<PAGE> 1
UNITED STATES
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 THREE MONTH PERIOD FROM JANUARY 2, 2000
TO APRIL 1, 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 0-20225
ZOLL MEDICAL CORPORATION
------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2711626
- ---------------------------------------- -----------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification number)
32 SECOND AVENUE, BURLINGTON, MA 01803-4420
- ---------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
(781) 229-0020
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Class Outstanding at May 10, 2000
Common Stock, $.02 par value 8,654,033
This document consists of 21 pages.
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ZOLL MEDICAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheets (unaudited) 3
April 1, 2000 and October 2, 1999
Consolidated Income Statements (unaudited) 4
Three Months and Six Months Ended April 1, 2000 and April 3, 1999
Consolidated Statements of Cash Flows (unaudited) 5
Six Months Ended April 1, 2000 and April 3, 1999
Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2. Management's Discussion and Analysis of Results of Operations 7
and Financial Condition
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities 18
ITEM 3. Defaults Upon Senior Securities 18
ITEM 4. Submission of Matters to a Vote of Security-Holders 18
ITEM 5. Other Information 19
ITEM 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZOLL MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
April 1, October 2,
2000 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 63,893 $ 1,821
Accounts receivable, less allowance of $1,952 at April 1,
2000 and $2,096 at October 2, 1999 26,776 25,464
Inventories:
Raw materials 7,002 5,332
Work-in-process 3,204 2,623
Finished goods 8,793 5,241
-------- --------
18,999 13,196
Prepaid expenses and other current assets 2,325 2,296
-------- --------
Total current assets 111,993 42,777
Property and equipment, at cost:
Land and building 3,437 3,432
Machinery and equipment 17,714 15,382
Construction in progress 143 477
Tooling 3,051 2,695
Furniture and fixtures 976 883
Leasehold improvements 755 737
-------- --------
26,076 23,606
Less accumulated depreciation 12,572 10,875
-------- --------
Net property and equipment 13,504 12,731
Other assets, net 4,711 4,179
-------- --------
$130,208 $ 59,687
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,429 $ 8,404
Accrued expenses and other liabilities 6,634 6,389
Current maturities of long-term debt 161 164
Deferred revenue 488 1,092
-------- --------
Total current liabilities 13,712 16,049
Deferred income taxes 347 347
Long-term debt 1,988 2,069
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value, authorized 1,000
shares, none issued and outstanding
Common stock, $.02 par value, authorized 19,000 shares,
8,653 and 6,772 issued and outstanding at April 1,
2000 and October 2, 1999, respectively 173 136
Capital in excess of par value 92,379 22,439
Retained earnings 21,609 18,647
-------- --------
Total stockholders' equity 114,161 41,222
-------- --------
$130,208 $ 59,687
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
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ZOLL MEDICAL CORPORATION
CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share and share data )
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- --------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net sales $25,654 $17,941 $50,089 $33,997
Cost of goods sold 11,129 7,439 21,972 13,971
------- ------- ------- -------
Gross profit 14,525 10,502 28,117 20,026
Expenses:
Selling and marketing 7,693 5,680 15,367 11,095
General and administrative 2,184 1,796 4,136 3,426
Research and development 2,026 1,743 3,757 3,346
------- ------- ------- -------
Total expenses 11,903 9,219 23,260 17,867
------- ------- ------- -------
Income from operations 2,622 1,283 4,857 2,159
Investment and other income 303 32 313 110
Interest expense 95 28 175 40
------- ------- ------- -------
Income before income taxes 2,830 1,287 4,995 2,229
Provision for income taxes 1,047 351 1,848 591
------- ------- ------- -------
Net income $ 1,783 $ 936 $ 3,147 $ 1,638
======= ======= ======= =======
Basic earnings per common share $ 0.24 $ 0.14 $ 0.44 $ 0.25
======= ======= ======= =======
Weighted average common shares outstanding 7,443 6,652 7,118 6,646
Diluted earnings per common and common
equivalent share $ 0.23 $ 0.14 $ 0.42 $ 0.24
======= ======= ======= =======
Weighted average number of common and common
equivalent shares outstanding 7,836 6,862 7,484 6,795
Unaudited pro forma information*:
Historical income before income taxes $ 1,287 $ 2,229
Pro forma incremental operating costs 65 130
------- -------
Pro forma income before income taxes 1,222 2,099
Pro forma provision for income taxes 415 715
------- -------
Pro forma net income $ 807 $ 1,384
======= =======
Pro forma diluted earnings per share $ 0.12 $ 0.20
======= =======
</TABLE>
* Pro forma adjustments have been made to the historical results to include
operating costs which are incurred as a result of the merger with Pinpoint
and income tax expense, assuming that Pinpoint was a taxable entity subject
to ZOLL's incremental tax rate.
See notes to unaudited consolidated financial statements.
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ZOLL MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------
April 1, April 3,
2000 1999
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,147 $ 1,638
Charges not affecting cash:
Depreciation and Amortization 1,905 1,422
Changes in assets and liabilities:
Accounts receivable (1,312) (3,162)
Inventories (5,803) (1,912)
Prepaid expenses and other current assets (29) 1,528
Accounts payable and accrued expenses (78) 21
Deferred Revenue (604) (115)
-------- --------
Cash used for operating activities (2,774) (580)
INVESTING ACTIVITIES:
Additions to property and equipment (2,869) (2,355)
Other assets (341) (19)
-------- --------
Cash used for investing activities (3,210) (2,374)
FINANCING ACTIVITIES:
Exercise of stock options, including income tax benefit 1,216 1
Distributions to stockholders (185) (346)
Contributions from stockholders -- 300
Issuance of common stock 67,109 --
Repayment of long-term debt (84) (67)
-------- --------
Cash provided by (used for) financing activities 68,056 (112)
-------- --------
Net increase/decrease in cash 62,072 (3,066)
Cash and cash equivalents at beginning of year 1,821 5,521
-------- --------
Cash and cash equivalents at end of period $ 63,893 $ 2,455
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Income taxes $ 663 $ 69
Interest 95 28
</TABLE>
See notes to unaudited consolidated financial statements.
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ZOLL MEDICAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The Consolidated Balance Sheet as of April 1, 2000, the Consolidated Income
Statements for the three months ended April 1, 2000 and April 3, 1999, and
the Consolidated Statements of Cash Flows for the six months ended April 1,
2000 and April 3, 1999 are unaudited, but in the opinion of management
include all adjustments, consisting of normal recurring items, necessary
for a fair presentation of results for these interim periods. The results
for the interim periods are not necessarily indicative of results to be
expected for the entire year.
2. On October 15, 1999, the Company acquired Pinpoint Technologies, Inc. and
Pinpoint Property Management LLC ("Pinpoint", individually and
collectively) in a business combination accounted for as a pooling of
interests. Pinpoint, which creates, develops and manufactures advanced
information technology software exclusively focused on the emergency
medical services (EMS) market, became a wholly owned subsidiary of the
Company through the exchange of approximately 433,000 shares of the
Company's common stock for all of the outstanding stock of Pinpoint. The
accompanying unaudited consolidated financial statements are presented on
the basis that the companies were combined for all periods presented, and
unaudited financial statements of the prior quarter have been restated to
give effect to the combination.
The unaudited pro forma information reflects pro forma adjustments that
have been made to the historical results to include operating costs
incurred as a result of the merger with Pinpoint and income tax expense,
assuming that Pinpoint was a taxable entity subject to ZOLL's incremental
tax rate. The pro forma information is presented for informational purposes
only and is not necessarily indicative of what would have occurred if the
acquisition had been made as of the beginning of that period. In addition,
the pro forma information is not intended to be a projection of future
results.
3. Certain reclassifications have been made to the prior periods' unaudited
consolidated financial statements to conform to the current period
presentation with no impact on net income.
4 Segment and Geographic Information
Segment information: The Company reports information to the chief operating
decision maker for four operating segments, determined by the type of
customer or product. These segments include the sale of cardiac
resuscitation devices and accessories and data collection management
software to the North America hospital market and to the North America
pre-hospital market, and the sale of cardiac resuscitation devices and
accessories to the international market. Each of these segments have
similar characteristics, manufacturing processes, customers, distribution
and marketing strategies, as well as a similar regulatory environment.
In order to make operating and strategic decisions, ZOLL's chief operating
decision maker evaluates revenue performance based on the worldwide
revenues of each segment and, due to shared infrastructures, profitability
based on an enterprise-wide basis. Net sales by segment were as follow:
(000's omitted)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Hospital Market - North America $ 9,217 $ 6,123 $19,744 $12,301
Pre-hospital Market - North 6,129 3,614 10,974 7,571
America
Other - North America 4,133 3,940 7,954 7,642
International Market 6,175 4,264 11,417 6,483
----------------------------------------------
$25,654 $17,941 $50,089 $33,997
==============================================
</TABLE>
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The Company reports assets on a consolidated basis to the chief operating
decision maker.
Geographic information: Net sales by major geographical area, determined on
the basis of destination of the goods, are as follow:
(000's omitted)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
United States $18,322 $13,543 $36,891 $27,258
Foreign 7,332 4,398 13,198 6,739
------- ------- ------- -------
Consolidated $25,654 $17,941 $50,089 $33,997
======= ======= ======= =======
</TABLE>
5. During the second quarter, the Company completed a secondary offering of
1,725,000 shares of common stock in exchange for net proceeds of
approximately $67 million after deducting approximately $5 million for
underwriters discounts and other expenses incurred for the offering.
6. The shares used for calculating basic earnings per common share were the
average shares outstanding and the shares used for calculating diluted
earnings per share were the average shares outstanding and the dilutive
effect of stock options.
7. The information contained in the interim financial statements should be
read in conjunction with the Company's audited financial statements as of
and for the year ended October 2, 1999 included in its form S-3 filed with
the Securities and Exchange Commission on February 22, 2000.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
THREE MONTHS ENDED APRIL 1, 2000 COMPARED TO THREE MONTHS ENDED APRIL 3, 1999
Our net sales increased 43% to $25,654,000 for the three months ended April 1,
2000. Our sales growth was driven primarily by increasing demand for the new
M-Series line of defibrillators/pacemakers. Sales growth also reflected
additional headcount in our North American and International sales forces. We
experienced significant growth in all major equipment segments of our business.
During the first quarter of 2000, North American sales increased 42% as compared
to the comparable period in 1999. Equipment sales to both the hospital and
pre-hospital markets increased 51% and 70%, respectively, as compared to the
same period in the prior year. International sales increased 45%, reflecting
widespread geographic growth. This growth does not reflect the recent expansion
of our direct sales force in Europe.
Gross margin for the second quarter of 2000 was 56.6% compared to 58.5% for the
comparable prior year quarter. The decrease primarily reflected a change in the
mix of electrode sales and capital equipment.
Selling and marketing expenses as a percentage of net sales decreased to 29.9%
from 31.6%. The decrease in selling and marketing expenses as a percentage of
sales reflects leverage from our sales force as we increased sales volume.
Selling and marketing expenses increased 35.4% due to an increase in sales force
headcount as well as the effect of the increase in sales on commissions.
General and administrative expenses decreased as a percentage of net sales to
8.5% from 10.0%. The decrease in the general and administrative expenses as a
percentage of sales reflects the absorption of relatively fixed operating
expenses by increased sales volume. General and administrative expenses
increased 21.6% over the prior period reflecting expenditures to support our
growing operations, including consulting costs related to the installation of
our new ERP information system.
Research and development expenses decreased as a percentage of net sales to 7.9%
from 9.7% reflecting primarily the significant increase in sales. Research and
development expenses increased 16.2% over the comparable prior year quarter
reflecting continued development of our cardiac resuscitation equipment.
The effective tax rate increased from 27% to 37% for the three months ended
April 1, 2000 as compared to the same period in 1999. This increase primarily
related to the fact that, prior to our acquisition of Pinpoint Technologies,
Inc. in October 1999, the operating results of Pinpoint did not include any
provision for income taxes because Pinpoint operated as a Subchapter S
corporation for income tax purposes. This increase also resulted as we fully
utilized net operating loss carryforwards from foreign subsidiaries in 1999.
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SIX MONTHS ENDED APRIL 1, 2000 COMPARED TO SIX MONTHS ENDED APRIL 3, 1999
Our net sales increased 47% to $50,089,000 for the six months ended April 1,
2000 as compared to the six months ended April 3, 1999. Our sales growth was
driven primarily by increasing demand for the new M-Series line of
defibrillators/pacemakers and also reflected additional headcount in both our
North America and International sales forces. During the first half of 2000,
North American sales increased 41% over the comparable period in 1999. Equipment
sales to the hospital and pre-hospital markets increased 61% and 45%,
respectively, as compared to the same period in the prior year. International
sales increased 76% reflecting widespread geographic growth.
Gross margin for the first half of 2000 was 56.1% compared to 58.9% for the
comparable prior year period. The decrease reflected volume pricing on our
German Army contract and the change in mix of electrode sales and capital
equipment.
Selling and marketing expenses as a percentage of net sales decreased to 30.7%
from 32.6%. The decrease in selling and marketing expenses as a percentage of
sales reflects leverage from our sales force as we increased sales volume.
Selling and marketing expenses increased 38.5% due primarily to an increase in
sales force headcount.
General and administrative expenses decreased as a percentage of net sales to
8.3% from 10.1%. The decrease in the general and administrative expenses as a
percentage of sales reflects the absorption of relatively fixed operating
expenses by increased sales volume. Research and development expenses decreased
as a percentage of net sales to 7.5% from 9.8% primarily reflecting the
significant increase in sales.
The effective tax rate increased from 27% to 37% for the six months ended April
1, 2000 as compared to the same period in 1999. This increase primarily related
to the fact that, prior to our acquisition of Pinpoint Technologies, Inc. in
October 1999, the operating results of Pinpoint did not include any provision
for income taxes because Pinpoint operated as a Subchapter S corporation for
income tax purposes. This increase also resulted as we fullly utilized net
operating loss carryforwards from foreign subsidiaries in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents at April 1, 2000 totaled $63,893,000 compared with
$1,821,000 at October 2, 1999. This significant increase reflects the proceeds
from a secondary stock offering of 1,725,000 shares of common stock.
Cash used for operating activities for the six months ended April 1, 2000
totaled $2,774,000, while cash used over the same period in 1999 totaled
$580,000. The increase in cash used for operations was primarily attributable to
an increase in M-Series finished goods inventories reflecting strong product
demand and the introduction of new monitoring parameters. In addition, we took
advantage of early payment opportunities and reduced the accounts payable
balance.
The amount of cash required to fund investing activities increased by $836,000
during the six months ended April 1, 2000 compared to the same period in 1999.
The increase primarily reflected the purchase and installation of our new
Enterprise Resource Planning information system from Oracle Corporation.
Cash provided by financing activities increased by $68,168,000 during the six
months ended April 1, 2000 compared to the same period in 1999. This increase
was primarily due to the proceeds from the secondary common stock offering as
well as exercise of stock options.
We maintain a working capital line of credit with our bank. Under this working
capital line, we may borrow on a demand basis. Currently, we may borrow up to
$12,000,000 at an interest rate equal to the bank's base rate (currently 9.0%)
or LIBOR plus 2%. The outstanding balance under this line was zero at the end of
the second quarter of both fiscal 2000 and 1999.
LEGAL AND REGULATORY AFFAIRS
We are involved in the normal course of our business in various litigation
matters and regulatory issues, including product recalls. Although we are unable
to determine at the present time the exact amount of any
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impact in any pending matters, we believe that none of the pending matters will
have an outcome material to our financial condition or business.
SAFE HARBOR STATEMENTS
Except for the historical information contained herein, the matters set forth
herein are forward looking statements within the meaning of Section 27A of the
Securities Act of 1933 as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, that are subject to certain risks and uncertainties
that could cause actual results to differ materially from those set forth in the
forward looking statements. Such risks and uncertainties include, but are not
limited to: product demand and market acceptance risks, the effect of economic
conditions, results of pending or future litigation, the impact of competitive
products and pricing, product development and commercialization, technological
difficulties, the government regulatory environment and actions, trade
environment, capacity and supply constraints or difficulties, the results of
financing efforts, actual purchases under agreements, potential warranty issues,
the effect of the Company's accounting policies, and those items set forth in
the following section entitled "Risk Factors."
RISK FACTORS
IF WE FAIL TO COMPETE SUCCESSFULLY IN THE FUTURE AGAINST EXISTING OR POTENTIAL
COMPETITORS, OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED
Our principal global competitors with respect to our entire cardiac
resuscitation equipment product line are Physio-Control Corporation and Agilent
Technologies, Inc. Physio-Control is a subsidiary of Medtronic, Inc., a leading
medical technology company, and Agilent, which now includes Heartstream, Inc.,
was formerly part of Hewlett-Packard Company. Physio-Control has been the market
leader in the defibrillator industry for over twenty years and has a broader
line of product offerings and accessories than we do. As a result of
Physio-Control's dominant position in this industry, many potential customers
have relationships with Physio-Control that could make it difficult for us to
continue to penetrate the markets for our products. In addition, Physio-Control,
its parent and Agilent and other competitors each have significantly greater
resources than we do. Accordingly, Physio-Control, Agilent and other competitors
could substantially increase the resources they devote to the development and
marketing of products that are competitive with ours. Moreover, these and other
competitors may develop and successfully commercialize medical devices that
directly or indirectly accomplish what our products are designed to accomplish
in a superior and/or less expensive manner. For example, we expect our
competitors to develop and sell devices in the future that will compete directly
with our M Series product line and our biphasic waveform technology. As a
consequence, such competing medical devices may render our products obsolete.
In addition to external defibrillation and external pacing with cardiac
resuscitation equipment, it is possible that other alternative therapeutic
approaches to the treatment of sudden cardiac arrest may be developed. These
alternative therapies or approaches, including pharmaceutical or other
alternatives, could prove to be superior to our products.
Moreover, there is significant competition in the business of developing and
marketing software for data collection, billing and data management in the
emergency medical system market. Our principal competitors in this business
include PAD Systems, Healthware Technologies, Inc., Tritech Software Systems,
Inc., Sweet Computer Services, Inc., RAM Software Systems, Inc., Intergraph
Corporation and AmbPac, Inc., some of which have greater financial, technical,
research and development and marketing resources than we do. In addition,
because the barriers to entry in this business are relatively low, additional
competitors may easily enter this market in the future. It is possible that
systems developed by competitors could be superior to our data management
system. Consequently, our ability to sell our data management system could be
materially impacted and our financial results could be materially and adversely
affected.
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OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE WHICH COULD CAUSE OUR STOCK PRICE
TO BE VOLATILE, AND THE ANTICIPATION OF A VOLATILE STOCK PRICE CAN CAUSE GREATER
VOLATILITY
Our quarterly and annual operating results have fluctuated and may continue to
fluctuate. Various factors have and may continue to affect our operating
results, including:
* high demand for our products which could disrupt our normal factory
utilization and cause shipments to occur in uneven patterns;
* variations in product orders;
* timing of new product introductions;
* temporary disruptions on buying behavior due to changes in technology
(e.g. shift to biphasic technology)
* changes in distribution channels;
* actions taken by our competitors such as the introduction of new
products or the offering of sales incentives;
* the ability of our sales force to effectively market our products;
* supply interruptions from our single source vendors;
* regulatory actions, including actions taken by the U.S. Food and Drug
Administration; and
* delays in obtaining domestic or foreign regulatory approvals.
Based on these factors, period-to-period comparisons should not be relied upon
as indications of future performance. In addition, in anticipation of less
successful quarterly results, parties may take short positions in our stock. The
actions of parties shorting our stock might cause even more volatility in our
stock price. The volatility of our stock may cause the value of a stockholder's
investment to decline rapidly.
WE MAY BE REQUIRED TO IMPLEMENT A COSTLY PRODUCT RECALL
In the event that any of our products proves to be defective, we can voluntarily
recall, or the U.S. Food and Drug Administration, the FDA, could require us to
redesign or implement a recall of, any of our products. We and our competitors
have voluntarily recalled products in the past, and based on this experience, we
believe that future recalls could result in significant costs to us and
significant adverse publicity which could harm our ability to market our
products in the future. Though it is not possible to quantify the economic
impact of a recall, it could have a material adverse effect on our business,
financial condition and results of operations.
WE CAN BE SUED FOR PRODUCING DEFECTIVE PRODUCTS AND WE MAY BE REQUIRED TO PAY
SIGNIFICANT AMOUNTS TO THOSE HARMED IF WE ARE FOUND LIABLE, AND OUR BUSINESS
COULD SUFFER FROM ADVERSE PUBLICITY
The manufacture and sale of medical products such as ours entail significant
risk of product liability claims. Our quality control standards comply with FDA
requirements and we believe that the amount of product liability insurance we
maintain is adequate based on past product liability claims in our industry. We
cannot assure you, however, that the amount of such insurance will be sufficient
to satisfy claims made against us in the future or that we will be able to
maintain insurance in the future at satisfactory rates or in adequate amounts.
Product liability claims could result in significant costs or litigation. In
addition, a successful claim brought against us in excess of our available
insurance coverage or any claim that results in significant adverse publicity
against us could have a material adverse effect on our business, financial
condition and results of operations.
OUR DEPENDENCE ON SOLE AND SINGLE SOURCE SUPPLIERS EXPOSES US TO SUPPLY
INTERRUPTIONS THAT COULD RESULT IN PRODUCT DELIVERY DELAYS AND SUBSTANTIAL COSTS
TO REDESIGN OUR PRODUCTS
Although we use many standard parts and components for our products, some key
components are purchased from sole or single source vendors for which
alternative sources are not currently readily available. For example, we
currently purchase proprietary components, including capacitors, screens, gate
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arrays and integrated circuits, for which there are no direct substitutes. Our
inability to obtain sufficient quantities of these components may result in
future delays or reductions in product shipments which could cause a fluctuation
in our results of operations.
These components could be replaced with alternatives from other suppliers, which
could involve a redesign of our products. Such redesign could involve
considerable time and expense. For example, in 1999, one of our vendors was
unable to provide sufficient quantities of screens that were used in our
M-Series products. To keep up with the demand for our products, we sought
alternative screens from another supplier and redesigned our product
accordingly. Redesigning our products resulted in additional costs and delays in
the shipment of some of our products. Although we believe we have solved this
supply problem, we cannot assure you that we will not have similar supply
problems in the future.
OUR RELIANCE ON INDEPENDENT MANUFACTURERS CREATES SEVERAL RISKS THAT COULD
RESULT IN PRODUCT DELIVERY DELAYS, INCREASED COSTS AND OTHER ADVERSE EFFECTS ON
OUR BUSINESS
We currently engage a small number of independent manufacturers to manufacture
several components for our products, including circuit boards, molded plastic
components, cables and high voltage assemblies. Our reliance on these
independent manufacturers involves a number of risks, including the potential
for inadequate capacity, unavailability of, or interruptions in access to,
process technologies, and reduced control over delivery schedules, manufacturing
yields and costs.
If our manufacturers are unable or unwilling to continue manufacturing our
components in required volumes, we will have to transfer manufacturing to
acceptable alternative manufacturers whom we have identified, which could result
in significant interruptions of supply. Moreover, the manufacture of these
components is complex, and our reliance on the suppliers of these components
exposes us to potential production difficulties and quality variations, which
could negatively impact the cost and timely delivery of our products.
Accordingly, any significant interruption in the supply, or degradation in the
quality, of any component would have a material adverse effect on our business,
financial condition and results of operations.
FAILURE TO PRODUCE NEW PRODUCTS OR OBTAIN MARKET ACCEPTANCE FOR OUR NEW PRODUCTS
IN A TIMELY MANNER COULD HARM OUR BUSINESS
Because substantially all of our revenue comes from the sale of cardiac
resuscitation devices and related products, our financial performance will
depend upon market acceptance of, and our ability to deliver and support, new
products such as upgrades to the M Series defibrillator, a product for the
public access defibrillation market and an integrated product for the emergency
medical system data management market. We cannot assure you that we will be able
to produce viable products in the time frames we currently estimate. Factors
which could cause delay in these schedules or even cancellation of our projects
to produce and market these new products include research and development
delays, the actions of our competitors producing competing products and the
actions of other parties who may provide alternative therapies or solutions
which could reduce or eliminate the markets for pending products.
The degree of market acceptance of any of our products will depend on a
number of factors, including:
* our ability to develop and introduce new products in the time frames
we currently estimate;
* our ability to successfully implement new product technologies;
* the market's readiness to accept new products such as our M Series
defibrillators and data management products;
* the standardization of an automated platform for data management
systems;
* having adequate financial and technical resources for future product
development and promotion;
* the efficacy of our products; and
* the prices of our products compared to the prices of our competitors'
products.
If our new products do not achieve market acceptance, our financial performance
will be adversely affected.
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WE MAY NOT BE ABLE TO OBTAIN APPROPRIATE REGULATORY APPROVALS FOR OUR NEW
PRODUCTS
The manufacture and sale of our products are subject to regulation by numerous
governmental authorities, principally the FDA and corresponding state and
foreign agencies. The FDA administers the Federal Food, Drug and Cosmetic Act,
as amended, and the rules and regulations promulgated thereunder. Some of our
products have been classified by the FDA as Class II devices and others, such as
our automated external defibrillators, have been classified as Class III
devices. All of these devices must secure either a 510(k) pre-market
notification clearance or an approved pre-market approval application before
they can be introduced into the U.S. market. The process of obtaining 510(k)
clearance typically takes several months and may involve the submission of
limited clinical data supporting assertions that the product is substantially
equivalent to another medical device on the market prior to 1976. The pre-market
approval process typically requires substantially more time than does 510(k)
clearance and requires the submission of significant quantities of clinical data
and supporting information. Delays in obtaining either 510(k), or if necessary,
pre-market approval clearance could have an adverse effect on the introduction
of future products. Moreover, approvals, if granted, may limit the uses for
which a product may be marketed, which could reduce or eliminate the commercial
benefit of manufacturing any such product.
We are also subject to regulation in each of the foreign countries in which we
sell products. Many of the regulations applicable to our products in such
countries are similar to those of the FDA. However, the national health or
social security organizations of certain countries require our products to be
qualified before they can be marketed in those countries. We cannot assure you
that such clearances will be obtained.
IF WE FAIL TO COMPLY WITH APPLICABLE REGULATORY LAWS AND REGULATIONS, THE FDA
COULD EXERCISE ANY OF ITS REGULATORY POWERS THAT COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS
Every company that manufactures or assembles medical devices is required to
register with the FDA and to adhere to certain good manufacturing practices,
which regulate the manufacture of medical devices and prescribe record keeping
procedures and provide for the routine inspection of facilities for compliance
with such regulations. The FDA also has broad regulatory powers in the areas of
clinical testing, marketing and advertising of medical devices. To ensure that
manufacturers adhere to good manufacturing practices, medical device
manufacturers are routinely subject to periodic inspections by the FDA. If the
FDA believes that a company may not be operating in compliance with applicable
laws and regulations, it could take any of the following actions:
* place the company under observation and reinspect the facilities;
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<PAGE> 13
* issue a warning letter apprising of violative conduct;
* detain or seize products;
* mandate a recall;
* enjoin future violations; and
* assess civil and criminal penalties against the company, its officers
or its employees.
We, like most of our U.S. competitors, have received warning letters from the
FDA in the past, and may receive warning letters in the future. We have always
complied with the warning letters we have received. However, our failure to
comply with FDA regulations could result in sanctions being imposed on us,
including restrictions on the marketing or recall of our products. These
sanctions could have a material adverse effect on our business.
WE ARE DEPENDENT UPON LICENSED AND PURCHASED TECHNOLOGY FOR UPGRADEABLE FEATURES
IN OUR PRODUCTS, AND WE MAY NOT BE ABLE TO RENEW THESE LICENSES OR PURCHASE
AGREEMENTS IN THE FUTURE
We license and purchase technology from third parties for upgradeable features
in our products, including 12 lead analysis program and pulse oximetry
technologies. We anticipate that we will need to license and purchase additional
technology to remain competitive. We may not be able to renew our existing
licenses and purchase agreements or to license and purchase other technologies
on commercially reasonable terms or at all. If we are unable to renew our
existing licenses and purchase agreements or we are unable to license or
purchase new technologies, we may not be able to offer competitive products.
FUTURE CHANGES IN APPLICABLE LAWS AND REGULATIONS COULD HAVE AN ADVERSE EFFECT
ON OUR BUSINESS
Although we are not aware of any pending changes in applicable laws and
regulations, we cannot assure you that federal, state or foreign governments
will not change existing laws or regulations or adopt new laws or regulations
that regulate our industry. Changes in or adoption of new laws or regulations
could result in the following consequences that would have an adverse effect on
our business:
* regulatory clearance previously received for our products could be
revoked;
* costs of compliance could increase; or
* we may be unable to comply with such laws and regulations so that we
would be unable to sell our products.
CHANGES IN THE HEALTH CARE INDUSTRY MAY REQUIRE US TO DECREASE THE SELLING PRICE
FOR OUR PRODUCTS OR COULD RESULT IN A REDUCTION IN THE SIZE OF THE MARKET FOR
OUR PRODUCTS, EACH OF WHICH COULD HAVE A NEGATIVE IMPACT ON OUR FINANCIAL
PERFORMANCE
Trends toward managed care, health care cost containment, and other changes in
government and private sector initiatives in the United States and other
countries in which we do business are placing increased emphasis on the delivery
of more cost-effective medical therapies which could adversely affect the sale
and/or the prices of our products. For example:
* major third-party payers of hospital services, including Medicare,
Medicaid and private health care insurers, have substantially revised
their payment methodologies during the last few years which has
resulted in stricter standards for reimbursement of hospital charges
for certain medical procedures;
* Medicare, Medicaid and private health care insurer cutbacks could
create downward price pressure in the cardiac resuscitation
pre-hospital market;
* proposals were adopted recently that will change the reimbursement
procedures for the capital expenditure portion of the cost of
providing care to Medicare patients;
* numerous legislative proposals have been considered that would result
in major reforms in the U.S. health care system that could have an
adverse effect on our business;
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<PAGE> 14
* there has been a consolidation among health care facilities and
purchasers of medical devices in the United States who prefer to limit
the number of suppliers from whom they purchase medical products, and
these entities may decide to stop purchasing our products or demand
discounts on our prices;
* there is economic pressure to contain health care costs in
international markets;
* there are proposed and existing laws and regulations in domestic and
international markets regulating pricing and profitability of
companies in the health care industry; and
* there have been recent initiatives by third party payers to challenge
the prices charged for medical products which could affect our ability
to sell products on a competitive basis.
Both the pressure to reduce prices for our products in response to these trends
and the decrease in the size of the market as a result of these trends could
adversely affect our levels of revenues and profitability of sales, which could
have a material adverse effect on our business.
UNCERTAIN CUSTOMER DECISION PROCESSES MAY RESULT IN LONG SALES CYCLES WHICH
COULD RESULT IN UNPREDICTABLE FLUCTUATIONS IN REVENUES AND DELAY THE REPLACEMENT
OF CARDIAC RESUSCITATION DEVICES
Many of the customers in the pre-hospital market consist of municipal fire and
emergency medical systems departments. As a result, there are numerous
decision-makers and governmental procedures in the decision-making process. In
addition, decisions at hospitals concerning the purchase of new medical devices
are sometimes made on a department-by-department basis. Accordingly, we believe
the purchasing decisions of many of our customers may be characterized by long
decision-making processes, which have resulted in and may continue to result in
long sales cycles for our products. For example, the sales cycles for cardiac
resuscitation products typically have been between six to nine months, although
some sales efforts have taken as long as two years.
OUR INTERNATIONAL SALES EXPOSE OUR BUSINESS TO A VARIETY OF RISKS THAT COULD
RESULT IN SIGNIFICANT FLUCTUATIONS IN OUR RESULTS OF OPERATIONS
Approximately 20% of our sales in fiscal 1999 were made to foreign purchasers,
particularly in countries located in Europe and Asia, and we plan to increase
the sale of our products to foreign purchasers in the future. As a result, a
significant portion of our sales is and will continue to be subject to the risks
of international business, including:
* fluctuations in foreign currencies;
* trade disputes;
* changes in regulatory requirements, tariffs and other barriers;
* the possibility of quotas, duties, taxes or other changes or
restrictions upon the importation or exportation of the products being
implemented by the United States or these foreign countries;
* timing and availability of import/export licenses;
* political and economic instability;
* difficulties in accounts receivable collections;
* difficulties in managing laws;
* increased tax exposure if our revenues in foreign countries are
subject to taxation by more than one jurisdiction;
* accepting customer purchase orders governed by foreign laws which may
differ significantly from U.S. laws and limit our ability to enforce
our rights under such agreements and to collect damages, if awarded;
and
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<PAGE> 15
* the general economies of these countries in which we transact
business.
As international sales become a larger portion of our total sales, these risks
could create significant fluctuations in our results of operations. In addition,
these risks could affect our ability to resell trade-in products to domestic
distributors, who in turn often resell the trade-in products in international
markets. Our inability to sell trade-in products might require us to offer lower
trade-in values, which might impact our ability to sell new products to
customers desiring to trade in older models and then purchase newer products.
FLUCTUATIONS IN CURRENCY EXCHANGE RATES MAY ADVERSELY AFFECT OUR INTERNATIONAL
SALES
Our revenue from international operations can be denominated in or significantly
influenced by the currency and general economic climate of the country in which
we make sales. A decrease in the value of such foreign currencies relative to
the U.S. dollar could result in downward price pressure for our products or
losses from currency exchange rate fluctuations. As we continue to expand our
international operations, downward price pressure and exposure to gains and
losses on foreign currency transactions may increase. We may choose to limit
such exposure by entering into forward-foreign exchange contracts or engaging in
similar hedging strategies. We cannot assure you that any currency exchange
strategy would be successful in avoiding losses due to exchange rate
fluctuations, or that the failure to manage currency risks effectively would not
have a material adverse effect on our business, financial condition, cash flows,
and results of operations.
WE MAY FAIL TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS OR
SECURE RIGHTS TO THIRD PARTY PATENTS, AND OUR COMPETITORS CAN USE SOME OF OUR
PREVIOUSLY PROPRIETARY TECHNOLOGY
Our success will depend in part on our ability to obtain and maintain patent
protection for our products, methods, processes and other technologies, to
preserve our trade secrets and to operate without infringing the proprietary
rights of third parties. To date, we have been issued 21 U.S. patents for our
various inventions and technologies. Additional patent applications have been
filed with the U.S. Patent and Trademark Office and are currently pending. The
patents that have been granted to us are for a definitive period of time and
will expire. We have filed certain corresponding foreign patent applications and
intend to file additional foreign and U.S. patent applications as appropriate.
We cannot assure you as to:
* the degree and range of protection any patents will afford against
competitors with similar products;
* if and when patents will be issued;
* whether or not others will obtain patents claiming aspects similar to
those covered by our patent applications;
* whether or not competitors will use information contained in our
expired patents, such as our U.S. pacing system patent which will
expire in 2000;
* whether or not others will design around our patents or obtain access
to our know-how; or
* the extent to which we will be successful in avoiding any patents
granted to others.
For example, we have patents and pending patent applications for our proprietary
biphasic technology. Our competitors could develop biphasic technology that has
comparable or superior clinical efficacy to our biphasic technology if our
patents do not adequately protect our technology, our competitors are able to
obtain patents claiming aspects similar to our biphasic technology or our
competitors can design around our patents.
If certain patents issued to others are upheld or if certain patent applications
filed by others issue and are upheld, we may be:
* required to obtain licenses or redesign our products or processes to
avoid infringement;
* prevented from practicing the subject matter claimed in those patents;
or
* required to pay damages.
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<PAGE> 16
Litigation or administrative proceedings, including interference proceedings
before the U.S. Patent and Trademark Office, related to intellectual property
rights could be brought against us or be initiated by us. Any judgment adverse
to us in any litigation or other proceeding arising in connection with a patent
or patent application could materially and adversely affect our business,
financial condition and results of operations. In addition, the costs of any
such proceeding may be substantial whether or not we are successful.
Our success is also dependent upon the skills, knowledge and experience, none of
which is patentable, of our scientific and technical personnel. To help protect
our rights, we require all employees, consultants and advisors to enter into
confidentiality agreements, which prohibit the disclosure of confidential
information to anyone outside of our company and require disclosure and
assignment to us of their ideas, developments, discoveries and inventions. We
cannot assure you, however, that these agreements will provide adequate
protection for our trade secrets, know-how or other proprietary information in
the event of any unauthorized use or disclosure of the lawful development by
others of such information.
RELIANCE ON OVERSEAS VENDORS FOR SOME OF THE COMPONENTS FOR OUR PRODUCTS EXPOSES
US TO INTERNATIONAL BUSINESS RISKS, WHICH COULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS
Some of the components we use in our products are acquired from foreign
manufacturers, particularly countries located in Europe and Asia. As a result, a
significant portion of our purchases of components is subject to the risks of
international business. The failure to obtain these components as a result of
any of these risks can result in significant delivery delays of our products,
which could have an adverse effect on our business.
WE RELY HEAVILY ON SEVERAL EMPLOYEES WHO MAY LEAVE, AND TIGHT LABOR MARKETS MAY
MAKE IT DIFFICULT TO RECRUIT EMPLOYEES
Our future operating results will depend in part upon the contributions of the
persons who will serve in senior management positions and the continued
contributions of key technical personnel, some of who would be difficult to
replace. In addition, our future success will depend in part upon our ability to
attract and retain highly qualified personnel, particularly product design
engineers. Increasingly tight labor markets could make it more difficult and/or
expensive to recruit and retain employees in a cost effective manner. There can
be no assurance that such key personnel will remain in our employment or that we
will be successful in hiring qualified personnel. Any loss of key personnel or
the inability to hire or retain qualified personnel could have a material
adverse effect on our business, financial condition and results of operations.
WE MAY ACQUIRE OTHER BUSINESSES, AND WE MAY HAVE DIFFICULTY INTEGRATING THESE
BUSINESSES OR GENERATING AN ACCEPTABLE RETURN FROM ACQUISITIONS
We may attempt to acquire or make strategic investments in businesses and other
assets. Such acquisitions will involve risks, including:
* the inability to achieve the strategic and operating goals of the
acquisition;
* the inability to raise the required capital to fund the acquisition;
* difficulty in assimilating the acquired operations and personnel;
* disruption of our ongoing business; and
* inability to successfully incorporate acquired technology into our
existing product lines and maintain uniform standards, controls,
procedures and policies.
PROVISIONS IN OUR CHARTER DOCUMENTS, OUR SHAREHOLDER RIGHTS AGREEMENT AND STATE
LAW MAY MAKE IT HARDER FOR OTHERS TO OBTAIN CONTROL OF ZOLL EVEN THOUGH SOME
STOCKHOLDERS MIGHT CONSIDER SUCH A DEVELOPMENT TO BE FAVORABLE
Our board of directors has the authority to issue up to 1,000,000 shares of
undesignated preferred stock and to determine the rights, preferences,
privileges and restrictions of such shares without further vote or action by our
stockholders. The rights of the holders of common stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. The issuance of
16
<PAGE> 17
preferred stock could have the effect of making it more difficult for third
parties to acquire a majority of our outstanding voting stock.
In addition, our restated articles of organization provide for staggered terms
for the members of the board of directors which could delay or impede the
removal of incumbent directors and could make a merger, tender offer or proxy
contest involving the Company more difficult. Our restated articles of
organization, restated by-laws and applicable Massachusetts law also impose
various procedural and other requirements that could delay or make a merger,
tender offer or proxy contest involving us more difficult.
In addition, we have implemented a so-called poison pill by adopting our
shareholders rights agreement. This poison pill significantly increases the
costs that would be incurred by an unwanted third party acquirer if such party
owns or announces its intent to commence a tender offer for more than 15% of our
outstanding common stock. The existence of this poison pill could delay, deter
or prevent a takeover of ZOLL.
All of these provisions could limit the price that investors might be willing to
pay in the future for shares of our common stock which could preclude our
shareholders from recognizing a premium over the prevailing market price of our
stock.
WE HAVE ONLY ONE MANUFACTURING FACILITY FOR EACH OF OUR MAJOR PRODUCTS AND ANY
DAMAGE OR INCAPACITATION OF EITHER OF THE FACILITIES COULD IMPEDE OUR ABILITY TO
PRODUCE THESE PRODUCTS
We have only one manufacturing facility, which produces defibrillators and one
separate manufacturing facility which produces electrodes. Damage to either
facility could render us unable to manufacture the relevant product or require
us to reduce the output of products at the damaged facility. This could
materially and adversely impact our business, financial condition and results of
operations.
OUR CURRENT AND FUTURE INVESTMENTS MAY LOSE VALUE IN THE FUTURE
We have made a $2.0 million investment in LifeCor, Inc., a development stage
company, and may in the future invest in the securities of other companies and
participate in joint venture agreements. This investment and future investments
are subject to the risks that the entities in which we invest will become
bankrupt or lose money. Investing in securities involves risks and no assurance
can be made as to the profitability of any investment. Our inability to identify
profitable investments could adversely affect our financial condition and
results of operations. Unless we hold a majority position in an investment or
joint venture, we will not be able to control all of the activities of the
companies in which we invest or the joint ventures in which we are
participating. Because of this, such entities may take actions against our
wishes and not in furtherance of, and even opposed to, our business plans and
objectives. These investments are also subject to the risk of impasse if no one
party exercises ultimate control over the business decisions.
WE MAY EXPERIENCE SHORT TERM OPERATING FLUCTUATIONS AS WE INTRODUCE OUR NEW
BIPHASIC TECHNOLOGY
While we believe our biphasic technology offers substantial opportunity for
future growth, there can be no guarantee that this will occur. In addition, in
the short term, an industry shift towards biphasic technology could cause a
lengthening of buying cycles, take additional sales time, and reduce the
salability of existing inventory and trade-in products. This risk related to a
shift towards biphasic technology could also be affected by uncertainty of the
governing bodies' recommendations of biphasic technology.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
17
<PAGE> 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the course of normal operations the Company is involved in
litigation arising from commercial disputes and claims of former
employees which management believes will not have a material
impact on the Company's financial position or its results of
operations.
Item 2. Changes in Securities.
In October 1999, a wholly owned subsidiary of the Company was
merged into Pinpoint Technologies, Inc. Pursuant to this merger,
the Company issued 433,000 shares of its common stock to the
stockholders of Pinpoint. The Company also issued 3,000 shares of
its common stock as consideration for non-competition agreements
entered into by certain officers of Pinpoint. The Company relied
upon the exemption from registration under Section 4 (2) of the
Securities Act.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security-Holders.
Not Applicable.
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<PAGE> 19
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Not Applicable.
(b) Reports on Form 8-K.
The registrant filed a Form 8-K on October 29, 1999 and
amended that report on December 29, 1999, January 18, 2000,
and January 28, 2000.
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<PAGE> 20
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 on May 16, 2000.
ZOLL MEDICAL CORPORATION
(Registrant)
Date: May 16, 2000 By: /s/ Richard A. Packer
------------------------------------------------
Richard A. Packer, Chairman and Chief Executive
Officer
(Principal Executive Officer)
Date: May 16, 2000 By: /s/ A. Ernest Whiton
------------------------------------------------
A. Ernest Whiton, Vice President of
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
20
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