UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarter ended March 31, 1998
Commission File Number 0-19943
PROTOCOL SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Oregon 93-0913130
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8500 SW Creekside Place, Beaverton, OR 97008
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(Address of principal executive offices) (Zip Code)
(503) 526-8500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes [ ] No
Number of shares of common stock outstanding as of
May 8, 1998:
8,538,398 shares, $.01 par value per share
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<PAGE>2
PROTOCOL SYSTEMS, INC.
Index to Form 10-Q
PART I FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
Condensed Consolidated Statements of
Operations for the three months ended
March 31, 1998 and 1997 3
Condensed Consolidated Balance Sheets
as of March 31, 1998 and December 31, 1997 4
Consolidated Statements of Cash Flows for
the three months ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II OTHER INFORMATION
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Item 2. Changes in Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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<PAGE>3
<TABLE>
PROTOCOL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Three months ended March 31,
1998 1997
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<S> <C> <C>
Sales $14,920 $13,193
Cost of sales 8,007 6,697
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Gross profit 6,913 6,496
Operating expenses:
Research and development expenses 1,859 2,021
Selling, general and administrative
expenses 5,015 4,628
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Total operating expenses 6,874 6,649
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Income from operations 39 (153)
Other income 280 233
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Income before income taxes 319 80
Provision for income taxes 89 25
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Net income $ 230 $ 55
======= =======
Comprehensive income $ 237 $ 37
======= =======
Basic earnings per share $ 0.03 $ 0.01
======= =======
Diluted earnings per share $ 0.03 $ 0.01
======= =======
Weighted average number of shares
used in the computation of:
Basic earnings per share 8,794 8,780
Diluted earnings per share 9,132 9,202
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>4
<TABLE>
PROTOCOL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, December 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,935 $12,257
Short-term investments 8,404 6,524
Accounts receivable - net 14,491 16,106
Inventories 12,106 13,507
Deferred taxes 1,470 1,474
Prepaid expenses and other 348 276
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Total current assets 45,754 50,144
Long-term investments 6,760 6,789
Property and equipment - net 4,701 4,575
Other assets 2,464 2,247
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$59,679 $63,755
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,859 $ 2,806
Accrued salaries, wages and related liabilities 2,242 2,375
Other accrued liabilities 581 606
Income taxes payable 94 676
Reserve for warranties 1,120 1,084
Deferred revenue and customer deposits 114 122
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Total current liabilities 7,010 7,669
Deferred taxes 503 408
Shareholders' equity:
Common Stock, $.01 par value. Authorized 30,000 shares;
issued and outstanding 8,571 at 1998 and 8,935 at 1997 86 89
Additional paid-in capital 31,668 35,414
Unrealized holding gain on investments 30 33
Retained earnings 20,307 20,077
Foreign currency translation adjustment 75 65
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Total shareholders' equity 52,166 55,678
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$59,679 $63,755
======= =======
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>5
<TABLE>
PROTOCOL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three months ended March 31,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 230 $ 55
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 535 606
Loss on disposal of property and equipment - 9
Amortization of bond premium 53 103
Provision for deferred taxes 91 (50)
Increase (decrease) in cash resulting from
changes in:
Accounts receivable 1,621 4,218
Inventories 1,404 (1,585)
Prepaid expenses and other assets (51) (78)
Accounts payable and accrued liabilities (115) (215)
Income taxes payable (583) (765)
Reserve for warranties 36 55
Deferred revenue and customer deposits (8) (18)
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Net cash provided by operating activities 3,213 2,335
Cash flows from investing activities:
Purchase of investments (3,886) (1,177)
Proceeds from maturity of investments 1,978 -
Acquisition of property and equipment (629) (801)
Expenditures for software development (190) -
Acquisition of intangible assets (50) -
Investment in subsidiaries (203) -
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Net cash used in investing activities (2,980) (1,978)
Cash flows from financing activities:
Proceeds from exercise of stock options
and stock purchase plan 743 398
Repurchase of common stock (4,293) -
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Net cash provided by (used in) financing activities (3,550) 398
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Effect of exchange rates on cash and cash equivalents (5) (10)
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Net increase (decrease) in cash and cash equivalents (3,322) 745
Cash and cash equivalents at beginning of period 12,257 6,903
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Cash and cash equivalents at end of period $ 8,935 $ 7,648
======= =======
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 545 $ 216
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>6
PROTOCOL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by the Company without audit and in conformity with generally
accepted accounting principles for interim financial information.
Accordingly, certain financial information and footnotes have been omitted or
condensed. In the opinion of management, the condensed consolidated financial
statements include all necessary adjustments (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. These financial statements should be read in conjunction
with the Company's audited consolidated financial statements for the year
ended December 31, 1997. The results of operations for the interim period
shown in this report are not necessarily indicative of results for any future
interim period or the entire fiscal year.
INVENTORIES
Inventories are valued at the lower of cost or market with cost determined on
the first-in, first-out basis (FIFO). The components of inventories are as
follows:
March 31, December 31,
(in thousands) 1998 1997
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Raw materials $ 4,723 $ 5,521
Work in process 2,692 2,460
Finished goods 2,786 3,569
Demonstration instruments 1,905 1,957
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Total inventories $12,106 $13,507
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PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and includes the following:
March 31, December 31,
(in thousands) 1998 1997
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Equipment $12,394 $11,732
Furniture and fixtures 1,803 1,757
Leasehold improvements 683 683
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14,880 14,172
Less accumulated depreciation and amortization 10,179 9,597
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Property and equipment - net $ 4,701 $ 4,575
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<PAGE>7
INCOME TAXES
The provision for income taxes has been recorded based on the current estimate
of the Company's annual effective tax rate. This rate differs from the
Federal statutory rate primarily because of the provision for state income
taxes, the benefit of the Company's foreign sales corporation and tax-exempt
interest income earned on investments. See Management's Discussion and
Analysis of Financial Condition and Results of Operations for further
discussion of income taxes.
BASIC AND DILUTED EARNINGS PER SHARE
In accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share" both basic earnings per share
and diluted earnings per share are presented. Basic earnings per share is
computed using the weighted average number of common shares outstanding and
diluted earnings per share is computed using the weighted average number of
common shares outstanding and dilutive potential common shares assumed to be
outstanding during the period using the treasury stock method. Dilutive
potential common shares consist of options to purchase common stock.
COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" which establishes standards for the reporting and
display of comprehensive income and its components. The following is a
reconciliation of net income to comprehensive income:
Three months ended March 31,
(in thousands) 1998 1997
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Net income $ 230 $ 55
Other comprehensive income, net of tax
Foreign currency translation
adjustments 10 10
Unrealized holding loss arising
during the period (3) (28)
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Other comprehensive income (loss) 7 (18)
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Comprehensive income $ 237 $ 37
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Statement changes the way public companies report segment information in
annual financial statements and also requires those companies to report
selected segment information in interim financial reports to shareholders.
The Company plans to adopt the statement for the quarter ending December 31,
1998.
<PAGE>8
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Sales. Sales for the first quarter of 1998 increased 13.1% to $14.9 million
from $13.2 million for the first quarter of 1997.
Domestic sales, excluding military revenues and Original Equipment
Manufacturer ("OEM") sales of GenESA devices and Pryon OEM products, increased
22.2% to $7.7 million (51.7% of total sales) in the first quarter of 1998 from
$6.3 million (47.8% of total sales) in the first quarter of 1997. The growth
in domestic sales was primarily due to an increase in both the average selling
price and the number of Acuity central stations sold, as well as an increase
in sales of related instruments and the introduction of the Networked Acuity
System in the first quarter of 1998. Additionally, sales of the QuikSigns
spot-check monitor, accessories and service increased in the first quarter of
1998.
U.S. military revenues increased 49.3% to $339,000 (2.3% of total sales) in
the first quarter of 1998 from $227,000 (1.7% of total sales) in the first
quarter of 1997.
International sales, excluding international OEM sales of GenESA devices and
Pryon OEM products, decreased 4.5% to $4.7 million (31.7% of total sales) in
the first quarter of 1998 from $5.0 million (37.6% of total sales) in the
first quarter of 1997. This decrease in international sales was principally
due to the increased strength of the U.S. dollar against foreign currencies
and soft economic conditions particularly in Europe and Asia.
OEM sales of GenESA devices and Pryon OEM products increased 25.8% to $2.1
million (14.3% of total sales) in the first quarter of 1998 from $1.7 million
(12.9% of total sales) in the first quarter of 1997 primarily due to increased
sales of GenESA devices to Gensia Automedics, Inc. Gensia received clearance
from the Food and Drug Administration (FDA) to market the GenESA device in the
United States in 1997. In April 1998, the Company was informed that Gensia
plans no additional purchases of the GenESA device under a supply agreement
with the Company which provided for the purchase of devices through the year
2002. Conditions of termination of this agreement have not yet been
determined.
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 application specialists and field service engineers.
Additionally, the Company has established direct sales organizations in France
and Germany during the first quarter of 1998.
Gross profit. As a percentage of sales, gross profit decreased to 46.3% in
the first quarter of 1998 from 49.2% in the first quarter of 1997. The
decline in gross margin was due primarily to higher manufacturing overhead
caused by a lower production volume resulting from a high finished goods
inventory at the end of 1997. Increased discounting on international sales and
higher system installation and service costs also contributed to the decline
in gross margin in the first quarter of 1998.
Research and development. Research and development expenses decreased 8.0% to
$1.9 million in the first quarter of 1998 from $2.0 million in the first
quarter of 1997. The decrease in research and development expenses resulted
primarily from the capitalization of software development costs relating to
the Networked Acuity System which was released in the first quarter of 1998.
As a percentage of sales, research and development expenses decreased to 12.5%
in the first quarter of 1998 from 15.3% in the first quarter of 1997.
<PAGE>9
Selling, general and administrative. Selling, general and administrative
expenses increased 8.4% to $5.0 million in the first quarter of 1998 from $4.6
million in the first quarter of 1997. This increase resulted primarily from
the establishment of direct sales organizations in Germany and France in the
first quarter of 1998 and an increase in the number of direct sales
representatives and clinical application specialists employed by the Company
to expand the field sales and service operations. The Company plans to
continue to increase its marketing and sales efforts in 1998 by adding
additional direct sales representatives and clinical application specialists
during the remainder of 1998. As a percentage of sales, selling, general and
administrative expenses decreased to 33.6% in the first quarter of 1998 from
35.1% in the first quarter of 1997.
Other income. Other income increased 19.8% to $280,000 in the first quarter
of 1998 from $233,000 in the first quarter of 1997 primarily as a result of an
increase in interest income due to a higher rate of return on investments in
the first quarter of 1998.
Provision for income taxes. The provision for income taxes increased to
$89,000 in the first quarter of 1998 from $25,000 in the first quarter of 1996
representing effective tax rates of 28.0% and 31.3%, respectively. The
effective tax rate, which reflects the estimate of the Company's annual
effective tax rate, was lower in the first quarter of 1998 than in the first
quarter of 1997 due to greater expected percentage benefits of research and
experimentation credits and tax-exempt interest.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintained its strong financial position as of March 31, 1998 with
working capital balances of $38.7 million and a current ratio of 6.5:1 as
compared to working capital of $42.5 million and a current ratio of 6.5:1 at
December 31, 1997. Cash flow from operating activities for the first three
months of 1998 was $3.2 million as compared to cash flow from operating
activities of $2.3 million for the first three months of 1997. In January
1998 the Company's Board of Directors adopted a resolution authorizing the
repurchase of up to 1,000,000 outstanding shares of the Company's common stock
over a 12 month period. During the first quarter of 1998, the Company
repurchased 439,000 shares. Management believes that current cash and
investment balances and future cash flows from operations will be sufficient
to meet the Company's liquidity and capital needs for the foreseeable future.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis and other sections of this Quarterly
Report contain forward-looking statements within the meaning of the Securities
Litigation Reform Act of 1995 that are based on current expectations,
estimates and projections about the Company's business, management's beliefs
and assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and variations of such
words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results may differ materially from
what is expressed or forecasted in such forward-looking statements due to
numerous factors, including, but not limited to those discussed in this
Quarterly Report and from time to time in the Company's other Securities and
Exchange Commission filings and reports. In addition, such statements could
be affected by general industry and market conditions and growth rates, and
general domestic and international economic conditions.
<PAGE>10
The Company's quarterly operating results have fluctuated in the past and may
continue to fluctuate in the future depending on factors such as increased
competition, timing of new product announcements, pricing changes by the
Company or its competitors, length of sales cycles, market acceptance or
delays in the introduction of new products or enhanced versions of existing
products, timing of significant orders, regulatory approval requirements,
product mix and economic factors and conditions generally and in the market
for the Company's products specifically. In particular, the Company's
quarterly operating results have fluctuated as a result of the unpredictable
size and timing of military patient monitoring equipment procurements, and
seasonal or other changes in customer buying patterns. A substantial portion
of the Company's revenue in each quarter results from orders booked in that
quarter. Accordingly, revenue from quarter to quarter is difficult to
forecast. The Company's expense levels are based, in part, on its
expectations as to future revenue. If revenue levels are below expectations,
operating results are likely to be adversely affected. In particular, net
income may be disproportionately affected by a reduction in revenue because
only a small portion of expenses vary with revenue. Results of operations in
any period should not be considered indicative of the result to be expected
for any future period, and fluctuations in operating results may also result
in fluctuations in the price of the Company's common stock. No assurance can
be given that the Company will be able to grow in future periods or that its
operations will remain profitable.
<PAGE>11
PART II. OTHER INFORMATION
Item 2. Changes in Securities
During the quarter ended March 31, 1998, the Company sold securities without
registration under the Securities Act of 1933, as amended (the "Securities
Act") upon the exercise of certain stock options granted under the Company's
stock option plans. An aggregate of 8,851 shares of Common Stock were issued
at an exercise prices ranging from $1.32 to $2.55. These transactions were
effected in reliance upon the exemption from registration under the Securities
Act provided by Rule 701 promulgated by the Securities and Exchange Commission
pursuant to authority granted under Section 3 (b) of the Securities Act.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the quarter
ended March 31, 1998.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: 27.1 Financial Data Schedule
(b) No reports were filed on Form 8-K during the quarter for which
this report is filed.
<PAGE>12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROTOCOL SYSTEMS, INC.
(Registrant)
Date: May 15, 1998 By /s/ David F. Bolender
---------------------
David F. Bolender
Chief Executive Officer
and Chairman of the
Board of Directors
By /s/ Craig M. Swanson
---------------------
Craig M. Swanson
Vice-President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Protocol
Systems, Inc. Condensed Consolidated Balance Sheet as of March 31, 1998 and
Condensed Consolidated Statement of Operations for the three months ended March
31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,935
<SECURITIES> 15,164
<RECEIVABLES> 14,014<F1>
<ALLOWANCES> 346
<INVENTORY> 12,106
<CURRENT-ASSETS> 45,754
<PP&E> 14,880
<DEPRECIATION> 10,179
<TOTAL-ASSETS> 59,679
<CURRENT-LIABILITIES> 7,010
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 52,080
<TOTAL-LIABILITY-AND-EQUITY> 59,679
<SALES> 14,920
<TOTAL-REVENUES> 14,920
<CGS> 8,007
<TOTAL-COSTS> 8,007
<OTHER-EXPENSES> 6,594
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 319
<INCOME-TAX> 89
<INCOME-CONTINUING> 230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
<FN>
<F1>Net of allowance
<F2>The amount of loss provision is not significant and has been included in other
expenses
</FN>
</TABLE>
