UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-19943
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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)
Registrant's telephone number, including area code: (503) 526-8500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 23, 1998 the aggregate market value of the voting stock held by
non-affiliates of the registrant was $79,522,281. There were 8,570,993 shares
of Common stock of the registrant outstanding at March 23, 1998.
Documents Incorporated by Reference
-----------------------------------
Part of Form 10-K Into
Document Which Incorporated
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Portions of the 1998 Proxy Statement Part III
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PART I
ITEM 1. BUSINESS
GENERAL
Protocol Systems, Inc. was incorporated in Oregon in November 1985, and made
its first commercial shipment of patient monitors in February 1988. Since
that date, the Company has sold over 46,000 vital signs monitors. In March
1992, the Company completed its initial public offering. The Company's stock
trades on the Nasdaq Stock Market under the symbol PCOL.
The Company designs, manufactures and markets patient monitoring instruments
and systems utilizing innovative design, advanced software concepts and
leading electronic technology. The Company's products are designed to address
hospitals' needs for more efficient and flexible utilization of patient
monitoring equipment. The Company's Propaq monitors, including the 100 Series
Propaq monitors and the Propaq Encore (200 Series) monitors, combine multiple
physiologic measurement and display capabilities in a single lightweight,
rugged instrument, permitting the use of the monitor in a variety of patient
care applications. The Company's Acuity central station further increases
monitoring flexibility by allowing a clinician to observe and control up to 60
Propaq monitors from a dedicated Sun Microsystems UNIX-based workstation.
The Company operates in a single industry segment: the design, manufacture,
sale and servicing of medical instruments and systems. Sales of the Company's
products by geographic region are shown in the notes to the consolidated
financial statements.
In 1996 the Company acquired Pryon Corporation ("Pryon"), a supplier of
capnography (CO2 monitoring) products to medical instrument manufacturers.
Capnography is the measurement and graphical display of carbon dioxide
concentration, or partial pressure appearing at a patient's airway. Pryon
designs, manufactures and markets both mainstream and sidestream sensors and
instrumentation to monitor end-tidal carbon dioxide levels present in the
respired breath of critically ill and other patients. This CO2 data, coupled
with other clinical signs and information, provides clinicians with a
noninvasive means to assess the patient's ventilation, perfusion and
circulatory status. Since 1989, Pryon has sold over 30,000 CO2 systems.
MARKET FOR PATIENT MONITORING EQUIPMENT
The 1997 worldwide market for patient monitoring equipment was estimated to be
$2.2 billion annually. The principal purchasers of patient monitoring
products are hospitals; other customers include outpatient surgery centers,
subacute care centers, clinics, physician offices and emergency transportation
units.
Patient monitoring products measure, display and document physiologic
information obtained from sensors attached to the patient. Measured
parameters include electrocardiogram (ECG), invasive and non-invasive blood
pressure, pulse rate, pulse oximetry, body temperature, respiration rate, end-
tidal CO2 and other specialized parameters. Products vary from specialized
single-parameter instruments to monitors with the ability to measure multiple
parameters and interface with other instruments.
PATIENT MONITORING MARKET SEGMENTS
The patient monitoring market may be divided into five segments: portable
bedside monitors, low-end systems, high-end systems, telemetry systems, and
stand-alone monitors. The segments are distinguished by the intensity and
duration of the monitoring, the acuity of the patient's condition and the
level of nursing attention devoted to each patient.
PORTABLE BEDSIDE MONITORS. Portable monitors are freestanding and movable and
typically measure multiple parameters. They are carried or wheeled with the
patient, often while he or she is being transported to or within the hospital.
They may also be left at the patient's bedside, providing continuous longer-
term monitoring when the patient's condition warrants. When monitoring is no
longer required, the monitor can be easily moved to a new location or patient.
The Company has been a leader in the development of the portable bedside
monitoring segment since its introduction of the highly portable, multiple-
parameter Propaq monitor in 1988.
HIGH-END SYSTEMS. High-end systems monitors are normally large, permanently
located adjacent to a particular hospital bed and connected to a central
monitoring station for observing multiple patients. They are used most often
in intensive care units (ICU's) where hospitals care for their more acutely
ill patients, maintain the highest nurse-to-patient ratios and provide for
constant patient monitoring. The Propaq Encore monitor and the Acuity central
station allow the Company to compete in certain segments of the high-end
systems market. The neonatal, impedance respiration and 5-lead ECG
capabilities of the Propaq Encore monitor and the central monitoring
capability of the Acuity central station provide a monitoring system which is
suitable to neonatal, pediatric and adult respiratory ICU applications.
LOW-END SYSTEMS. As medical monitoring manufacturers began to network their
portable bedside monitors, the low-end systems market segment emerged. These
systems allow for cost-effective, continuous monitoring of non-ICU patients.
The Company's Acuity central station, with its central monitoring capability,
is designed to meet the requirements of this market segment. Subsequent
enhancements to the Acuity software, including arrhythmia detection and 96-
hour full disclosure capabilities, have expanded the potential applications
for the Company's monitoring system.
TELEMETRY SYSTEMS. A telemetry system typically consists of a small unit worn
by the patient which transmits ECG data via telemetry to a central monitoring
station. They are used in situations, such as post-coronary care, where the
patient is allowed freedom of movement as part of the recovery process. The
Company's Protocol Cordless-Registered Trademark- monitoring system provides
such ECG telemetry monitoring for ambulating patients.
STAND-ALONE MONITORS. This market segment includes stand-alone units which
are not connected to a central monitoring station. They are often used in
areas such as operating, emergency and recovery rooms as well as labor and
delivery units. In these environments, the monitoring needs arise from
specific procedures and the care giver is closely involved with the patient.
While some stand-alone monitors include multiple physiologic capabilities,
many measure only one parameter. The Company's QuikSigns-TM- monitor,
introduced in May 1997, is classified as a stand alone monitor.
PRODUCTS
The Company believes that its products presently address approximately $1.4
billion of the $2.2 billion annual worldwide patient vital sign monitoring
market. The Company's highly portable multiple-parameter monitors and ECG
telemetry transmitters networked to Acuity central workstations allow
hospitals to realize the benefits of Flexible Monitoring-TM-. Flexible
Monitoring allows hospitals to constantly reconfigure their monitoring
capability in order to match vital signs monitoring with patient acuity levels
in the most cost-effective way without compromising the quality of patient
care.
PROPAQ MONITORS AND OPTIONS. The Company's principal product line, Propaq
portable patient monitors, is used in hospitals, outpatient surgery centers,
clinics, physician offices and emergency transportation units to obtain and
display current physiologic patient information. This information enables
health care providers to continuously evaluate the patient's condition and to
assist the clinician in determining the proper medication or treatment
necessary to promote the patient's recovery. Propaq monitors lead the
industry in terms of weight, durability and battery life for any comparably
configured monitor. Propaq 100 Series monitors are available in multiple
configurations and can measure ECG; blood pressure, both invasively and non-
invasively; arterial blood oxygen saturation level (pulse oximetry); end-tidal
CO2 (ETCO2); and body temperature. Propaq monitors are available in five
languages: English, German, French, Spanish and Japanese.
The Company introduced the second generation Propaq monitor, the Propaq
Encore, in 1995. The Propaq Encore retains all of the monitoring capabilities
and portability of the 100 Series Propaq monitor. In addition, the Propaq
Encore monitor provides a brighter, higher resolution display, an enhanced
user interface, respiration monitoring using impedance pneumography and
diagnostic level 5-lead ECG monitoring capability. Propaq Encore monitors can
be configured to monitor neonatal, pediatric or adult patients.
In September 1997 the Company introduced the sidestream Carbon Dioxide (CO2)
option for its Propaq Encore monitor. The sidestream CO2 option provides non-
invasive vital sign measurements of ETCO2, inspired CO2 and breath rate from
non-intubated patients using a technologically-advanced sensor. The Company
has offered a mainstream CO2 monitoring option for its Propaq monitors since
1992. Unlike the mainstream option, which places a CO2 sensor directly on the
airway of intubated patients, the sidestream option utilizes a simple nasal
cannula to monitor CO2 and can be used on non-intubated patients. Shipments
of the sidestream CO2 option are expected to begin in the second quarter of
1998.
The Company introduced the Modem Propaq monitor in April 1997. This monitor
provides all the functionality of the Propaq 100 series and Propaq Encore
monitors and is able to transmit multiple patient vital signs data via a
simple telephone modem to the Acuity central station. The Modem propaq gives
the health care provider the flexibility to remotely monitor patients located
both inside and outside the hospital from a central nursing station.
FLEXIBLE MONITORING SYSTEM. The Flexible Monitoring System is the product of
a co-development effort with Massachusetts General Hospital and was introduced
by the Company in 1991. The Flexible Monitoring System combines networked
Propaq monitors, Modem Propaqs and Protocol Cordless transmitters with a Sun
Microsystems, Inc. workstation and proprietary Protocol software to monitor
the vital signs of up to 60 patients simultaneously. The Company's software
controls the networked Propaq monitors and Protocol Cordless transmitters with
an easy-to-understand graphical user interface display on a high-resolution
color CRT screen. The Acuity central station utilizes a map to display the
physical layout of the individual hospital floor. Remote diagnostic
capabilities enable the Company's service and support personnel to evaluate
system performance without user interruption and provide timely service
response. The Acuity software is available in three languages: English,
German and French.
Central station monitoring generally has been limited to intensive care
environments in which systems monitors are permanently wired to a central
station. Propaq monitors, however, can easily be connected to the Acuity
central station as the hospital's needs dictate through the use of a simple
snap-in modular plug similar to a telephone jack. The portability of Propaq
monitors and ease with which they may be connected to the system reduces the
number of monitors the hospital would otherwise need to cover a large number
of beds.
The full disclosure software version for the Acuity central station provides
the ability to capture and later retrieve each second of patient vital signs
data for the previous 96-hour period. The system captures all monitored vital
sign parameters for each patient being monitored by compressing the vital sign
data and archiving it for later retrieval and analysis.
The arrhythmia detection software option enables the system to detect various
types of ventricular and life-threatening arrhythmias in a patient, classify
the detected arrhythmias by category and provide an alarm when appropriate.
Arrhythmia detection is often used in areas of the hospital such as emergency
departments, cardiac telemetry units, step-down units and intermediate or
transitional care units.
The Company introduced Networked Acuity patient monitoring systems in February
1998. Networked Acuity systems operate as Vital Signs Servers-TM-, each
capable of centrally monitoring local and remote groups of patients resident
on multiple Networked Acuity systems. These systems, both inside and outside
the hospital, connect smaller hospitals or clinics, or floors within a single
hospital such as areas outside the ICU, providing a number of benefits to the
user. Remote viewing and control of both real-time and historical full
disclosure waveform information, for consultation on any patient's vital signs
data, is easily accessible from any of the connected Acuity central stations.
From admission to discharge, a seamless patient flow record is automatically
generated as the patient moves from one Networked Acuity system to another.
Furthermore, the Networked Acuity system configured with an additional review
station can provide "mission critical" back-up capability to another Networked
Acuity system within the enterprise in the event of a hardware failure. The
Company expects the Networked Acuity systems will be available for customer
shipments in the second quarter of 1998.
In August 1997 the Company introduced ST Segment Analysis software for its
Acuity central stations. This software analyzes the ST Segment of a patient's
ECG for changes that may indicate myocardial ischemia or injury. The Company
expects customer shipments of the product to begin in the second quarter of
1998.
PROTOCOL CORDLESS TELEMETRY SYSTEM. The telemetry option provides wireless
communication of ECG signals by radio frequency (RF) waves from a portable
transmitter, generally worn by an ambulating patient, to an Acuity central
station and/or Propaq monitor.
QUIKSIGNS MONITOR. In May 1997, the Company signed an agreement with Welch
Allyn, Inc. under which Welch Allyn manufactures the QuikSigns monitor under
the Company's name and provides the Company with exclusive U.S. hospital
distribution and marketing rights. The QuikSigns product is a spot-check
patient monitor that adds to the breadth of Protocol's product line, and is
ideal for gathering routine and procedural vital signs data. The instrument
quickly and non-invasively monitors blood pressure, blood oxygen and
temperature, and features data storage and printing capabilities.
OEM PRODUCTS. Pryon manufactures solutions for CO2 monitoring applications
that include mainstream and sidestream CO2 sensors for OEM applications and
stand-alone monitors for both OEM and direct distribution channels. The
sidestream CO2 sensor and related hardware and software are used with non-
intubated patients in applications such as post-ventilator patient assessment,
conscious sedation, acute asthma assessment in the emergency room, assessment
of patient conditions on BiPAP and other applications. The mainstream CO2
sensors and related hardware and software are used in hospital venues for
intubated patients. Pryon also manufactures a line of consumable products
that are used in conjunction with its CO2 sensors.
Pryon manufactures the SC-300 CO2 Monitor, a stand alone instrument containing
both mainstream and sidestream CO2 monitoring modalities. A follow-up
product, the SC-210 CO2 Monitor, was introduced in 1995. This device utilizes
the SC-300 platform and provides sidestream monitoring. Pryon plans to expand
its OEM business through the offering of a wider range of technologies
currently under development.
MARKETING AND DISTRIBUTION
DOMESTIC. The Company markets its products domestically through both Company-
employed sales representatives and independent distributors. Protocol's
domestic sales managers supervise the Company's direct sales representatives,
independent representatives, and independent distributors, in a defined
geographic area. Pryon's SC-210 and SC-300 are sold through independent
distributors while their OEM subassemblies and accessories are sold directly
to OEM customers. The Company intends to continue to use a combination of
direct sales representatives, independent representatives and independent
distributors based on the most effective sales approach for each territory.
Protocol's primary market in the United States consists of approximately 6,000
hospitals, where its products are purchased for use in emergency departments,
operating rooms, post-anesthesia care units, step-down intensive care units,
special procedure rooms such as cardiac catheterization and gastrointestinal
endoscopy, labor and delivery, general-care floors, and for transport of
patients between departments.
In 1990, the General Services Administration approved the Company's Propaq
monitors for purchase by United States government agencies, including the
armed forces and Veterans' Administration hospitals. The Company's products
were added to the U.S. Government's international supply schedule in 1992. In
1995, the Company received approval from the U. S. Air Force for in-flight use
of the 100 Series Propaq monitor. In November 1997, the Propaq Encore was
approved for use during all phases of flight on all U.S. Air Force aircraft.
The Company's national accounts managers negotiate and manage the Company's
group contracts with organizations such as AmeriNet, University Hospital
Consortium (UHC), Kaiser Permanente and others. In 1995, the Company was
exclusively awarded the Seal of Acceptance by the Alliance of Children's
Hospitals, Inc., a cooperative of 33 children's hospitals across the U.S. In
1996, Protocol was awarded a sole source contract for non-critical care
physiological monitoring by MAGNET, a 948-hospital group purchasing
organization (GPO) based in Pennsylvania. A similar sole source renewal was
signed with Sisters of the Sorrowful Mother, a major Catholic GPO. In July
1997, the Company was awarded a two-year contract with Shared Services
Healthcare, Inc. to offer monitoring products to over 1,000 purchasing
affiliates of the group. In February 1998, the Company signed an exclusive 3-
year purchasing agreement with American Medical Response, the largest
ambulance service and emergency physician practice manager in the U.S. The
Company now has group contracts which include more than half of the acute care
hospitals in the U.S.
The Company has developed a financial modeling tool called Proforma-TM- to
help hopitals evaluate the financial impact of Flexible Monitoring on the
institutions. Proforma facilitates sales of Flexible Monitoring systems by
helping customers re-engineer the patient flow that can lower patient care
costs.
INTERNATIONAL. The Company markets its products internationally through
independent distributors covering all major European and Pacific Rim markets
and has sold its products in over 90 countries. The agreements with these
distributors generally provide the exclusive right to sell the Company's
products in a specific geographic area or country subject to certain
performance requirements. A team of five international sales managers
supervise, assist and train this network of international distributors.
International sales through independent distributors are made in U.S. dollars
which has helped reduce any foreign currency risk. The Company believes that
its ability to provide monitors in English, German, French, Spanish or
Japanese is an important international marketing advantage.
In January 1998, the Company formed two wholly owned subsidiaries: Protocol
Systems, S.A.R.L. and Protocol Systems, GmbH, operating in France and Germany,
respectively. These subsidiaries will provide direct sales and service to
France and Germany. Direct international sales are made in the local
currency.
OEM. Pryon's marketing strategy is to establish and develop OEM customer
relationships with U.S. and international patient monitoring systems
manufacturers. Pryon's customers include Nellcor Puritan Bennett, SpaceLabs
Medical, Medical Data Electronics, Marquette Electronics, Inc., Datex
Engstrom, Hellige GmbH, Nihon Kohden, NEC Medical Equipment, G. Stemple GmbH,
and others.
In 1990, the Company entered into a development and supply agreement with
Gensia, Inc. This agreement was amended in December 1997. Under this
agreement, the Company has developed a closed-loop drug delivery and
monitoring device ("GenESA device"). The GenESA device will be used in
combination with Gensia's novel drug "Arbutamine" for the diagnosis of
coronary artery disease in conjunction with three major diagnostic modalities:
electrocardiography (ECG), echocardiography, and radionuclide perfusion
imaging. OEM sales of this device to Gensia began in 1994 with delivery of
pilot production units. Gensia began shipments of the GenESA device to Europe
in early 1995 and received FDA clearance to market the product in the United
States in the third quarter of 1997.
CUSTOMER SUPPORT. The Company maintains a technical support group to provide
clinical in-service, installation, repair and technical training services in
support of both direct and distributor sales. Technical support offices are
currently maintained in Beaverton, Oregon, the United Kingdom, Germany and
Asia/Pacific (New Zealand). The Company provides maintenance and repair
classes for distributors and the biomedical engineering personnel of its
hospital customers. In addition, Protocol has developed a "Partners in Care"
program designed to provide clinical education and training to customers
installing Flexible Monitoring systems. The services of Sun Microsystems and
its third-party maintenance affiliates are available to support the Acuity
central station. Pryon provides its OEM customers technical support from
their offices in Menomonee Falls, Wisconsin.
WARRANTIES. The Company warrants its Propaq products sold in the United
States and Canada for three years from the date of original delivery to the
ultimate purchaser and for one year if sold outside North America. A 90-day
warranty is provided on accessories included with the products at the time of
purchase. Sales of the Acuity central stations are warranted for a one-year
period. Pryon offers warranties between 9 and 24 months for OEM products and
12 months for stand-alone products. Optional extended warranty contracts are
available for all Propaq products and the Acuity central stations.
BACKLOG. The majority of customer orders are filled within 30 days of order
receipt. As a result, order backlog is normally less than one to two months'
production. Due to these factors, the Company does not believe backlog is an
accurate indication of future sales.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts at both the Beaverton, Oregon
and Menomonee Falls, Wisconsin locations focus on developing new products and
expanding the capabilities of existing products. The Company's research and
development staff consists of 89 individuals with collective expertise in
analog and digital circuit design, software design, networking and
communications, mechanical and packaging design, mathematics, medical and
clinical sciences, and optics and display technology. During 1997, 1996 and
1995, research and development expenses, net of reimbursed expenditures, were
$8.7 million, $8.7 million and $7.6 million, respectively.
The Company has taken a leadership role in the Andover Working Group (AWG) and
CORBAmed, two industry organizations that are dedicated to the goal of
interoperability between different hospital computer systems. Using the
standards adopted by CORBAmed and AWG, Protocol will be able to transmit
Acuity central station data to any system that adheres to the adopted
standards and is also programmed to utilize the kind of data the Acuity
central station generates. This capability provides a seamless exchange of
data between the Flexible Monitoring system and hospital information systems.
First demonstrated in October 1996 and February 1997 at industry conferences,
the capability is expected to be included in the Acuity System Communications
Option (ACO) which is expected to be available for customer shipments in late
1998.
MANUFACTURING
Protocol's manufacturing operations consist of procurement and inspection of
components, final assembly of electronic components and extensive testing of
finished products. The Company uses subcontractors for the fabrication and
assembly of printed circuit boards. By using this approach, the Company
reduces its capital and employee requirements and can more easily and rapidly
adopt emerging manufacturing technologies.
The Company currently procures all of its parts from outside suppliers and
relies upon a number of single-source suppliers to provide certain parts for
its products, including the pulse oximetry and EL display subassemblies. To
date, the Company has been able to obtain the necessary parts to meet
manufacturing requirements. There can be no assurance, however, that supply
shortages or interruptions will not arise in the future, which could increase
the cost or delay the shipment of the Company's products or cause the Company
to incur costs to develop alternative sources, either of which could have a
material adverse effect on the Company's results of operations.
The Company typically purchases components pursuant to open purchase orders
placed from time to time in the ordinary course of business. In order to
reduce the risk of supply interruption, the Company maintains close working
relationships with its suppliers and may choose to inventory selected
components.
Quality and reliability are emphasized in the design and manufacture of the
Company's products. The Company believes it manufactures its products
according to criteria that meet or exceed the requirements of all applicable
domestic and foreign regulations and standards. The Company's products
undergo thorough quality inspection and testing throughout the manufacturing
process. In addition, Protocol's quality assurance group inspects, operates
and verifies calibration and conformance with the customer order of all
products prior to shipment.
The Company's Beaverton, Oregon manufacturing facility received ISO 9001 and
EN 46001 certifications in January 1998 for its engineering and design
practices, which upgrades the ISO 9002 certification received in 1995 for the
production of patient vital signs monitoring systems and closed-loop drug
delivery/vital signs monitoring systems for diagnosis. In 1995, the Company
successfully completed a combined Premarket Approval (PMA) and Good
Manufacturing Practices (GMP) audit by the FDA. The PMA audit centered on the
Company's manufacturing process for the GenESA device. The combined audit was
completed with no adverse observations and without the issuance of Form 483.
In November 1997, Protocol was a recipient of the 1997 Oregon Quality Award
which is presented to organizations who demonstrate excellence and achievement
in key areas such as customer focus and satisfaction process management,
strategic planning and leadership.
Pryon manufactures and assembles its products at its facility in Menomonee
Falls, Wisconsin. Pryon has made significant capital and other investments to
enhance its manufacturing process and systems including production specific
systems, computerized in-process test stations, automatic computerized
calibration, specialized test fixtures and an airway adapter test system. In
addition, Pryon has made a significant investment in personnel and systems in
the areas of quality, regulatory and documentation control. As a result of
these efforts, Pryon received ISO 9001 and EN 46001 certifications in November
1995, and achieved self certification status per Annex II of the Medical
Device Directive in June 1996. Pryon completed a GMP audit in October 1996.
This audit, as well as all previous GMP audits, was completed with no adverse
findings and without the issuance of Form 483.
COMPETITION
The patient monitoring products market is intensely competitive and
characterized by rapidly evolving technology. Selling its products in
multiple market segments, the Company faces a broad range of competitors, many
of which have financial, technical, research and development and marketing
resources significantly greater than those of the Company. The Company's
principal competitors are Datascope Corporation, Hewlett-Packard Co.,
Marquette Electronics, Inc., Medical Data Electronics, Inc., Siemens Medical
Electronics, and Spacelabs Medical, Inc. Pryon's competitors include
Novametrix, Andros and Oridion (formerly Spegas). In addition to the
Company's existing competitors, other medical and electronic equipment
companies could enter the markets in which the Company competes.
The Company believes that the principal competitive factors in its market are
product depth and breadth, individual product features, reliability, customer
service, product reputation, price and effectiveness of marketing and sales
efforts. In addition, the Company believes that the speed with which
companies can identify medical needs and anticipate evolving standards of
care, develop products to meet those needs and standards, and supply
commercial quantities to the market are important competitive factors. The
Company believes that it competes favorably with respect to these factors.
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company owns or has rights to eleven U.S. patents, and has ten U.S. patent
applications pending related to the design and manufacture of patient
monitoring instruments. The Company owns or has the rights to six foreign
patents. The Company also owns eleven U.S. registered trademarks, has four
U.S. trademark registration applications pending, owns eight registered
trademarks in various countries and has one foreign trademark application
pending. In addition, the Company holds copyrights with respect to its
proprietary software. Pryon owns or has the rights to two U.S. patents.
Although the Company has such proprietary rights, it believes that its success
depends more upon the innovative skills and technical competence of its
management and employees in responding to customer needs and changing markets
than upon ownership of such rights.
GOVERNMENT REGULATION
The manufacture and sale of the Company's products are subject to substantial
regulation by numerous governmental authorities, principally the FDA and
corresponding foreign agencies. The Company is subject to FDA regulations,
standards and procedures with respect to registration of the Company's
manufacturing facilities and the manufacture of its medical devices and to
periodic FDA inspection for compliance therewith. The FDA also has broad
regulatory powers with respect to pre-clinical and clinical testing of new
medical devices and the manufacturing, marketing and advertising of medical
devices.
The Company is also subject to regulation in the foreign countries in which it
markets its products. Many of the regulations applicable to the Company's
products in such countries are similar to those of the FDA. However, certain
foreign regulatory agencies establish product standards and qualification
requirements for medical devices which are different from, and in some cases
more stringent than, those in the United States.
The Company has received certification that the 100 Series Propaq monitor, the
Propaq Encore monitor and the SC-300 and SC-210 stand alone CO2 monitors meet
the essential requirements of the Medical Device Directive of the European
Union. This certification authorizes the Company to display the CE mark on
its monitors and to sell monitors in the various countries of the European
Union. Prior to obtaining this certification, the Company was required to
obtain product approvals from each of the pertinent regulatory agencies of the
individual countries of the European Union.
Federal and foreign regulations regarding manufacture and sale of products
such as those of the Company, as well as regulations and practices regarding
the reimbursement of hospitals and other health care providers for the cost of
service rendered, are subject to change. Although the Company cannot predict
what impact, if any, such changes might have on its business, it is possible
that any such changes could adversely affect the Company's business.
EMPLOYEES
As of December 31, 1997, the Company had 409 employees, including 89 in
research and development, 167 in manufacturing, 110 in marketing and sales and
43 in administration. The Company's future success will depend, in part, on
its continued ability to attract and retain qualified personnel. None of the
Company's employees are represented by collective bargaining groups and the
Company considers its relationships with employees to be good.
ITEM 2. PROPERTIES
The Company's principal offices are located in Beaverton, Oregon and Menomonee
Falls, Wisconsin. The Company leases approximately 75,000 square feet at the
Beaverton, Oregon location under a lease that expires in December 2005. The
lease for 26,000 square feet at the Menomonee Falls, Wisconsin facility
expires in June 1999. The primary manufacturing, warehousing, research and
development, sales, marketing and administrative activities of the Company are
conducted from these facilities which are nearly fully utilized and are
maintained in good condition. The Company believes that the properties
subject to the lease and additional office space available under lease options
will be sufficient to accommodate its operations for the near term.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock began trading on the Nasdaq Stock Market under the
symbol PCOL on March 24, 1992 following the Company's initial public offering.
As of March 23, 1998, there were 170 stockholders of record of Protocol common
stock and approximately 3,800 beneficial owners of common stock. No cash
dividends have been paid on the common stock and the Company does not
anticipate paying any cash dividends in the foreseeable future.
Following are the range of the high and low sales prices for the Company's
common stock as reported by Nasdaq:
1997 -- QUARTER ENDED: HIGH LOW
- - ---------------------------- ------ ------
December 31, 1997.................... $12.81 $ 9.88
September 30, 1997................... 12.75 7.63
June 30, 1997........................ 8.94 7.00
March 31, 1997....................... 14.50 8.88
1996 -- QUARTER ENDED: HIGH LOW
- - ---------------------------- ------ ------
December 31, 1996.................... $15.75 $10.00
September 30, 1996................... 23.25 15.25
June 30, 1996........................ 26.38 15.63
March 31, 1996....................... 17.50 10.50
During the fourth quarter of 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 25,250 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 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands, except
per share amounts) 1997 1996 1995 1994 1993
- --------------------------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
OPERATIONS DATA
Sales $64,094 $66,894 $59,602 $48,158 $43,327
Income from operations 3,316 5,005 6,010 4,098 3,823
Income before cumulative
effect of change in
accounting principle 3,356 4,078 5,398 3,434 2,954
Net income 3,356 4,078 5,398 3,434 3,054
PER SHARE DATA
Basic earnings per share
before cumulative effect
of change in accounting
principle $.38 $.47 $.64 $.42 $.37
Diluted earnings per share
before cumulative effect
of change in accounting
principle .36 .44 .60 .40 .34
Basic earnings per share .38 .47 .64 .42 .38
Diluted earnings per share .36 .44 .60 .40 .36
Weighted average number of
shares used in the
computation of :
Basic earnings
per share 8,859 8,672 8,460 8,201 8,070
Diluted earnings
per share 9,253 9,373 9,004 8,639 8,573
Dividends declared -- -- -- -- --
BALANCE SHEET DATA
Cash and investments $25,570 $22,703 $24,267 $23,719 $19,466
Working capital 42,475 43,783 30,853 33,352 30,399
Total assets 63,755 59,045 57,220 48,196 42,213
Long-term debt and capital
lease obligations,
excluding current
maturities -- -- 1,795 156 387
Shareholders' equity 55,678 51,309 46,793 39,426 34,733
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis of Results of Operations for 1996 and
1995 has been restated to conform to the 1997 presentation.
1997 COMPARED TO 1996
SALES. Sales decreased 4.2% to $64.1 million in 1997 from $66.9 million in
1996. Instrument sales (including the Propaq and Propaq Encore monitors and
monitor options) decreased by $5.8 million or 12.4% from 1996. The decline in
instrument sales resulted from a decrease in the unit sales of 100 Series
Propaq monitors, the older monitor model sold, and higher sales discounts.
Sales of the Propaq Encore (200 Series) monitor increased from the prior year
in both units and total dollars. Sales of GenESA devices to Gensia
Automedics, Inc. decreased $1.8 million or 76.1% in 1997. These decreases
were partially offset by an increase in sales of Acuity central stations,
service, accessories, and the introduction of the QuikSigns monitor in 1997.
Acuity central station sales increased $2.3 million or 86.7% in 1997 as a
result of an increase in the number of Acuity central stations sold as well as
higher average selling prices due to an increase in the size and scale of
individual sales.
Domestic sales, excluding military revenues and Original Equipment
Manufacturer (OEM) sales of GenESA devices and Pryon OEM products, increased
19.5% to $34.8 million (54.3% of total sales) in 1997 from $29.2 million
(43.6% of total sales) in 1996. The growth in domestic sales was primarily
attributable to an increase in the sales of Acuity central stations and
related instruments as a result of the growing market acceptance of the
Company's Flexible Monitoring concept which enables health care providers to
maximize patient monitor utilization and reduce overall monitoring costs.
U.S. military revenues decreased 60.2% to $3.4 million (5.3% of total sales)
in 1997 from $8.5 million (12.7% of total sales) in 1996. The Company
attributes the decrease in its military revenues in 1997 to the unpredictable
size and timing of military patient monitoring equipment procurements.
International sales, excluding international OEM sales of GenESA devices and
Pryon OEM products, decreased 8.0% to $17.5 million (27.3% of total sales) in
1997 from $19.0 million (28.5% of total sales) in 1996. This decline in
international sales was principally due to the increased strength of the U.S.
dollar against foreign currencies and soft economic conditions in
international markets, particularly in Europe and Asia.
OEM sales of GenESA devices and Pryon OEM products decreased 17.9% to $8.4
million (13.1% of total sales) in 1997 from $10.2 million (15.2% of total
sales) in 1996 due to decreased sales of GenESA devices to Gensia Automedics,
Inc. Gensia began shipments of GenESA devices to Europe in early 1995 and in
1997 Gensia received clearance from the Food and Drug Administration (FDA) to
market the GenESA device in the United States. As a result of the FDA market
clearance the development and supply agreement with Gensia was amended and the
Company expects sales to Gensia to increase in 1998.
The Company announced in January 1998 that it expected net income in 1998 to
remain relatively flat compared to 1997 as the Company plans to increase its
marketing and sales efforts in 1998 by increasing the number of direct sales
representatives, clinical applications specialists and field service
engineers. Additionally, the Company is establishing direct sales
organizations in France and Germany in 1998.
GROSS PROFIT. Gross profit as a percentage of sales decreased from 54.4% in
1996 to 51.3% in 1997. 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 Flexible Monitoring system, Massachusetts General Hospital had the
right to purchase certain monitoring equipment for a small markup over cost.
This right expired in October 1997. Gross profit was also negatively impacted
by additional warranty expenses incurred as a result of the Company's
voluntary decision to replace a defective component in certain Propaq Encore
monitors in 1997, as well as an increase in the percentage of sales of lower
margin products including service, accessories and QuikSigns monitors.
RESEARCH AND DEVELOPMENT. Research and development expenses remained
consistent at $8.7 million in 1997 compared to $8.8 million in 1996. As a
percentage of sales, research and development expenses were 13.5% in 1997 and
13.1% in 1996.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 3.0% to $20.9 million in 1997 from $20.3 million in 1996.
This increase resulted primarily from rising payroll and related costs
associated with the growth of the sales organization and higher commission
expense related to the increase in domestic sales. As a percentage of sales,
selling, general and administrative expenses were 32.6% in 1997 and 30.3% in
1996.
Selling, general and administrative expenses are expected to increase in both
total dollars and as a percentage of sales in 1998 as a result of anticipated
increases in the number of direct sales representatives and clinical
applications specialists employed by the Company and the establishment of
direct sales organizations in France and Germany in 1998.
ACQUISITION RELATED AND LITIGATION SETTLEMENT CHARGES. In 1996, the Company
incurred expenses of $2.1 million in connection with the acquisition of Pryon.
Additionally, the Company incurred $275,000 in expenses in connection with the
settlement of litigation regarding the 1991 termination of the Company's
former Canadian distributor. No such charges were incurred in 1997.
OTHER INCOME. Other income (net) increased to $1.1 million in 1997 from
$999,000 in 1996 primarily due to an increase in interest income on higher
cash and investments balances as well as a slightly higher rate of return on
investments.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased to $1.0
million in 1997 from $1.9 million in 1996, representing effective tax rates of
23.5% and 32.1%, respectively. The decrease in the effective tax rate resulted
primarily from the effect in 1996 of nondeductible charges related to the
acquisition of Pryon. Other factors that effect the tax rate comparison
include lower 1997 state taxes and increased R&E tax credits created by the
extension of the federal credit provisions, offset by greater tax benefits in
1996 of deferred tax valuation reserve adjustments and utilization of net
operating loss carryovers.
1996 COMPARED TO 1995
SALES. Sales increased 12.2% to $66.9 million in 1996 from $59.6 million in
1995. Instrument sales (including the Propaq and Propaq Encore monitors and
monitor options) increased by $7.0 million or 17.6% from 1995. The growth in
instrument sales resulted from increased unit sales of monitors and monitor
options as well as increased average selling prices for monitors. Average
selling prices for monitors rose as unit sales of the Propaq Encore (200
Series) monitor increased and represented a larger percentage of total monitor
unit sales. Sales of the Propaq Encore monitor, which carries a higher list
price than the Company's 100 Series Propaq monitor, began in June 1995.
Increases in the sales of accessories, service, Acuity central stations and
GenESA devices also contributed to the growth in total sales.
Domestic sales, excluding military revenues and Original Equipment
Manufacturer (OEM) sales of GenESA devices and Pryon OEM products, increased
9.4% to $29.2 million (43.6% of total sales) in 1996 from $26.7 million (44.7%
of total sales) in 1995. The growth in domestic sales is primarily due to the
increase in sales of the Propaq Encore monitor and the growing market
acceptance of the Company's Flexible Monitoring concept which enables
hospitals to maximize patient monitor utilization and reduce overall
monitoring costs.
U.S. military revenues increased 146.7% to $8.5 million (12.7% of sales) in
1996 from $3.5 million (5.8% of sales) in 1995 due to several large shipments
of monitoring equipment made to the U.S. Department of Defense in 1996.
International sales, excluding international OEM sales of GenESA devices and
Pryon OEM products, increased 13.3% to $19.0 million (28.5% of total sales) in
1996 from $16.8 million (28.2% of total sales) in 1995. This growth in
international sales was principally due to increased sales to the Company's
Japanese distributor and increased sales of the Propaq Encore monitor.
OEM sales of GenESA devices and Pryon OEM products decreased 19.7% to $10.2
million (15.2% of total sales) in 1996 from $12.7 million (21.3% of total
sales) in 1995. OEM sales by Pryon decreased by $2.7 million or 25.7% due to
reductions in orders from two of its largest OEM customers. OEM sales of
GenESA devices to Gensia, Inc. increased 9.6% to $2.4 million in 1996 from
$2.2 million in 1995, partially offsetting the decrease in Pryon's sales.
GROSS PROFIT. Gross profit as a percentage of sales increased from 53.4% in
1995 to 54.4% in 1996. The increase in gross profit as a percentage of sales
was largely due to the decline in OEM sales as a percentage of total sales.
OEM sales generally have lower margins than sales to end-user customers.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 13.4%
to $8.8 million in 1996 from $7.7 million in 1995. The increase in expenses
consisted primarily of payroll and related costs associated with the
additional engineering headcount required to support the Company's development
activities. In addition, the inclusion of the expenses of the Company's
Northern Ireland subsidiary, Protocol Medical Systems Limited, for a full
twelve months in 1996 also contributed to the increase in expenses. This
subsidiary was acquired on July 31, 1995 and therefore, only a portion of the
year's expenses were included in 1995. As a percentage of sales, research and
development expenses were 13.1% in 1996 and 13.0% in 1995.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 12.2% to $20.3 million in 1996 from $18.1 million in 1995.
This increase resulted primarily from rising payroll and related costs
associated with the growth of the sales organization, higher administrative
fees paid to hospital buying groups and increased travel costs for the
domestic and international sales organizations. As a percentage of sales,
selling, general and administrative expenses were 30.3% in both 1996 and 1995.
ACQUISITION RELATED CHARGES. The Company incurred expenses of $2.1 million in
1996 in connection with the acquisition of Pryon. These expenses consisted
principally of fees for investment banking, legal and accounting services as
well as other expenses related to the combination of the two companies.
LITIGATION SETTLEMENT CHARGES. In 1996, the Company incurred $275,000 in
expenses in connection with the settlement of litigation regarding the 1991
termination of the Company's former Canadian distributor.
OTHER INCOME. Other income (net) increased to $999,000 in 1996 from $916,000
in 1995 primarily due to reduced interest expense on the debt of Pryon.
Following the Company's acquisition of Pryon in July 1996, the outstanding
debt of Pryon was retired.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to $1.9
million in 1996 from $1.5 million in 1995, representing effective tax rates of
32.1% and 22.1%, respectively. The increase in the effective tax rate
resulted primarily from the effect of nondeductible charges related to the
acquisition of Pryon and a reduction in the tax benefit from the utilization
of Pryon's net operating loss carryovers.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company's financial position remained strong as
cash and investment balances totaling $25.6 million continued to provide the
Company with a substantial source of capital and liquidity. Working capital
balances decreased to $42.5 million at December 31, 1997 from $43.8 million at
December 31, 1996 primarily due to a shift in the Company's investment
portfolio towards long-term investments. The change in the mix of long-term
and short-term investments also resulted in a decrease in the current ratio to
6.5:1 at December 31, 1997 from 7.0:1 at December 31, 1996.
Operating activities generated positive cash flows of $4.5 million in 1997
despite an increase in overall inventory balances. Cash of $2.2 million was
used for the acquisition of property and equipment in 1997.
No significant commitments for capital expenditures have been entered into as
of December 31, 1997. However, 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. As of
March 23, 1998, the Company had repurchased 439,000 shares of common stock at
a weighted average purchase price of $9.78 per share. Additionally,
management will continue to explore opportunities for strategic relationships
with other companies and the possible acquisition of technologies or
businesses, all of which may require significant future outlays of cash.
Management believes that the combination of current cash and investment
balances and cash flows from operations will be sufficient to meet the
Company's liquidity and capital needs for 1998 and the foreseeable future.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other sections of this Annual 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 discussion and analysis of financial condition and
results of operations, as well as those discussed elsewhere in the Annual
Report and from time to time in the Company's Securities and Exchange
Commission filings and reports, including the Company's Annual Report on Form
10-K for the year ended December 31, 1997. In addition, such statements could
be affected by general industry and market conditions and growth rates, and
general domestic and international economic conditions.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". The Statement establishes standards for the
reporting and display of comprehensive income and its components. The
Statement requires that all items that are income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Statement is effective for financial statements for fiscal
years beginning after December 15, 1997. The Company will adopt the statement
for the year ended December 31, 1998.
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 Statement is effective for financial statements for fiscal years beginning
after December 15, 1997. The Company will adopt the statement for the year
ended December 31, 1998.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The management of Protocol Systems, Inc. is responsible for the accompanying
consolidated financial statements. These consolidated financial statements
were prepared by management in conformity with generally accepted accounting
principles and necessarily include amounts which are based on management's
best estimates and judgment.
Management is also responsible for maintaining systems of internal control to
provide reasonable assurance that assets are safeguarded, business activities
are executed in accordance with management authorization and transactions are
properly recorded.
Throughout 1997, the Audit Committee of the Board of Directors was composed of
two outside directors who were not officers or employees of the Company.
These directors met regularly with management and with the independent
auditors to review matters related to accounting, financial reporting and the
Company's systems of internal control. The independent auditors have free
access to the Audit Committee, without management present, to discuss these
matters.
/s/ David F. Bolender
Chief Executive Officer and Chairman of the Board
/s/ James B. Moon
President and Chief Technical Officer
/s/ Craig M. Swanson
Vice-President Finance, Chief Financial Officer and Secretary
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Protocol Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Protocol
Systems, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Protocol
Systems, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
January 23, 1998
<PAGE>
PROTOCOL SYSTEMS, INC.
Consolidated Statements of Operations
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Sales $64,094 $66,894 $59,602
Cost of sales 31,212 30,471 27,793
Gross profit 32,882 36,423 31,809
Operating expenses:
Research and development expenses 8,675 8,754 7,719
Selling, general and administrative expenses 20,891 20,292 18,080
Acquisition related charges -- 2,097 --
Litigation settlement charges -- 275 --
------- ------- -------
Total operating expenses 29,566 31,418 25,799
------- ------- -------
Income from operations 3,316 5,005 6,010
Other income (expense):
Interest income 1,104 1,156 1,164
Interest expense -- (110) (186)
Other (32) (47) (62)
------- ------- -------
1,072 999 916
------- ------- -------
Income before income taxes 4,388 6,004 6,926
Provision for income taxes (note 9) 1,032 1,926 1,528
------- ------- -------
Net income $ 3,356 $ 4,078 $ 5,398
------- ------- -------
Earnings per share (note 6):
Basic earnings per share $ 0.38 $ 0.47 $ 0.64
------- ------- -------
Diluted earnings per share $ 0.36 $ 0.44 $ 0.60
------- ------- -------
Weighted average number of shares
used in the computation of:
Basic earnings per share 8,859 8,672 8,460
Diluted earnings per share 9,253 9,373 9,004
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PROTOCOL SYSTEMS, INC.
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------
ASSETS 1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $12,257 $ 6,903
Short-term investments (note 3) 6,524 14,787
Accounts receivable:
Trade, less allowance for doubtful accounts
of $358 and $252 at 1997 and 1996, respectively 15,746 14,923
Other 360 533
Inventories (note 2) 13,507 12,416
Deferred income taxes (note 9) 1,474 1,320
Prepaid expenses and other 276 166
------- -------
Total current assets 50,144 51,048
Long-term investments (note 3) 6,789 1,013
Property and equipment, at cost
Equipment 11,732 10,180
Furniture and fixtures 1,757 1,419
Leasehold improvements 683 654
------- -------
14,172 12,253
Less accumulated depreciation and amortization 9,597 7,775
------- -------
Net property and equipment 4,575 4,478
Software development costs 271 446
Other assets 1,976 2,060
------- -------
$63,755 $59,045
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,806 $ 2,480
Accrued salaries, wages and related liabilities 2,375 2,514
Other accrued liabilities 606 739
Income taxes payable 676 405
Reserve for warranties 1,084 985
Deferred revenue and customer deposits 122 142
------- -------
Total current liabilities 7,669 7,265
Deferred income taxes (note 9) 408 471
Commitments (note 8) -- --
Shareholders' equity (note 4):
Preferred stock, $.01 par value. Authorized
10,000 shares; 0 shares issued and
outstanding at 1997 and 1996 -- --
Common stock, $.01 par value. Authorized
30,000 shares; issued and outstanding
8,935 at 1997 and 8,744 at 1996 89 87
Additional paid-in capital 35,414 34,363
Unrealized holding gain on investments (note 3) 33 32
Retained earnings 20,077 16,721
Foreign currency translation adjustment 65 106
------- -------
Total shareholders' equity 55,678 51,309
------- -------
$63,755 $59,045
------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PROTOCOL SYSTEMS, INC.
Consolidated Statements of Shareholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Foreign Total
Common stock Additional Unrealized currency share-
----------------- paid-in holding Retained translation holders'
Shares Par value capital gain (loss) earnings adjustment equity
------ --------- --------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 8,312 $83 $32,332 ($233) $7,245 $ -- $39,427
Common stock
issued under
stock purchase
and stock
option plans 155 2 678 -- -- -- 680
Tax benefit from
stock option
incentive plans -- -- 191 -- -- -- 191
Common stock issued
for purchase of
subsidiary 145 1 851 -- -- -- 852
Unrealized holding
gain on
investments
(note 3) -- -- -- 279 -- -- 279
Net income -- -- -- -- 5,398 -- 5,398
Foreign currency
translation
adjustment -- -- -- -- -- (34) (34)
------ --------- --------- ----------- -------- ----------- ---------
Balance at
December 31, 1995 8,612 86 34,052 46 12,643 (34) 46,793
Common stock
issued under
stock purchase
and stock
option plans 189 2 948 -- -- -- 950
Tax benefit from
stock option
incentive plans -- -- 531 -- -- -- 531
Vesting of shares
issued for
purchase of
subsidiary -- -- 92 -- -- -- 92
Repurchase of
common stock (57) (1) (1,260) -- -- -- (1,261)
Unrealized holding
loss on
investments
(note 3) -- -- -- (14) -- -- (14)
Net income -- -- -- -- 4,078 -- 4,078
Foreign currency
translation
adjustment -- -- -- -- -- 140 140
------ --------- --------- ----------- -------- ----------- ---------
Balance at
December 31, 1996 8,744 87 34,363 32 16,721 106 51,309
Common stock
issued under
stock purchase
and stock
option plans 191 2 879 -- -- -- 881
Tax benefit from
stock option
incentive plans -- -- 81 -- -- -- 81
Vesting of shares
issued for
purchase of
subsidiary -- -- 91 -- -- -- 91
Unrealized holding
gain on
investments
(note 3) -- -- -- 1 -- -- 1
Net income -- -- -- -- 3,356 -- 3,356
Foreign currency
translation
adjustment -- -- -- -- -- (41) (41)
------ --------- --------- ------------ -------- ----------- ---------
Balance at
December 31, 1997 8,935 $89 $35,414 $33 $20,077 $65 $55,678
------ --------- --------- ------------ -------- ----------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PROTOCOL SYSTEMS, INC.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,356 $4,078 $5,398
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,365 2,196 1,802
Amortization of bond premium 312 398 240
Provision for deferred income taxes (250) (125) (390)
Increase (decrease) in cash resulting from changes in:
Accounts receivable (653) 34 (4,299)
Inventories (1,098) (2,530) (1,886)
Prepaid expenses and other assets (130) 148 201
Accounts payable and accrued expenses 199 142 428
Income taxes payable 271 (845) 471
Reserve for warranties 99 (70) 75
Deferred revenue and customer deposits (20) (6) (59)
-------- -------- -------
Net cash provided by operating activities 4,451 3,420 1,981
Cash flows from investing activities:
Purchase of investments (14,539) (9,683) (25,498)
Proceeds from maturity of investments 16,715 13,764 22,966
Acquisition of property and equipment (2,198) (2,528) (2,228)
Expenditures for software development (26) (205) (131)
Acquisition of intangible assets (10) (200) --
Cash paid for acquisition of subsidiary, net
of cash acquired -- -- (237)
-------- -------- --------
Net cash provided by (used in) investing
activities (58) 1,148 (5,128)
Cash flows from financing activities:
Proceeds from stock option and stock purchase plans
and related tax benefits 962 1,481 871
Repurchase of common stock -- (1,261) --
Proceeds from long-term debt -- -- 1,831
Principal payments on long-term debt -- (1,894) (1,571)
-------- -------- --------
Net cash provided by (used in) financing
activities 962 (1,674) 1,131
Effect of exchange rates on cash and cash equivalents (1) 35 (6)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents 5,354 2,929 (2,022)
Cash and cash equivalents at beginning of year 6,903 3,974 5,996
-------- -------- --------
Cash and cash equivalents at end of year $12,257 $6,903 $3,974
-------- -------- --------
Supplemental disclosures of cash flow information:
Cash paid for interest -- $ 119 $ 179
-------- -------- --------
Cash paid for income taxes $ 933 $2,364 $1,255
-------- -------- --------
Supplemental schedule of noncash financing activities:
Increase in investment in Protocol Medical Systems,
Ltd. due to release of compensatory shares of
common stock from escrow $ 91 $ 92
Fair value of net assets of subsidiary, consisting
primarily of intangible technology assets,
acquired by issuance of common stock and
liabilities incurred $ 754
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PROTOCOL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Protocol
Systems, Inc. and its wholly owned subsidiaries (the "Company"). All material
intercompany balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of these consolidated financial statements, the Company considers
all highly liquid securities purchased with an original or effective maturity
of three months or less to be cash equivalents.
INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities", all investments in marketable securities are classified as
available-for-sale and are reported at their fair market value.
Short-term investments consist of highly liquid securities with maturities of
less than one year. Long-term investments consist of highly-rated notes and
bonds from a variety of issuers with maturities of greater than one year and
less than two years.
INVENTORIES
Inventories consist primarily of raw materials, work in process, finished
goods and demonstration instruments and are valued at the lower of cost or
market. Cost is determined on the first-in, first-out basis (FIFO).
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the various assets,
generally three to five years. Leasehold improvements are amortized using the
straight-line method over a period of five years or the life of the lease,
whichever is shorter. Depreciation expense, including amortization of capital
leases, totaled $2,058,000, $1,860,000, and $1,467,000 for 1997, 1996, and
1995, respectively.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes certain software development costs incurred in
accordance with the provisions of Statement of Financial Accounting Standards
No. 86. These capitalized costs are amortized using the straight-line method
over the estimated economic life of the software, which is not anticipated to
exceed three years. The Company capitalized software development costs of
$26,000, $205,000, and $131,000 in 1997, 1996, and 1995, respectively.
Amortization expense related to capitalized software development costs of
$202,000, $244,000, and $276,000 was recorded in 1997, 1996, and 1995,
respectively. Amortization of capitalized software costs is included in cost
of sales in the consolidated statements of operations. Accumulated
amortization at December 31, 1997 and 1996 was $1,314,000 and $1,112,000,
respectively.
INTANGIBLE ASSETS
Intangible assets, which are classified as other non-current assets, are
stated at historical cost less accumulated amortization. The Company's
intangible assets include purchased intangible assets of $350,000 consisting
of $150,000 of patents and an engineering software license of $200,000. The
patents are amortized using the straight-line method over their estimated
economic lives of ten years. Amortization of the engineering software license
will commence upon the initial sale of the related product. Accumulated
amortization of these assets was $50,000 at December 31, 1997.
The Company acquired the technology rights to the Universal Defibrillator
Module (UDM), a compact, lightweight, microprocessor-based system, through its
acquisition in 1995 of Protocol Medical Systems Limited, formerly Omeara
Limited. The total value assigned to this asset at time of purchase was
$1,560,000. Amortization of this asset will commence upon the initial sale of
a combined monitor/defibrillator product.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiary, Protocol Medical
Systems Limited, is the local currency. Assets and liabilities of Protocol
Medical Systems Limited are translated into U.S. dollars at the current
exchange rate as of the balance sheet date. Revenues and expenses are
translated using a weighted average exchange rate for the period presented.
Adjustments resulting from the translation of the financial statements of
Protocol Medical Systems Limited are included as a separate component of
consolidated shareholders' equity.
Cash flows from Protocol Medical Systems Limited are calculated using its
functional currency. As a result, changes in assets and liabilities reported
on the consolidated statements of cash flows will not necessarily agree to
changes in the corresponding items on the consolidated balance sheets. The
effect of exchange rate changes on cash balances held in foreign currencies is
reported as a separate line item in the consolidated statements of cash flows.
REVENUE RECOGNITION
Revenue is recognized and all related costs, including warranty, are recorded
upon transfer of title and risk of loss to the customer which generally occurs
upon product shipment.
BASIC AND DILUTED EARNINGS PER SHARE
During 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share." In accordance with the requirements of
SFAS 128 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.
FINANCIAL INSTRUMENTS
The recorded amount of financial instruments approximates the fair market
value.
USE OF ESTIMATES
These consolidated financial statements were prepared by management in
conformity with generally accepted accounting principles and necessarily
include amounts which are based on management's best estimates and judgment.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements for 1996 and 1995 to conform to the 1997 presentation.
STOCK-BASED COMPENSATION PLANS
Prior to 1996, the Company accounted for its stock plans in accordance with
the provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees." Under APB No. 25, compensation
expense would be recorded on the date of grant of an option only if the
current market price of the underlying stock exceeded the exercise price under
the option. Effective in 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value method of accounting for stock
plans. As allowed under SFAS No. 123, the Company has elected to continue to
apply the provisions of APB No. 25 to its plans covering employees and non-
employee directors, and to provide pro-forma disclosures of the effects of
SFAS No. 123 on net income and earnings per share.
NOTE 2. INVENTORIES
<TABLE>
<CAPTION>
The components of inventories are as follows:
(in thousands) 1997 1996
------- -------
<S> <C> <C>
Raw materials $ 5,521 $ 4,921
Work in process 2,460 2,307
Finished goods 3,569 3,396
Demonstration instruments 1,957 1,792
------- -------
Total inventories $13,507 $12,416
------- -------
</TABLE>
NOTE 3. INVESTMENTS
At December 31, 1997, the fair market value of short-term and long-term
investments was $13,313,000 while short-term and long-term investments stated
at amortized cost were $13,280,000 resulting in an unrealized holding gain of
$33,000. At December 31, 1996, the fair market value of short-term and long-
term investments was $15,800,000 while short-term and long-term investments
stated at amortized cost were $15,768,000 resulting in an unrealized holding
gain of $32,000. Unrealized holding gains and losses on available-for-sale
securities are reported as a separate component of shareholders' equity until
realized.
NOTE 4. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of $.01 par value
preferred stock. At December 31, 1997, no preferred shares were issued;
however, 100,000 shares of Series D Junior Participating Preferred Stock had
been designated and reserved. Additional series of preferred stock may be
designated and the related rights and preferences fixed by action of the Board
of Directors.
COMMON STOCK OPTIONS
Pursuant to the Company's 1987 and 1992 stock option plans, the Board of
Directors has the authority to grant incentive stock options. The incentive
stock options generally vest at a rate of 25% per year, with the Board having
authority to accelerate the vesting schedules. The options expire ten years
from the date of grant. The incentive stock option price is determined by the
Board of Directors, but may not be less than the fair market value of the
Company's common stock on the date of grant.
Non-statutory stock options may also be granted pursuant to the 1992 stock
option plan. The option price for the non-statutory stock options is
determined by the Board of Directors on the date of grant, but may not be less
than the fair market value of the Company's common stock on the grant date.
The outstanding options vest at a rate of 25% per year, with the Board having
authority to accelerate the vesting schedules. Non-statutory options expire
ten years from the date of grant.
Pursuant to the Company's 1993 Stock Option Plan for Nonemployee Directors,
each nonemployee director will receive an initial option to purchase 10,000
shares of common stock immediately following the annual meeting of
shareholders at which such director is first elected to the Board of
Directors. The initial option grant vests ratably over a three year period.
Following each subsequent annual meeting of shareholders, each nonemployee
director will receive an additional option, which is immediately exercisable,
to purchase 3,000 shares of common stock. The option price for the non-
statutory stock options granted pursuant to the plan may not be less than the
fair market value of the Company's common stock at the date of grant. Each
option expires ten years from the date of grant.
As of December 31, 1997, there were 203,113 stock options available for grant
under the 1992 option plan, 257,000 non-statutory stock options available for
grant under the 1993 option plan for non-employee directors and no stock
options available for grant under the 1987 option plan. The Company has
reserved 1,837,736 shares of common stock for future issuance pursuant to
these plans.
The following is a summary of option activity under the Company's option plans:
<TABLE>
<CAPTION>
INCENTIVE NON-STATUTORY
STOCK OPTIONS STOCK OPTIONS
------------------------ -----------------------
<S> <C> <C> <C> <C>
NUMBER PRICE NUMBER PRICE
OF SHARES PER SHARE OF SHARES PER SHARE
---------- ------------ --------- -------------
Outstanding at December 31, 1994 951,415 $ .35 -11.00 72,773 $7.25 -11.00
Exercised (97,866) 1.32 -11.00 ( 7,000) 7.25
Cancelled (37,399) 2.55 -12.00 -- --
Granted 182,188 1.06 -12.00 12,000 9.75
---------- ------------ --------- -------------
Outstanding at December 31, 1995 998,338 .35 -12.00 77,773 7.25 -11.00
Exercised (123,871) .35 -11.50 (19,000) 7.25 - 9.75
Cancelled (33,277) .89 -26.00 -- --
Granted 381,788 10.50 -26.00 77,552 12.13 -18.75
---------- ------------ --------- -------------
Outstanding at December 31, 1996 1,222,978 .35 -26.00 136,325 7.25 -18.75
Exercised (108,408) .35 -10.75 -- --
Cancelled (408,426) .89 -26.00 -- --
Granted 504,404 7.00 -13.75 30,750 8.00 -13.75
---------- ------------ --------- -------------
Outstanding at December 31, 1997 1,210,548 $ .35 -20.75 167,075 $7.25- 18.75
---------- ------------ --------- -------------
</TABLE>
There were 617,438 and 634,803 incentive stock options and 107,461 and 59,807
non-statutory stock options exercisable at December 31, 1997 and 1996,
respectively.
SHAREHOLDER RIGHTS PLAN
In March 1992, the Board of Directors approved a shareholder rights plan and
declared a dividend of one preferred share purchase right for each outstanding
common share. Each right represents the right to purchase one one-hundredth
of a share of Series D Junior Participating Preferred Stock, par value $.01
per share, at an exercise price of $40, subject to adjustment. The rights are
only exercisable ten days after a person or group acquires, or commences a
tender or exchange offer to acquire, beneficial ownership of 20% or more of
the Company's outstanding common shares. Subject to the terms of the
shareholder rights plan and upon the occurrence of certain events, each right
would entitle the holder to purchase common shares of the Company, or of an
acquiring company in certain circumstances, having a market value of two times
the exercise price of the right. The rights expire in March 2002, but may be
redeemed by action of the Board of Directors prior to that time at $.01 per
right.
EMPLOYEE STOCK PURCHASE PLAN
On May 19, 1994, the Company's shareholders approved the 1994 Employee Stock
Purchase Plan. Pursuant to this plan, employees of the Company may elect to
accumulate funds of up to 10% of their cash compensation via payroll deduction
to purchase shares of the Company's common stock. Under the plan, 91,736,
45,972, and 50,295 shares of common stock were issued in 1997, 1996, and 1995,
respectively. The Company has reserved 86,523 shares of common stock for
future issuance under this plan.
NOTE 5. STOCK-BASED COMPENSATION PLANS
At December 31, 1997, the Company had four plans providing for stock
compensation; three fixed option plans under which options are granted to
acquire company stock at exercise prices equal to 100% of the fair value of
the stock as of the date the option is granted, and an employee stock purchase
plan, which provides for six-month enrollment periods under which shares may
be purchased at 85% of the lesser of the fair value at the beginning or end of
the enrollment period.
The Company applies APB No. 25 in accounting for these plans and, accordingly,
no compensation cost has been recognized with respect thereto. Had
compensation cost for these plans been determined consistent with SFAS No.
123, the Company's net income and basic and diluted earnings per share would
have been reduced to the pro forma amounts shown in the following table:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C> <C>
Net income (in thousands) As reported $3,356 $4,078 $5,398
Pro forma $1,811 $3,155 $5,086
Basic earnings per share As reported $ 0.38 $ 0.47 $ 0.64
Proforma $ 0.20 $ 0.36 $ 0.60
Diluted earnings per share As reported $ 0.36 $ 0.44 $ 0.60
Proforma $ 0.20 $ 0.35 $ 0.57
</TABLE>
The pro forma information presented above includes only the effects of
applying SFAS No. 123 to options granted in 1997, 1996 and 1995. Because
options generally vest over a number of years and additional awards are made
each year, the pro forma 1997, 1996 and 1995 amounts are not representative of
the effect SFAS No. 123 would have had on net income and earnings per share
had it been applied to options granted prior to 1995. The resulting pro forma
compensation costs may not be representative of that expected in future years.
The fair value of compensation cost reflected in the above pro forma amounts
was determined using the Black-Scholes option pricing model and the following
weighted-average assumptions: (1) risk-free interest rate: 1997 - 6.18%; 1996
- - 6.14%; 1995 - 6.59%; (2) expected life of option - 5 years; (3) expected
volatility - .60; and (4) expected dividends - 0%.
Information with respect to the Company's fixed option plans for 1997, 1996
and 1995 is provided below:
<TABLE>
<CAPTION>
Weighted-average
Number of shares exercise price per share
---------------- ------------------------
<S> <C> <C>
Balance at December 31, 1994 1,024,188 $ 5.21
Granted 194,188 9.27
Exercised (104,866) 3.17
Cancelled (37,399) 7.79
Expired -- --
--------- -------
Balance at December 31, 1995 1,076,111 6.01
Granted 459,340 14.64
Exercised (142,871) 3.49
Cancelled (33,277) 14.66
Expired -- --
--------- -------
Balance at December 31, 1996 1,359,303 $ 8.51
Granted 535,154 8.38
Exercised (108,408) 2.02
Cancelled (408,426) 12.93
Expired -- --
--------- -------
Balance at December 31, 1997 1,377,623 $ 7.66
--------- -------
</TABLE>
The weighted-average grant date fair value of options granted during 1997,
1996, and 1995 was $4.80, $8.33 and $5.38, respectively. Additional
information regarding options as of December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
- ------------- ------------------------------------- ------------------------
Weighted- Weighted- Weighted-
Range of average average average
exercise Number remaining exercise Number exercise
prices outstanding life price exercisable price
- ------------- ------------------------------------- ------------------------
<C> <C> <C> <C> <C> <C>
$ 0.35-$ 6.00 369,508 3.90 years $ 3.47 358,464 $ 3.42
6.25- 7.75 500,949 8.50 years 7.02 123,325 7.09
7.88- 12.00 275,316 6.82 years 9.36 182,406 9.09
12.00- 20.75 231,850 8.61 years 13.73 60,704 14.24
- ------------- ----------- ----------- ------- ----------- --------
$ 0.35-$20.75 1,377,623 6.95 years $ 7.66 724,899 $ 6.37
- ------------- ----------- ----------- ------- ----------- --------
</TABLE>
STOCK OPTION REPRICING
In June 1997, the Compensation Committee of the Board of Directors adopted a
resolution to offer employees (other than officers and directors) holding
incentive stock options from the 1987 and 1992 stock option plans the
opportunity to exchange their existing stock options for new incentive stock
options. The exchange allowed employees to receive options for the same
number of shares at an exercise price of $7.00 per share, the then current
market price. The new options vest at a rate of 25% per year. The offer was
made because the Board of Directors believes lower-priced options provide a
greater retention advantage and incentive to key employees. Option holders
elected to exchange options covering 351,744 shares, with an average original
exercise price of $13.13 per share.
NOTE 6. EARNINGS PER SHARE
A reconciliation of the numerator and denominator between basic and diluted
earnings per share calculations for 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
(in thousands except Weighted Average
per share amounts) Net Income Number of Shares Per Share
(numerator) (denominator) Amounts
----------- ----------------- ---------
1997
- ----
<S> <C> <C> <C>
Basic earnings per share $3,356 8,859 $0.38
-----
Effect of dilutive stock
options -- 394
------ -----
Diluted earnings per share $3,356 9,253 $0.36
-----
1996
- ----
Basic earnings per share $4,078 8,672 $0.47
-----
Effect of dilutive stock
options -- 701
------ -----
Diluted earnings per share $4,078 9,373 $0.44
-----
1995
Basic earnings per share $5,398 8,460 $0.64
-----
Effect of dilutive stock
options -- 544
------ -----
Diluted earnings per share $5,398 9,004 $0.60
-----
</TABLE>
The number of options to purchase shares of common stock that were outstanding
but were not included in the computation of diluted earnings per share because
the options' exercise price was greater than the average market price of the
shares were 414,000, 54,000, and 31,000 for 1997, 1996, and 1995,
respectively.
NOTE 7. SUBSEQUENT EVENT
On January 7, 1998, the Board of Directors adopted a resolution that
authorizes the repurchase of up to 1,000,000 shares of the Company's currently
outstanding shares of common stock over a 12 month period. The stock
repurchases will be effected through open market purchases, privately
negotiated transactions, or in such other manner as will comply with the
provisions of the Securities Exchange Act of 1934. As of March 23, 1998, the
Company had repurchased 439,000 shares of common stock at an weighted average
purchase price of $9.78 per share.
NOTE 8. LEASES
The Company leases its primary office and manufacturing facilities under long-
term operating leases which expire in December 2005 for the Beaverton, Oregon
facility and June 1999 for the Menomonee Falls, Wisconsin facility. Other
operating leases have been entered into in connection with the lease of
additional office space and capital equipment. Minimum future rental payments
under all operating leases are as follows:
<TABLE>
<CAPTION>
Year ending
December 31, (in thousands)
----------- --------------
<S> <C>
1998 $ 869
1999 992
2000 1,107
2001 1,158
2002 1,120
Thereafter 3,639
------
Total future minimum lease payments $8,885
------
</TABLE>
Total rental expense for all operating leases was $767,000, $868,000, and
$512,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
NOTE 9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Current:
Federal $1,080 $1,707 $1,625
Foreign 4 28 19
State 198 316 274
------ ------ ------
1,282 2,051 1,918
Deferred:
Federal (156) (85) (297)
Foreign (65) (51) (71)
State (29) 11 (22)
------ ------ ------
(250) (125) (390)
------ ------ ------
Total $1,032 $1,926 $1,528
------ ------ ------
</TABLE>
A reconciliation showing the reasons for the difference between the Company's
effective tax rate and the statutory Federal income tax rate of 34% is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit 2.5 4.0 3.5
Research and experimentation credits (7.6) (3.4) (2.4)
Tax benefit of foreign sales corporation (2.3) (3.3) (2.4)
Tax benefit of exempt interest income (5.6) (4.4) (4.0)
Decrease in valuation allowance -- (2.7) (1.9)
Net operating loss carryovers utilized -- (3.0) (4.4)
Non-deductible acquisition related charges -- 11.3 --
Other, net 2.5 (.4) (.3)
----- ----- -----
Effective tax rate 23.5% 32.1% 22.1%
----- ----- -----
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
(in thousands)
1997 1996
----- -----
<S> <C> <C>
Deferred tax assets:
Reserve for warranties $ 419 $ 380
Inventory valuation adjustments 615 482
Accrued vacation 213 216
Allowance for doubtful accounts 138 97
Net operating loss carryovers 422 330
Federal and state tax credit carryovers 414 392
Other 330 401
----- -----
Gross deferred tax assets 2,551 2,298
Valuation allowance (987) (878)
----- -----
Deferred tax assets 1,564 1,420
Deferred tax liabilities:
Depreciation (65) (67)
Intangible technology rights (405) (446)
Software development costs (28) (58)
----- -----
Deferred tax liabilities (498) (571)
----- -----
Net deferred taxes $1,066 $849
----- -----
Net current deferred taxes - asset $1,474 $1,320
Net long-term deferred taxes - liability ($408) ($471)
</TABLE>
The Company has established a valuation allowance for certain deferred tax
assets of $987,000 at December 31, 1997. The valuation allowance was $878,000
and $1,223,000 at December 31, 1996 and 1995, respectively. The $109,000
increase to the valuation allowance recorded in 1997 related to the adjustment
of fully reserved net operating loss and federal and state tax credit
carryovers.
Tax benefits of $81,000, $531,000, and $191,000 relating to the Company's
stock option incentive plans were credited directly to shareholders' equity in
1997, 1996, and 1995, respectively.
At December 31, 1997, the Company had available federal net operating loss
carryovers of $947,000 which expire in 2009 and state net operating loss
carryovers of $1,927,000 which expire in the years 2007 through 2009. The
Company also had available federal and state research and experimentation tax
credit carryovers of $289,000 and $104,000, respectively, expiring in the
years 2003 through 2010.
NOTE 10. DEVELOPMENT AGREEMENTS
In April 1990, the Company entered into a collaborative research and license
agreement with Massachusetts General Hospital to design a multiple-patient
Flexible Monitoring system, which consists of an Acuity central station
connected with Propaq monitors. Under the terms of this agreement, the
Company provided discounts on certain equipment purchased by the hospital in
recognition of consultation services performed by key hospital personnel in
connection with the development of the Flexible Monitoring system. Discounts
totaled approximately $331,000, $124,000, and $201,000, in 1997, 1996, and
1995, respectively. In addition, royalties were paid to the hospital based
upon a percentage of the Company's net sales of the Acuity central stations
and related products to other customers. Royalties paid were not material.
This agreement expired in October 1997.
NOTE 11. INDUSTRY AND GEOGRAPHIC INFORMATION
The Company operates in a single industry segment: the design, manufacture,
sale and servicing of medical instruments and systems. Sales are made
primarily to hospitals and other health-care related customers. Credit risk
with respect to accounts receivable is limited due to the large number and
geographical dispersion (both domestically and internationally) of entities
which comprise the Company's customer base. Sales by geographic region were
as follows for the years ended December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
United States $45,365 $41,588 $40,080
Europe 11,359 14,938 11,481
Asia and Pacific Rim 4,998 7,836 6,166
Other 2,372 2,532 1,875
------- ------- -------
Total Sales $64,094 $66,894 $59,602
------- ------- -------
</TABLE>
NOTE 12. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
<TABLE>
<CAPTION>
(in thousands except common stock Quarters ended
prices and per share amounts) ------------------------------------------------
March 31 June 30 September 30 December 31
--------- -------- ------------ ------------
<S> <C> <C> <C> <C>
1997
Sales $13,193 $16,110 $17,158 $17,633
Gross profit 6,496 8,077 9,063 9,246
Income (loss) from operations (153) 696 1,527 1,246
Net income 55 694 1,377 1,230
Basic earnings per share .01 .08 .15 .14
Diluted earnings per share .01 .08 .15 .13
Weighted average number of shares
used in the computation of:
Basic earnings per share 8,780 8,846 8,888 8,920
Diluted earnings per share 9,202 9,102 9,337 9,387
Common stock prices:
High $14.50 $8.94 $12.75 $12.81
Low 8.88 7.00 7.63 9.88
1996
Sales $16,239 $17,097 $16,193 $17,365
Gross profit 8,883 9,691 8,954 8,895
Income (loss) from operations 1,880 1,964 (726) 1,887
Net income (loss) 1,553 1,591 (910) 1,844
Basic earnings (loss) per share .18 .18 (.10) .21
Diluted earnings (loss) per share .17 .17 (.10) .20
Weighted average number of shares
used in the computation of:
Basic earnings per share 8,630 8,660 8,680 8,720
Diluted earnings per share 9,273 9,508 8,680 9,223
Common stock prices:
High $17.50 $26.38 $23.25 $15.75
Low 10.50 15.63 15.25 10.00
</TABLE>
The Company's common stock began trading on the Nasdaq Stock Market under the
symbol PCOL on March 24, 1992 following the Company's initial public offering.
The above quoted market prices represent the high and low closing sale prices
as reported by Nasdaq for the periods indicated. As of March 23, 1998, there
were 170 shareholders of record of Protocol common stock and approximately
3,800 beneficial owners of common stock. No cash dividends have been paid on
the common stock and the Company does not anticipate paying any cash dividends
in the foreseeable future.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding Directors is included under
the captions "Election of Directors", "Management" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's 1998 Proxy
Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption "Executive
Compensation" in the Company's 1998 Proxy Statement and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption "Stock
Owned By Management and Principal Shareholders" in the Company's 1998 Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
The following financial statements listed are included on pages indicated in
the Company's 1997 Annual Report to Shareholders:
<TABLE>
<CAPTION>
Page #
------
<S> <C>
Report of Management 20
Report of Independent Accountants for the fiscal years ended
December 31, 1997 and 1996 20
Consolidated Statements of Operations - Years ended December 31,
1997, 1996 and 1995 21
Consolidated Balance Sheets - As of December 31, 1997 and 1996 22
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1997, 1996 and 1995 23
Consolidated Statements of Cash Flows - Years ended
December 31, 1997, 1996 and 1995 24
(A) (2) FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts S-1
Report of Independent Accountants on Financial Statement
Schedules S-2
</TABLE>
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is included in the Consolidated
Financial Statements or notes thereto.
<PAGE>
(A) (3) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
2.0 Agreement and Plan of Merger dated as of February 20, 1996 Among Protocol
Systems, Inc., Protocol Merger Corporation and Pryon Corporation.****
3.1 Fourth Restated Articles of Incorporation of Protocol Systems, Inc. *
3.2 Restated Bylaws of Protocol Systems, Inc. *
4.0 Rights Agreement dated March 20, 1992 between Protocol Systems, Inc. and
First Interstate Bank of Oregon, N.A. *
10.1 Distribution Agreement dated February 7, 1989 between Protocol Systems, Inc.
and Siemens Medical Electronics, Inc. *
10.2 Renewal of Distribution Agreement dated July 19, 1991 between Protocol
Systems, Inc. and Siemens Medical Electronics, Inc. *
10.3 Original Equipment Manufacturer Agreement for Purchase and Sale of Pulse
Oximeter Modules dated October 23, 1989 between Protocol Systems, Inc. and
Nellcor, Incorporated, and addendum thereto dated January 21, 1992. *
10.4 Development and Supply Agreement dated January 26, 1990 between Protocol
Systems, Inc. and Gensia Pharmaceuticals, Inc. *
10.5 Collaborative Research and License Agreement dated April 1, 1990 between
Protocol Systems, Inc. and the General Hospital Corporation (Massachusetts
General Hospital). *
10.6 Form of Indemnity Agreements between Protocol Systems, Inc. and its
Executive Officers and Directors. *
10.7 Protocol Systems, Inc. 1987 Key Employee's Incentive Stock Option Plan, as
amended on January 21, 1992. *
10.8 Protocol Systems, Inc. 1987 Non-Statutory Stock Option Plan, as amended on
January 21, 1992. *
10.9 Protocol Systems, Inc. 1992 Stock Incentive Plan as amended on January 24,
1995. ****
10.10 Business Park Lease dated October 26, 1990 By and Among Protocol Systems,
Inc., Koll-Copley Partners and Petula Associates and amendments thereto
dated October 16,1991 and November 6, 1991. *
10.11 Amendment to Business Park Lease between Protocol Systems, Inc., Koll-Copley
Partners and Petula Associates dated October 6, 1993. ***
10.12 Amendment to Original Equipment Manufacturer Agreement for Purchase and Sale
of Pulse Oximeter Modules dated February 25, 1993 between Protocol Systems,
Inc. and Nellcor, Incorporated. ***
10.13 Protocol Systems, Inc. 1993 Stock Option Plan for Nonemployee Directors.
****
10.14 Protocol Systems, Inc. 1994 Employee Stock Purchase Plan. **
10.15 Amendment to the Development and Supply Agreement between Protocol Systems,
Inc. and Gensia Automedics, Inc. dated December 23, 1997
10.16 Amendment to Business Park Lease between Protocol Systems, Inc., Koll-Copley
Partners and Petula Associates dated December 24, 1997
22.0 Subsidiaries of the Registrant
23.1 Consent of Accountants
27.1 Financial Data Schedule for the year ended December 31, 1997
27.2 Financial Data Schedule for the periods ended September 30, 1997 and June 30,
1997
27.3 Financial Data Schedule for the periods ended December 31, 1996, September 30,
1996 and June 30,1996
</TABLE>
* Incorporated herein by reference to the Company's Registration
Statement on Form S-1 dated January 22, 1992, File No. 33-45067.
** Incorporated herein by reference to the Company's Registration
Statement on Form S-8 dated January 24, 1994, File No. 33-74384.
*** Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993.
**** Incorporated herein by reference to the Company's Registration
Statement on Form S-4 dated April 9, 1996, File No. 333-03316.
(b) No reports on Form 8-K were filed during the quarter ended December 31,
1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 30, 1998 By: /s/ David F. Bolender
-----------------------
David F. Bolender
Chief Executive Officer and
Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- -----
<S> <C> <C>
/s/ David F. Bolender Chief Executive Officer and Chairman
- --------------------- of the Board of Directors
David F. Bolender (Principal Executive Officer) March 30, 1998
--------------
/s/ James B. Moon President and Chief Technical
- ---------------------- Officer March 30, 1998
James B. Moon --------------
/s/ Craig M. Swanson Vice-President, Chief Financial
- ---------------------- Officer and Secretary (Principal
Craig M. Swanson Financial and Accounting Officer) March 30, 1998
--------------
/s/ Steven E. Wynne Director March 30, 1998
- ---------------------- --------------
Steven E. Wynne
/s/ Ronald S. Newbower, Ph.D. Director March 30, 1998
- ------------------------------- --------------
Ronald S. Newbower, Ph.D.
/s/ Frank E. Samuel, Jr. Director March 30, 1998
- --------------------------- --------------
Frank E. Samuel, Jr.
/s/ William New, Jr., M.D. Director March 30, 1998
- ---------------------------- --------------
William New, Jr., M.D.
</TABLE>
<PAGE>S-1
PROTOCOL SYSTEMS, INC. Schedule II
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Additions Additions
Balance at charged to charged to Balance at
beginning costs and other end of
Description period expenses accounts Deductions period
---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for doubtful
accounts $ 190 $ 65 -- $ 43(1) $ 212
Allowance for sales returns 35 65 -- -- 100
Inventory obsolescence and
valuation reserves 864 485 -- 286(2) 1,063
Reserve for warranties 979 577 -- 503(3) 1,053
Reserve for product upgrades 27 163 -- -- 190
Year ended December 31, 1996:
Allowance for doubtful
accounts 212 111 -- 71(1) 252
Allowance for sales returns 100 -- -- -- 100
Inventory obsolescence and
valuation reserves 1,063 319 -- 597(2) 785
Reserve for warranties 1,053 620 -- 688(3) 985
Reserve for product upgrades 190 54 -- 241(4) 3
Year ended December 31, 1997:
Allowance for doubtful
accounts 252 147 -- 41(1) 358
Allowance for sales returns 100 187 -- -- 287
Inventory obsolescence and
valuation reserves 785 530 -- 313(2) 1,002
Reserve for warranties 985 1,177 -- 1,078(3) 1,084
Reserve for product upgrades 3 245 -- 56(4) 192
</TABLE>
(1) Deductions primarily represent write-offs of accounts receivable during
the period.
(2) Deductions primarily represent inventory scrapped or sold during the
period.
(3) Deductions primarily represent inventory and labor costs incurred
repairing products under warranty.
(4) Deductions primarily represent inventory and labor costs incurred for
product upgrades performed during the period.
<PAGE>S-2
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Protocol Systems, Inc.:
Under the date of January 23, 1998, we reported on the consolidated balance
sheets of Protocol Systems, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997, which are included in the 1997 annual report to
shareholders. These consolidated financial statements and our report thereon
are included in the annual report on Form 10-K for the year 1997. In
connection with our audit of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedule as
listed in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
January 23, 1998
AMENDMENT TO DEVELOPMENT AND SUPPLY AGREEMENT
This Amendment (the "Amendment"), dated as of December 23, 1997, to
that certain Development and Supply Agreement (the "Agreement"), dated
as of January 26, 1990, by and between Gensia Pharmaceuticals, Inc.
(now known as GENSIA SICOR INC.), a Delaware corporation ("Gensia"),
and PROTOCOL SYSTEMS, INC., an Oregon corporation ("PS").
WITNESSETH:
WHEREAS Gensia and PS have entered into the Agreement; and
WHEREAS Gensia and PS, in light of the facts and circumstances
which have developed since the effective date of the Agreement, now
wish to amend the Agreement as set forth in this Amendment;
Now, therefore, the parties hereto agree as follows:
1. DEFINITIONS; REFERENCES. Capitalized terms in this
Amendment shall, unless otherwise defined herein, have the meanings
ascribed to them in the Agreement.
2. AMENDMENT OF SECTION 3.2. Section 3.2(d) of the Agreement
is hereby amended to read as follows:
"(d) purchase at least 2,500 units in
total by the end of the five (5) year
period commencing January 1, 1998 and
ending on December 31, 2002. At lest 500
Units shall be purchased in each calendar
year during such period, and at least 125
Units shall be purchased in each calendar
quarter during such period, provided that
the 100 Units ordered pursuant to purchase
orders issued during 1997 may be credited
against the 125 Unit requirement for the
first calendar quarter of 1998."
3. EQUITY PURCHASE. In consideration of PS's execution of
this Amendment, on the date hereof, Gensia Automedics, Inc., a Delaware
corporation ("Automedics"), shall issue to PS 400,000 shares of
Subordinated Convertible Preferred Stock (the "Shares") of Automedics,
equal to 4% of the outstanding shares of Automedics on a fully diluted
basis. In connection with the issuance of such shares, PS hereby makes
the representations and warranties set forth on Exhibit A hereto.
4. CONSENT TO ASSIGNMENT. Pursuant to Section 9.7 of the
Agreement, PS hereby consents to the assignment by Gensia of all its
rights and obligations under the Agreement to Automedics, provided,
however, that Gensia and Automedics shall be jointly and severally
liable to PS for any breach of Section 3.2(d) of the Agreement as
amended hereby.
5. RELEASE. In consideration of Gensia's and Automedics'
execution of this Amendment, PS on its own behalf and on behalf of
officers, directors, parents, subsidiaries, affiliates, assigns,
employees, agents, attorneys, and representatives, hereby releases
Gensia, its officers, directors, parents, subsidiaries, affiliates,
assigns, employees, agents, attorneys and representatiaves, and
Automedics, its officers, directors, parents, subsidiaries, affiliates,
assigns, employees, agents, attorneys and representatives, from any and
all claims, damages, liability or causes of action of any kind relating
to Gensia's performance to date of its obligations under Section 3.2(d)
of the Agreement. PS specifically waives the provisions of Section
1542 of the California Civil Code, which provides that, "(a) general
release does not extend to claims which the creditor does not know or
suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with
the debtor."
6. FULL FORCE AND EFFECT. Except as expressly modified,
amended or supplemented above, all rights, terms and conditions of the
Agreement shall remain in full force and effect.
7. GOVERNING LAW. This Amendment shall be construed and
enforced in accordance with, and the rights shall be governed by and
construed under, the laws of the State of Oregon (irrespective of its
choice of law principles).
8. COUNTERPARTS. This Amendment may be executed in two or
more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment to the
Agreement as of the date first above written.
GENSIA SICOR INC. PROTOCOL SYSTEMS, INC.
By: /s/ John Sayward By: /s/ Craig M. Swanson
----------------------- --------------------------
Name: John Sayward Name: Craig M. Swanson
Title: V.P. Finance, CFO Title: V.P. Finance, CFO
& Treasurer
GENSIA AUTOMEDICS, INC.
By: /s/ David Burgess
-----------------------
Name: David Burgess
Title: President
EXHIBIT A
ACQUISITION ENTIRELY FOR OWN ACCOUNT. The shares of Subordinated
Preferred Stock to be acquired by PS pursuant to Section 3 hereof are
acquired for investment purposes and for its own account, not as a
nominee or agent, and not with a view to the resale or distribution of
any part thereof, and that PS has no present intention of selling,
granting any participation in, or otherwise distributing the same. By
executing this Agreement, PS further represents that PS does not have
any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participations to such person or to any third
person, with respect to any of such shares of Subordinated Preferred
Stock.
RESTRICTED SECURITIES. PS understands that the shares of
Subordinated Preferred Stock it is acquiring are characterized as
"restricted securities" under the federal securities laws inasmuch as
they are being acquired from Automedics in a transaction exempt from
registration under the Securities Act of 1933, as amended (the
"Securities Act"), and that such shares of Subordinated Preferred Stock
may be resold without registration under the Securities Act only in
certain limited circumstances. In this connection PS represents that
it is familiar with Rule 144 promulgated under the Securities Act, as
presently in effect, and understands the resale limitations imposed
thereby and by the Securities Act.
LEGENDS. It is understood that the certificates evidencing the
Securities may bear one or all of the following legends:
"These securities have not been registered
under the Securities Act of 1933, as amended. They
may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration
statement in effect with respect to the securities
under such Act or an opinion of counsel satisfactory
to Automedics that such registration is not required
or unless sold pursuant to Rule 144 of such Act."
Any legend required by the laws of the State of
California or other jurisdiction.
ACCREDITED INVESTOR. PS is an accredited investor as defined in
Rule 501(a) of Regulation D promulgated under the Securities Act.
- 3 -
FIFTH AMENDMENT TO LEASE
RENEWAL AND EXPANSION
That certain Lease dated 10/26/90 by and between Koll Copley Partners
and Petula Associates, Ltd., assigned to Petula Associates Ltd., an Iowa
corporation and principal Mutual Life Insurance Company, an Iowa
corporation doing business as KC Creekside-Phase I, Landlord, and
Protocol Systems, Inc., Tenant, is amended this 24th day of December,
1997 solely as hereinafter described.
1.b. Address (Leased Premises): 8500 and 8605 SW Creekside Place,
Beaverton, Oregon
1.c. Landlord Address For Notices: c/o Insignia/Forum Commercial
Group, 8705 SW Nimbus Avenue, Suite 230, Beaverton, Oregon 97008
l.e. Premises Area: Approximately 94,646 square feet.
8500 SW Creekside Place: 65,147 square feet
8605 SW Creekside Place: 30,499 square feet
l.f. Project Area: Approximately 155,784 square feet
1.g. Premises Percent of Project: 60.7%, combined
1.h. Term of Lease:
8500 SW Creekside Place
Renewal Commencement date: January 1, 2001
Expiration date: December 31, 2005
8605 SW Creekside Place
Commencement date: July 1, 1999
Expiration date: December 31, 2005
l.i. Base Monthly Rent:
8500 SW Creekside Place
January 1, 2001 - December 31, 2003 $61,581
January 1, 2004 no rent, operating expenses
only
February 1, 2004 - December 31,2005 $67,996
8605 SW Creekside Place
July 1, 1999 - June 30, 2002 $29,279
July 1, 2002 no rent, operating expenses
only
August 1, 2002 - December 31, 2005 $32,329
Rental abatements shall be given if Tenant is current on all payments
due Landlord, and provided there is no current uncured event of default
by Tenant under this Lease.
1.l Total Security Deposit:
$17,541 in security is currently held for 8500 SW Creekside Place.
$32,329 in security required to be deposited with Landlord for
8605 SW Creekside Place on July 1, 1999.
l.m. Broker: Pat Schreck, Melvin Mark. (8605 SW Creekside Place Only)
TENANT IMPROVEMENT ALLOWANCE: Landlord shall provide $7 per square foot
to Tenant for the purpose of making standard improvements to each
building, with plans and specifications subject to the Landlord's
reasonable review and approval. Said allowance shall be available for
the 8605 SW Creekside Place building in 1999 in order to improve the
building for a July 1 occupancy. Said allowance shall be available for
the 8500 SW Creekside Place building January 1, 2001. Total improvement
dollars may be used in either 8605 or 8500 SW Creekside Place.
38. RIGHT OF FIRST OPPORTUNITY: The terms of this section stand as
written, except the particular buildings covered by this right shall now
include 8700 SW Creekside Place and 8505 SW Creekside Place.
A clarification on this right: Any renewal or extension rights held by
existing building tenants make precedence over the Right of First
Opportunity.
RIGHT OF FIRST OPPORTUNITY TO RENEW: During the extended term of this
Lease, so long as Tenant is not then in default under this Lease,
Landlord agrees not to enter into any lease of the Premises with any
third-party tenant without first offering Tenant an opportunity to renew
the Lease for one successive term of five (5) years. This right of
first opportunity shall be personal to Tenant and shall automatically
become null and void and of no further force or effect in the event of
any assignment or sublease. Landlord shall offer such opportunity to
renew by notifying Tenant in writing thereof. If within seven (7)
business days from the effective date of such notice Landlord has
received written notice from Tenant of its election to renew the Lease
for the renewal term, then Landlord shall not enter into a lease of the
Premises with a third-party tenant and the Lease shall be binding for
the renewal term without further action of the parties. In such event,
the renewal term shall commence on the day following the expiration date
of the Lease. Notwithstanding the foregoing, Tenant acknowledges and
agrees that its right of first opportunity to renew is and shall be
subordinate to any existing option or expansion rights in favor of other
tenants as of the date of this agreement. The terms and conditions of
the Lease for the renewal term shall be identical with the existing
Lease except that Base Rental shall be the then fair market rental value
of the Premises as determined by Landlord, by comparison with the fair
market rental value of comparable space in Creekside Corporate Park, but
in no event less than the last rental payable under this Lease.
All other terms and conditions of said Lease shall remain in full force
and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as
of the date first written above.
LANDLORD: Petula Associates, Ltd., an Iowa corporation, and Principal
Mutual Life Insurance Company, an Iowa company, doing business as
KC Creekside-phase I
By: /s/ Terrence M. Tobin /s/ Dennis D. Ballard
----------------------- ------------------------
Terrence M. Tobin Dennis D. Ballard
Counsel Counsel
/s/ Steven Graves /s/ Darin Benningdorf
--------------------- -------------------------
Steven Graves Darin Benningdorf
2nd Vice President Assistant Director
Commercial Real Estate Loans Commercial Real Estate
TENANT: Protocol Systems, Inc.
By: /s/ Craig M. Swanson
------------------------
Craig M. Swanson
Vice President, Finance
EXHIBIT 22.0
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of
Subsidiary Incorporation
- ---------- ----------------
Pryon Corporation Wisconsin
Protocol Medical Systems Limited Northern Ireland
Protocol U.K. Limited Oregon
Protocol Systems Foreign Sales Corporation Guam
Protocol Systems, S.A.R.L. France
Protocol Systems, GmbH Germany
Exhibit 23.1
Consent of Independent Accountants
- --------------------------------------------
The Board of Directors
Protocol Systems, Inc.
We consent to incorporation by reference in the Registration Statements
(Nos. 33-94912, 33-53992,33-66272, 33-74384, 33-81104, 333-17703 and
333-17705) on Form S-8 of Protocol Systems, Inc. of our reports dated
January 23, 1998, relating to the consolidated balance sheets of
Protocol Systems, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997, and all related financial
statement schedules, which reports appear in the December 31, 1997
annual report on Form 10-K of Protocol Systems, Inc.
/s/ KPMG Peat Marwick LLP
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Protocol
Systems, Inc. Consolidated Balance Sheet as of December 31, 1997 and
Consolidated Statement of Operations for the year ended December 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,257
<SECURITIES> 13,313
<RECEIVABLES> 15,746<F1>
<ALLOWANCES> 358
<INVENTORY> 13,507
<CURRENT-ASSETS> 50,144
<PP&E> 14,172
<DEPRECIATION> 9,597
<TOTAL-ASSETS> 63,755
<CURRENT-LIABILITIES> 7,669
<BONDS> 0
0
0
<COMMON> 89
<OTHER-SE> 55,589
<TOTAL-LIABILITY-AND-EQUITY> 63,755
<SALES> 64,094
<TOTAL-REVENUES> 64,094
<CGS> 31,212
<TOTAL-COSTS> 31,212
<OTHER-EXPENSES> 28,494
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,388
<INCOME-TAX> 1,032
<INCOME-CONTINUING> 3,356
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,356
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.36
<FN>
<F1>Net of allowance
<F2>The amount of loss provision is not significant and has been included in other
expenses.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
respective consolidated balance sheets as of September 30, 1997 and June 30,
1997 and the related consolidated statements of operations for the respective
periods then ended and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997
<CASH> 12,206 7,438
<SECURITIES> 12,843 16,525
<RECEIVABLES> 15,569<F1> 13,945<F1>
<ALLOWANCES> 267 261
<INVENTORY> 13,284 12,811
<CURRENT-ASSETS> 48,512 47,493
<PP&E> 13,773 13,286
<DEPRECIATION> 9,218 8,708
<TOTAL-ASSETS> 62,163 59,215
<CURRENT-LIABILITIES> 7,396 6,294
<BONDS> 0 0
0 0
0 0
<COMMON> 89 89
<OTHER-SE> 54,238 52,389
<TOTAL-LIABILITY-AND-EQUITY> 62,163 59,215
<SALES> 46,460 29,303
<TOTAL-REVENUES> 46,460 29,303
<CGS> 22,824 14,730
<TOTAL-COSTS> 22,824 14,730
<OTHER-EXPENSES> 21,566 14,030
<LOSS-PROVISION> 0<F2> 0<F2>
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 2,873 1,055
<INCOME-TAX> 747 306
<INCOME-CONTINUING> 2,125 749
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,126 749
<EPS-PRIMARY> 0.24<F3> 0.09<F3>
<EPS-DILUTED> 0.23<F3> 0.08<F3>
<FN>
<F1>Net of allowance
<F2>The amount of "loss provision" is not significant and has been included in
other expenses.
<F3>Reflects new standard of presenting both basic and diluted net income per
share.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
respective consolidated balance sheets as of December 31, 1996, September 30,
1996 and June 30, 1996 and the related consolidated statements of operations for
the respective periods then ended and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996
<CASH> 6,903 6,897 10,169
<SECURITIES> 15,800 17,109 16,236
<RECEIVABLES> 15,456<F1> 13,170<F1> 13,392<F1>
<ALLOWANCES> 252 252 232
<INVENTORY> 12,416 12,239 11,544
<CURRENT-ASSETS> 51,048 45,808 43,943
<PP&E> 12,253 11,660 10,995
<DEPRECIATION> 7,775 7,323 6,849
<TOTAL-ASSETS> 59,045 57,650 60,448
<CURRENT-LIABILITIES> 7,265 8,056 7,733
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 87 87 87
<OTHER-SE> 51,222 49,068 50,316
<TOTAL-LIABILITY-AND-EQUITY> 59,045 57,650 60,448
<SALES> 66,894 49,529 33,336
<TOTAL-REVENUES> 66,894 49,529 33,336
<CGS> 30,471 22,001 14,762
<TOTAL-COSTS> 30,471 22,001 14,762
<OTHER-EXPENSES> 30,419 23,649 14,225
<LOSS-PROVISION> 0<F2> 0<F2> 0<F2>
<INTEREST-EXPENSE> 110 110 110
<INCOME-PRETAX> 6,004 3,559 4,349
<INCOME-TAX> 1,926 1,646 1,205
<INCOME-CONTINUING> 4,078 2,233 3,144
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4,078 2,233 3,144
<EPS-PRIMARY> 0.47<F3> 0.26<F3> 0.36<F3>
<EPS-DILUTED> 0.44<F3> 0.24<F3> 0.33<F3>
<FN>
<F1>Net of allowance
<F2>The amount of "loss provision" is not significant and has been included in
other expenses
<F3>Reflects new standard of presenting both basic and diluted net income per
share.
</FN>
</TABLE>
