-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R3DtpiSZu41X9wjOA98+Us9gybOR9RHDPtN4w+m1dtaGGzYdDhpCdNa8TPcK8Bfx 6tkug9oBXnIpDyH4CAO6/A== 0000883322-96-000007.txt : 19960813 0000883322-96-000007.hdr.sgml : 19960813 ACCESSION NUMBER: 0000883322-96-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960812 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTOCOL SYSTEMS INC/NEW CENTRAL INDEX KEY: 0000883322 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 930913130 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19943 FILM NUMBER: 96609093 BUSINESS ADDRESS: STREET 1: 8500 S W CREEKSIDE PLACE CITY: BEAVERTON STATE: OR ZIP: 97008 BUSINESS PHONE: 6126862500 MAIL ADDRESS: STREET 1: 8500 SW CREEKSIDE PLACE CITY: BEAVERTON STATE: OR ZIP: 97008 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter ended June 30, 1996 Commission File Number 0-19943 PROTOCOL SYSTEMS, INC. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Oregon 93-0913130 - ------------------------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8500 SW Creekside Place, Beaverton, OR 97008 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (503) 526-8500 - ------------------------------------------------------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Number of shares of common stock outstanding as of August 7, 1996: 8,684,208 shares, $.01 par value per share ------------------------------------------ 2 PROTOCOL SYSTEMS, INC. Index to Form 10-Q PART I FINANCIAL INFORMATION Page No. - ----------------------------- -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995 3 Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 1996 and 1995 4 Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and 1995 5 Notes to Condensed Consolidated Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-12 PART II OTHER INFORMATION - -------------------------- Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 - ---------- 3 PROTOCOL SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited) June 30, December 31, 1996 1995 ------ ------ ASSETS Current assets: Cash and cash equivalents $10,133 $ 3,929 Short-term investments 6,086 8,225 Accounts receivable - net 12,864 13,980 Inventories 8,074 6,301 Deferred taxes 1,416 1,249 Prepaid expenses and other 380 91 ------- ------- Total current assets 38,953 33,775 Long-term investments 10,150 12,068 Property and equipment - net 2,344 2,028 Other assets 1,966 2,009 ------- ------- $53,413 $49,880 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,549 $ 2,058 Accrued salaries, wages and related liabilities 2,422 1,924 Other accrued liabilities 661 627 Income taxes payable 550 1,246 Reserve for warranties 925 908 Deferred revenue and customer deposits 132 140 ------- ------- Total current liabilities 7,239 6,903 Deferred taxes 406 446 Shareholders' equity: Common Stock, $.01 par value. Authorized 30,000 shares; issued and outstanding 7,473 at 1996 and 7,401 at 1995 75 74 Additional paid-in capital 28,350 27,824 Unrealized holding gain on investments (6) 46 Retained earnings 17,391 14,620 Foreign currency translation adjustment (42) (33) ------- ------- Total shareholders' equity 45,768 42,531 ------- ------- $53,413 $49,880 ======= ======= See acompanying notes to condensed consolidated financial statements
4 PROTOCOL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) (unaudited) Three months ended June 30, Six months ended June 30, 1996 1995 1996 1995 ------ ------ ------ ------ Sales $15,017 $10,761 $28,806 $20,937 Cost of sales 6,521 4,856 12,829 9,435 ------- ------- ------- ------- Gross profit 8,496 5,905 15,977 11,502 Operating expenses: Research and development expenses 1,784 1,556 3,579 3,251 Selling, general and administrative expenses 4,911 3,905 8,994 7,370 ------- ------- ------- ------- Total operating expenses 6,695 5,461 12,573 10,621 ------- ------- ------- ------- Income from operations 1,801 444 3,404 881 Other income 289 287 609 544 ------- ------- ------- ------- Income before income taxes 2,090 731 4,013 1,425 Provision for income taxes 647 207 1,242 399 ------- ------- ------- ------- Net Income $ 1,443 $ 524 $ 2,771 $ 1,026 ======= ======= ======= ======= Net income per common and common equivalent share $ 0.18 $ 0.07 $ 0.34 $ 0.13 ======= ======= ======= ======= Weighted average number of common and common equivalent shares outstanding 8,209 7,603 8,177 7,601 See acompanying notes to condensed consolidated financial statements
5 PROTOCOL SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Six months ended June 30, 1996 1995 ------ ------ Cash flows from operating activities: Net income $ 2,771 $ 1,026 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 674 563 Amortization of bond premium 185 125 Provision for deferred taxes (204) (119) Changes in assets and liabilities: Decrease in accounts receivable 1,117 7 Increase in inventories (1,774) (2,475) (Increase) decrease in prepaid expenses and other assets (274) 241 Increase in accounts payable and accrued liabilities 1,022 269 Decrease in income taxes payable (696) (157) Increase (decrease) in reserve for warranties 17 (7) Decrease in deferred revenue and customer deposits (7) (66) ------- ------- Net cash provided by (used in) operating activities 2,831 (593) Cash flows from investing activities: Purchase of investments (4,644) (9,232) Proceeds from maturity of investments 8,464 8,200 Acquisition of property and equipment (892) (939) Expenditures for software development (80) - ------- ------- Net cash provided by (used in) investing activities 2,848 (1,971) Cash flows from financing activities: Proceeds from exercise of stock options and stock purchase plan 526 435 ------- ------- Net cash provided by financing activities 526 435 Effect of exchange rates on cash and cash equivalents (1) - ------- ------- Net increase (decrease) in cash and cash equivalents 6,204 (2,129) Cash and cash equivalents at beginning of period 3,929 5,829 ------- ------- Cash and cash equivalents at end of period $10,133 $ 3,700 ======= ======= Supplemental disclosure of cash flow information: Cash paid for income taxes $ 1,748 $ 554 See acompanying notes to condensed consolidated financial statements
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, 1995. The results of operations for the interim period shown in this report are not necessarily indicative of results for any future interim period or the entire fiscal year. INVENTORIES Inventories are valued at the lower of cost or market with cost determined on the first-in, first-out basis (FIFO). The components of inventories are as follows: June 30, December 31, (in thousands) 1996 1995 - ------------------------------------------------------------------------- Raw materials $3,570 $2,772 Work in process 785 816 Finished goods 1,408 957 Demonstration instruments 2,311 1,756 ------ ------ Total inventories $8,074 $6,301 ====== ====== PROPERTY AND EQUIPMENT Property and equipment is stated at cost and includes the following: June 30, December 31, (in thousands) 1996 1995 - ------------------------------------------------------------------------- Equipment $6,032 $5,302 Furniture and fixtures 1,053 942 Leasehold improvements 237 233 ------ ------ 7,322 6,477 Less accumulated depreciation and amortization 4,978 4,449 ------ ------ Property and equipment - net $2,344 $2,028 ====== ====== 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. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and common equivalent share is computed using the weighted average number of common and dilutive common equivalent shares assumed to be outstanding during the period. Common equivalent shares consist of options to purchase common stock. NEW ACCOUNTING PRONOUNCEMENTS On January 1, 1996 the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock Based Compensation." This statement defines a fair value based method of accounting for employee stock options or similar equity instruments. However, this statement allows an entity to continue to measure compensation costs related to such equity instruments in accordance with the intrinsic value based method of accounting prescribed by APB Opinion No. 25. Entities which elect to continue to apply the provisions of APB Opinion No. 25 are required to make pro-forma disclosures of net income and earnings per share annually as calculated using the fair value based method of accounting prescribed by SFAS No. 123. The Company has elected to continue to account for stock based compensation in accordance with APB Opinion No. 25. Therefore, implementation of this statement has not had a material effect on the Company's financial position or results of operations. On January 1, 1996 the Company adopted the Financial Accounting Standards Board's SFAS No. 121 "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of." This statement specifies when long- lived assets should be reviewed for impairment, how to determine if such an asset is impaired and how to measure an impairment loss. This statement also requires that long-lived assets held for disposal be valued at the lower of carrying amount or fair value less the cost to sell the asset, except for assets that constitute part of a discontinued operation. Implementation of this statement has not had a material effect on the Company's financial position or results of operations. 8 SUBSEQUENT EVENT On July 10, 1996 the Company completed the acquisition of Pryon Corporation ("Pryon") pursuant to a merger accounted for as a pooling of interests. As a result of the merger Pryon became a wholly-owned subsidiary of the Company. In accordance with the terms of the merger, 1,211,100 shares of Protocol common stock were exchanged for all of the outstanding capital stock of Pryon. In addition, the Company issued options to purchase 121,385 shares of the Company's common stock in replacement of options to purchase Pryon common stock outstanding immediately prior to the consummation of the merger. These options vest and become exercisable in accordance with the terms of the original Pryon stock options. Since this acquisition was not consummated as of June 30, 1996, the results of Pryon are not included in the accompanying condensed consolidated financial statements. The following table presents, on a pro forma basis, the consolidated results of operations as if the acquisition of Pryon had been consummated as of June 30, 1996: (in thousands except per share amounts) - ------------------------------------------------------------------------------ (Unaudited) Three months ended June 30, Six months ended June 30, 1996 1995 1996 1995 ------ ------ ------ ------ Sales $17,097 $13,343 $33,356 $26,287 Net income 1,591 665 3,144 1,478 Net income per share $ .17 $ .07 $ .34 $ .16 - ------------------------------------------------------------------------------ 9 MANAGEMENT'S DISCUSSION AND ANALYSIS LIQUIDITY AND CAPITAL RESOURCES The Company maintained its strong financial position as of June 30, 1996 with working capital balances of $31.7 million and a current ratio of 5.4:1 as compared to working capital of $26.9 million and a current ratio of 4.9:1 at December 31, 1995. Positive cash flow from operating activities for the first six months of 1996 was $2.8 million as compared to negative operating cash flows of $593,000 for the first six months of 1995. 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. ACQUISITION OF SUBSIDIARY On July 10, 1996 the Company completed the acquisition of Pryon Corporation pursuant to a merger accounted for as a pooling of interests. Further discussion of this transaction is included in the Subsequent Event footnote to the accompanying condensed consolidated financial statements. RESULTS OF OPERATIONS Second Quarter 1996 vs. Second Quarter 1995 - ------------------------------------------- Sales. Sales for the second quarter of 1996 increased 39.5% to $15.0 million from $10.8 million for the second quarter of 1995. Instrument sales (including monitor options) increased by $4.4 million or 55.2% from the prior year's second quarter. The growth in instrument sales resulted primarily from increased unit sales of monitors and monitor options. Additional revenue growth was generated by increases in sales of accessories and service. Domestic sales increased 57.2% to $10.3 million (68.9% of total sales) in the second quarter of 1996 from $6.6 million (61.1% of total sales) in the second quarter of 1995. The Company attributes its continuing strong domestic sales growth to increased customer preference for its Flexible Monitoring (TM) solutions which maximize patient monitor utilization while reducing monitoring costs and to sales of $1.9 million to the U.S. Department of Defense ("DOD") in the second quarter of 1996. International sales increased 25.4% to $4.0 million (26.8% of total sales) in the second quarter of 1996 from $3.2 million (29.9% of total sales) in the second quarter of 1995. International sales growth in the second quarter of 1996 was positively impacted by sales of $4.4 million to the DOD in the first quarter of 1996. As a result of these first quarter 1996 sales to the DOD, certain international customer orders originally expected to ship in the first quarter of 1996 were pushed into the second quarter. Original Equipment Manufacturer ("OEM") sales decreased to $643,000 (4.3% of total sales) in the second quarter of 1996 from $968,000 (9.0% of total sales) in the prior year's second quarter. The decrease in OEM sales was primarily the result of a reduction in the number of GenESA devices sold to Gensia, Inc. Full production of the GenESA device for the European market began in early 1995. Production of the device for the domestic market must await market clearance by the FDA. 10 Gross profit. As a percentage of sales, gross profit increased from 54.9% in the second quarter of 1995 to 56.6% in the second quarter of 1996. The increase in gross profit as a percentage of sales resulted primarily from manufacturing efficiencies realized as a result of increased Propaq Encore monitor production and sales levels. Research and development. Research and development expenses increased 14.6% to $1.8 million in the second quarter of 1996 from $1.6 million in the second quarter of 1995. Research and development expenses as a percentage of sales decreased to 11.9% from 14.5% in the second quarter of 1995. Research and development expenses as a percentage of sales were above historical levels in the second quarter of 1995 as the result of non-recurring expenses incurred in that quarter related to the final testing and introduction of the Propaq Encore monitor. Selling, general and administrative. Selling, general and administrative expenses increased 25.8% to $4.9 million in the second quarter of 1996 from $3.9 million in the second quarter of 1995. Rising payroll and related costs resulting from headcount increases in marketing and administrative personnel was the primary cause of the increase in expenses. Increased sales commission expense as a result of the increased sales level also contributed significantly to the increase in expenses. As a percentage of sales, selling, general and administrative expenses decreased to 32.7% in the second quarter of 1996 from 36.3% in the second quarter of 1995. Other income. Other income remained virtually unchanged from the second quarter of 1995 as the effects of higher invested balances were offset by lower interest rates earned on the Company's investments. Provision for income taxes. The provision for income taxes increased to $647,000 in the second quarter of 1996 from $207,000 in the second quarter of 1995 representing effective tax rates of 31.0% and 28.3%, respectively. The increase in the effective tax rate resulted primarily from the expiration of tax code provisions allowing for research and experimentation tax credits and a decrease in the tax benefit of the Company's foreign sales corporation 11 Six Months Ended June 30, 1996 vs. Six Months Ended June 30, 1995 - ----------------------------------------------------------------- Sales. Sales for the first six months of 1996 increased 37.6% to $28.8 million from $20.9 million for the first six months of 1995. Instrument sales (including monitor options) increased by $7.5 million or 46.9% from the prior year's first six months. The growth in instrument sales resulted primarily from increased unit sales of monitors and monitor options. Additional revenue growth was generated by increases in sales of accessories and service. Domestic sales increased 62.6% to $20.0 million (69.5% of total sales) in the first six months of 1996 from $12.3 million (58.8% of total sales) in the first six months of 1995. The Company attributes its continuing strong domestic growth to increased customer preference for its Flexible Monitoring (TM) solutions which maximize patient monitor utilization while reducing monitoring costs and to sales of $6.4 million to the U.S. Department of Defense in the first six months of 1996. International sales increased 8.4% to $7.9 million (27.3% of total sales) in the first six months of 1996 from $7.3 million (34.7% of total sales) in the first six months of 1995. An increase in sales to NEC, the Company's exclusive distributor in Japan, contributed significantly to the increase in international sales. Original Equipment Manufacturer sales decreased to $906,000 (3.1% of total sales) in the first six months of 1996 from $1.4 million (6.5% of total sales) in the prior year's first six months. The decrease in OEM sales was primarily the result of a reduction in the number of GenESA devices sold to Gensia, Inc. Full production of the GenESA device for the European market began in early 1995. Production of the device for the domestic market must await market clearance by the FDA. Gross profit. As a percentage of sales, gross profit increased from 54.9% in the first six months of 1995 to 55.5% in the first six months of 1996. The increase in gross profit as a percentage of sales resulted primarily from manufacturing efficiencies realized as a result of increased Propaq Encore monitor production and sales levels, partially offset by the effect of significant price discounting on the $6.4 million of orders shipped to the U.S. Department of Defense in the first six months of 1996. Research and development. Research and development expenses increased 10.1% to $3.6 million in the first six months of 1996 from $3.3 million in the first six months of 1995. Research and development expenses as a percentage of sales decreased to 12.4% from 15.5% in the first six months of 1995. Research and development expenses as a percentage of sales were above historical levels in the first six months of 1995 as the result of non-recurring expenses incurred in that period to complete development of the Propaq Encore monitor. Selling, general and administrative. Selling, general and administrative expenses increased 22.0% to $9.0 million in the first six months of 1996 from $7.4 million in the first six months of 1995. Rising payroll and related costs resulting from headcount increases in marketing and administrative personnel was the primary cause of the increase in expenses. Increased sales commission expense as a result of the increased sales level also contributed significantly to the increase in expenses. As a percentage of sales, selling, general and administrative expenses decreased to 31.2% in the first six months of 1996 from 35.2% in the first six months of 1995. 12 Other income. Other income increased 11.9% to $609,000 in the first six months of 1996 from $544,000 in the first six months of 1995 primarily due to increased interest income resulting from higher invested balances. Provision for income taxes. The provision for income taxes increased to $1.2 million in the first six months of 1996 from $399,000 in the first six months of 1995 representing effective tax rates of 30.9% and 28.0%, respectively. The increase in the effective tax rate resulted primarily from the expiration of tax code provisions allowing for research and experimentation tax credits and a decrease in the tax benefit of the Company's foreign sales corporation. 13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 27.1 Financial Data Schedule (b) During the second quarter of 1996, the Company filed a Current Report on Form 8-K dated June 14, 1996 to report under Item 5 the determination of the number of shares of the Company's common stock to be issued for each share of Pryon Corporation capital stock upon consummation of the merger of the Company and Pryon. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROTOCOL SYSTEMS, INC. (Registrant) Date: August 9, 1996 By /s/ James B. Moon --------------------- James B. Moon President and Chief Executive Officer By /s/ Craig M. Swanson --------------------- Craig M. Swanson Vice-President and Chief Financial Officer EX-27.1 2
5 This schedule contains summary financial information extracted from Protocol Systems, Inc.'s Condensed Consolidated Balance Sheet as of June 30, 1996 and Condensed Consolidated Statement of Operations for the six months ended June 30, 1996 and is qualified in its entirety by reference to such financial statements. 0000883322 PROTOCOL SYSTEMS, INC. 1,000 6-MOS DEC-31-1996 JUN-30-1996 10,133 16,236 12,864 0 8,074 38,953 7,322 4,978 53,413 7,239 0 0 0 75 45,963 53,413 28,806 28,806 12,829 12,829 11,964 0 0 4,013 1,242 2,771 0 0 0 2,771 0.34 0.34 net of allowance
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