-----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, LMmipvTvZrrXN68vVfEY+7vtLh0xkS3K26sAyvOsc5iyJNVuPJ7G15VgHE0p3/DB cKYJSDRNowOKSGE47Ru9zg== 0000883322-97-000013.txt : 19970813 0000883322-97-000013.hdr.sgml : 19970813 ACCESSION NUMBER: 0000883322-97-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 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: 97656847 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, 1997 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 8, 1997 8,903,742 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 Statements of Operations for the three months and six months ended June 30, 1997 and 1996 3 Condensed Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 4 Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996 5 Notes to Condensed Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 PART II OTHER INFORMATION - -------------------------- Item 2. Changes in Securities 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 13 - ---------- 3 PROTOCOL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) (unaudited) Three months ended June 30, Six months ended June 30, 1997 1996 1997 1996 ------- ------- ------- ------- Sales $16,110 $17,097 $29,303 $33,336 Cost of sales 8,033 7,406 14,730 14,762 ------- ------- ------- ------- Gross profit 8,077 9,691 14,573 18,574 Operating expenses: Research and development expenses 2,143 2,237 4,164 4,492 Selling, general and administrative expenses 5,238 5,490 9,866 10,238 ------- ------- ------- ------- Total operating expenses 7,381 7,727 14,030 14,730 ------- ------- ------- ------- Income from operations 696 1,964 543 3,844 Other income 279 237 512 505 ------- ------- ------- ------- Income before income taxes 975 2,201 1,055 4,349 Provision for income taxes 281 610 306 1,205 ------- ------- ------- ------- Net Income $ 694 $ 1,591 $ 749 $ 3,144 ======= ======= ======= ======= Net income per common and common equivalent share $ 0.08 $ 0.17 $ 0.08 $ 0.33 ======= ======= ======= ======= Weighted average number of common and common equivalent shares outstanding 9,103 9,537 9,148 9,504 See accompanying notes to condensed consolidated financial statements
4 PROTOCOL SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited) June 30, December 31, 1997 1996 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 7,438 $ 6,903 Short-term investments 11,751 14,787 Accounts receivable - net 13,945 15,456 Inventories 12,811 12,416 Deferred taxes 1,341 1,320 Prepaid expenses and other 207 166 ------- ------- Total current assets 47,493 51,048 Long-term investments 4,774 1,013 Property and equipment - net 4,578 4,478 Other assets 2,370 2,506 ------- ------- $59,215 $59,045 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,447 $ 2,480 Accrued salaries, wages and related liabilities 1,902 2,514 Other accrued liabilities 343 739 Income taxes payable 460 405 Reserve for warranties 1,027 985 Deferred revenue and customer deposits 115 142 ------- ------- Total current liabilities 6,294 7,265 ------- ------- Deferred taxes 443 471 Shareholders' equity: Common Stock, $.01 par value. Authorized 30,000 shares; issued and outstanding 8,851 at 1997 and and 8,744 at 1996 89 87 Additional paid-in capital 34,830 34,363 Unrealized holding gain on investments 16 32 Retained earnings 17,470 16,721 Foreign currency translation adjustment 73 106 ------- ------- Total shareholders' equity 52,478 51,309 ------- ------- $59,215 $59,045 ======= ======= See accompanying notes to condensed consolidated financial statements
5 PROTOCOL SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Six months ended June 30, 1997 1996 ------ ------ Cash flows from operating activities: Net income $ 749 $ 3,144 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,211 1,044 Amortization of bond premium 201 185 Provision for deferred taxes (38) (241) Increase (decrease) in cash resulting from changes in: Accounts receivable 1,510 1,497 Inventories (401) (1,678) Prepaid expenses and other assets (46) (447) Accounts payable and accrued liabilities (1,039) 244 Income taxes payable 55 (696) Reserve for warranties 42 27 Deferred revenue and customer deposits (27) (4) ------- ------- Net cash provided by operating activities 2,217 3,075 Cash flows from investing activities: Purchase of investments (9,943) (4,644) Proceeds from maturity of investments 9,002 8,464 Acquisition of property and equipment (1,199) (1,233) Acquisition of intangible assets (10) - Expenditures for software development - (80) ------- ------- Net cash provided by (used in) investing activities (2,150) 2,507 Cash flows from financing activities: Proceeds from exercise of stock options and stock purchase plans and related tax benefits 469 526 Net proceeds of long-term debt - 87 ------- ------- Net cash provided by financing activities 469 613 ------- ------- Effect of exchange rates on cash and cash equivalents (1) - ------- ------- Net increase in cash and cash equivalents 535 6,195 Cash and cash equivalents at beginning of period 6,903 3,974 ------- ------- Cash and cash equivalents at end of period $ 7,438 $10,169 ======= ======= Supplemental disclosure of cash flow information: Cash paid for interest $ - $ 118 Cash paid for income taxes $ 259 $ 1,763 See accompanying notes to condensed consolidated financial statements
6 PROTOCOL SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared by the Company without audit and in conformity with generally accepted accounting principles for interim financial information. Accordingly, certain financial information and footnotes have been omitted or condensed. In the opinion of management, the condensed consolidated financial statements include all necessary adjustments (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. These financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 1996. The results of operations for the interim period shown in this report are not necessarily indicative of results for any future interim period or the entire fiscal year. INVENTORIES Inventories are valued at the lower of cost or market with cost determined on the first-in, first-out basis (FIFO). The components of inventories are as follows: June 30, December 31, (in thousands) 1997 1996 - ------------------------------------------------------------------------- Raw materials $ 4,994 $ 4,921 Work in process 2,541 2,307 Finished goods 3,458 3,396 Demonstration instruments 1,818 1,792 ------- ------ Total inventories $12,811 $12,416 ======= ====== PROPERTY AND EQUIPMENT Property and equipment is stated at cost and includes the following: June 30, December 31, (in thousands) 1997 1996 - ------------------------------------------------------------------------- Equipment $10,932 $10,180 Furniture and fixtures 1,698 1,419 Leasehold improvements 656 654 ------ ------ 13,286 12,253 Less accumulated depreciation and amortization 8,708 7,775 ------ ------ Property and equipment - net $ 4,578 $ 4,478 ====== ====== 7 INCOME TAXES The provision for income taxes has been recorded based on the current estimate of the Company's annual effective tax rate. This rate differs from the Federal statutory rate primarily because of the provision for state income taxes, the benefit of the Company's foreign sales corporation, the utilization of research and experimentation tax credits and tax-exempt interest income earned on investments. See Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of income taxes. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and common equivalent share is computed using the weighted average number of common and dilutive common equivalent shares assumed to be outstanding during the period. Common equivalent shares consist of options to purchase common stock. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS 128 establishes a different method of computing net income per share than is currently required under the provisions of Accounting Principles Board Opinion No. 15. Under SFAS No. 128, the Company will be required to present both basic net income per share and diluted net income per share. Basic net income per share is expected to be comparable or slightly higher than the currently presented net income per share as the effect of dilutive stock options will not be considered in computing basic net income per share. Diluted net income per share is expected to be comparable to the currently presented net income per share. The Company plans to adopt SFAS 128 in its quarter ending December 31, 1997 and at that time all historical net income per share data presented will be restated to conform to the provisions of SFAS No. 128. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS LIQUIDITY AND CAPITAL RESOURCES The Company maintained its strong financial position as of June 30, 1997 with working capital balances of $41.2 million and a current ratio of 7.5:1 as compared to working capital of $43.8 million and a current ratio of 7.0:1 at December 31, 1996. Cash flow from operating activities for the first six months of 1997 was $2.2 million as compared to cash flow from operating activities of $3.1 million for the first six months of 1996. Management believes that current cash and investment balances and future cash flows from operations will be sufficient to meet the Company's liquidity and capital needs for the foreseeable future. FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis and other sections of this Quarterly Report contain forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projections about the Company's business, management's beliefs and assumptions made by management. Words such as 'expects,' 'anticipates,' 'intends,' 'plans,' 'believes,' 'seeks,' 'estimates' and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to those discussed in this Quarterly Report and from time to time in the Company's other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic and international economic conditions. RESULTS OF OPERATIONS Second Quarter 1997 vs. Second Quarter 1996 - ------------------------------------------- Sales. Sales for the second quarter of 1997 decreased 5.8% to $16.1 million from $17.1 million for the second quarter of 1996. Instrument sales (including the Propaq and Propaq Encore monitors and monitor options) decreased by $1.4 million or 11.7% from the prior year's second quarter. The decline in instrument sales resulted from decreased average selling prices due to higher discounts as well as a slight decrease in overall unit sales. Although overall unit sales of instruments decreased, unit sales of the Propaq Encore monitor increased from the prior year's second quarter. Increased sales of Acuity systems, accessories, service and the introduction of the QuikSigns spot-check monitor also partially offset the decline in instrument sales. Domestic sales decreased 11.7% to $9.1 million (56.7% of total sales) in the second quarter of 1997 from $10.3 million (60.5% of total sales) in the second quarter of 1996. The Company attributes this decrease to a significant reduction in military shipments, which declined to $1.2 million in the second quarter of 1997 from $1.9 million in the second quarter of 1996. In addition, second quarter 1996 domestic revenues were also unusually high due primarily to a large order backlog from the first quarter of 1996 when the Company shipped $4.4 million in military orders. 9 International sales increased 14.4% to $4.6 million (28.6% of total sales) in the second quarter of 1997 from $4.0 million (23.6% of total sales) in the second quarter of 1996. The increase in international sales was driven by strong sales in the European market. This growth was offset by decreased sales to NEC, the Company's exclusive distributor in Japan. Original equipment manufacturer ('OEM') sales decreased to $2.4 million (14.7% of total sales) in the second quarter of 1997 from $2.7 million (15.9% of total sales) in the prior year's second quarter. The decrease in OEM sales was primarily the result of a $608,000 decrease in sales of GenESA devices to Gensia, Inc. Gensia began shipments of the GenESA System to Europe in early 1995. Gensia continues to await Food and Drug Administration (FDA) market clearance for the GenESA System in the United States. The decrease in GenESA device sales was partially offset by an increase in sales of Pryon's CO2 monitoring products in the second quarter of 1997. Gross profit. As a percentage of sales, gross profit decreased to 50.1% in the second quarter of 1997 from 56.7% in the second quarter of 1996. The decrease in gross profit as a percentage of sales was partially due to higher sales discounts, including discounts related to sales of refurbished instruments and an enterprise-wide upgrade of Massachusetts General Hospital's monitoring systems. As a co-developer of the Company's Acuity central monitoring system, Massachusetts General Hospital has the right to purchase certain monitoring equipment for a small markup over cost. This right expires in October 1997. Gross profit was also negatively impacted by an increase in the percentage of international sales which have lower average selling prices and an increase in the percentage of sales of lower margin products including service and accessories. Research and development. Research and development expenses remained steady at $2.1 million in the second quarter of 1997 compared to $2.2 million in the second quarter of 1996. As a percentage of sales, research and development expenses increased to 13.3% in the second quarter of 1997 from 13.1% in the second quarter of 1996. Selling, general and administrative. Selling, general and administrative expenses decreased 4.6% to $5.2 million in the second quarter of 1997 compared to $5.5 million in the second quarter of 1996 primarily due to lower payroll and related expenses resulting from a decreased headcount and reduced incentive compensation. As a percentage of sales, selling, general and administrative expenses increased to 32.5% in the second quarter of 1997 from 32.1% in the second quarter of 1996. Other income. Other income increased 17.6% to $279,000 in the second quarter of 1997 from $237,000 in the second quarter of 1996 primarily as a result of an increase in interest income due to higher short and long-term investment balances in the second quarter of 1997. Provision for income taxes. The provision for income taxes decreased to $281,000 in the second quarter of 1997 from $610,000 in the second quarter of 1996 representing effective tax rates of 28.8% and 27.7%, respectively. The lower effective tax rate for the second quarter of 1996 was primarily due to the expected tax benefit of utilization of Pryon's net operating loss carryforwards. 10 Six Months Ended June 30, 1997 vs. Six Months Ended June 30, 1996 - ----------------------------------------------------------------- Sales. Sales for the first six months of 1997 decreased 12.1% to $29.3 million from $33.3 million for the first six months of 1996. Instrument sales (including the Propaq and Propaq Encore monitors and monitor options) decreased by $4.0 million or 17.1% from the first six months of the prior year. The decline in these instrument sales resulted from decreased average selling prices due to higher sales discounts as well as a decrease in overall unit sales. Although overall unit sales of instruments decreased, unit sales of the Propaq Encore monitor increased from the first six months of the prior year. Sales of OEM products decreased $1.3 million or 24.4% from the first six months of the prior year due to decreased sales of GenESA devices and Pryon's CO2 monitoring products. These sales reductions were partially offset by increased sales of Acuity systems, accessories, service and the introduction of the QuikSigns spot-check monitor in the first six months of 1997. Domestic sales decreased 21.8% to $15.7 million (53.5% of total sales) in the first six months of 1997 from $20.0 million (60.1% of total sales) in the first six months of 1996. The Company attributes this decrease primarily to a significant reduction in military shipments, which declined to $1.4 million in the first half of 1997 from $6.4 million in the first half of 1996. International sales increased 20.9% to $9.5 million (32.5% of total sales) in the first six months of 1997 from $7.9 million (23.6% of total sales) in the first six months of 1996. The increase in international sales was driven by strong sales in the European market. This growth was offset by decreased sales to NEC, the Company's exclusive distributor in Japan. OEM sales decreased 24.4% to $4.1 million (14.0% of total sales) in the first six months of 1997 from $5.4 million (16.3% of total sales) in the first six months of 1996. The decrease in OEM sales was partially the result of a $754,000 decrease in sales of GenESA devices to Gensia, Inc. Gensia began shipments of the GenESA System to Europe in early 1995. Gensia continues to await Food and Drug Administration (FDA) market clearance for the GenESA System in the United States. Additionally, sales of Pryon's CO2 monitoring products decreased $578,000 in the first six months of 1997 primarily due to reductions in orders from certain of its OEM customers. Gross profit. As a percentage of sales, gross profit decreased to 49.7% in the first six months of 1997 from 55.7% in the first six months of 1996. The decrease in gross profit as a percentage of sales was partially due to increased sales discounts, including discounts related to sales of refurbished instruments and an enterprise-wide upgrade of Massachusetts General Hospital's monitoring systems. As a co-developer of the Company's Acuity central monitoring system, Massachusetts General Hospital has the right to purchase certain monitoring equipment for a small markup over cost. This right expires in October 1997. Gross profit was also negatively impacted by additional warranty expense incurred as a result of the Company's voluntary decision to replace a defective component in certain Propaq Encore monitors in the first six months of 1997, an increase in the percentage of international sales which have lower average selling prices, and the significant reduction in Pryon's gross margin as a result of its lower manufacturing volumes. 11 Research and development. Research and development expenses decreased 7.3% to $4.2 million in the first six months of 1997 from $4.5 million in the first six months of 1996. The decrease in research and development expenses resulted primarily from lower development and testing costs in the first six months of 1997. In the first quarter of 1996 there were significant development and testing costs for a new release of software introduced in March 1996 for the Acuity system. As a percentage of sales, research and development expenses increased to 14.2% in the first six months of 1997 from 13.5% in the first six months of 1996. Selling, general and administrative. Selling, general and administrative expenses decreased 3.6% to $9.9 million in the first six months of 1997 compared to $10.2 million in the first six months of 1996 primarily due to lower payroll and related expenses and reduced incentive compensation. As a percentage of sales, selling, general and administrative expenses increased to 33.7% in the first six months of 1997 from 30.7% in the first six months of 1996. Other income. Other income remained steady at $512,000 in the first six months of 1997 compared to $505,000 in the first six months of 1996. Provision for income taxes. The provision for income taxes decreased to $306,000 in the first six months of 1997 from $1,205,000 in the first six months of 1996 representing effective tax rates of 29.1% and 27.7%, respectively. The lower effective tax rate for the first six months of 1996 was primarily due to the expected tax benefit of utilization of Pryon's net operating loss carryforwards. 12 PART II. OTHER INFORMATION Item 2. Changes in Securities During the quarter ended June 30, 1997, the Company sold securities without registration under the Securities Act of 1933, as amended (the 'Securities Act') upon the exercise of certain stock options granted under the Company's stock option plans. An aggregate of 52,083 shares of Common Stock were issued at exercise prices ranging from $1.32 to $6.00. These transactions were effected in reliance upon the exemption from registration under the Securities Act provided by Rule 701 promulgated by the Securities and Exchange Commission pursuant to authority granted under Section 3 (b) of the Securities Act. Item 4. Submission of Matters to a Vote of Security Holders. The annual meeting of shareholders of the Company was held on May 12, 1997 at which the following actions were taken by a vote of the shareholders: (1) The following persons were elected to the Board of Directors for three-year terms expiring in 2000 by the votes indicated below: Ronald S. Newbower: 6,975,348 votes for; 95,768 votes withheld Frank E. Samuel, Jr.: 5,630,149 votes for; 1,440,967 votes withheld (2) The appointment of KPMG Peat Marwick LLP to serve as the Company's independent auditors for the year ending December 31, 1997 was ratified by a vote of 6,923,359 to 7,203 (with 140,554 abstentions). Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 27.1 Financial Data Schedule (b) No reports were filed on Form 8-K during the quarter for which this report is filed. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROTOCOL SYSTEMS, INC. (Registrant) Date: August 11, 1997 By /s/ James B. Moon --------------------- James B. Moon President and Chief Executive Officer By /s/ Craig M. Swanson --------------------- Craig M. Swanson Vice-President and Chief Financial Officer 1 EX-27.1 2
5 This schedule contains summary financial information extracted from Protocol Systems, Inc. Condensed Consolidated Balance Sheet as of June 30, 1997 and Condensed Consolidated Statement of Operations for the six months ended June 30, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 7,438 16,525 13,945 261 12,811 47,493 13,286 8,708 59,215 6,294 0 0 0 89 52,389 59,215 29,303 29,303 14,730 14,730 14,030 0 0 1,055 306 749 0 0 0 749 0.08 0.08 Net of allowance
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