.
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 June 30, 1997
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
August 8, 1997
8,903,742 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 Statements of
Operations for the three months and six months
ended June 30, 1997 and 1996 3
Condensed Consolidated Balance Sheets
as of June 30, 1997 and December 31, 1996 4
Consolidated Statements of Cash Flows for
the six months ended June 30, 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 8-11
PART II OTHER INFORMATION
- --------------------------
Item 2. Changes in Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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<PAGE>3
<TABLE>
PROTOCOL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Three months ended June 30, Six months ended June 30,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $16,110 $17,097 $29,303 $33,336
Cost of sales 8,033 7,406 14,730 14,762
------- ------- ------- -------
Gross profit 8,077 9,691 14,573 18,574
Operating expenses:
Research and development
expenses 2,143 2,237 4,164 4,492
Selling, general and
administrative expenses 5,238 5,490 9,866 10,238
------- ------- ------- -------
Total operating expenses 7,381 7,727 14,030 14,730
------- ------- ------- -------
Income from operations 696 1,964 543 3,844
Other income 279 237 512 505
------- ------- ------- -------
Income before income taxes 975 2,201 1,055 4,349
Provision for income taxes 281 610 306 1,205
------- ------- ------- -------
Net Income $ 694 $ 1,591 $ 749 $ 3,144
======= ======= ======= =======
Net income per common
and common equivalent
share $ 0.08 $ 0.17 $ 0.08 $ 0.33
======= ======= ======= =======
Weighted average number
of common and common
equivalent shares
outstanding 9,103 9,537 9,148 9,504
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>4
<TABLE>
PROTOCOL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
June 30, December 31,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,438 $ 6,903
Short-term investments 11,751 14,787
Accounts receivable - net 13,945 15,456
Inventories 12,811 12,416
Deferred taxes 1,341 1,320
Prepaid expenses and other 207 166
------- -------
Total current assets 47,493 51,048
Long-term investments 4,774 1,013
Property and equipment - net 4,578 4,478
Other assets 2,370 2,506
------- -------
$59,215 $59,045
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,447 $ 2,480
Accrued salaries, wages and related
liabilities 1,902 2,514
Other accrued liabilities 343 739
Income taxes payable 460 405
Reserve for warranties 1,027 985
Deferred revenue and customer deposits 115 142
------- -------
Total current liabilities 6,294 7,265
------- -------
Deferred taxes 443 471
Shareholders' equity:
Common Stock, $.01 par value. Authorized 30,000
shares; issued and outstanding 8,851 at 1997 and
and 8,744 at 1996 89 87
Additional paid-in capital 34,830 34,363
Unrealized holding gain on investments 16 32
Retained earnings 17,470 16,721
Foreign currency translation adjustment 73 106
------- -------
Total shareholders' equity 52,478 51,309
------- -------
$59,215 $59,045
======= =======
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>5
<TABLE>
PROTOCOL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six months ended June 30,
1997 1996
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 749 $ 3,144
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,211 1,044
Amortization of bond premium 201 185
Provision for deferred taxes (38) (241)
Increase (decrease) in cash resulting from
changes in:
Accounts receivable 1,510 1,497
Inventories (401) (1,678)
Prepaid expenses and other assets (46) (447)
Accounts payable and accrued liabilities (1,039) 244
Income taxes payable 55 (696)
Reserve for warranties 42 27
Deferred revenue and customer deposits (27) (4)
------- -------
Net cash provided by operating activities 2,217 3,075
Cash flows from investing activities:
Purchase of investments (9,943) (4,644)
Proceeds from maturity of investments 9,002 8,464
Acquisition of property and equipment (1,199) (1,233)
Acquisition of intangible assets (10) -
Expenditures for software development - (80)
------- -------
Net cash provided by (used in) investing activities (2,150) 2,507
Cash flows from financing activities:
Proceeds from exercise of stock options
and stock purchase plans and related tax benefits 469 526
Net proceeds of long-term debt - 87
------- -------
Net cash provided by financing activities 469 613
------- -------
Effect of exchange rates on cash and cash equivalents (1) -
------- -------
Net increase in cash and cash equivalents 535 6,195
Cash and cash equivalents at beginning of period 6,903 3,974
------- -------
Cash and cash equivalents at end of period $ 7,438 $10,169
======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ 118
Cash paid for income taxes $ 259 $ 1,763
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, 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:
June 30, December 31,
(in thousands) 1997 1996
- -------------------------------------------------------------------------
Raw materials $ 4,994 $ 4,921
Work in process 2,541 2,307
Finished goods 3,458 3,396
Demonstration instruments 1,818 1,792
------- ------
Total inventories $12,811 $12,416
======= ======
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and includes the following:
June 30, December 31,
(in thousands) 1997 1996
- -------------------------------------------------------------------------
Equipment $10,932 $10,180
Furniture and fixtures 1,698 1,419
Leasehold improvements 656 654
------ ------
13,286 12,253
Less accumulated depreciation and amortization 8,708 7,775
------ ------
Property and equipment - net $ 4,578 $ 4,478
====== ======
<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 to 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 June 30, 1997 with
working capital balances of $41.2 million and a current ratio of 7.5:1 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 six
months of 1997 was $2.2 million as compared to cash flow from operating
activities of $3.1 million for the first six 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
Second Quarter 1997 vs. Second Quarter 1996
- -------------------------------------------
Sales. Sales for the second quarter of 1997 decreased 5.8% to $16.1 million
from $17.1 million for the second quarter of 1996. Instrument sales
(including the Propaq and Propaq Encore monitors and monitor options)
decreased by $1.4 million or 11.7% from the prior year's second quarter. The
decline in instrument sales resulted from decreased average selling prices due
to higher discounts as well as a slight decrease in overall unit sales.
Although overall unit sales of instruments decreased, unit sales of the Propaq
Encore monitor increased from the prior year's second quarter. Increased
sales of Acuity systems, accessories, service and the introduction of the
QuikSigns spot-check monitor also partially offset the decline in instrument
sales.
Domestic sales decreased 11.7% to $9.1 million (56.7% of total sales) in the
second quarter of 1997 from $10.3 million (60.5% of total sales) in the second
quarter of 1996. The Company attributes this decrease to a significant
reduction in military shipments, which declined to $1.2 million in the second
quarter of 1997 from $1.9 million in the second quarter of 1996. In addition,
second quarter 1996 domestic revenues were also unusually high due primarily
to a large order backlog from the first quarter of 1996 when the Company
shipped $4.4 million in military orders.
<PAGE>9
International sales increased 14.4% to $4.6 million (28.6% of total sales) in
the second quarter of 1997 from $4.0 million (23.6% of total sales) in the
second quarter of 1996. The increase in international sales was driven by
strong sales in the European market. This growth was offset by decreased
sales to NEC, the Company's exclusive distributor in Japan.
Original equipment manufacturer ('OEM') sales decreased to $2.4 million (14.7%
of total sales) in the second quarter of 1997 from $2.7 million (15.9% of
total sales) in the prior year's second quarter. The decrease in OEM sales
was primarily the result of a $608,000 decrease in sales of GenESA devices to
Gensia, Inc. Gensia began shipments of the GenESA System to Europe in early
1995. Gensia continues to await Food and Drug Administration (FDA) market
clearance for the GenESA System in the United States. The decrease in GenESA
device sales was partially offset by an increase in sales of Pryon's CO2
monitoring products in the second quarter of 1997.
Gross profit. As a percentage of sales, gross profit decreased to 50.1% in
the second quarter of 1997 from 56.7% in the second quarter of 1996. The
decrease in gross profit as a percentage of sales was partially due to higher
sales discounts, including discounts related to sales of refurbished
instruments and an enterprise-wide upgrade of Massachusetts General Hospital's
monitoring systems. As a co-developer of the Company's Acuity central
monitoring system, Massachusetts General Hospital has the right to purchase
certain monitoring equipment for a small markup over cost. This right expires
in October 1997. Gross profit was also negatively impacted by an increase in
the percentage of international sales which have lower average selling prices
and an increase in the percentage of sales of lower margin products including
service and accessories.
Research and development. Research and development expenses remained steady
at $2.1 million in the second quarter of 1997 compared to $2.2 million in the
second quarter of 1996. As a percentage of sales, research and development
expenses increased to 13.3% in the second quarter of 1997 from 13.1% in the
second quarter of 1996.
Selling, general and administrative. Selling, general and administrative
expenses decreased 4.6% to $5.2 million in the second quarter of 1997 compared
to $5.5 million in the second quarter of 1996 primarily due to lower payroll
and related expenses resulting from a decreased headcount and reduced
incentive compensation. As a percentage of sales, selling, general and
administrative expenses increased to 32.5% in the second quarter of 1997 from
32.1% in the second quarter of 1996.
Other income. Other income increased 17.6% to $279,000 in the second quarter
of 1997 from $237,000 in the second quarter of 1996 primarily as a result of
an increase in interest income due to higher short and long-term investment
balances in the second quarter of 1997.
Provision for income taxes. The provision for income taxes decreased to
$281,000 in the second quarter of 1997 from $610,000 in the second quarter of
1996 representing effective tax rates of 28.8% and 27.7%, respectively. The
lower effective tax rate for the second quarter of 1996 was primarily due to
the expected tax benefit of utilization of Pryon's net operating loss
carryforwards.
<PAGE>10
Six Months Ended June 30, 1997 vs. Six Months Ended June 30, 1996
- -----------------------------------------------------------------
Sales. Sales for the first six months of 1997 decreased 12.1% to $29.3
million from $33.3 million for the first six months of 1996. Instrument sales
(including the Propaq and Propaq Encore monitors and monitor options)
decreased by $4.0 million or 17.1% from the first six months of the prior
year. The decline in these instrument sales resulted from decreased average
selling prices due to higher sales discounts as well as a decrease in overall
unit sales. Although overall unit sales of instruments decreased, unit sales
of the Propaq Encore monitor increased from the first six months of the prior
year. Sales of OEM products decreased $1.3 million or 24.4% from the first
six months of the prior year due to decreased sales of GenESA devices and
Pryon's CO2 monitoring products. These sales reductions were partially offset
by increased sales of Acuity systems, accessories, service and the
introduction of the QuikSigns spot-check monitor in the first six months of
1997.
Domestic sales decreased 21.8% to $15.7 million (53.5% of total sales) in the
first six months of 1997 from $20.0 million (60.1% of total sales) in the
first six months of 1996. The Company attributes this decrease primarily to a
significant reduction in military shipments, which declined to $1.4 million in
the first half of 1997 from $6.4 million in the first half of 1996.
International sales increased 20.9% to $9.5 million (32.5% of total sales) in
the first six months of 1997 from $7.9 million (23.6% of total sales) in the
first six months of 1996. The increase in international sales was driven by
strong sales in the European market. This growth was offset by decreased
sales to NEC, the Company's exclusive distributor in Japan.
OEM sales decreased 24.4% to $4.1 million (14.0% of total sales) in the first
six months of 1997 from $5.4 million (16.3% of total sales) in the first six
months of 1996. The decrease in OEM sales was partially the result of a
$754,000 decrease in sales of GenESA devices to Gensia, Inc. Gensia began
shipments of the GenESA System to Europe in early 1995. Gensia continues to
await Food and Drug Administration (FDA) market clearance for the GenESA
System in the United States. Additionally, sales of Pryon's CO2 monitoring
products decreased $578,000 in the first six months of 1997 primarily due to
reductions in orders from certain of its OEM customers.
Gross profit. As a percentage of sales, gross profit decreased to 49.7% in
the first six months of 1997 from 55.7% in the first six months of 1996. The
decrease in gross profit as a percentage of sales was partially due to
increased sales discounts, including discounts related to sales of refurbished
instruments and an enterprise-wide upgrade of Massachusetts General Hospital's
monitoring systems. As a co-developer of the Company's Acuity central
monitoring system, Massachusetts General Hospital has the right to purchase
certain monitoring equipment for a small markup over cost. This right expires
in October 1997. Gross profit was also negatively impacted by additional
warranty expense incurred as a result of the Company's voluntary decision to
replace a defective component in certain Propaq Encore monitors in the first
six months of 1997, an increase in the percentage of international sales which
have lower average selling prices, and the significant reduction in Pryon's
gross margin as a result of its lower manufacturing volumes.
<PAGE>11
Research and development. Research and development expenses decreased 7.3% to
$4.2 million in the first six months of 1997 from $4.5 million in the first
six months of 1996. The decrease in research and development expenses resulted
primarily from lower development and testing costs in the first six months 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 14.2% in the first six months of 1997 from 13.5% in the first six
months of 1996.
Selling, general and administrative. Selling, general and administrative
expenses decreased 3.6% to $9.9 million in the first six months of 1997
compared to $10.2 million in the first six months of 1996 primarily due to
lower payroll and related expenses and reduced incentive compensation. As a
percentage of sales, selling, general and administrative expenses increased to
33.7% in the first six months of 1997 from 30.7% in the first six months of
1996.
Other income. Other income remained steady at $512,000 in the first six
months of 1997 compared to $505,000 in the first six months of 1996.
Provision for income taxes. The provision for income taxes decreased to
$306,000 in the first six months of 1997 from $1,205,000 in the first six
months of 1996 representing effective tax rates of 29.1% and 27.7%,
respectively. The lower effective tax rate for the first six months of 1996
was primarily due to the expected tax benefit of utilization of Pryon's net
operating loss carryforwards.
<PAGE>12
PART II. OTHER INFORMATION
Item 2. Changes in Securities
During the quarter ended June 30, 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 52,083 shares of Common Stock were issued
at exercise prices ranging from $1.32 to $6.00. 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.
The annual meeting of shareholders of the Company was held on May 12, 1997 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 2000 by the votes indicated below:
Ronald S. Newbower: 6,975,348 votes for; 95,768 votes withheld
Frank E. Samuel, Jr.: 5,630,149 votes for; 1,440,967 votes
withheld
(2) The appointment of KPMG Peat Marwick LLP to serve as the
Company's independent auditors for the year ending December 31,
1997 was ratified by a vote of 6,923,359 to 7,203 (with 140,554
abstentions).
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>13
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: August 11, 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
1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Protocol
Systems, Inc. Condensed Consolidated Balance Sheet as of June 30, 1997 and
Condensed Consolidated Statement of Operations for the six months ended June 30,
1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,438
<SECURITIES> 16,525
<RECEIVABLES> 13,945<F1>
<ALLOWANCES> 261
<INVENTORY> 12,811
<CURRENT-ASSETS> 47,493
<PP&E> 13,286
<DEPRECIATION> 8,708
<TOTAL-ASSETS> 59,215
<CURRENT-LIABILITIES> 6,294
<BONDS> 0
0
0
<COMMON> 89
<OTHER-SE> 52,389
<TOTAL-LIABILITY-AND-EQUITY> 59,215
<SALES> 29,303
<TOTAL-REVENUES> 29,303
<CGS> 14,730
<TOTAL-COSTS> 14,730
<OTHER-EXPENSES> 14,030
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,055
<INCOME-TAX> 306
<INCOME-CONTINUING> 749
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 749
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
<FN>
<F1>Net of allowance
</FN>
</TABLE>
