-----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, E9mmfjXQWOC44UqicrPp8cO2rIAdS0KRFdCwAEkE3rRb+qvuxeX3lAhGlQdORvpt ihEqXPlG667BreKiT3+UUw== 0000883322-98-000004.txt : 19980401 0000883322-98-000004.hdr.sgml : 19980401 ACCESSION NUMBER: 0000883322-98-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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-K405 SEC ACT: SEC FILE NUMBER: 000-19943 FILM NUMBER: 98580075 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-K405 1 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 ------- 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) 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 -------------------------------------- (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 -------- ---------------------- Portions of the 1998 Proxy Statement Part III 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. 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
Year Ended December 31, (in thousands, except per share amounts) 1997 1996 1995 1994 1993 - --------------------------- ------- ------- ------- ------- -------- 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
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. 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 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 PROTOCOL SYSTEMS, INC. Consolidated Statements of Operations (in thousands except per share amounts)
Year ended December 31, ----------------------------- 1997 1996 1995 ------- ------- ------- 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
See accompanying notes to consolidated financial statements. PROTOCOL SYSTEMS, INC. Consolidated Balance Sheets (in thousands)
December 31, --------------------- ASSETS 1997 1996 -------- -------- 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 ------- -------
See accompanying notes to consolidated financial statements. PROTOCOL SYSTEMS, INC. Consolidated Statements of Shareholders' Equity (in thousands)
Foreign Total Common stock Additional Unrealized currency share- ----------------- paid-in holding Retained translation holders' Shares Par value capital gain (loss) earnings adjustment equity ------ --------- --------- ----------- -------- ----------- --------- 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 ------ --------- --------- ------------ -------- ----------- ---------
See accompanying notes to consolidated financial statements. PROTOCOL SYSTEMS, INC. Consolidated Statements of Cash Flows (in thousands)
Year ended December 31, ------------------------------- 1997 1996 1995 ------------------------------- 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
See accompanying notes to consolidated financial statements. 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
The components of inventories are as follows: (in thousands) 1997 1996 ------- ------- 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 ------- -------
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:
INCENTIVE NON-STATUTORY STOCK OPTIONS STOCK OPTIONS ------------------------ ----------------------- 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 ---------- ------------ --------- -------------
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:
1997 1996 1995 ------- ------ ------ 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
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:
Weighted-average Number of shares exercise price per share ---------------- ------------------------ 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 --------- -------
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:
Options outstanding Options exercisable - ------------- ------------------------------------- ------------------------ Weighted- Weighted- Weighted- Range of average average average exercise Number remaining exercise Number exercise prices outstanding life price exercisable price - ------------- ------------------------------------- ------------------------ $ 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 - ------------- ----------- ----------- ------- ----------- --------
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:
(in thousands except Weighted Average per share amounts) Net Income Number of Shares Per Share (numerator) (denominator) Amounts ----------- ----------------- --------- 1997 - ---- 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 -----
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:
Year ending December 31, (in thousands) ----------- -------------- 1998 $ 869 1999 992 2000 1,107 2001 1,158 2002 1,120 Thereafter 3,639 ------ Total future minimum lease payments $8,885 ------
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:
(in thousands) 1997 1996 1995 ----- ----- ----- 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 ------ ------ ------
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:
1997 1996 1995 ----- ----- ----- 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% ----- ----- -----
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:
(in thousands) 1997 1996 ----- ----- 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)
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:
(in thousands) 1997 1996 1995 ------- ------- ------- 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 ------- ------- -------
NOTE 12. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
(in thousands except common stock Quarters ended prices and per share amounts) ------------------------------------------------ March 31 June 30 September 30 December 31 --------- -------- ------------ ------------ 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
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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 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. 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:
Page # ------ 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
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. (A) (3) EXHIBITS
Exhibit Number Description - ------- ----------- 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
* 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. 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.
Signature Title Date --------- ----- ----- /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.
S-1 PROTOCOL SYSTEMS, INC. Schedule II Valuation and Qualifying Accounts (in thousands)
Additions Additions Balance at charged to charged to Balance at beginning costs and other end of Description period expenses accounts Deductions period ---------- ---------- --------- ---------- ---------- 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
(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. 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 EX-10.15 2 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 - EX-10.16 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 EX-22.0 4 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 EX-23.1 5 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 EX-27.1 6
5 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. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 12,257 13,313 15,746 358 13,507 50,144 14,172 9,597 63,755 7,669 0 0 0 89 55,589 63,755 64,094 64,094 31,212 31,212 28,494 0 0 4,388 1,032 3,356 0 0 0 3,356 0.38 0.36 Net of allowance The amount of loss provision is not significant and has been included in other expenses.
EX-27.2 7
5 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. 1,000 9-MOS 6-MOS DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 SEP-30-1997 JUN-30-1997 12,206 7,438 12,843 16,525 15,569 13,945 267 261 13,284 12,811 48,512 47,493 13,773 13,286 9,218 8,708 62,163 59,215 7,396 6,294 0 0 0 0 0 0 89 89 54,238 52,389 62,163 59,215 46,460 29,303 46,460 29,303 22,824 14,730 22,824 14,730 21,566 14,030 0 0 0 0 2,873 1,055 747 306 2,125 749 0 0 0 0 0 0 2,126 749 0.24 0.09 0.23 0.08 Net of allowance The amount of "loss provision" is not significant and has been included in other expenses. Reflects new standard of presenting both basic and diluted net income per share.
EX-27.3 8
5 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. 1,000 YEAR 9-MOS 6-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 DEC-31-1996 SEP-30-1996 JUN-30-1996 6,903 6,897 10,169 15,800 17,109 16,236 15,456 13,170 13,392 252 252 232 12,416 12,239 11,544 51,048 45,808 43,943 12,253 11,660 10,995 7,775 7,323 6,849 59,045 57,650 60,448 7,265 8,056 7,733 0 0 0 0 0 0 0 0 0 87 87 87 51,222 49,068 50,316 59,045 57,650 60,448 66,894 49,529 33,336 66,894 49,529 33,336 30,471 22,001 14,762 30,471 22,001 14,762 30,419 23,649 14,225 0 0 0 110 110 110 6,004 3,559 4,349 1,926 1,646 1,205 4,078 2,233 3,144 0 0 0 0 0 0 0 0 0 4,078 2,233 3,144 0.47 0.26 0.36 0.44 0.24 0.33 Net of allowance The amount of "loss provision" is not significant and has been included in other expenses Reflects new standard of presenting both basic and diluted net income per share.
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