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, 1998
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
August 7, 1998:
8,443,326 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 and six months
ended June 30, 1998 and 1997 3
Condensed Consolidated Balance Sheets
as of June 30, 1998 and December 31, 1997 4
Consolidated Statements of Cash Flows for
the six months ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
PART II OTHER INFORMATION
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Item 2. Changes in Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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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,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales $16,960 $16,110 $31,880 $29,303
Cost of sales 7,993 8,033 16,000 14,730
------- ------- ------- -------
Gross profit 8,967 8,077 15,880 14,573
Operating expenses:
Research and development expenses 2,052 2,143 3,911 4,164
Selling, general and administrative
expenses 6,193 5,238 11,208 9,866
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Total operating expenses 8,245 7,381 15,119 14,030
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Income from operations 722 696 761 543
Other income 213 279 493 512
------- ------- ------- -------
Income before income taxes 935 975 1,254 1,055
Provision for income taxes 262 281 351 306
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Net income $ 673 $ 694 $ 903 $ 749
======= ======= ======= =======
Comprehensive income $ 654 $ 729 $ 891 $ 699
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Basic earnings per share $ 0.08 $ 0.08 $ 0.10 $ 0.09
======= ======= ======= =======
Diluted earnings per share $ 0.08 $ 0.08 $ 0.10 $ 0.08
======= ======= ======= =======
Weighted average number of shares
used in the computation of:
Basic earnings per share 8,501 8,846 8,647 8,813
Diluted earnings per share 8,845 9,103 8,988 9,148
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>4
<TABLE>
PROTOCOL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
June 30, December 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,522 $12,257
Short-term investments 8,317 6,524
Accounts receivable - net 16,609 16,106
Inventories 12,116 13,507
Deferred taxes 1,404 1,474
Prepaid expenses and other 408 276
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Total current assets 47,376 50,144
Long-term investments 3,691 6,789
Property and equipment - net 4,550 4,575
Other assets 2,433 2,247
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$58,050 $63,755
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,509 $ 2,806
Accrued salaries, wages and related liabilities 2,061 2,375
Other accrued liabilities 454 606
Income taxes payable 114 676
Reserve for warranties 1,120 1,084
Deferred revenue and customer deposits 127 122
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Total current liabilities 6,385 7,669
Deferred taxes 444 408
Shareholders' equity:
Common stock, $.01 par value. Authorized 30,000 shares;
issued and outstanding 8,427 at 1998 and 8,935 at 1997 84 89
Additional paid-in capital 30,215 35,414
Unearned compensation (144) -
Unrealized holding gain on investments 33 33
Retained earnings 20,980 20,077
Foreign currency translation adjustment 53 65
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Total shareholders' equity 51,221 55,678
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$58,050 $63,755
======= =======
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,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 903 $ 749
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,137 1,211
Amortization of bond premium 32 201
Provision for deferred taxes 101 (38)
Other non-cash items 48 -
Increase (decrease) in cash resulting from
changes in:
Accounts receivable (501) 1,510
Inventories 1,390 (401)
Prepaid expenses and other assets (118) (46)
Accounts payable and accrued liabilities (819) (1,039)
Income taxes payable (515) 55
Reserve for warranties 37 42
Deferred revenue and customer deposits 5 (27)
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Net cash provided by operating activities 1,700 2,217
Cash flows from investing activities:
Purchase of investments (6,843) (9,943)
Proceeds from maturity of investments 8,115 9,002
Acquisition of property and equipment (1,028) (1,199)
Capitalization of software development costs (191) -
Acquisition of intangible assets (74) (10)
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Net cash used in investing activities (21) (2,150)
Cash flows from financing activities:
Proceeds from exercise of stock options
and stock purchase plan 740 469
Repurchase of common stock (6,140) -
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Net cash provided by (used in) financing activities (5,400) 469
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Effect of exchange rates on cash and cash equivalents (14) (1)
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Net increase (decrease) in cash and cash equivalents (3,735) 535
Cash and cash equivalents at beginning of period 12,257 6,903
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Cash and cash equivalents at end of period $ 8,522 $ 7,438
======= =======
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 739 $ 259
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, 1997. 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) 1998 1997
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Raw materials $ 4,638 $ 5,521
Work in process 2,695 2,460
Finished goods 2,689 3,569
Demonstration instruments 2,094 1,957
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Total inventories $12,116 $13,507
======= ======
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and includes the following:
June 30, December 31,
(in thousands) 1998 1997
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Equipment $12,685 $11,732
Furniture and fixtures 1,895 1,757
Leasehold improvements 690 683
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15,270 14,172
Less accumulated depreciation and amortization 10,720 9,597
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Property and equipment - net $ 4,550 $ 4,575
====== ======
<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 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.
BASIC AND DILUTED EARNINGS PER SHARE
In accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share" both basic earnings per share
and diluted earnings per share are presented. Basic earnings per share is
computed using the weighted average number of common shares outstanding and
diluted earnings per share is computed using the weighted average number of
common shares outstanding and dilutive potential common shares assumed to be
outstanding during the period using the treasury stock method. Dilutive
potential common shares consist of options to purchase common stock.
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income" which
establishes standards for the reporting and display of comprehensive income
and its components. The following is a reconciliation of net income to
comprehensive income:
<TABLE>
Three months ended June 30, Six months ended June 30,
(in thousands) 1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net income $ 673 $ 694 $ 903 $ 749
Other comprehensive
income, net of tax
Foreign currency
translation adjustments (22) 23 (12) (34)
Unrealized holding
gain (loss) arising
during the period 3 12 - (16)
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Other comprehensive
income (loss) (19) 35 (12) (50)
------- ------- ------- -------
Comprehensive income $ 654 $ 729 $ 891 $ 699
======= ======= ======= =======
</TABLE>
RECENT DEVELOPMENTS
On July 9, 1998 the Company announced that its wholly-owned subsidiary, Pryon
Corporation, located in Menomonee Falls, Wisconsin will be relocated to the
Company's Beaverton, Oregon facility during the third quarter of 1998. This
relocation will include moving all Pryon operations including key management
personnel.
<PAGE>8
In 1990, the Company entered into a development and supply agreement with
Gensia, Inc. to develop and supply a closed-loop drug delivery and monitoring
device ("GenESA device"). This agreement was amended in December 1997. Gensia
began shipments of the GenESA device to Europe in 1995 and received FDA
clearance to market the product in the United States in the third quarter of
1997. In April 1998, the Company was informed that Gensia plans no additional
purchases of the GenESA device under the supply agreement with the Company
which provided for the purchase of devices through the year 2002. In July
1998, the Company commenced litigation against Gensia Sicor, Inc. and Gensia
Automedics alleging that they have breached the supply agreement and is
seeking damages of approximately $10 million.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Statement changes the way public companies report segment information in
annual financial statements and also requires those companies to report
selected segment information in interim financial reports to shareholders.
The Company plans to adopt the statement for the quarter ending December 31,
1998.
In October 1997, the AICPA issued Statement of Position (SOP) 97-2, "Software
Revenue Recognition", which supercedes SOP 91-1. The Company adopted SOP 97-2
for software transactions entered into beginning January 1, 1998. SOP 97-2
generally requires revenue earned on software arrangements involving multiple
elements to be allocated to each element based on the relative fair values of
the elements. The revenue allocated to software products generally is
recognized upon delivery of the products. The revenue allocated to post-
contract customer support generally is recognized ratably over the term of the
support and revenue allocated to service elements generally is recognized as
the services are performed. The impact on the Company's Consolidated Financial
Statements is not material.
<PAGE>9
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Second Quarter 1998 vs. Second Quarter 1997
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Sales. Sales for the second quarter of 1998 increased 5.3% to $17.0 million
from $16.1 million for the second quarter of 1997.
Domestic sales, excluding military revenues and Original Equipment
Manufacturer ("OEM") sales of GenESA devices and Pryon OEM products, increased
15.9% to $9.2 million (54.2% of total sales) in the second quarter of 1998
from $7.9 million (49.3% of total sales) in the second quarter of 1997. The
growth in domestic sales in the second quarter of 1998 was primarily due to an
increase in both the number and average selling price of Flexible Monitoring
system sales including the Acuity central workstation. The Company attributes
the increase in Flexible Monitoring system sales to the increase in the size
and scale of individual sales as well as the introduction of the Networked
Acuity System in 1998. Additionally, sales of accessories and the QuikSigns
spot-check monitor increased in the second quarter of 1998.
U.S. military revenues increased 183.1% to $3.4 million (20.0% of total sales)
in the second quarter of 1998 from $1.2 million (7.4% of total sales) in the
second quarter of 1997 due to several large military orders shipped during the
second quarter 1998.
International sales, excluding international OEM sales of GenESA devices and
Pryon OEM products, decreased 40.0% to $2.8 million (16.6% of total sales) in
the second quarter of 1998 from $4.7 million (29.1% of total sales) in the
second quarter of 1997. This decrease in international sales was principally
due to the continuing strength of the U.S. dollar against foreign currencies
and soft economic conditions particularly in Europe and Asia.
OEM sales of GenESA devices and Pryon OEM products decreased 31.9% to $1.6
million (9.2% of total sales) in the second quarter of 1998 from $2.3 million
(14.2% of total sales) in the second quarter of 1997 primarily due to
decreased sales of Pryon products to certain of its OEM customers. The Company
announced on July 9, 1998 it was relocating its Pryon subsidiary from
Wisconsin to Oregon. This move is scheduled for the third quarter of 1998 and
is expected to provide approximately $2 million per year in savings from
operating efficiencies beginning in 1999. The Company estimates that the one-
time relocation charge associated with this move will not exceed $2 million.
Gross profit. As a percentage of sales, gross profit increased to 52.9% in
the second quarter of 1998 from 50.1% in the second quarter of 1997. The
increase in gross margin was due to non-recurring warranty and product upgrade
expenses incurred in the second quarter of 1997.
<PAGE>10
Research and development. Research and development expenses decreased 4.2% to
$2.1 million in the second quarter of 1998. The decrease in research and
development expenses resulted primarily from reduced payroll and related
costs. As a percentage of sales, research and development expenses decreased
to 12.1% in the second quarter of 1998 from 13.3% in the second quarter of
1997.
Selling, general and administrative. Selling, general and administrative
expenses increased 18.2% to $6.2 million in the second quarter of 1998 from
$5.2 million in the second quarter of 1997. This increase resulted primarily
from the establishment of direct sales organizations in Germany and France in
1998 and an increase in the number of direct sales representatives and
clinical application specialists employed by the Company to expand the field
sales and service operations. As a percentage of sales, selling, general and
administrative expenses increased to 36.5% in the second quarter of 1998 from
32.5% in the second quarter of 1997.
Other income. Other income decreased 23.7% to $213,000 in the second quarter
of 1998 from $279,000 in the second quarter of 1997 primarily due to a
decrease in interest income. Cash and investments decreased as the Company
repurchased common stock during 1998 under a previously announced buy-back
program.
Provision for income taxes. The provision for income taxes decreased to
$262,000 in the second quarter of 1998 from $281,000 in the second quarter of
1997 representing effective tax rates of 28.0% and 28.8%, respectively. The
effective tax rate, which reflects the estimate of the Company's annual
effective tax rate, was lower in the second quarter of 1998 than in the second
quarter of 1997 due to greater expected percentage benefits of research and
experimentation credits and tax-exempt interest.
Net income. Due to the factors described above net income decreased 3.0% to
$673,000 in the second quarter of 1998 from $694,000 in the second quarter of
1997. The Company expects net income in 1998, excluding costs associated with
the relocation of Pryon, to remain relatively flat compared to 1997 as a
result of increases in its marketing and sales efforts in 1998, including
increases in the number of direct sales representatives, clinical application
specialists, field service engineers, and the establishment of direct sales
organizations in France and Germany during 1998.
Six Months Ended June 30, 1998 vs. Six Months Ended June 30, 1997
- -----------------------------------------------------------------
Sales. Sales for the first six months of 1998 increased 8.8% to $31.9 million
from $29.3 million for the first six months of 1997.
Domestic sales, excluding military revenues and Original Equipment
Manufacturer ("OEM") sales of GenESA devices and Pryon OEM products, increased
18.7% to $16.9 million (53.0% of total sales) in the first six months of 1998
from $14.2 million (48.6% of total sales) in the first six months of 1997.
The growth in domestic sales was primarily due to an increase in both the
average selling price and the number Flexible Monitoring system sales
including the Acuity central stations and related monitoring instruments.
Additionally, sales of the QuikSigns spot-check monitor and accessories
increased in the first six months of 1998.
U.S. military revenues increased 161.8% to $3.7 million (11.7% of total sales)
from $1.4 million (4.9% of total sales) due to several large military orders
shipped during the first six months of 1998.
<PAGE>11
International sales, excluding international OEM sales of GenESA devices and
Pryon OEM products, decreased 21.8% to $7.5 million (23.7% of total sales) in
the first six months of 1998 from $9.6 million (32.9% of total sales) in the
first six months of 1997. This decrease in international sales was principally
due to the continuing strength of the U.S. dollar against foreign currencies
and soft economic conditions particularly in Europe and Asia.
OEM sales of GenESA devices and Pryon OEM products decreased 7.4% to $3.7
million (11.6% of total sales) in the first six months of 1998 from $4.0
million (13.6% of total sales) in the first six months of 1997. Pryon OEM
sales decreased by $754,000 primarily as a result of a decrease in sales to
certain of its OEM customers. This decrease was partially offset by an
increase of $460,000 in sales of the GenESA device to Gensia Automedics, Inc.
Gensia received clearance from the Food and Drug Administration (FDA) to
market the GenESA device in the United States in 1997. In April 1998, the
Company was informed that Gensia plans no additional purchases of the GenESA
device under a supply agreement with the Company which provided for the
purchase of devices through the year 2002. In July 1998, the Company
commenced litigation against Gensia Sicor, Inc. and Gensia Automedics alleging
that they have breached the supply agreement and seeking damages of
approximately $10 million.
Gross profit. As a percentage of sales, gross profit increased slightly to
49.8% in the first six months of 1998 from 49.7% in the first six months of
1997 primarily due to an improvement in gross margins of Pryon OEM products.
Research and development. Research and development expenses decreased 6.1% to
$3.9 million in the first six months of 1998 from $4.2 million in the first
six months of 1997. The decrease in research and development expenses resulted
primarily from the capitalization of software development costs relating to
the Networked Acuity System which was released in the first quarter of 1998.
Additionally, payroll and related costs decreased in the first six months of
1998. As a percentage of sales, research and development expenses decreased
to 12.3% in the first six months of 1998 from 14.2% in the first six months of
1997.
Selling, general and administrative. Selling, general and administrative
expenses increased 13.6% to $11.2 million in the first six months of 1998
compared to $9.9 million in the first six months of 1997. This increase
resulted primarily from the establishment of direct sales organizations in
Germany and France in 1998 and an increase in the number of direct sales
representatives and clinical application specialists employed by the Company
to expand the field sales and service operations. As a percentage of sales,
selling, general and administrative expenses increased to 35.2% in the first
six months of 1998 from 33.7% in the first six months of 1997.
Other income. Other income decreased 3.7% to $493,000 in the first six months
of 1998 from $512,000 in the first six months of 1997 as interest income
decreased due to a reduction in the cash and investments balance as the
Company repurchased shares of common stock in 1998. This decrease was
partially offset by a higher rate of return on investments in 1998.
Provision for income taxes. The provision for income taxes increased to
$351,000 in the first six months of 1998 from $306,000 in the first six months
of 1997 representing effective tax rates of 28.0% and 29.0%, respectively.
The effective tax rate, which reflects the estimate of the Company's annual
effective tax rate, was lower in the first six months of 1998 than in the
first six months of 1997 due to greater expected percentage benefits of
research and experimentation credits and tax-exempt interest.
<PAGE>12
Net income. Due to the factors described above net income increased 20.6% to
$903,000 in first six months of 1998 from $749,000 in the first six months of
1997. The Company expects net income in 1998, excluding costs associated with
the relocation of Pryon, to remain relatively flat compared to 1997 as a
result of increases in its marketing and sales efforts in 1998, including
increases in the number of direct sales representatives, clinical application
specialists, field service engineers, and the establishment of direct sales
organizations in France and Germany during 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintained its strong financial position as of June 30, 1998 with
working capital balances of $41.0 million and a current ratio of 7.4:1 as
compared to working capital of $42.5 million and a current ratio of 6.5:1 at
December 31, 1997. Cash flow from operating activities for the first six
months of 1998 was $1.7 million as compared to cash flow from operating
activities of $2.2 million for the first six months of 1997. In January 1998
the Company's Board of Directors adopted a resolution authorizing the
repurchase of up to 1,000,000 outstanding shares of the Company's common stock
over a 12 month period. During the first six months of 1998, the Company
repurchased 632,000 shares. 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.
YEAR 2000 ISSUES
As the year 2000 approaches, the Company recognizes the need to ensure its
operations will not be adversely impacted by Year 2000 software issues. The
Company is addressing this issue to ensure the availability and integrity of
its financial systems and operational systems to ensure the Company is Year
2000 compliant. To date, no significant concerns have been identified and
accordingly the Company does not currently expect to incur material costs in
connection with the Year 2000 issue. There can be no assurance; however, that
there will not be any Year 2000 related operating problems or material
expenses that will arise with the Company's computer systems or in connection
with the interface with the computer systems of the Company's major vendors or
suppliers.
FORWARD-LOOKING STATEMENTS
This Quarterly Report contains statements, including statements regarding the
Company's expectations as to net income for 1998 and the charges to be
incurred in connection with the relocation of Pryon Corporation, that are
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 factors that could cause unforeseen
increases or decreases in the expenses expected to be incurred in connection
with the relocation of Pryon Corporation, the Company's increased marketing
and sales efforts in 1998, or the establishment of direct sales organizations
in France and Germany during 1998. In addition, such statements could be
affected by other factors discussed in this Quarterly Report and from time to
time in the Company's other Securities and Exchange Commission filings and
reports and by general industry and market conditions and growth rates, and
general domestic and international economic conditions.
<PAGE>13
The Company's quarterly operating results have fluctuated in the past and may
continue to fluctuate in the future depending on factors such as increased
competition, timing of new product announcements, pricing changes by the
Company or its competitors, length of sales cycles, market acceptance or
delays in the introduction of new products or enhanced versions of existing
products, timing of significant orders, regulatory approval requirements,
product mix and economic factors and conditions generally and in the market
for the Company's products specifically. In particular, the Company's
quarterly operating results have fluctuated as a result of the unpredictable
size and timing of military patient monitoring equipment procurements, and
seasonal or other changes in customer buying patterns. A substantial portion
of the Company's revenue in each quarter results from orders booked in that
quarter. Accordingly, revenue from quarter to quarter is difficult to
forecast. The Company's expense levels are based, in part, on its
expectations as to future revenue. If revenue levels are below expectations,
operating results are likely to be adversely affected. In particular, net
income may be disproportionately affected by a reduction in revenue because
only a small portion of expenses vary with revenue. Results of operations in
any period should not be considered indicative of the result to be expected
for any future period, and fluctuations in operating results may also result
in fluctuations in the price of the Company's common stock. No assurance can
be given that the Company will be able to grow in future periods or that its
operations will remain profitable.
<PAGE>14
PART II. OTHER INFORMATION
Item 2. Changes in Securities
During the quarter ended June 30, 1998, 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 5,585 shares of Common Stock were issued
at an 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 19, 1998 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 2001 by the votes indicated below:
James B. Moon: 7,049,449 votes for; 163,151 votes withheld
Curtis M. Stevens: 7,145,582 votes for; 67,018 votes withheld
(2) The Company's 1998 Stock Incentive Plan was approved by a vote
of 6,090,672 to 1,104,422 (with 17,506 abstentions)
(3) An amendment to the Company's 1994 Employee Stock Purchase Plan
to reserve an additional 100,000 shares of Common Stock under
the Plan was approved by a vote of 7,082,884 to 113,651 (with
16,065 abstentions.
(4) The appointment of KPMG Peat Marwick LLP to serve as the
Company's independent auditors for the year ending December 31,
1998 was ratified by a vote of 7,146,552 to 16,423 (with 49,625
abstentions).
<PAGE> 15
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.1 Protocol Systems, Inc. 1994 Employee Stock Purchase Plan as
amended on May 19,1998*
10.2 Protocol Systems, Inc. 1998 Stock Incentive Plan**
10.3 Protocol Systems, Inc. Non-Qualified Stock Option Agreement
dated March 6, 1998***
10.4 Protocol Systems, Inc. Restricted Stock Award Agreement
dated April 3, 1998
27.1 Financial Data Schedule
* Incorporated herein by reference to the Company's Registration
Statement on S-8 dated August 13, 1998 (File 333-61423)
** Incorporated herein by reference to the Company's Registration
Statement on S-8 dated August 13, 1998 (File 333-61419)
*** Incorporated herein by reference to the Company's Registration
Statement on S-8 dated August 13, 1998 (File 333-61415)
(b) No reports were filed on Form 8-K during the quarter for which
this report is filed.
<PAGE>16
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 14, 1998 By /s/ David F. Bolender
---------------------
David F. Bolender
Chief Executive Officer
and Chairman of the
Board of Directors
By /s/ Craig M. Swanson
---------------------
Craig M. Swanson
Vice-President and
Chief Financial Officer
PROTOCOL SYSTEMS, INC.
RESTRICTED STOCK AWARD AGREEMENT
TO: David F. Bolender Date of Grant: April 3, 1998
We are pleased to inform you that you have been selected by the Board
of Directors (the "Board") of Protocol Systems, Inc. (the "Company") to
receive a Restricted Stock Award (the "Award") of 20,000 shares of the
Company's $.01 par value common stock ("Shares"). This Award is subject to
the following terms and conditions.
1. VESTING: The Shares will vest and become deliverable to you according
to the following schedule:
Date On and After Which Shares Vest Number of Shares Vested
- ----------------------------------- ------------------------
April 3, 1998 5,000 shares
July 3, 1998 5,000 shares
October 3, 1998 5,000 shares
January 3, 1999 5,000 shares
2. WITHHOLDING TAXES: As a condition to the delivery of the Shares, you
must make such arrangements as the Company may require for the satisfaction of
any federal, state or local withholding tax obligations that may arise in
connection with issuance and delivery of the Shares.
3. TERMINATION: If your relationship with the Company ceases because your
employment with the Company terminates for any reason, including death or
disability, then, notwithstanding the vesting schedule set forth above, you
will be entitled to receive a number of Shares that is equal to the same
percentage of the Shares that would vest on the next vesting date as the
number of days you were employed during that vesting period divided by the
number of days in the vesting period.
4. TRANSFERABILITY OF AWARD: This Award and the rights and privileges
conferred hereby may not be transferred, assigned, pledged or hypothecated in
any manner (whether by operation of law or otherwise) other than by will or by
the applicable laws of descent and distribution and shall not be subject to
execution, attachment or similar process. Any attempt to transfer, assign,
pledge, hypothecate or otherwise dispose of this Award or of any right or
privilege conferred hereby, contrary to the provisions hereof, or the sale or
levy or any attachment or similar process upon the rights and privileges
conferred hereby will be null and void. Notwithstanding the foregoing, to the
extent permitted by applicable law and regulation, the Company, in its sole
discretion, may permit you to transfer this Award and the rights and
privileges conferred hereby.
5. CONTINUATION OF RELATIONSHIP: Nothing in this Award will confer upon
you any right to continue in the employ or other relationship of the Company,
or to interfere in any way with the right of the Company to terminate your
employment or other relationship with the Company at any time.
6. DETERMINATION OF BOARD TO BE FINAL: All determinations referred to
herein will be made by the Board, and such determinations will be final,
binding and conclusive.
7. INVESTMENT INTENT: You represent and warrant to the Company that you
are acquiring the Shares for your own account and investment and not with a
view to, or for sale in connection with, any distribution.
8. RESTRICTED SECURITIES; LEGEND: You understand that the Shares have not
been registered under the Securities Act of 1933 in reliance upon an exemption
from registration. Such exemption depends upon, among other things, the bona
fide nature of your investment intent stated in this Agreement. You under-
stand that the Shares must be held indefinitely, unless the Shares
subsequently are registered under the Securities Act of 1933 or unless an
exemption from registration is otherwise available. You understand that the
Company is not obligated to register the Shares. You agree that the Shares
may not be offered, sold, transferred, pledged, or otherwise disposed of in
the absence of an effective registration statement under the Securities Act of
1933 and applicable state securities laws or an opinion of counsel acceptable
to the Company that such registration is not required. You understand that
the certificate(s) representing the Shares will be imprinted with
substantially the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR APPLICABLE STATE
SECURITIES LAWS. THE SHARES HAVE BEEN ACQUIRED WITHOUT A VIEW TO DISTRIBUTION
AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE ACT
AND UNDER ANY APPLICABLE SECURITIES LAWS, OR AN OPINION OF COUNSEL FOR THE
HOLDER (CONCURRED IN BY LEGAL COUNSEL FOR THE CORPORATION) THAT SUCH REGISTRA-
TION IS NOT REQUIRED AS TO SUCH SALE OR OFFER. THE STOCK TRANSFER AGENT HAS
BEEN ORDERED TO EFFECTUATE TRANSFERS OF THIS CERTIFICATE ONLY IN ACCORDANCE
WITH THE ABOVE INSTRUCTION.
9. COMPENSATION CLAIM: You understand and agree that this Award is made
in lieu of the payment of cash compensation to you, and you agree that all of
the Shares issued and delivered to you pursuant to this Agreement will be
forfeited to the Company in the event that you make any legal claim for cash
compensation for work performed during the vesting periods set forth above.
Please execute the Agreement in the space below and return it to the
undersigned.
Very truly yours,
PROTOCOL SYSTEMS, INC.
By:
------------------------------
AGREED AND ACCEPTED:
- ------------------------
David F. Bolender
- ------------------------
Date
GES\3784ges.agr
<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, 1998 and
Condensed Consolidated Statement of Operations for the six months ended June 30,
1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,522
<SECURITIES> 12,008
<RECEIVABLES> 16,609<F1>
<ALLOWANCES> 391
<INVENTORY> 12,116
<CURRENT-ASSETS> 47,376
<PP&E> 15,270
<DEPRECIATION> 10,720
<TOTAL-ASSETS> 58,050
<CURRENT-LIABILITIES> 6,385
<BONDS> 0
0
0
<COMMON> 84
<OTHER-SE> 51,137
<TOTAL-LIABILITY-AND-EQUITY> 58,050
<SALES> 31,880
<TOTAL-REVENUES> 31,880
<CGS> 16,000
<TOTAL-COSTS> 16,000
<OTHER-EXPENSES> 14,626
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,254
<INCOME-TAX> 351
<INCOME-CONTINUING> 903
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 903
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
<FN>
<F1>Net of allowance
<F2>The amount of loss provision is not significant and has been included with
other expenses.
</FN>
</TABLE>
