UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarter ended September 30, 1996
Commission File Number 0-19943
PROTOCOL SYSTEMS, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oregon 93-0913130
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8500 SW Creekside Place, Beaverton, OR 97008
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(Address of principal executive offices) (Zip Code)
(503) 526-8500
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(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.
[X] Yes [ ] No
Number of shares of common stock outstanding as of
November 12, 1996:
8,707,527 shares, $.01 par value per share
------------------------------------------
<PAGE>2
PROTOCOL SYSTEMS, INC.
Index to Form 10-Q
PART I FINANCIAL INFORMATION Page No.
- ----------------------------- --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of
Operations for the three months and nine months
ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
PART II OTHER INFORMATION
- --------------------------
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
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<PAGE>3
<TABLE>
PROTOCOL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
September 30, December 31,
1996 1995
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,897 $ 3,974
Short-term investments 11,970 8,225
Accounts receivable - net 13,170 15,427
Inventories 12,239 9,866
Deferred taxes 1,344 1,249
Prepaid expenses and other 188 289
------- -------
Total current assets 45,808 39,030
Long-term investments 5,139 12,068
Property and equipment - net 4,337 3,848
Other assets 2,366 2,274
------- -------
$57,650 $57,220
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,433 $ 2,669
Accrued salaries, wages and related liabilities 2,396 2,282
Other accrued liabilities 703 696
Income taxes payable 318 1,246
Reserve for warranties 1,040 1,053
Deferred revenue and customer deposits 153 140
Current portion, long-term debt 13 100
------- -------
Total current liabilities 8,056 8,186
Long-term debt - 1,795
Deferred taxes 439 446
Shareholders' equity:
Common Stock, $.01 par value. Authorized 30,000 shares;
issued and outstanding 8,694 at 1996 and 8,612 at 1995 87 86
Additional paid-in capital 34,211 34,052
Unrealized holding gain on investments 6 46
Retained earnings 14,876 12,643
Foreign currency translation adjustment (25) (34)
------- -------
Total shareholders' equity 49,155 46,793
------- -------
$57,650 $57,220
======= =======
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>4
<TABLE>
PROTOCOL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Three months ended Sept. 30, Nine months ended Sept. 30,
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales $16,193 $15,222 $49,529 $41,509
Cost of sales 7,239 7,362 22,001 19,672
------- ------- ------- -------
Gross profit 8,954 7,860 27,528 21,837
Operating expenses:
Research and development expenses 2,235 1,848 6,726 5,875
Selling, general and administrative
expenses 5,073 4,569 15,312 13,086
Acquisition related charges 2,097 - 2,097 -
Litigation settlement charges 275 - 275 -
------- ------- ------- -------
Total operating expenses 9,680 6,417 24,410 18,961
------- ------- ------- -------
Income from operations (726) 1,443 3,118 2,876
Other income 257 239 761 683
------- ------- ------- -------
Income before income taxes (469) 1,682 3,879 3,559
Provision for income taxes 441 430 1,646 829
------- ------- ------- -------
Net Income ($ 910) $ 1,252 $ 2,233 $ 2,730
======= ======= ======= =======
Net income per common and
common equivalent share ($ 0.10) $ 0.14 $ 0.24 $ 0.31
======= ======= ======= =======
Weighted average number of common
and common equivalent shares
outstanding 9,433 9,092 9,410 8,779
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>5
<TABLE>
PROTOCOL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months ended September 30,
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,233 $ 2,730
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,595 1,371
Amortization of bond premium 293 156
Provision for deferred taxes (147) (172)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 2,263 (818)
Increase in inventories (2,371) (1,826)
Decrease in prepaid expenses and other assets 124 192
Increase (decrease) in accounts payable and accrued liabilities 1,009 (348)
Increase (decrease) in income taxes payable (929) 37
Increase (decrease) in reserve for warranties (12) 16
Increase (decrease) in deferred revenue and customer deposits 9 (67)
------- -------
Net cash provided by operating activities 4,067 1,271
Cash flows from investing activities:
Purchase of investments (9,674) (16,512)
Proceeds from maturity of investments 12,534 14,521
Acquisition of property and equipment (1,915) (1,844)
Acquisition of intangible assets (200) -
Investment in subsidiary - (237)
Expenditures for software development (80) (20)
------- -------
Net cash provided by (used in) investing activities 665 (4,092)
Cash flows from financing activities:
Proceeds from exercise of stock options and stock purchase plan 1,111 780
Repurchase of common stock (1,042) -
Payments of long-term debt (1,882) -
Proceeds from issuance of long-term debt - 284
------- -------
Net cash provided by (used in) financing activities (1,813) 1,064
------- -------
Effect of exchange rates on cash and cash equivalents 4 (3)
------- -------
Net increase (decrease) in cash and cash equivalents 2,923 (1,760)
Cash and cash equivalents at beginning of period 3,974 5,996
------- -------
Cash and cash equivalents at end of period $ 6,897 $ 4,236
======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 119 $ 141
Cash paid for income taxes $ 2,323 $ 791
Supplemental schedule of noncash transactions:
Increase in investment in Protocol Medical Systems Ltd.
due to release of compensatory shares of common
stock from escrow $ 91 $ -
Fair value of net assets of subsidiary, consisting primarily of
intangible technology assets, acquired by issuance of common
stock and liabilities incurred $ - $ 754
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>6
PROTOCOL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by the Company without audit and in conformity with generally
accepted accounting principles for interim financial information.
Accordingly, certain financial information and footnotes have been omitted or
condensed. In the opinion of management, the condensed consolidated financial
statements include all necessary adjustments (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. These financial statements should be read in conjunction
with the Company's audited consolidated financial statements for the year
ended December 31, 1995. The results of operations for the interim period
shown in this report are not necessarily indicative of results for any future
interim period or the entire fiscal year.
ACQUISITION OF SUBSIDIARY
On July 10, 1996 the Company completed the acquisition of Pryon Corporation
("Pryon") pursuant to a merger accounted for as a pooling of interests. As a
result of the merger Pryon became a wholly-owned subsidiary of the Company.
In accordance with the terms of the merger, 1,211,100 shares of Protocol
common stock were exchanged for all of the outstanding capital stock of Pryon.
In addition, the Company issued options to purchase 121,385 shares of the
Company's common stock in replacement of options to purchase Pryon common
stock outstanding immediately prior to the consummation of the merger. These
options vest and become exercisable in accordance with the terms of the
original Pryon stock options. The Company's condensed consolidated financial
statements for the periods prior to the acquisition have been restated to
include the results of operations, financial position and cash flows of Pryon.
The Company incurred $2.1 million of expenses in connection with the
acquisition of Pryon. The costs of the acquisition consisted primarily of
investment banking, legal and accounting fees.
<PAGE>7
Separate results of operations of the Company and Pryon for the periods prior
to the acquisition are as follows:
(in thousands) (unaudited)
- ------------------------------------------------------------------------------
Six months Year ended
ended June 30, December 31,
1996 1995
------ ------
Sales:
Protocol $28,806 $49,067
Pryon 6,253 12,276
Eliminations (1,723) (1,741)
------- -------
Combined $33,336 $59,602
Net Income:
Protocol $2,771 $4,678
Pryon 501 818
Eliminations (128) (98)
------ ------
Combined $3,144 $5,398
- ------------------------------------------------------------------------------
INVENTORIES
Inventories are valued at the lower of cost or market with cost determined on
the first-in, first-out basis (FIFO). The components of inventories are as
follows:
September 30, December 31,
(in thousands) 1996 1995
- -------------------------------------------------------------------------
Raw materials $ 4,857 $4,096
Work in process 2,618 3,001
Finished goods 2,578 1,013
Demonstration instruments 2,186 1,756
------- ------
Total inventories $12,239 $9,866
======= ======
<PAGE>8
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and includes the following:
September 30, December 31,
(in thousands) 1996 1995
- -------------------------------------------------------------------------
Equipment $9,837 $8,150
Furniture and fixtures 1,173 1,035
Leasehold improvements 650 625
------ ------
11,660 9,810
Less accumulated depreciation and amortization 7,323 5,962
------ ------
Property and equipment - net $4,337 $3,848
====== ======
INCOME TAXES
The provision for income taxes has been recorded based on the current estimate
of the Company's annual effective tax rate. This rate differs from the
Federal statutory rate primarily because of non-deductible expenses related to
the acquisition of Pryon, the benefit of net operating loss carryforwards, the
provision for state income taxes, the benefit of the Company's foreign sales
corporation, the utilization of research and experimentation tax credits and
tax-exempt interest income earned on investments. See Management's Discussion
and Analysis of Financial Condition and Results of Operations for further
discussion of income taxes.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is computed using the
weighted average number of common and dilutive common equivalent shares
assumed to be outstanding during the period. Common equivalent shares consist
of options to purchase common stock.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1996 the Company adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting
for Stock Based Compensation." This statement defines a fair value based
method of accounting for employee stock options or similar equity instruments.
However, this statement allows an entity to continue to measure compensation
costs related to such equity instruments in accordance with the intrinsic
value based method of accounting prescribed by APB Opinion No. 25. Entities
which elect to continue to apply the provisions of APB Opinion No. 25 are
required to make pro-forma disclosures of net income and earnings per share
annually as calculated using the fair value based method of accounting
prescribed by SFAS No. 123. The Company has elected to continue to account
for stock based compensation in accordance with APB Opinion No. 25.
Therefore, implementation of this statement has not had a material effect on
the Company's financial position or results of operations.
<PAGE>9
On January 1, 1996 the Company adopted the Financial Accounting Standards
Board's SFAS No. 121 "Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets to be Disposed Of." This statement specifies when long-
lived assets should be reviewed for impairment, how to determine if such an
asset is impaired and how to measure an impairment loss. This statement also
requires that long-lived assets held for disposal be valued at the lower of
carrying amount or fair value less the cost to sell the asset, except for
assets that constitute part of a discontinued operation. Implementation of
this statement has not had a material effect on the Company's financial
position or results of operations.
<PAGE>10
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
The Company maintained its strong financial position as of September 30, 1996
with working capital balances of $37.8 million and a current ratio of 5.6:1 as
compared to working capital of $30.8 million and a current ratio of 4.8:1 at
December 31, 1995. Cash flow from operating activities for the first nine
months of 1996 was $4.1 million as compared to cash flow from operating
activities of $1.3 million for the first nine months of 1995. Management
believes that current cash and investment balances and future cash flows from
operations will be sufficient to meet the Company's liquidity and capital
needs for the foreseeable future.
ACQUISITION OF SUBSIDIARY
On July 10, 1996 the Company completed the acquisition of Pryon Corporation
("Pryon") pursuant to a merger accounted for as a pooling of interests.
Further discussion of this transaction is included in the footnotes to the
accompanying condensed consolidated financial statements. All figures
presented for the periods prior to the acquisition have been restated to
include the results of operations, financial position and cash flows of Pryon.
RESULTS OF OPERATIONS
Third Quarter 1996 vs. Third Quarter 1995
- -----------------------------------------
Sales. Sales for the third quarter of 1996 increased 6.4% to $16.2 million
from $15.2 million for the third quarter of 1995. Instrument sales (including
Propaq and Propaq Encore monitors and monitor options) increased by $1.7
million or 16.9% from the prior year's third quarter. The growth in
instrument sales resulted primarily from increased unit sales of monitors and
monitor options. Sales of Pryon's original equipment manufacturer ("OEM") CO2
monitoring products and related accessories decreased $896,000 or 36.2% from
the prior year's third quarter, primarily as the result of a reduction in
sales to two of Pryon's largest customers.
Domestic sales increased 15.1% to $9.2 million (56.8% of total sales) in the
third quarter of 1996 from $8.0 million (52.5% of total sales) in the third
quarter of 1995. The Company attributes its continuing strong domestic sales
growth to increased customer preference for its Flexible Monitoring (TM)
solutions which maximize patient monitor utilization while reducing monitoring
costs.
International sales increased 28.6% to $5.3 million (32.5% of total sales) in
the third quarter of 1996 from $4.1 million (26.8% of total sales) in the
third quarter of 1995. Increased sales to NEC, the Company's exclusive
distributor in Japan, contributed significantly to the increase in
international sales.
<PAGE>11
OEM sales decreased to $1.7 million (10.7% of total sales) in the third
quarter of 1996 from $3.1 million (20.7% of total sales) in the prior year's
third quarter. The decrease in OEM sales was primarily the result of an
$896,000 decrease in sales of Pryon's CO2 monitoring products. Pryon has
received four new OEM contracts for its CO2 monitoring technology since
signing the Protocol merger agreement in February 1996; however, these
contracts are not expected to contribute additional revenues to the Company
until 1998. Decreased sales of GenESA devices to Gensia, Inc., also
contributed to the decrease in OEM sales. Production of the GenESA device for
the European market began in early 1995. Production of the device for the
domestic market must await market clearance by the FDA.
Gross profit. As a percentage of sales, gross profit increased to 55.3% in
the third quarter of 1996 from 51.6% in the third quarter of 1995. The
increase in gross profit as a percentage of sales resulted primarily from
manufacturing efficiencies realized as a result of increased Propaq Encore
monitor production and sales levels.
Research and development. Research and development expenses increased 20.9%
to $2.2 million in the third quarter of 1996 from $1.8 million in the third
quarter of 1995. The increase in research and development expenses resulted
primarily from rising payroll and related costs resulting from headcount
increases to support product development efforts. As a percentage of sales,
research and development expenses increased to 13.8% in the third quarter of
1996 from 12.1% in the third quarter of 1995.
Selling, general and administrative. Selling, general and administrative
expenses increased 11.0% to $5.1 million in the third quarter of 1996 from
$4.6 million in the third quarter of 1995. Rising payroll and related costs
resulting from headcount increases in marketing and administrative personnel
was the primary cause of the increase in expenses. Increased costs of
consumable accessories for marketing demonstration equipment also contributed
to the increase in expenses. As a percentage of sales, selling, general and
administrative expenses increased to 31.3% in the third quarter of 1996 from
30.0% in the third quarter of 1995.
Acquisition related charges and litigation settlement charges. The Company
incurred charges of $2.1 million in the third quarter of 1996 in connection
with the Company's acquisition of Pryon. The costs of the acquisition
consisted primarily of investment banking, legal and accounting fees. The
acquisition of Pryon was completed on July 10, 1996. The Company incurred
charges of $275,000 in the quarter related to the settlement of litigation
regarding the 1991 termination of the Company's former Canadian distributor.
Other income. Other income increased 7.6% to $257,000 in the third quarter of
1996 from $239,000 in the third quarter of 1995 primarily as a result of a
decrease in interest expense due to the use of available cash to reduce
Pryon's borrowings.
Provision for income taxes. The provision for income taxes increased to
$441,000 in the third quarter of 1996 from $430,000 in the third quarter of
1995. The Company incurred income tax expense in the third quarter of 1996
despite a pre-tax loss due to the non-deductibility of expenses related to the
acquisition of Pryon incurred during the quarter. Excluding the effect of
non-deductible acquisition related charges from pre-tax income, the effective
tax rate increased to 27.1% in the third quarter of 1996 from 25.6% in the
third quarter of 1995
<PAGE>12
Nine Months Ended September 30, 1996 vs. Nine Months Ended September 30, 1995
- -----------------------------------------------------------------------------
Sales. Sales for the first nine months of 1996 increased 19.3% to $49.5
million from $41.5 million for the first nine months of 1995. Instrument
sales (including Propaq and Propaq Encore monitors and monitor options)
increased by $9.3 million or 35.2% from the prior year's first nine months.
The growth in instrument sales resulted primarily from increased unit sales of
monitors and monitor options. Sales of Pryon's original equipment
manufacturer ("OEM") CO2 monitoring products and related accessories decreased
$1.7 million or 21.9% from the prior year's first nine months, primarily as
the result of a reduction in sales to two of Pryon's largest customers.
Domestic sales increased 43.9% to $29.2 million (59.0% of total sales) in the
first nine months of 1996 from $20.3 million (48.9% of total sales) in the
first nine months of 1995. The Company attributes its continuing strong
domestic growth to increased customer preference for its Flexible Monitoring
(TM) solutions which maximize patient monitor utilization while reducing
monitoring costs and to increased sales to the U.S. Department of Defense in
the first nine months of 1996.
International sales increased 15.7% to $13.1 million (26.5% of total sales) in
the first nine months of 1996 from $11.3 million (27.3% of total sales) in the
first nine months of 1995. An increase in sales to NEC, the Company's
exclusive distributor in Japan, contributed significantly to the increase in
international sales.
OEM sales decreased to $7.2 million (14.5% of total sales) in the first nine
months of 1996 from $9.9 million (23.7% of total sales) in the prior year's
first nine months. The decrease in OEM sales was primarily the result of a
$1.7 million decrease in sales of Pryon's CO2 monitoring products. Pryon has
received four new OEM contracts for its CO2 monitoring technology since
signing the Protocol merger agreement in February 1996; however, these
contracts are not expected to contribute additional revenues to the Company
until 1998. Decreased sales of GenESA devices to Gensia, Inc., also
contributed to the decrease in OEM sales. Production of the GenESA device for
the European market began in early 1995. Production of the device for the
domestic market must await market clearance by the FDA.
Gross profit. As a percentage of sales, gross profit increased to 55.6% in
the first nine months of 1996 from 52.6% in the first nine months of 1995.
The increase in gross profit as a percentage of sales resulted primarily from
manufacturing efficiencies realized as a result of increased Propaq Encore
monitor production and sales levels, partially offset by the effect of price
discounting on orders shipped to the U.S. Department of Defense in the first
nine months of 1996.
Research and development. Research and development expenses increased 14.5%
to $6.7 million in the first nine months of 1996 from $5.9 million in the
first nine months of 1995. The increase in research and development expenses
resulted primarily from rising payroll and related costs resulting from
headcount increases to support product development efforts. As a percentage
of sales, research and development expenses decreased to 13.6% in the first
nine months of 1996 from 14.2% in the first nine months of 1995.
<PAGE>13
Selling, general and administrative. Selling, general and administrative
expenses increased 17.0% to $15.3 million in the first nine months of 1996
from $13.1 million in the first nine months of 1995. Rising payroll and
related costs resulting from headcount increases in marketing and
administrative personnel was the primary cause of the increase in expenses.
As a percentage of sales, selling, general and administrative expenses
decreased to 30.9% in the first nine months of 1996 from 31.5% in the first
nine months of 1995.
Acquisition related charges and litigation settlement charges. The Company
incurred charges of $2.1 million in the third quarter of 1996 in connection
with the Company's acquisition of Pryon. The costs of the acquisition
consisted primarily of investment banking, legal and accounting fees. The
acquisition of Pryon was completed on July 10, 1996. The Company incurred
charges of $275,000 in the third quarter of 1996 related to the settlement of
litigation regarding the 1991 termination of the Company's former Canadian
distributor.
Other income. Other income increased 11.4% to $761,000 in the first nine
months of 1996 from $683,000 in the first nine months of 1995 primarily due to
increased interest income resulting from higher invested balances.
Provision for income taxes. The provision for income taxes increased to $1.6
million in the first nine months of 1996 from $829,000 in the first nine
months of 1995 representing effective tax rates of 42.4% and 23.3%,
respectively. The increase in the effective tax rate resulted primarily from
expenses of the acquisition of Pryon which reduced pre-tax income in 1996
but which were not deductible for purposes of calculating the Company's
income tax expense. Excluding the effect of non-deductible acquisition
related charges from pre-tax income, the effective tax rate increased to
27.5% in the first nine months of 1996 from 23.3% in first nine months
of 1995.
<PAGE>14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders of the Company was held on July 10, 1996
and reconvened on July 31, 1996 and August 7, 1996 at which the following
actions were taken by a vote of the shareholders:
(1) The following persons were elected to the Board of Directors for
three-year terms expiring in 1999 by the votes indicated below:
Steven E. Wynne: 6,386,166 votes for; 13,188 votes withheld
David F. Bolender: 6,386,566 votes for; 12,788 votes withheld
(2) The proposal to issue shares of the Company's common stock in
connection with the Agreement and Plan of Merger among the
Company, Pryon and Protocol Merger Corporation was approved by a
vote of 4,350,687 to 123,100 (with 44,202 abstentions).
(3) The Amendment to the Protocol Systems, Inc. 1992 Stock Incentive
Plan was approved by a vote of 3,760,580 to 1,332,900 (with
38,424 abstentions).
(4) The Amendment to the Protocol Systems, Inc. 1993 Stock Option
Plan for Nonemployee Directors was approved by a vote of
3,492,194 to 972,340 (with 99,104 abstentions).
(5) The appointment of KPMG Peat Marwick LLP to serve as the
Company's independent auditors for the year ending December 31,
1996 was ratified by a vote of 6,314,901 to 9,130 (with 75,323
abstentions).
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: 27.1 Financial Data Schedule
(b) During the third quarter of 1996, the Company filed a Current
Report on Form 8-K dated July 10, 1996 to report under Item 2
the acquisition of Pryon Corporation effective as of July 10,
1996.
<PAGE>15
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.
PROTOCOL SYSTEMS, INC.
(Registrant)
Date: November 13, 1996 By /s/ James B. Moon
---------------------
James B. Moon
President and
Chief Executive Officer
By /s/ Craig M. Swanson
---------------------
Craig M. Swanson
Vice-President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Protocol
Systems, Inc.'s Condensed Consolidated Balance Sheet as of September 30, 1996
and Condensed Consolidated Statement of Operations for the nine months ended
September 30, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000883322
<NAME> PROTOCOL SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,897
<SECURITIES> 17,109
<RECEIVABLES> 13,170<F1>
<ALLOWANCES> 0
<INVENTORY> 12,239
<CURRENT-ASSETS> 45,808
<PP&E> 11,660
<DEPRECIATION> 7,323
<TOTAL-ASSETS> 57,650
<CURRENT-LIABILITIES> 8,056
<BONDS> 0
0
0
<COMMON> 87
<OTHER-SE> 49,068
<TOTAL-LIABILITY-AND-EQUITY> 57,650
<SALES> 49,529
<TOTAL-REVENUES> 49,529
<CGS> 22,001
<TOTAL-COSTS> 22,001
<OTHER-EXPENSES> 23,649
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,559
<INCOME-TAX> 1,646
<INCOME-CONTINUING> 2,233
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,233
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
<FN>
<F1>net of allowance
</FN>
</TABLE>
