton, and San Antonio franchises.
Interest expense increased $104 or 274% for the first quarter of 2000 when
compared to the first quarter of 1999. The higher interest expense was due
mainly to an increase in debt resulting from the franchise buy-backs in 1999.
INCOME TAXES
The Company's effective tax rate was 40.0% for the first quarter of 2000 and
37.9% for the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company's working capital was $7,459 and its cash and
cash equivalents totaled $3,808. Working capital as of March 31, 2000 reflected
an increase of $1,449 or 24.1% from $6,010 as of December 31, 1999.
The Company currently maintains a $25 million credit facility with a commercial
bank, $20 million of which is for future business acquisitions and $5 million of
which is for short-term financing requirements, at an interest rate equal to
the bank's prime rate, 9.0% at March 31, 2000 less 0.5%. The Company had no
new borrowings against the line of credit in 2000. The outstanding balance as of
March 31, 2000 was $4.5 million. As of March 31, 2000, the Company has $15.5
million and $5 million available for borrowing under the acquisition and
short-term financing portions of the credit facility, respectively.
10
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The nature of the computer education and training industry requires substantial
cash commitments for the purchase of computer equipment, software, and training
facilities. During the first three months of 2000 the Company spent
approximately $1,836 on capital items. Capital expenditures for 2000 are
expected to total approximately $4,800.
Management believes that its current working capital position, cash flows from
operations, along with its credit facility, will be adequate to support its
current and anticipated capital and operating expenditures and its strategies to
grow its computer education and training business.
INFORMATION ABOUT FORWARD-LOOKING STATEMENTS
The statements made in this Quarterly Report on Form 10-Q that are not
historical facts are forward-looking statements. Such statements are based on
current expectations but involve risks, uncertainties, and other factors which
may cause actual results to differ materially from those contemplated by such
forward-looking statements. All statements that address operating performance,
events or developments that management anticipates will occur in the future,
including statements relating to future revenue, profits, expenses, income and
earnings per share or statements expressing general optimism about future
results, are forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"). In addition, words such as
"expects," "anticipates," "intends," "plans," "believes," "estimates,"
variations of such words, and similar expressions are intended to identify
forward-looking statements. Forward-looking statements are subject to safe
harbors created in the Exchange Act.
Important factors which may result in variations from results contemplated by
such forward-looking statements include, but are by no means limited to: (1) the
Company's ability to respond effectively to potential changes in the manner in
which computer training is delivered, including the increasing acceptance of
technology-based training which could have more favorable economics with respect
to timing and delivery costs; (2) the Company's ability to attract and retain
qualified instructors; (3) the rate at which new software applications are
introduced by manufacturers and the Company's ability to keep up with new
applications and enhancements to existing applications; (4) the level of
expenditures devoted to upgrading information systems and computer software by
customers; (5) the Company's ability to compete effectively with low cost
training providers who may not be authorized by software manufacturers; and (6)
the Company's ability to manage the growth of its business.
The Company's strategy focuses on enhancing revenues and profits at current
locations, and also includes the possible opening of new company-owned
locations, the sale of additional franchises, the selective acquisition of
existing franchises in the United States which have demonstrated the ability to
achieve above average profitability while increasing market share, and the
acquisition of companies in similar or complementary businesses. The Company's
growth strategy is premised on a number of assumptions concerning trends in the
information technology training industry. These include the continuation of
growth in the market for information technology training and the trend toward
outsourcing. To the extent that the Company's assumptions with respect to any of
these matters are inaccurate, its results of operations and financial condition
could be adversely effected.
11
<PAGE>
PART I. FINANCIAL INFORMATION
(Dollars in thousands)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates. It
monitors the risks associated with interest rates and financial instrument
positions.
The Company's primary interest rate risk exposure results from floating rate
debt on its line of credit. At March 31, 2000, most of the Company's total
long-term debt consisted of floating rate debt. If interest rates were to
increase 100 basis points (1.0%) from March 31, 2000 rates, and assuming no
changes in long-term debt from the March 31, 2000 levels, the additional annual
expense would be approximately $45 on a pre-tax basis. The Company currently
does not hedge its exposure to floating interest rate risk.
The Company's revenue derived from international operations is paid by its
franchisees in United States dollars and, accordingly, the foreign currency
exchange rate fluctuation is not material.
12
<PAGE>
PART II. FINANCIAL INFORMATION
(Dollars in thousands)
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
c) Recent Sale of Unregistered Securities
No securities of the Company that were not registered under the Securities Act
of 1933 have been issued or sold by the Company for the period covered by this
Quarterly Report on Form 10-Q other than the following:
On January 6, 2000, the Company issued 3,855 shares of the Company's common
stock as additional consideration to a previously acquired franchise for certain
performance targets achieved. The average price of the Company's stock seven
days before and after the date of the transaction was $11.83 per share of common
stock. Thus, the aggregate value of the 3,855 shares of common stock on the date
of the transaction was $46. Registration under the Securities Act of 1933 was
not effected with respect to the transaction described above in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933.
13
<PAGE>
PART II: Other Information
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exhibit
Number Description of Documents
- ------ ------------------------
10.1** Amendment dated January 4, 2000 to relocation agreement between the
Registrant and Thomas J. Bresnan (1)
10.2** Severance agreement dated January 4, 2000 between the Registrant and
Kenneth M. Hagerstrom (1)
10.3** Severance agreement dated January 4, 2000 between the Registrant and
Robert S. McMillan (1)
10.4 Lease Agreement dated February 15, 2000 between New Horizons
Worldwide, Inc. and Stadium Gateway Associates, LLC, guaranteed by the
Registrant(1)
27 Financial Data Schedule*
(1) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1999.
* Filed herewith
** Compensatory plan or agreement
14
<PAGE>
SIGNATURE
---------
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 thereto duly authorized.
NEW HORIZONS WORLDWIDE, INC.
(Registrant)
Date: May 12, 2000 By: /s/ ----------------------------
Robert S. McMillan
NEW HORIZONS WORLDWIDE, INC.
Chief Financial Officer
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000850414
<NAME> NEW HORIZONS WORLDWIDE
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1.0
<CASH> 3,808
<SECURITIES> 0
<RECEIVABLES> 23,990
<ALLOWANCES> 931
<INVENTORY> 1,364
<CURRENT-ASSETS> 33,067
<PP&E> 31,771
<DEPRECIATION> 16,432
<TOTAL-ASSETS> 108,336
<CURRENT-LIABILITIES> 25,608
<BONDS> 4,510
0
0
<COMMON> 99
<OTHER-SE> 76,295
<TOTAL-LIABILITY-AND-EQUITY> 108,336
<SALES> 34,025
<TOTAL-REVENUES> 34,025
<CGS> 15,773
<TOTAL-COSTS> 29,479
<OTHER-EXPENSES> (102)
<LOSS-PROVISION> 49
<INTEREST-EXPENSE> 142
<INCOME-PRETAX> 4,506
<INCOME-TAX> 1,802
<INCOME-CONTINUING> 2,704
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,704
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.27
</TABLE>