-----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, IwG9OJbN8SfNheRtS61VJyBFvn6Pxb8rDYMMB6Gjwep7/ifuiS3r4lRDziRPtOVX U8JuG9T4w66eycOP8jxrLA== 0000883322-98-000007.txt : 19980518 0000883322-98-000007.hdr.sgml : 19980518 ACCESSION NUMBER: 0000883322-98-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTOCOL SYSTEMS INC/NEW CENTRAL INDEX KEY: 0000883322 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 930913130 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19943 FILM NUMBER: 98626002 BUSINESS ADDRESS: STREET 1: 8500 S W CREEKSIDE PLACE CITY: BEAVERTON STATE: OR ZIP: 97008 BUSINESS PHONE: 6126862500 MAIL ADDRESS: STREET 1: 8500 SW CREEKSIDE PLACE CITY: BEAVERTON STATE: OR ZIP: 97008 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter ended March 31, 1998 Commission File Number 0-19943 PROTOCOL SYSTEMS, INC. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Oregon 93-0913130 - ------------------------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8500 SW Creekside Place, Beaverton, OR 97008 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (503) 526-8500 - ------------------------------------------------------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Number of shares of common stock outstanding as of May 8, 1998: 8,538,398 shares, $.01 par value per share ------------------------------------------ 2 PROTOCOL SYSTEMS, INC. Index to Form 10-Q PART I FINANCIAL INFORMATION Page No. - ----------------------------- -------- Item 1. Financial Statements Condensed Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997 3 Condensed Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997 4 Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 PART II OTHER INFORMATION - -------------------------- Item 2. Changes in Securities 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12 - ---------- 3 PROTOCOL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) (unaudited) Three months ended March 31, 1998 1997 ------ ------ Sales $14,920 $13,193 Cost of sales 8,007 6,697 ------- ------- Gross profit 6,913 6,496 Operating expenses: Research and development expenses 1,859 2,021 Selling, general and administrative expenses 5,015 4,628 ------- ------- Total operating expenses 6,874 6,649 ------- ------- Income from operations 39 (153) Other income 280 233 ------- ------- Income before income taxes 319 80 Provision for income taxes 89 25 ------- ------- Net income $ 230 $ 55 ======= ======= Comprehensive income $ 237 $ 37 ======= ======= Basic earnings per share $ 0.03 $ 0.01 ======= ======= Diluted earnings per share $ 0.03 $ 0.01 ======= ======= Weighted average number of shares used in the computation of: Basic earnings per share 8,794 8,780 Diluted earnings per share 9,132 9,202 See accompanying notes to condensed consolidated financial statements
4 PROTOCOL SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited) March 31, December 31, 1998 1997 ------ ------ ASSETS Current assets: Cash and cash equivalents $ 8,935 $12,257 Short-term investments 8,404 6,524 Accounts receivable - net 14,491 16,106 Inventories 12,106 13,507 Deferred taxes 1,470 1,474 Prepaid expenses and other 348 276 ------- ------- Total current assets 45,754 50,144 Long-term investments 6,760 6,789 Property and equipment - net 4,701 4,575 Other assets 2,464 2,247 ------- ------- $59,679 $63,755 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,859 $ 2,806 Accrued salaries, wages and related liabilities 2,242 2,375 Other accrued liabilities 581 606 Income taxes payable 94 676 Reserve for warranties 1,120 1,084 Deferred revenue and customer deposits 114 122 ------- ------- Total current liabilities 7,010 7,669 Deferred taxes 503 408 Shareholders' equity: Common Stock, $.01 par value. Authorized 30,000 shares; issued and outstanding 8,571 at 1998 and 8,935 at 1997 86 89 Additional paid-in capital 31,668 35,414 Unrealized holding gain on investments 30 33 Retained earnings 20,307 20,077 Foreign currency translation adjustment 75 65 ------- ------- Total shareholders' equity 52,166 55,678 ------- ------- $59,679 $63,755 ======= ======= See accompanying notes to condensed consolidated financial statements
5 PROTOCOL SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Three months ended March 31, 1998 1997 ------ ------ Cash flows from operating activities: Net income $ 230 $ 55 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 535 606 Loss on disposal of property and equipment - 9 Amortization of bond premium 53 103 Provision for deferred taxes 91 (50) Increase (decrease) in cash resulting from changes in: Accounts receivable 1,621 4,218 Inventories 1,404 (1,585) Prepaid expenses and other assets (51) (78) Accounts payable and accrued liabilities (115) (215) Income taxes payable (583) (765) Reserve for warranties 36 55 Deferred revenue and customer deposits (8) (18) ------- ------- Net cash provided by operating activities 3,213 2,335 Cash flows from investing activities: Purchase of investments (3,886) (1,177) Proceeds from maturity of investments 1,978 - Acquisition of property and equipment (629) (801) Expenditures for software development (190) - Acquisition of intangible assets (50) - Investment in subsidiaries (203) - ------- ------- Net cash used in investing activities (2,980) (1,978) Cash flows from financing activities: Proceeds from exercise of stock options and stock purchase plan 743 398 Repurchase of common stock (4,293) - ------- ------- Net cash provided by (used in) financing activities (3,550) 398 ------- ------- Effect of exchange rates on cash and cash equivalents (5) (10) ------- ------- Net increase (decrease) in cash and cash equivalents (3,322) 745 Cash and cash equivalents at beginning of period 12,257 6,903 ------- ------- Cash and cash equivalents at end of period $ 8,935 $ 7,648 ======= ======= Supplemental disclosure of cash flow information: Cash paid for income taxes $ 545 $ 216 See accompanying notes to condensed consolidated financial statements
6 PROTOCOL SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared by the Company without audit and in conformity with generally accepted accounting principles for interim financial information. Accordingly, certain financial information and footnotes have been omitted or condensed. In the opinion of management, the condensed consolidated financial statements include all necessary adjustments (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. These financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 1997. The results of operations for the interim period shown in this report are not necessarily indicative of results for any future interim period or the entire fiscal year. INVENTORIES Inventories are valued at the lower of cost or market with cost determined on the first-in, first-out basis (FIFO). The components of inventories are as follows: March 31, December 31, (in thousands) 1998 1997 - ------------------------------------------------------------------------- Raw materials $ 4,723 $ 5,521 Work in process 2,692 2,460 Finished goods 2,786 3,569 Demonstration instruments 1,905 1,957 ------- ------ Total inventories $12,106 $13,507 ======= ====== PROPERTY AND EQUIPMENT Property and equipment is stated at cost and includes the following: March 31, December 31, (in thousands) 1998 1997 - ------------------------------------------------------------------------- Equipment $12,394 $11,732 Furniture and fixtures 1,803 1,757 Leasehold improvements 683 683 ------ ------ 14,880 14,172 Less accumulated depreciation and amortization 10,179 9,597 ------ ------ Property and equipment - net $ 4,701 $ 4,575 ====== ====== 7 INCOME TAXES The provision for income taxes has been recorded based on the current estimate of the Company's annual effective tax rate. This rate differs from the Federal statutory rate primarily because of the provision for state income taxes, the benefit of the Company's foreign sales corporation and tax-exempt interest income earned on investments. See Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of income taxes. BASIC AND DILUTED EARNINGS PER SHARE In accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" both basic earnings per share and diluted earnings per share are presented. Basic earnings per share is computed using the weighted average number of common shares outstanding and diluted earnings per share is computed using the weighted average number of common shares outstanding and dilutive potential common shares assumed to be outstanding during the period using the treasury stock method. Dilutive potential common shares consist of options to purchase common stock. COMPREHENSIVE INCOME During the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" which establishes standards for the reporting and display of comprehensive income and its components. The following is a reconciliation of net income to comprehensive income: Three months ended March 31, (in thousands) 1998 1997 - ----------------------------------------------------------------------- Net income $ 230 $ 55 Other comprehensive income, net of tax Foreign currency translation adjustments 10 10 Unrealized holding loss arising during the period (3) (28) ------- ------- Other comprehensive income (loss) 7 (18) ------- ------- Comprehensive income $ 237 $ 37 ======= ======= NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The Statement changes the way public companies report segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports to shareholders. The Company plans to adopt the statement for the quarter ending December 31, 1998. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Sales. Sales for the first quarter of 1998 increased 13.1% to $14.9 million from $13.2 million for the first quarter of 1997. Domestic sales, excluding military revenues and Original Equipment Manufacturer ("OEM") sales of GenESA devices and Pryon OEM products, increased 22.2% to $7.7 million (51.7% of total sales) in the first quarter of 1998 from $6.3 million (47.8% of total sales) in the first quarter of 1997. The growth in domestic sales was primarily due to an increase in both the average selling price and the number of Acuity central stations sold, as well as an increase in sales of related instruments and the introduction of the Networked Acuity System in the first quarter of 1998. Additionally, sales of the QuikSigns spot-check monitor, accessories and service increased in the first quarter of 1998. U.S. military revenues increased 49.3% to $339,000 (2.3% of total sales) in the first quarter of 1998 from $227,000 (1.7% of total sales) in the first quarter of 1997. International sales, excluding international OEM sales of GenESA devices and Pryon OEM products, decreased 4.5% to $4.7 million (31.7% of total sales) in the first quarter of 1998 from $5.0 million (37.6% of total sales) in the first quarter of 1997. This decrease in international sales was principally due to the increased strength of the U.S. dollar against foreign currencies and soft economic conditions particularly in Europe and Asia. OEM sales of GenESA devices and Pryon OEM products increased 25.8% to $2.1 million (14.3% of total sales) in the first quarter of 1998 from $1.7 million (12.9% of total sales) in the first quarter of 1997 primarily due to increased sales of GenESA devices to Gensia Automedics, Inc. Gensia received clearance from the Food and Drug Administration (FDA) to market the GenESA device in the United States in 1997. In April 1998, the Company was informed that Gensia plans no additional purchases of the GenESA device under a supply agreement with the Company which provided for the purchase of devices through the year 2002. Conditions of termination of this agreement have not yet been determined. The Company announced in January 1998 that it expected net income in 1998 to remain relatively flat compared to 1997 as the Company plans to increase its marketing and sales efforts in 1998 by increasing the number of direct sales representatives, clinical application specialists and field service engineers. Additionally, the Company has established direct sales organizations in France and Germany during the first quarter of 1998. Gross profit. As a percentage of sales, gross profit decreased to 46.3% in the first quarter of 1998 from 49.2% in the first quarter of 1997. The decline in gross margin was due primarily to higher manufacturing overhead caused by a lower production volume resulting from a high finished goods inventory at the end of 1997. Increased discounting on international sales and higher system installation and service costs also contributed to the decline in gross margin in the first quarter of 1998. Research and development. Research and development expenses decreased 8.0% to $1.9 million in the first quarter of 1998 from $2.0 million in the first quarter of 1997. The decrease in research and development expenses resulted primarily from the capitalization of software development costs relating to the Networked Acuity System which was released in the first quarter of 1998. As a percentage of sales, research and development expenses decreased to 12.5% in the first quarter of 1998 from 15.3% in the first quarter of 1997. 9 Selling, general and administrative. Selling, general and administrative expenses increased 8.4% to $5.0 million in the first quarter of 1998 from $4.6 million in the first quarter of 1997. This increase resulted primarily from the establishment of direct sales organizations in Germany and France in the first quarter of 1998 and an increase in the number of direct sales representatives and clinical application specialists employed by the Company to expand the field sales and service operations. The Company plans to continue to increase its marketing and sales efforts in 1998 by adding additional direct sales representatives and clinical application specialists during the remainder of 1998. As a percentage of sales, selling, general and administrative expenses decreased to 33.6% in the first quarter of 1998 from 35.1% in the first quarter of 1997. Other income. Other income increased 19.8% to $280,000 in the first quarter of 1998 from $233,000 in the first quarter of 1997 primarily as a result of an increase in interest income due to a higher rate of return on investments in the first quarter of 1998. Provision for income taxes. The provision for income taxes increased to $89,000 in the first quarter of 1998 from $25,000 in the first quarter of 1996 representing effective tax rates of 28.0% and 31.3%, respectively. The effective tax rate, which reflects the estimate of the Company's annual effective tax rate, was lower in the first quarter of 1998 than in the first quarter of 1997 due to greater expected percentage benefits of research and experimentation credits and tax-exempt interest. LIQUIDITY AND CAPITAL RESOURCES The Company maintained its strong financial position as of March 31, 1998 with working capital balances of $38.7 million and a current ratio of 6.5:1 as compared to working capital of $42.5 million and a current ratio of 6.5:1 at December 31, 1997. Cash flow from operating activities for the first three months of 1998 was $3.2 million as compared to cash flow from operating activities of $2.3 million for the first three months of 1997. In January 1998 the Company's Board of Directors adopted a resolution authorizing the repurchase of up to 1,000,000 outstanding shares of the Company's common stock over a 12 month period. During the first quarter of 1998, the Company repurchased 439,000 shares. Management believes that current cash and investment balances and future cash flows from operations will be sufficient to meet the Company's liquidity and capital needs for the foreseeable future. FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis and other sections of this Quarterly Report contain forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projections about the Company's business, management's beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to those discussed in this Quarterly Report and from time to time in the Company's other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic and international economic conditions. 10 The Company's quarterly operating results have fluctuated in the past and may continue to fluctuate in the future depending on factors such as increased competition, timing of new product announcements, pricing changes by the Company or its competitors, length of sales cycles, market acceptance or delays in the introduction of new products or enhanced versions of existing products, timing of significant orders, regulatory approval requirements, product mix and economic factors and conditions generally and in the market for the Company's products specifically. In particular, the Company's quarterly operating results have fluctuated as a result of the unpredictable size and timing of military patient monitoring equipment procurements, and seasonal or other changes in customer buying patterns. A substantial portion of the Company's revenue in each quarter results from orders booked in that quarter. Accordingly, revenue from quarter to quarter is difficult to forecast. The Company's expense levels are based, in part, on its expectations as to future revenue. If revenue levels are below expectations, operating results are likely to be adversely affected. In particular, net income may be disproportionately affected by a reduction in revenue because only a small portion of expenses vary with revenue. Results of operations in any period should not be considered indicative of the result to be expected for any future period, and fluctuations in operating results may also result in fluctuations in the price of the Company's common stock. No assurance can be given that the Company will be able to grow in future periods or that its operations will remain profitable. 11 PART II. OTHER INFORMATION Item 2. Changes in Securities During the quarter ended March 31, 1998, the Company sold securities without registration under the Securities Act of 1933, as amended (the "Securities Act") upon the exercise of certain stock options granted under the Company's stock option plans. An aggregate of 8,851 shares of Common Stock were issued at an exercise prices ranging from $1.32 to $2.55. These transactions were effected in reliance upon the exemption from registration under the Securities Act provided by Rule 701 promulgated by the Securities and Exchange Commission pursuant to authority granted under Section 3 (b) of the Securities Act. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders during the quarter ended March 31, 1998. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 27.1 Financial Data Schedule (b) No reports were filed on Form 8-K during the quarter for which this report is filed. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROTOCOL SYSTEMS, INC. (Registrant) Date: May 15, 1998 By /s/ David F. Bolender --------------------- David F. Bolender Chief Executive Officer and Chairman of the Board of Directors By /s/ Craig M. Swanson --------------------- Craig M. Swanson Vice-President and Chief Financial Officer EX-27.1 2
5 This schedule contains summary financial information extracted from Protocol Systems, Inc. Condensed Consolidated Balance Sheet as of March 31, 1998 and Condensed Consolidated Statement of Operations for the three months ended March 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 8,935 15,164 14,014 346 12,106 45,754 14,880 10,179 59,679 7,010 0 0 0 86 52,080 59,679 14,920 14,920 8,007 8,007 6,594 0 0 319 89 230 0 0 0 230 0.03 0.03 Net of allowance The amount of loss provision is not significant and has been included in other expenses
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