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 March 31, 1997
Commission File Number 0-19943
PROTOCOL SYSTEMS, INC.
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(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
May 8, 1997:
8,849,143 shares, $.01 par value per share
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<PAGE>2
PROTOCOL SYSTEMS, INC.
Index to Form 10-Q
PART I FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
Condensed Consolidated Statements of
Operations for the three months ended
March 31, 1997 and 1996 3
Condensed Consolidated Balance Sheets
as of March 31, 1997 and December 31, 1996 4
Consolidated Statements of Cash Flows for
the three months ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial
Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-9
PART II OTHER INFORMATION
- --------------------------
Item 2. Changes in Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
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<TABLE>
PROTOCOL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Three months ended March 31,
1997 1996
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<S> <C> <C>
Sales $13,193 $16,239
Cost of sales 6,697 7,356
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Gross profit 6,496 8,883
Operating expenses:
Research and development expenses 2,021 2,255
Selling, general and administrative
expenses 4,628 4,748
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Total operating expenses 6,649 7,003
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Income from operations (153) 1,880
Other income 233 268
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Income before income taxes 80 2,148
Provision for income taxes 25 595
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Net Income $ 55 $ 1,553
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Net income per common and
common equivalent share $ 0.01 $ 0.17
======= =======
Weighted average number of common
and common equivalent shares
outstanding 9,202 9,369
See accompanying notes to condensed consolidated financial statements
</TABLE>
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<TABLE>
PROTOCOL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, December 31,
1997 1996
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,648 $ 6,903
Short-term investments 15,838 14,787
Accounts receivable - net 11,232 15,456
Inventories 13,993 12,416
Deferred taxes 1,341 1,320
Prepaid expenses and other 240 166
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Total current assets 50,292 51,048
Long-term investments 1,008 1,013
Property and equipment - net 4,729 4,478
Other assets 2,383 2,506
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$58,412 $59,045
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,574 $ 2,480
Accrued salaries, wages and related liabilities 2,047 2,514
Other accrued liabilities 271 739
Income taxes payable 252 405
Reserve for warranties 1,040 985
Deferred revenue and customer deposits 124 142
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Total current liabilities 6,308 7,265
Deferred taxes 427 471
Shareholders' equity:
Common Stock, $.01 par value. Authorized 30,000 shares;
issued and outstanding 8,801 at 1997 and 8,744 at 1996 88 87
Additional paid-in capital 34,760 34,363
Unrealized holding gain on investments 4 32
Retained earnings 16,776 16,721
Foreign currency translation adjustment 49 106
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Total shareholders' equity 51,677 51,309
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$58,412 $59,045
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See accompanying notes to condensed consolidated financial statements
</TABLE>
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<TABLE>
PROTOCOL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three months ended March 31,
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 55 $ 1,553
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 606 516
Loss on disposal of property and equipment 9 -
Amortization of bond premium 103 81
Provision for deferred taxes (50) (80)
Increase (decrease) in cash resulting from
changes in:
Accounts receivable 4,218 1,268
Inventories (1,585) (377)
Prepaid expenses and other assets (78) (179)
Accounts payable and accrued liabilities (215) 139
Income taxes payable (765) (273)
Reserve for warranties 55 17
Deferred revenue and customer deposits (18) (1)
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Net cash provided by operating activities 2,335 2,664
Cash flows from investing activities:
Purchase of investments (1,177) (2,624)
Proceeds from maturity of investments - 8,464
Acquisition of property and equipment (801) (642)
Expenditures for software development - (46)
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Net cash provided by (used in) investing activities (1,978) 5,152
Cash flows from financing activities:
Proceeds from exercise of stock options
and stock purchase plan 398 141
Net proceeds of long-term debt - 165
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Net cash provided by financing activities 398 306
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Effect of exchange rates on cash and cash equivalents (10) (4)
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Net increase in cash and cash equivalents 745 8,118
Cash and cash equivalents at beginning of period 6,903 3,974
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Cash and cash equivalents at end of period $ 7,648 $12,092
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Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ 52
Cash paid for income taxes $ 216 $ 916
See accompanying notes to condensed consolidated financial statements
</TABLE>
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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, 1996. 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.
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:
March 31, December 31,
(in thousands) 1997 1996
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Raw materials $ 6,162 $ 4,921
Work in process 2,646 2,307
Finished goods 3,475 3,396
Demonstration instruments 1,710 1,792
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Total inventories $13,993 $12,416
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PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and includes the following:
March 31, December 31,
(in thousands) 1997 1996
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Equipment $10,486 $10,180
Furniture and fixtures 1,679 1,419
Leasehold improvements 654 654
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12,819 12,253
Less accumulated depreciation and amortization 8,090 7,775
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Property and equipment - net $ 4,729 $ 4,478
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<PAGE>7
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 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
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." SFAS 128 establishes a different method of computing net income per
share than is currently required under the provisions of Accounting Principles
Board Opinion No. 15. Under SFAS No. 128, the Company will be required to
present both basic net income per share and diluted net income per share.
Basic net income per share is expected to be comparable or slightly higher
than the currently presented net income per share as the effect of dilutive
stock options will not be considered in computing basic net income per share.
Diluted net income per share is expected to be comparable or slightly lower
than the currently presented net income per share.
The Company plans to adopt SFAS 128 in its quarter ending December 31, 1997
and at that time all historical net income per share data presented
will be restated to conform to the provisions of SFAS No. 128.
<PAGE>8
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
The Company maintained its strong financial position as of March 31, 1997 with
working capital balances of $44.0 million and a current ratio of 8.0:1 as
compared to working capital of $43.8 million and a current ratio of 7.0:1 at
December 31, 1996. Cash flow from operating activities for the first three
months of 1997 was $2.3 million as compared to cash flow from operating
activities of $2.7 million for the first three months of 1996. 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.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis and other sections of this Quarterly
Report contain forward-looking statements within the meaning of the Securities
Litigation Reform Act of 1995 that are based on current expectations,
estimates and projections about the Company's business, management's beliefs
and assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and variations of such
words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results may differ materially from
what is expressed or forecasted in such forward-looking statements due to
numerous factors, including, but not limited to those discussed in this
Quarterly Report and from time to time in the Company's other Securities and
Exchange Commission filings and reports. In addition, such statements could
be affected by general industry and market conditions and growth rates, and
general domestic and international economic conditions.
RESULTS OF OPERATIONS
Sales. Sales for the first quarter of 1997 decreased 18.8% to $13.2 million
from $16.2 million for the first quarter of 1996. Instrument sales (including
the Propaq and Propaq Encore monitors and monitor options) decreased by $2.6
million or 23.1% from the prior year's first quarter. The decline in
instrument sales resulted from decreased unit sales of Propaq monitors and
monitor options, partially offset by an increase in the unit sales of Propaq
Encore monitors. In addition, sales of Pryon's original equipment
manufacturer ("OEM") CO2 monitoring products and related accessories decreased
$767,000 or 31.3% from the prior year's first quarter.
Domestic sales decreased 32.5% to $6.5 million (49.5% of total sales) in the
first quarter of 1997 from $9.7 million (59.7% of total sales) in the first
quarter of 1996. The Company attributes this decrease primarily to a
significant reduction in military shipments, which declined to $227,000 in the
first quarter of 1997 from $4.4 million in the first quarter of 1996.
International sales increased 27.9% to $4.9 million (37.2% of total sales) in
the first quarter of 1997 from $3.8 million (23.6% of total sales) in the
first quarter of 1996. This increase is primarily a result of the impact of
the large military shipments in the first quarter of 1996 which caused the
postponement of a portion of international sales to the second quarter of
1996, resulting in lower than usual international sales in the first quarter
of 1996.
<PAGE>9
OEM sales decreased to $1.7 million (13.3% of total sales) in the first
quarter of 1997 from $2.7 million (16.7% of total sales) in the prior year's
first quarter. The decrease in OEM sales was primarily the result of
decreased sales of Pryon's CO2 monitoring products due to reductions in orders
from certain of its OEM customers. The Company believes that Pryon's sales
will improve as Pryon introduces new products and as new OEM customers come
on-line later in the year.
Gross profit. As a percentage of sales, gross profit decreased to 49.2% in
the first quarter of 1997 from 54.7% in the first quarter of 1996. A decrease
of 2.1% in gross profit as a percentage of sales resulted from additional
warranty expense incurred as a result of the Company's voluntary decision to
replace a defective component in certain Propaq Encore monitors. Also
contributing to the decline in gross margin in the first quarter of 1997 from
the same quarter last year was the significant reduction in Pryon's gross
margin as a result of its lower manufacturing volumes.
Research and development. Research and development expenses decreased 10.4%
to $2.0 million in the first quarter of 1997 from $2.3 million in the first
quarter of 1996. The decrease in research and development expenses resulted
primarily from lower development and testing costs in the first quarter of
1997. In the first quarter of 1996 there were significant development and
testing costs for a new release of software introduced in March 1996 for the
Acuity system. As a percentage of sales, research and development expenses
increased to 15.3% in the first quarter of 1997 from 13.9% in the first
quarter of 1996.
Selling, general and administrative. Selling, general and administrative
expenses remained steady at $4.6 million in the first quarter of 1997 compared
to $4.7 million in the first quarter of 1996. As a percentage of sales,
selling, general and administrative expenses increased to 35.1% in the first
quarter of 1997 from 29.2% in the first quarter of 1996.
Other income. Other income decreased 12.7% to $233,000 in the first quarter
of 1997 from $268,000 in the first quarter of 1996 primarily as a result of a
decrease in interest income due to the use of available cash to reduce Pryon's
borrowings in the third quarter of 1996.
Provision for income taxes. The provision for income taxes decreased to
$25,000 in the first quarter of 1997 from $595,000 in the first quarter of
1996 representing effective tax rates of 31.3% and 27.7%, respectively. The
effective tax rate for the first quarter of 1996 was reduced by the tax
benefit of Pryon's utilization of net operating loss carryforwards.
<PAGE>10
PART II. OTHER INFORMATION
Item 2. Changes in Securities
During the quarter ended March 31, 1997, the Company sold securities without
registration under the Securities Act of 1933, as amended (the "Securities
Act") upon the exercise of certain stock options granted under the Company's
stock option plans. An aggregate of 6,667 shares of Common Stock were issued
at an exercise price of $1.32. These transactions were effected in reliance
upon the exemption from registration under the Securities Act provided by Rule
701 promulgated by the Securities and Exchange Commission pursuant to
authority granted under Section 3 (b) of the Securities Act.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the quarter
ended March 31, 1997.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: 27.1 Financial Data Schedule
(b) No reports were filed on Form 8-K during the quarter for which
this report is filed.
<PAGE>11
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: May 9, 1997 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 March 31, 1997 and
Condensed Consolidated Statement of Operations for the three months ended March
31, 1997 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 7,648
<SECURITIES> 16,846
<RECEIVABLES> 11,232<F1>
<ALLOWANCES> 255
<INVENTORY> 13,993
<CURRENT-ASSETS> 50,292
<PP&E> 12,819
<DEPRECIATION> 8,090
<TOTAL-ASSETS> 58,412
<CURRENT-LIABILITIES> 6,308
<BONDS> 0
0
0
<COMMON> 88
<OTHER-SE> 51,589
<TOTAL-LIABILITY-AND-EQUITY> 58,412
<SALES> 13,193
<TOTAL-REVENUES> 13,193
<CGS> 6,697
<TOTAL-COSTS> 6,697
<OTHER-EXPENSES> 6,649
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 80
<INCOME-TAX> 25
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<FN>
<F1>Net of allowance.
</FN>
</TABLE>
