<PAGE>
PROTOCOL SYSTEMS, INC.
8500 S.W. CREEKSIDE PLACE
BEAVERTON, OREGON 97008
June 5, 1996
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders (the
"Protocol Annual Meeting") of Protocol Systems, Inc. ("Protocol"), which will be
held on Wednesday, July 10, 1996, at 10:00 a.m., local time, at Protocol's
offices at 8500 S.W. Creekside Place, Beaverton, Oregon 97008.
At the Protocol Annual Meeting, you will be asked to consider and vote upon
a proposal to approve the issuance (the "Issuance") of shares of common stock of
Protocol (the "Protocol Common Stock") to the shareholders of Pryon Corporation
("Pryon") in connection with an Agreement and Plan of Merger among Pryon,
Protocol and Protocol Merger Corporation ("Merger Sub"), a subsidiary of
Protocol (the "Merger Agreement"), which provides for the merger of Pryon and
Merger Sub (the "Merger"). Pursuant to the Merger Agreement Pryon will become a
wholly owned subsidiary of Protocol, and all of the outstanding shares of
capital stock of Pryon will be converted into shares of Protocol Common Stock
based on an exchange ratio which will be determined according to the Merger
Agreement. You will also be asked to elect two directors to Protocol's Board of
Directors, approve amendments to the Protocol 1992 Stock Incentive Plan and the
Protocol 1993 Stock Option Plan for Nonemployee Directors and to ratify the
appointment of KPMG Peat Marwick LLP as independent auditors of the Company for
the fiscal year ending December 31, 1996.
You should read carefully the accompanying Notice of Annual Meeting of
Shareholders and the Joint Proxy Statement/Prospectus for details of the Merger,
including information about the exchange ratio and the number of shares of
Protocol Common Stock to be issued in connection with the Merger and additional
related information.
Whether or not you plan to attend the Protocol Annual Meeting, please
complete, sign and date the enclosed proxy card and return it promptly in the
enclosed postage-prepaid envelope. Your proxy may be revoked at any time before
it is voted by signing and returning a later-dated proxy with respect to the
same shares or by filing with the Secretary of Protocol a written revocation
bearing a later date. If you attend the Protocol Annual Meeting, you may vote in
person if you wish, even though you previously have returned your proxy card.
Your prompt cooperation will be greatly appreciated.
Sincerely,
James B. Moon
PRESIDENT & CHIEF EXECUTIVE OFFICER
<PAGE>
PROTOCOL SYSTEMS, INC.
8500 S.W. CREEKSIDE PLACE
BEAVERTON, OREGON 97008
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JULY 10, 1996
TO THE SHAREHOLDERS OF PROTOCOL SYSTEMS, INC.:
The Annual Meeting of Shareholders (the "Protocol Annual Meeting") of
Protocol System, Inc., an Oregon corporation ("Protocol"), will be held on July
10, 1996, at 10:00 a.m., local time, at Protocol's offices at 8500 S.W.
Creekside Place, Beaverton, Oregon 97008, for the following purposes:
1. To consider and vote upon a proposal to approve the issuance (the
"Issuance") of shares of common stock of Protocol (the "Protocol Common
Stock") to the shareholders of Pryon Corporation ("Pryon") in connection
with an Agreement and Plan of Merger, dated as of February 20, 1996 (the
"Merger Agreement"), among Pryon, Protocol and Protocol Merger Corporation,
a Wisconsin corporation and a wholly owned subsidiary of Protocol ("Merger
Sub"), which provides for the merger of Merger Sub into Pryon (the
"Merger"). Pursuant to the Merger Agreement, Pryon will become a wholly
owned subsidiary of Protocol, and all of the shares of capital stock of
Pryon (the "Pryon Stock") issued and outstanding immediately prior to the
Merger will be converted into shares of Protocol Common Stock based on an
exchange ratio which will be determined according to the Merger Agreement.
The Merger, including the exchange ratio and the number of shares of
Protocol Common Stock to be issued in connection with the Merger, is more
completely described in the accompanying Joint Proxy Statement/Prospectus,
and a copy of the Merger Agreement is attached as Appendix A thereto.
2. To elect two directors, each to hold office for a three-year term.
3. To approve a proposed amendment to the Protocol 1992 Stock Incentive Plan.
4. To approve proposed amendments to the Protocol 1993 Stock Option Plan for
Nonemployee Directors.
5. To ratify the appointment of KPMG Peat Marwick LLP as Protocol's independent
auditors for the fiscal year ending December 31, 1996.
6. To transact such other business as may properly come before the Protocol
Annual Meeting or any adjournments or postponements thereof.
Only holders of record of Protocol Common Stock at the close of business on
May 6, 1996, the record date for the Protocol Annual Meeting, are entitled to
notice of and to vote at the Protocol Annual Meeting and any adjournments or
postponements thereof.
Whether or not you plan to attend the Protocol Annual Meeting, please
complete, sign and date the enclosed proxy card and return it promptly in the
enclosed postage-prepaid envelope. Your proxy may be revoked at any time before
it is voted by signing and returning a later-dated proxy with respect to the
same shares, by filing with the Secretary of Protocol a written revocation
bearing a later date or by attending and voting at the Protocol Annual Meeting.
PROTOCOL SYSTEMS, INC.
James B. Moon
PRESIDENT & CHIEF EXECUTIVE OFFICER
Beaverton, Oregon
June 5, 1996
<PAGE>
PRYON CORPORATION
N93 W14575 WHITTAKER WAY
MENOMONEE FALLS, WISCONSIN 53051
June 5, 1996
Dear Shareholder:
A Special Meeting of Shareholders of Pryon Corporation ("Pryon") will be
held on Monday, July 8, 1996, at 10:00 a.m., local time, at Pryon's offices at
N93 W14575 Whittaker Way, Menomonee Falls, Wisconsin 53051.
At this Special Meeting, you will be asked to consider and vote upon the
approval and adoption of a merger agreement (the "Merger Agreement") providing
for the merger (the "Merger") of Pryon with a subsidiary of Protocol Systems,
Inc. ("Protocol"), as described in the accompanying Joint Proxy
Statement/Prospectus. Pursuant to the Merger, Pryon will become a subsidiary of
Protocol, and (i) all outstanding shares of Pryon's Series A and Series B
Preferred Stock and all outstanding shares of Pryon's common stock (together,
the "Pryon Stock"), other than dissenters' shares, will be converted into and
exchanged for shares of common stock, $.01 par value, of Protocol (the "Protocol
Common Stock"), and (ii) all outstanding options to acquire Pryon Common Stock
will be converted into options to acquire Protocol Common Stock. Each holder of
Pryon Stock (other than dissenting shareholders) will receive shares of Protocol
Common Stock in exchange for shares of Pryon Stock owned by such shareholder
based upon an exchange ratio which will be determined according to the Merger
Agreement. For more information regarding the consideration to be received by
Pryon shareholders in the Merger, please refer to the accompanying Joint Proxy
Statement/Prospectus, under "Terms of the Merger -- Conversion of Pryon Stock in
the Merger."
The Pryon Board of Directors has approved the Merger Agreement described in
the attached material and the transactions contemplated thereby and has
determined that the Merger is in the best interests of Pryon and its
shareholders. After careful consideration, the Board of Directors recommends a
vote in favor of the Merger.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Shareholders, a Joint Proxy Statement/Prospectus relating to the
actions to be taken by Pryon shareholders at the Special Meeting, and a form of
appointment of proxy. The Joint Proxy Statement/Prospectus more fully describes
the proposed Merger and includes information about Protocol and Pryon.
All shareholders are cordially invited to attend the Special Meeting in
person. However, whether or not you plan to attend the Special Meeting, please
complete, sign, date and return your proxy or proxies in the enclosed postage
paid envelope. A shareholder who attends the Special Meeting will be able to
vote his or her shares whether or not he or she has granted a proxy and will be
able to revoke such proxy at any time before the shares covered thereby are
voted at the Special Meeting by filing with the Secretary of Pryon an instrument
revoking it or a duly executed proxy bearing a later date or by attendance at
the Special Meeting and voting in person. It is important that your shares be
represented and voted at the Special Meeting.
Sincerely,
Daniel F. Carsten
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
PRYON CORPORATION
N93 W14575 WHITTAKER WAY
MENOMONEE FALLS, WISCONSIN 53051
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 8, 1996
TO THE SHAREHOLDERS:
A Special Meeting of Shareholders of Pryon Corporation, a Wisconsin
corporation ("Pryon"), will be held on Friday, July 8, 1996, at 10:00 a.m.,
local time, at the offices of Pryon. At the Special Meeting, Pryon's
shareholders will be asked to consider and vote upon a proposal to approve and
adopt the Agreement and Plan of Merger dated as of February 20, 1996 entered
into by and among Protocol Systems, Inc., an Oregon corporation ("Protocol"),
Protocol Merger Corporation, a Wisconsin corporation and a wholly-owned
subsidiary of Protocol ("Merger Sub"), and Pryon (the "Merger Agreement"). The
Merger Agreement provides that (i) Merger Sub will be merged with and into
Pryon, with Pryon remaining as the surviving corporation and becoming a
wholly-owned subsidiary of Protocol (the "Merger"), (ii) all outstanding shares
of Pryon's Series A Preferred Stock, $0.10 par value per share ("Pryon Series A
Preferred Stock") and Series B Preferred Stock, $0.10 par value per share,
("Pryon Series B Preferred Stock") (collectively, the "Pryon Preferred Stock")
and all outstanding shares of Pryon's Common Stock, $0.10 par value ("Pryon
Common Stock") (together, the Pryon Preferred Stock and Pryon Common Stock are
referred to as the "Pryon Stock"), other than dissenters' shares, will be
converted into and exchanged for shares of common stock, $0.01 par value, of
Protocol (the "Protocol Common Stock"), and (iii) all outstanding options to
acquire Pryon Common Stock will be converted into options to acquire Protocol
Common Stock. Each holder of Pryon Stock (other than dissenting shareholders)
will receive shares of Protocol Common Stock in exchange for shares of Pryon
Stock owned by such shareholder based upon an exchange ratio which will be
determined according to the Merger Agreement. The exchange ratio is described in
more detail in the accompanying Joint Proxy Statement/Prospectus under "Terms of
the Merger -- Conversion of Pryon Stock in the Merger." The Merger is more fully
described in, and the Merger Agreement is attached in its entirety to, the
accompanying Joint Proxy Statement/Prospectus.
Only shareholders of record at the close of business on June 3, 1996, are
entitled to notice of and to vote at the Special Meeting, or at any
continuance(s) or adjournment(s) thereof. APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF SHARES REPRESENTING
(i) A MAJORITY OF THE NUMBER OF SHARES OF PRYON STOCK OUTSTANDING AND (ii)
66 2/3% OF THE NUMBER OF SHARES OF PRYON PREFERRED STOCK OUTSTANDING.
AS DESCRIBED IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS,
SHAREHOLDERS AND BENEFICIAL SHAREHOLDERS OF PRYON WILL BE ENTITLED TO PAYMENT OF
THE FAIR VALUE OF THOSE SHARES WHICH ARE NOT VOTED IN FAVOR OF THE MERGER
AGREEMENT, IF WRITTEN NOTICE OF THE SHAREHOLDERS' INTENT TO DEMAND PAYMENT IF
THE MERGER AGREEMENT AND MERGER ARE APPROVED IS DELIVERED TO PRYON BEFORE THE
VOTE IS TAKEN AND THE REQUIREMENTS OF SECTIONS 180.1301 THROUGH 180.1331 OF THE
WISCONSIN BUSINESS CORPORATION LAW ARE MET.
Shareholders of Pryon, regardless of whether they plan to attend the Special
Meeting, are requested to execute and return promptly the accompanying
Appointment of Proxy, which is solicited by the Board of Directors of Pryon. A
shareholder who attends the Special Meeting will be able to vote his or her
shares whether or not he or she has granted a Proxy and will be able to revoke
such Proxy at any time before the shares covered thereby are voted at the
Special Meeting by filing with the Secretary of Pryon an instrument revoking it
or a duly executed proxy bearing a later date or by attendance at the Special
Meeting and voting in person. If you are represented at the Special Meeting,
either in person or by proxy, and you abstain from voting on a particular matter
or matters, you will still be considered to be present at the Special Meeting
for purposes of determining whether a quorum is present. A prompt response is
helpful and your cooperation will be appreciated.
By Order of the Board of Directors,
Menomonee Falls, Wisconsin Daniel F. Carsten
June 5, 1996 PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
JOINT PROXY STATEMENT
OF
PROTOCOL SYSTEMS, INC.
AND
PRYON CORPORATION
---------------------
PROSPECTUS
OF
PROTOCOL SYSTEMS, INC.
---------------------
This Joint Proxy Statement/Prospectus is being furnished to shareholders of
Protocol Systems, Inc., an Oregon corporation ("Protocol"), in connection with
the solicitation of proxies by Protocol's Board of Directors (the "Protocol
Board") for use at the Annual Meeting of Shareholders to be held on July 10,
1996, commencing at 10:00 a.m., local time, and at any adjournments or
postponements thereof.
This Joint Proxy Statement/Prospectus is also being furnished to
shareholders of Pryon Corporation, a Wisconsin corporation ("Pryon"), in
connection with the solicitation of proxies by the Board of Directors of Pryon
for use at the Special Meeting of Shareholders to be held on July 8, 1996, at
Pryon's offices at N93 W14575 Whittaker Way, Menomonee Falls, Wisconsin 53051,
commencing at 10:00 a.m., local time, and at any adjournments or continuances
thereof.
This Joint Proxy Statement/Prospectus relates to the proposed merger of
Protocol Merger Corporation, a newly formed Wisconsin corporation and wholly
owned subsidiary of Protocol, with and into Pryon (the "Merger"). Protocol has
filed a Registration Statement on Form S-4 with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, relating to up to
2,320,843 shares of common stock, par value $.01 per share of Protocol
("Protocol Common Stock"), issuable in connection with the Merger. This Joint
Proxy Statement/Prospectus constitutes the Prospectus of Protocol with respect
to the shares of Protocol Common Stock to be issued in the Merger. All
information contained in this Joint Proxy Statement/Prospectus relating to
Protocol has been supplied by Protocol, and all information contained herein
relating to Pryon has been supplied by Pryon.
This Joint Proxy Statement/Prospectus is first being mailed to shareholders
of Protocol and Pryon on or about June 5, 1996.
THE SHARES OF PROTOCOL COMMON STOCK ISSUABLE IN THE MERGER HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
FOR A DESCRIPTION OF CERTAIN FACTORS PRYON SHAREHOLDERS SHOULD CONSIDER IN
EVALUATING THE MERGER AND THE ACQUISITION OF THE PROTOCOL COMMON STOCK OFFERED
HEREBY, SEE "RISK FACTORS" AT PAGE 12.
---------------------
The date of this Joint Proxy Statement/Prospectus is June 4, 1996.
<PAGE>
AVAILABLE INFORMATION
Protocol is subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at certain regional offices of the Commission
located at Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661, and 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such information can be obtained at prescribed rates from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549. This Joint Proxy Statement/Prospectus does not contain
all the information set forth in the Registration Statement on Form S-4 (the
"Registration Statement") filed by Protocol with the Commission under the
Securities Act of 1933, as amended, (the "Securities Act"), certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. The Registration Statement and any amendments thereto, including
exhibits as a part thereof, are available for inspection and copying as set
forth above.
Pryon is not subject to the information and reporting requirements of the
Exchange Act.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH
DOCUMENTS, OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY
INCORPORATED BY REFERENCE THEREIN, ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS JOINT PROXY STATEMENT/ PROSPECTUS
IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO THE SECRETARY, PROTOCOL SYSTEMS,
INC., 8500 S.W. CREEKSIDE PLACE, BEAVERTON, OREGON 97008, TELEPHONE NUMBER (503)
526-8500. TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE
BEFORE JUNE 25, 1996.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Protocol's Annual Report on Form 10-K for the fiscal year ended December 31,
1995 and Protocol's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996 previously filed with the Commission pursuant to the Exchange Act are
incorporated herein by this reference. All documents filed by Protocol pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the date of the Protocol Annual Meeting shall be deemed to
be incorporated by reference herein and to be a part hereof from the date any
such document is filed. The information relating to Protocol contained in this
Joint Proxy Statement/Prospectus does not purport to be comprehensive and should
be read together with the information in the documents incorporated by
reference.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document which also is incorporated by reference
herein) modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed to constitute a part hereof except as so modified
or superseded. All information appearing in this Joint Proxy
Statement/Prospectus is qualified in its entirety by the information and
financial statements (including notes thereto) appearing in the documents
incorporated herein by reference, except to the extent set forth in the
immediately preceding statement.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH
RESPECT TO SUCH MATTERS NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY PROTOCOL OR PRYON. THIS JOINT PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER
(i)
<PAGE>
TO BUY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF PROTOCOL OR PRYON SINCE THE DATE HEREOF OR THAT THE INFORMATION IN
THIS JOINT PROXY STATEMENT/PROSPECTUS OR IN THE DOCUMENTS INCORPORATED BY
REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THEREOF.
(ii)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY............................................................................... 1
General............................................................................. 1
The Companies....................................................................... 1
Meetings of Shareholders............................................................ 1
The Merger.......................................................................... 2
Risk Factors........................................................................ 7
SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA......... 8
COMPARATIVE PER SHARE DATA............................................................ 10
COMPARATIVE PER SHARE MARKET INFORMATION.............................................. 11
Protocol............................................................................ 11
Pryon............................................................................... 11
RISK FACTORS.......................................................................... 12
Risks Relating to the Merger........................................................ 12
Risks Relating to Both Protocol and Pryon........................................... 12
ANNUAL MEETING OF PROTOCOL SHAREHOLDERS............................................... 15
General............................................................................. 15
Matters to be Considered at the Meeting............................................. 15
Record Date; Shares Entitled to Vote; Vote Required................................. 15
Proxies; Proxy Solicitation......................................................... 16
SPECIAL MEETING OF PRYON SHAREHOLDERS................................................. 17
General............................................................................. 17
Matters to be Considered at the Meeting............................................. 17
Record Date; Shares Entitled to Vote; Vote Required................................. 17
Proxies; Proxy Solicitation......................................................... 18
BACKGROUND OF AND REASONS FOR THE MERGER.............................................. 19
Background.......................................................................... 19
Joint Reasons for the Merger........................................................ 20
Protocol's Reasons for the Merger................................................... 20
Pryon's Reasons for the Merger...................................................... 21
Recommendation of Protocol Board.................................................... 22
Opinion of Protocol Financial Advisor............................................... 22
Recommendation of Pryon Board....................................................... 26
Advice of Pryon's Financial Advisor................................................. 26
THE MERGER............................................................................ 29
Terms of the Merger................................................................. 29
Effective Time of the Merger........................................................ 31
Exchange of Pryon Stock............................................................. 31
Escrow of Protocol Common Stock..................................................... 31
Quotation of Protocol Common Stock on Nasdaq National Market........................ 32
Representations and Warranties...................................................... 32
Business of Pryon Pending the Merger................................................ 33
Certain Covenants of Protocol....................................................... 34
Voting Agreements................................................................... 34
No Solicitation..................................................................... 34
Conditions; Waivers................................................................. 34
Termination; Amendment.............................................................. 36
Indemnification Agreements.......................................................... 37
</TABLE>
(iii)
<PAGE>
<TABLE>
<S> <C>
Certain Federal Income Tax Considerations........................................... 37
Resale of Protocol Common Stock Issued in the Merger; Affiliates.................... 39
Accounting Treatment................................................................ 39
Management and Operations of Pryon After the Merger................................. 39
Expenses and Fees................................................................... 39
Rights of Dissenting Pryon Shareholders............................................. 40
CONFLICTS OF INTEREST................................................................. 41
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS........................... 43
BUSINESS OF PROTOCOL.................................................................. 49
BUSINESS OF PRYON..................................................................... 49
General............................................................................. 49
Industry............................................................................ 49
Products............................................................................ 50
Strategy............................................................................ 50
Customer Support and Service........................................................ 51
Marketing and Customers............................................................. 51
Manufacturing....................................................................... 52
Research and Development............................................................ 52
Facilities.......................................................................... 52
Employees........................................................................... 52
SELECTED PRYON FINANCIAL DATA......................................................... 53
PRYON MANAGEMENT'S DISCUSSION AND ANALYSIS............................................ 54
PROTOCOL MANAGEMENT................................................................... 58
PROTOCOL EXECUTIVE COMPENSATION....................................................... 59
STOCK OWNED BY PROTOCOL MANAGEMENT AND PRINCIPAL SHAREHOLDERS......................... 64
PRYON MANAGEMENT...................................................................... 66
Executive Officers.................................................................. 66
Directors........................................................................... 66
PRYON EXECUTIVE COMPENSATION.......................................................... 67
Summary of Cash and Certain Other Compensation...................................... 67
CERTAIN TRANSACTIONS AND RELATIONSHIPS WITH PRYON..................................... 68
STOCK OWNED BY PRYON MANAGEMENT AND PRINCIPAL SHAREHOLDERS............................ 69
ELECTION OF PROTOCOL DIRECTORS........................................................ 71
APPROVAL OF AMENDMENT TO PROTOCOL 1992 STOCK INCENTIVE PLAN........................... 73
APPROVAL OF AMENDMENTS TO PROTOCOL 1993 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS... 75
RATIFICATION OF APPOINTMENT OF PROTOCOL INDEPENDENT AUDITORS.......................... 77
DESCRIPTION OF PROTOCOL CAPITAL STOCK................................................. 78
Common Stock........................................................................ 78
Preferred Stock..................................................................... 78
Oregon Control Share and Business Combination Statutes.............................. 79
Shareholder Rights Plan............................................................. 79
Transfer Agent...................................................................... 81
COMPARATIVE RIGHTS OF PRYON SHAREHOLDERS AND PROTOCOL SHAREHOLDERS.................... 81
Classes of Stock.................................................................... 81
</TABLE>
(iv)
<PAGE>
<TABLE>
<S> <C>
Amendments To Articles of Incorporation and Bylaws.................................. 83
Shareholder Power To Call Special Shareholders' Meeting............................. 84
Approval of Certain Corporate Transactions.......................................... 84
Dissenters' Rights.................................................................. 85
Anti-Takeover Provisions............................................................ 85
"Blank Check" Preferred Stock....................................................... 87
Removal of Directors................................................................ 87
Classified Board of Directors....................................................... 87
Size of Board of Directors.......................................................... 87
Dividends and Repurchase of Shares.................................................. 88
Class Voting........................................................................ 88
LEGAL OPINION......................................................................... 88
DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS.......................................... 89
EXPERTS............................................................................... 89
FINANCIAL STATEMENTS.................................................................. F-1
Appendix A -- Agreement and Plan of Merger............................................ A-1
Appendix B -- Fairness Opinion of Wessels, Arnold & Henderson, L.L.C.................. B-1
Appendix C -- Wisconsin Dissenters' Rights Provisions................................. C-1
</TABLE>
(v)
<PAGE>
SUMMARY
CERTAIN SIGNIFICANT MATTERS DISCUSSED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS ARE SUMMARIZED BELOW. THIS SUMMARY IS NOT INTENDED TO BE
COMPLETE AND IS QUALIFIED IN ALL RESPECTS BY REFERENCE TO THE MORE DETAILED
INFORMATION APPEARING OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT/ PROSPECTUS (INCLUDING THE APPENDICES HERETO).
GENERAL
This Joint Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") of Protocol Merger Corporation ("Merger Sub"), a newly formed, wholly
owned subsidiary of Protocol Systems, Inc., an Oregon corporation ("Protocol"),
with and into Pryon Corporation, a Wisconsin corporation ("Pryon"). Subject to
the approval of the Merger by the shareholders of Pryon at the Special Meeting
of Pryon shareholders scheduled to be held on July 8, 1996 (the "Pryon Special
Meeting"), the approval of the issuance of shares of Protocol Common Stock to
Pryon shareholders in the Merger by the shareholders of Protocol at the Annual
Meeting of Protocol shareholders scheduled to be held on July 10, 1996 (the
"Protocol Annual Meeting") and the satisfaction of certain other conditions, the
Merger will be effected pursuant to the terms of an Agreement and Plan of Merger
dated as of February 20, 1996 (the "Merger Agreement") among Pryon, Protocol and
Merger Sub, a copy of which is attached hereto as Appendix A and is incorporated
herein by reference.
THE COMPANIES
PROTOCOL SYSTEMS, INC. Protocol designs, manufactures and markets patient
monitoring instruments and systems utilizing innovative design, advanced
software concepts and leading electronic technology. Protocol's products are
designed to address hospitals' needs for more efficient and flexible utilization
of patient monitoring equipment. Protocol's Propaq monitors combine multiple
physiologic measurement and display capabilities into a single lightweight
instrument, permitting the use of the monitor in a variety of hospital settings.
Propaq monitors are available in a variety of configurations and can measure
ECG; blood pressure, both invasively and non-invasively; arterial blood oxygen
saturation level (pulse oximetry); end-tidal CO(2) ("CO(2)"); respiration
(impedance pneumography); and body temperature. The Propaq monitor can also be
configured to receive wireless communication of ECG signals from a portable
transmitter. Protocol's Acuity System further increases monitoring flexibility
by allowing a clinician to observe and control up to 32 Propaq monitors from a
dedicated UNIX-based workstation. The mailing address of Protocol's principal
executive offices is 8500 S.W. Creekside Place, Beaverton, Oregon 97008 and its
telephone number is (503) 526-8500. See "BUSINESS OF PROTOCOL."
PROTOCOL MERGER CORPORATION. Merger Sub, a wholly owned subsidiary of
Protocol, was formed by Protocol solely for the purpose of effecting the Merger.
The mailing address of Merger Sub's principal executive offices is c/o Protocol
Systems, Inc., 8500 S.W. Creekside Place, Beaverton, Oregon 97008 and its
telephone number is (503) 526-8500.
PRYON CORPORATION. Pryon is a leading supplier of capnography products for
medical instrumentation 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
CO(2) data, coupled with other clinical signs and information, provides
clinicians with a noninvasive means to assess the patient's ventilation,
perfusion and circulatory status. In addition, Pryon has expanded its mission in
the medical market to provide complete airway monitoring systems, using its
market presence in CO(2) monitoring as leverage. The mailing address of Pryon is
N93 W14575 Whittaker Way, Menomonee Falls, Wisconsin 53051, and its telephone
number is (414) 253-2770. See "BUSINESS OF PRYON."
MEETINGS OF SHAREHOLDERS
PROTOCOL ANNUAL MEETING. The Protocol Annual Meeting is scheduled to be
held on July 10, 1996 at 10:00 a.m., local time, at Protocol's offices at 8500
S.W. Creekside Place, Beaverton, Oregon 97008.
1
<PAGE>
At the Protocol Annual Meeting, shareholders of Protocol will consider and vote
upon (i) the issuance of Protocol Common Stock in exchange for all of the
outstanding shares of capital stock of Pryon, and upon the exercise of options
to be issued by Protocol in exchange for currently outstanding options
exercisable for shares of Pryon Common Stock, in connection with the Merger
Agreement (the "Issuance"); (ii) the election of two directors to the Protocol
Board, each to hold office for a three-year term; (iii) an amendment to the
Protocol 1992 Stock Incentive Plan (the "Protocol 1992 Plan"); (iv) amendments
to the Protocol 1993 Stock Option Plan for Nonemployee Directors (the "Protocol
1993 Plan"); (v) ratification of the appointment of KPMG Peat Marwick LLP as the
Company's independent auditors for the fiscal year ending December 31, 1996 and
(vi) such other business as may be properly brought before the Protocol Annual
Meeting.
Only holders of record of Protocol Common Stock at the close of business on
May 6, 1996, are entitled to notice of and to vote at the Protocol Annual
Meeting. On that date, 7,443,223 shares of Protocol Common Stock were
outstanding and entitled to vote. The affirmative vote of the holders of a
majority of the votes cast on the proposal is required for approval of the
Issuance. The affirmative vote of the holders of a majority of the outstanding
shares of Protocol Common Stock is required to amend the Protocol 1992 Plan. The
affirmative vote of the holders of a majority of the shares of Protocol Common
Stock present in person or by proxy at the Protocol Annual Meeting is required
to amend the Protocol 1993 Plan. A plurality of the votes cast by the shares
entitled to vote is required for the election of each director. See "ANNUAL
MEETING OF PROTOCOL SHAREHOLDERS."
PRYON SPECIAL MEETING. The Pryon Special Meeting is scheduled to be held on
July 8, 1996 at 10:00 a.m., local time, at Pryon's offices at N93 W14575
Whittaker Way, Menomonee Falls, Wisconsin 53051. At the Special Meeting,
shareholders of Pryon will consider and vote upon a proposal to approve and
adopt the Merger Agreement and the Merger.
Only holders of record of Pryon common stock, par value $.10 per share
("Pryon Common Stock"), holders of Pryon Series A Preferred Stock, par value
$.10 per share ("Pryon Series A Preferred Stock") and holders of Pryon Series B
Preferred Stock, par value $.10 per share ("Pryon Series B Preferred Stock") at
the close of business on June 3, 1996, are entitled to notice of and to vote at
the Pryon Special Meeting. On that date, 75,408 shares of Pryon Common Stock,
58,505 shares of Pryon Series A Preferred Stock and 80,599 shares of Pryon
Series B Preferred Stock were outstanding and entitled to vote. The Pryon Common
Stock, Pryon Series A Preferred Stock and Pryon Series B Preferred Stock are
collectively referred to as the "Pryon Stock." The affirmative vote of holders
of shares representing (i) a majority of the number of shares of Pryon Stock
outstanding and (ii) 66 2/3% of the sum of the number of shares of (A) Pryon
Series A Preferred Stock and (B) Pryon Series B Preferred Stock (collectively,
the "Pryon Preferred Stock") outstanding is necessary to approve and adopt the
Merger Agreement and the Merger. It is a condition to consummation of the Merger
that holders of not more than 5% of the total number of shares of Pryon Common
Stock that would be outstanding if all outstanding shares of Pryon Series A
Preferred Stock and Pryon Series B Preferred Stock were converted into Pryon
Common Stock exercise dissenters' rights. See "SPECIAL MEETING OF THE PRYON
SHAREHOLDERS."
THE MERGER
GENERAL. Upon consummation of the Merger, Merger Sub will merge into Pryon,
Pryon will become a wholly owned subsidiary of Protocol, and the shares of Pryon
Stock then outstanding (other than shares as to which dissenters' rights have
been exercised), and the options to purchase shares of Pryon Common Stock which
are then outstanding under Pryon's 1991 Stock Option Plan and Pryon's 1994 Stock
Option Plan (the "Pryon Employee Stock Options") will be converted as described
below.
EFFECTIVE TIME OF THE MERGER. Following receipt of all required approvals
and satisfaction or waiver of the other conditions to the Merger, the Merger
will be consummated and become effective at the time (the "Effective Time") at
which the articles of merger to be filed pursuant to the Wisconsin
2
<PAGE>
Business Corporation Law (the "WBCL") are received for filing by the Secretary
of State of Wisconsin or such later date and time as may be specified in such
articles of merger. See "THE MERGER -- Effective Time of the Merger" and
"Conditions; Waivers."
CONVERSION OF PRYON STOCK IN THE MERGER. Upon consummation of the Merger,
all shares of Pryon Stock issued and outstanding immediately prior to the
Effective Time (other than shares as to which dissenters' rights of appraisal
have been duly sought, perfected and are not subsequently withdrawn) and all
shares of Pryon Common Stock issuable upon exercise of Pryon Employee Stock
Options will, collectively, be exchanged for 2,320,843 shares of Protocol Common
Stock (the "Aggregate Merger Consideration") (subject to adjustment as described
below), to be allocated among the shares of Pryon Common Stock, Pryon Series A
Preferred Stock, Pryon Series B Preferred Stock and Pryon Employee Stock Options
in accordance with the rights of each such class or series as set forth in
Pryon's Articles of Incorporation. If the Protocol Market Value (as defined
below) equals or exceeds $12.45, each share of Pryon Preferred Stock and each
share of Pryon Common Stock will be exchanged for the same number of shares of
Protocol Common Stock. The Merger Agreement provides that the Aggregate Merger
Consideration will be adjusted if the Protocol Market Value (as defined below)
is less than $10.643 per share or greater than $13.486 per share. The "Protocol
Market Value" will be the average of the per share closing price of Protocol
Common Stock on the Nasdaq National Market for the thirty (30) consecutive
trading days ending on June 14, 1996. If the Protocol Market Value is less than
$10.643, the Aggregate Merger Consideration will be increased to that number of
shares of Protocol Common Stock which is equal to the number obtained by
dividing $24,700,000 by the Protocol Market Value. If the Protocol Market Value
is more than $13.486, the Aggregate Merger Consideration will be decreased to
that number of shares of Protocol Common Stock which is equal to the number
obtained by dividing $31,300,000 by the Protocol Market Value.
The following table shows, at various assumed Protocol Market Values, the
total number of shares of Protocol Common Stock that would be issued upon
consummation of the Merger and the number of such shares that would be issued in
respect of each share of (i) Pryon Common Stock, (ii) Pryon Series A Preferred
Stock and (iii) Pryon Series B Preferred Stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PROTOCOL COMMON STOCK
TO
TOTAL NUMBER OF BE ISSUED IN RESPECT OF ONE SHARE OF PRYON
MARKET VALUE OF SHARES OF -------------------------------------------
ASSUMED PROTOCOL AGGREGATE MERGER PROTOCOL COMMON SERIES A SERIES B
MARKET VALUE PER CONSIDERATION STOCK TO BE PREFERRED PREFERRED
SHARE (IN MILLIONS) ISSUED (1) COMMON STOCK STOCK STOCK
- ----------------- ----------------- ----------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 10.00 $ 24.7 2,470,000 9.07 10.33 12.25
10.65 24.7 2,320,843 8.52 9.71 11.50
12.46 28.9 2,320,843 9.83 9.83 9.83
13.48 31.3 2,320,843 9.83 9.83 9.83
14.00 31.3 2,235,714 9.47 9.47 9.47
15.00 31.3 2,086,667 8.84 8.84 8.84
16.00 31.3 1,956,250 8.29 8.29 8.29
17.00 31.3 1,841,176 7.80 7.80 7.80
18.00 31.3 1,738,889 7.37 7.37 7.37
19.00 31.3 1,647,368 6.98 6.98 6.98
20.00 31.3 1,565,000 6.63 6.63 6.63
21.00 31.3 1,490,476 6.32 6.32 6.32
22.00 31.3 1,422,727 6.03 6.03 6.03
23.00 31.3 1,360,870 5.77 5.77 5.77
24.00 31.3 1,304,167 5.53 5.53 5.53
25.00 31.3 1,252,000 5.30 5.30 5.30
26.00 31.3 1,203,846 5.10 5.10 5.10
27.00 31.3 1,159,259 4.91 4.91 4.91
28.00 31.3 1,117,857 4.74 4.74 4.74
</TABLE>
- ------------------------
(1) Includes shares of Protocol Common Stock to be issued upon exercise of
Replacement Options.
3
<PAGE>
The closing price of Protocol Common Stock was $24.88 on May 31, 1996. The
average closing price of Protocol Common Stock for the thirty (30) consecutive
trading days ending on May 31, 1996 was $21.14, which, if used as the Protocol
Market Value, would result in the issuance of 6.27 shares of Protocol Common
Stock in exchange for each share of Pryon Stock upon consummation of the Merger.
Assuming a Protocol Market Value of $21.14, a total of approximately 1,345,886
shares of Protocol Common Stock and Replacement Options for a total of
approximately 134,895 shares of Protocol Common Stock would be issued upon
consummation of the Merger. The Protocol Common Stock to be issued in the
Merger, including Protocol Common Stock issuable upon exercise of Replacement
Options, would represent approximately 16% of the shares of Protocol Common
Stock outstanding after the Merger, assuming a Protocol Market Value $21.14.
Because the number of shares of Protocol Common Stock to be issued in the Merger
is subject to adjustment if the Protocol Market Value is less than $10.643 per
share or greater than $13.486 per share, fluctuations in the market price of
Protocol Common Stock during the thirty consecutive trading days ending on June
14, 1996 will impact the number of shares of Protocol Common Stock issued in the
Merger in exchange for each share of Pryon Stock. At any time after June 14,
1996, shareholders of Protocol and Pryon may obtain information as to the actual
Protocol Market Value by calling Protocol at (503) 526-8500. The market value of
Protocol Common Stock that the Pryon shareholders ultimately receive will be
subject to fluctuations in the market price of Protocol Common Stock and could
be more or less than its market value on the date of this Joint Proxy
Statement/Prospectus or more or less than the Protocol Market Value. Protocol
and Pryon shareholders are advised to obtain current market quotations for
Protocol Common Stock. No assurance can be given as to the market price of
Protocol Common Stock at any time before the Effective Time or as to the market
price of Protocol Common Stock at any time thereafter. If the actual Protocol
Market Value is less than $20.00 or more than $26.00, Protocol and Pryon will
recirculate a supplement to this Joint Proxy Statement/Prospectus containing
information as to the actual Protocol Market Value and the shareholders of
Protocol and Pryon will be given an opportunity to change their votes.
CONVERSION OF PRYON EMPLOYEE STOCK OPTIONS IN THE MERGER. Upon consummation
of the Merger, each Pryon Employee Stock Option that is outstanding immediately
prior to the Effective Time will be converted into an option (a "Replacement
Option") to purchase the number of shares of Protocol Common Stock (rounded up
or down to the nearest whole share) equal to the product of (i) the number of
shares of Pryon Common Stock which the option holder would have been entitled to
receive had such holder exercised the Pryon Employee Stock Option in full
immediately prior to the consummation of the Merger (whether or not such Pryon
Employee Stock Options would then have been exercisable) and (ii) the number of
shares of Protocol Common Stock for which each share of Pryon Common Stock is
exchanged in the Merger (the "Exchange Ratio"). The per share exercise price for
a Replacement Option will be equal to the aggregate exercise price for such
replaced Pryon Employee Stock Option divided by the number of full shares of
Protocol Common Stock deemed to be purchasable pursuant to such Replacement
Option. At or after the Effective Time, option agreements for Replacement
Options will be issued pursuant to Protocol's 1992 Stock Incentive Plan to
holders of Pryon Employee Stock Options. Replacement Options will have terms
which are substantially identical to the terms of the Pryon Employee Stock
Options they replace.
FRACTIONAL SHARES. No fractional shares of Protocol Common Stock will be
issued in the Merger. Any fractional amount resulting from the Merger will be
rounded up or down to the nearest full share of Protocol Common Stock.
RECOMMENDATION OF PROTOCOL BOARD OF DIRECTORS. The Protocol Board has
determined the Issuance and the Merger to be fair to and in the best interests
of Protocol and its shareholders and has approved the Issuance and the Merger
Agreement. The Protocol Board recommends that Protocol shareholders vote FOR the
Issuance and the amendment of the Protocol 1992 Plan. The Protocol Board's
recommendations are based upon a number of factors discussed in this Joint Proxy
Statement/Prospectus. See "BACKGROUND OF AND REASONS FOR THE MERGER," and
"APPROVAL OF AMENDMENT TO PROTOCOL 1992 STOCK INCENTIVE PLAN".
4
<PAGE>
OPINION OF PROTOCOL FINANCIAL ADVISOR. Wessels, Arnold & Henderson, L.L.C.
("Wessels") has been retained by Protocol to act as its financial advisor in
connection with the Merger. Wessels has delivered its oral opinion to the
Protocol Board of Directors dated February 16, 1996 (as confirmed in writing on
February 20, 1996, the "Wessels Opinion"), to the effect that, as of such date
and based on the procedures followed, factors considered and assumptions made by
Wessels as set forth therein, the consideration to be paid to holders of capital
stock of Pryon pursuant to the Merger Agreement is fair from a financial point
of view to Protocol. The full text of the Wessels Opinion, which sets forth
assumptions made, matters considered and limitations on the review undertaken,
is attached hereto as Appendix B. Protocol shareholders are urged to read the
opinion carefully and in its entirety. The Wessels Opinion is directed only to
the fairness to Protocol of the consideration to be paid to the Pryon
shareholders pursuant to the Merger Agreement from a financial point of view and
should not be deemed to constitute a recommendation by Wessels to Protocol
shareholders to vote in favor of any matter presented in this Joint Proxy
Statement/Prospectus. The summary of the Wessels Opinion set forth herein is
qualified in its entirety by reference to the full text of such opinion. See
"BACKGROUND OF AND REASONS FOR THE MERGER -- Opinion of Protocol Financial
Advisor."
RECOMMENDATION OF PRYON BOARD OF DIRECTORS. The Pryon Board has determined
the Merger to be fair to and in the best interests of Pryon and its shareholders
and has approved the Merger Agreement and the Merger. The Pryon Board recommends
that Pryon shareholders approve the Merger Agreement and the Merger. The Pryon
Board's recommendations are based upon a number of factors discussed in this
Joint Proxy Statement/Prospectus. See "BACKGROUND OF AND REASONS FOR THE MERGER"
and "CONFLICTS OF INTEREST."
VOTING AGREEMENTS. Certain Shareholders of Pryon owning an aggregate of
189,629 shares of Pryon Stock representing 88.4% of all outstanding Pryon Stock
and also representing 79.2%, 86.6% and 98.3% of the outstanding shares of Pryon
Common Stock, Pryon Series A Preferred Stock and Pryon Series B Preferred Stock,
respectively, have entered into an agreement with Protocol to vote all of their
shares of Pryon Stock for approval of the Merger and the Merger Agreement. See
"THE MERGER -- Voting Agreements."
EXCHANGE OF PRYON STOCK IN THE MERGER. As soon as practicable after the
Effective Time, the Exchange Agent for the Merger (the "Exchange Agent") will
deliver to each holder of certificates representing shares of Pryon Stock (other
than dissenting shares), a form of letter of transmittal and instructions for
use in effecting the surrender of such certificates for conversion into shares
of Protocol Common Stock. Upon surrender of such certificates to the Exchange
Agent, together with the letter of transmittal and other required documents,
each such holder will receive for each share of Pryon Stock represented by such
certificate the number of shares of Protocol Common Stock into which shares of
Pryon Stock were converted in the Merger, less the number of shares delivered
pursuant to the Escrow Agreement. See "THE MERGER -- Terms of the Merger" and
"Exchange of Pryon Common Stock."
ESCROW OF PROTOCOL COMMON STOCK. The Merger Agreement provides that
Protocol will withhold, on a pro rata basis, ten percent (10%) of the shares of
Protocol Common Stock to be received by each holder of Pryon Stock upon
consummation of the Merger (the "Escrow Shares"). The Escrow Shares will be
delivered to First Interstate Bank of Oregon, N.A., as escrow agent (the "Escrow
Agent"). The Escrow Shares will be held by the Escrow Agent for a period ending
on the first anniversary of the Closing Date. Subject to certain limitations set
forth in the Merger Agreement, the Escrow Shares will be subject to claims by
Protocol to satisfy Pryon's obligations under the Merger Agreement to reimburse
Protocol for any and all losses, damages, liabilities, costs and expenses
incurred by Protocol by reason of, arising out of, or in connection with any
breach or inaccuracy of any representation or warranty of Pryon contained in the
Merger Agreement or the failure by Pryon to perform any agreement or covenant
required of Pryon under the Merger Agreement. See "THE MERGER -- Escrow of
Protocol Common Stock."
5
<PAGE>
QUOTATION OF PROTOCOL COMMON STOCK ON THE NASDAQ NATIONAL MARKET. Protocol
has agreed to use all reasonable efforts to cause the Protocol Common Stock to
be issued pursuant to the Merger Agreement and upon exercise of Pryon Employee
Stock Options to be quoted for trading on the Nasdaq National Market. See "THE
MERGER -- Quotation of Protocol Common Stock on the Nasdaq National Market."
BUSINESS OF PROTOCOL PENDING THE MERGER. Protocol has agreed that, prior to
the Effective Time or earlier termination of the Merger Agreement, unless Pryon
agrees in writing or except as otherwise permitted pursuant to the Merger
Agreement, it will carry on its business consistent with past practices and will
not engage in certain actions specified in the Merger Agreement. See "THE MERGER
- -- Certain Covenants of Protocol."
BUSINESS OF PRYON PENDING THE MERGER. Pryon has agreed that, prior to the
Effective Time or earlier termination of the Merger Agreement, except as
contemplated by the Merger Agreement, it will conduct its operations according
to its ordinary course of business consistent with past practice. In addition,
unless Protocol agrees in writing or except as otherwise permitted pursuant to
the Merger Agreement, prior to the Effective Time Pryon will not engage in any
of a number of actions specified in the Merger Agreement. See "THE MERGER --
Business of Pryon Pending the Merger."
NO SOLICITATION. Pryon has agreed that, prior to the Effective Time or
earlier termination of the Merger Agreement, neither it nor any of its
affiliates will, directly or indirectly, encourage, solicit or engage in
discussions or negotiations with any third party concerning any merger,
consolidation, share exchange or similar transaction involving Pryon or any
purchase of all or a significant portion of the assets of or equity interest in
Pryon, or any other transaction that would involve the transfer or potential
transfer of control of Pryon. See "THE MERGER -- No Solicitation."
MANAGEMENT AND OPERATIONS OF PRYON AFTER THE MERGER. After the Merger,
Pryon will be a wholly owned subsidiary of Protocol. Pryon will operate as one
of Protocol's business units, and Protocol currently intends to maintain Pryon's
corporate headquarters in Menomonee Falls, Wisconsin. After the Merger, Pryon
will have access to resources generally available to Protocol's other business
units, will participate in appropriate activities with other Protocol business
units and will be managed by its current officers, under the direction and
guidance of Protocol's senior management and the Protocol and Pryon Boards. See
"THE MERGER -- Management and Operations of Pryon After the Merger."
CONDITIONS OF THE MERGER; TERMINATION. The consummation of the Merger is
conditioned upon the fulfillment or waiver of certain conditions set forth in
the Merger Agreement. See "THE MERGER -- Conditions; Waivers." The Merger
Agreement may be terminated (i) by mutual consent of Protocol and Pryon, (ii) by
either Protocol or Pryon if the Merger has not been consummated by July 12,
1996, and (iii) under certain other circumstances. See "THE MERGER -- Amendment;
Termination."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. It is expected that the Merger
will constitute a reorganization for federal income tax purposes and,
accordingly, that no gain or loss will be recognized by holders of Pryon Stock
upon the conversion of Pryon Stock into Protocol Common Stock in the Merger. It
is further expected that no gain or loss will be recognized by Pryon or Protocol
as a result of the Merger. See "THE MERGER -- Certain Federal Income Tax
Consequences." Pryon shareholders are urged to consult their own tax advisor as
to the specific tax consequences to them of the Merger.
REGULATORY APPROVALS. The parties to the Merger are not required to file
notifications under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and are not aware of any other regulatory approvals required to
consummate the Merger other than compliance with the federal securities laws and
applicable securities and "blue sky" laws of the various states.
ACCOUNTING TREATMENT. It is expected that the Merger will be accounted for
as a pooling of interests. See "THE MERGER -- Accounting Treatment."
6
<PAGE>
CONFLICTS OF INTEREST. As of the Pryon Record Date, non-employee directors
of the Pryon Board beneficially owned an aggregate of 116,797 shares of Pryon
Stock. Assuming a Protocol Market Value of $13.48 per share or more, the
aggregate dollar value of Protocol Common Stock to be received by these
non-employee directors in respect of outstanding shares of Pryon Stock would be
approximately $15,489,143, representing approximately 49.5% of the aggregate
consideration to be received by all holders of Pryon Stock and Pryon Employee
Stock Options.
As of the Record Date, the executive officers of Pryon beneficially owned an
aggregate of 42,740 shares of Pryon Stock and held options to acquire 13,100
shares of Pryon Common Stock, which options will convert into Replacement
Options to acquire Protocol Common Stock based on the Exchange Ratio. See "THE
MERGER -- Terms of the Merger -- Conversion of Pryon Employee Stock Options in
the Merger" and "Interests of Certain Persons in the Merger." Assuming a
Protocol Market Value of $13.48 per share or more, the aggregate dollar value of
Protocol Common Stock to be received by these executive officers in respect of
outstanding shares of Pryon Stock would be approximately $5,668,179,
representing approximately 18.1% of the aggregate consideration to be received
by all holders of Pryon Stock and Pryon Employee Stock Options. Assuming a
Protocol Market Value of $13.48 per share or more, the aggregate dollar value of
Protocol Common Stock issuable upon the exercise of Replacement Options to be
received by the executive officers would be approximately $1,737,322.
Pryon is indebted to each of Daniel F. Carsten, Robert H. Ricciardelli and
Robert M. Sommer, which indebtedness is evidenced by a Pryon Promissory Note,
each dated July 1, 1995, and each in the principal amount of $75,429.00 (the
"Promissory Notes"), plus any accrued and unpaid interest. The indebtedness
evidenced by the Promissory Notes is subordinate to certain indebtedness of
Pryon to its senior bank lender. Pursuant to the Merger Agreement, Protocol has
committed at or within ten days after the Closing to cause Pryon to pay in full
each of the Promissory Notes.
DISSENTERS' RIGHTS. Holders of Pryon Common Stock have the right to dissent
from the proposed Merger and, subject to certain conditions, to receive payment
of the "fair value" of their shares of Pryon Common Stock, as provided in
Sections 180.1301 through 180.1331 of the WBCL. A shareholder who elects to
exercise his or her dissenters' rights must perfect such rights by delivering to
Pryon prior to the vote at the Special Meeting written notice of his or her
intent to demand payment, and not vote his or her shares in favor of the Merger
Agreement, by either voting against adoption of the Merger Agreement or
abstaining from voting. See "THE MERGER -- Rights of Dissenting Pryon
Shareholders."
RISK FACTORS
The shareholders of Protocol and Pryon should consider carefully the
information set forth herein under the heading "Risk Factors" which discusses,
among other things, the risks associated with: the integration of the businesses
of Protocol and Pryon following the Merger; expenses related to the Merger; the
effect of future sales of the shares issued in the Merger on the market for
Protocol Common Stock; the termination of Pryon customers in response to the
Merger; the transition of sales responsibilities from Pryon distributors to the
Protocol direct sales force; fluctuations in operating results of Protocol and
Pryon; OEM sales; competition and changes in technology; dependence on
suppliers; cost containment programs in the health care industry; product defect
and liability matters; government regulation; dependence on key personnel;
protection of intellectual property; and certain antitakeover protective
measures adopted by Protocol.
7
<PAGE>
SELECTED HISTORICAL AND UNAUDITED
PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following selected historical financial information of Protocol and
Pryon has been derived from their respective historical consolidated financial
statements, and should be read in conjunction with such financial statements and
the notes thereto. Protocol's financial statements are incorporated by reference
in this Joint Proxy Statement/Prospectus. Pryon's audited Balance Sheets as of
December 31, 1995 and 1994, its audited Statements of Operations for the years
1995, 1994 and 1993, its unaudited Balance Sheet as of March 31, 1996 and its
unaudited Statements of Operations for the three-month periods ended March 31,
1996 and 1995 are included elsewhere in this Joint Proxy Statement/Prospectus.
Pryon's other audited historical financial statements for 1993, 1992 and 1991
are not included herein. The selected unaudited pro forma combined financial
information, which gives effect to the Merger on a pooling of interests basis as
if it had been consummated at the beginning of the periods presented, is derived
from the unaudited pro forma combined condensed financial statements included
elsewhere in this Joint Proxy Statement/Prospectus and should read in
conjunction with such statements and the notes thereto.
The unaudited pro forma combined financial information is not necessarily
indicative of the actual results or financial position that would have been
achieved had the Merger been consummated at the beginning of the years
presented, and should not be construed as representative of future operations.
See "UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS."
PROTOCOL HISTORICAL FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
AT OR FOR THREE
MONTHS ENDED MARCH
AT OR FOR YEAR ENDED DECEMBER 31, 31,
----------------------------------------------------- --------------------
1995 1994 1993 1992 1991 1996 1995
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Sales....................................... $ 49,067 $ 41,166 $ 37,132 $ 29,091 $ 23,009 $ 13,789 $ 10,176
Income from operations...................... 5,095 4,659 4,241 2,459 2,335 1,603 437
Income before extraordinary item and
cumulative effect of change in accounting
principle.................................. 4,678 4,146 3,408 2,158 1,515 1,328 502
Net income.................................. 4,678 4,146 3,508 2,201 2,231 1,328 502
Net income per common and common equivalent
share before extraordinary item and
cumulative effect of change in accounting
principle.................................. 0.61 0.56 0.46 0.31 0.26 0.17 0.07
Net income per common and common equivalent
share...................................... 0.61 0.56 0.47 0.32 0.39 0.17 0.07
Weighted average common and common
equivalent shares outstanding.............. 7,701 7,456 7,459 6,964 5,702 8,042 7,632
CONSOLIDATED BALANCE SHEET DATA:
Cash and investments........................ $ 24,222 $ 23,552 $ 19,323 $ 21,208 $ 2,939 $ 26,431 $ 23,364
Working capital............................. 26,872 31,436 28,214 21,871 7,094 28,854 31,833
Total assets................................ 49,880 41,839 37,272 31,920 12,491 51,429 42,014
Long-term debt excluding current
maturities................................. 0 0 0 249 640 0 0
Shareholders' equity (1).................... 42,531 35,884 31,477 27,464 8,223 43,956 36,773
Book value per common and common equivalent
share...................................... 5.45 4.79 4.21 3.75 1.44 5.45 4.81
</TABLE>
8
<PAGE>
PRYON HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
AT OR FOR THREE
MONTHS ENDED MARCH
AT OR FOR YEAR ENDED DECEMBER 31, 31,
----------------------------------------------------- --------------------
1995 1994 1993 1992 1991 1996 1995
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Sales............................................... $ 12,276 $ 8,001 $ 7,240 $ 3,066 $ 1,460 $ 3,135 $ 3,059
Income (loss) from operations....................... 1,013 (643) (229) (829) (637) 255 371
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle.......................................... 818 (794) (264) (855) (621) 202 338
Net (loss) income................................... 818 (794) (264) (855) (621) 202 338
Net income (loss) per common and common equivalent
share before extraordinary item and cumulative
effect of change in accounting principle........... 3.65 (10.55) (3.51) (11.20) (7.85) 0.89 1.49
Net income (loss) per common and common equivalent
share.............................................. 3.65 (10.55) (3.51) (11.20) (7.85) 0.89 1.49
Weighted average common and common equivalent shares
outstanding (2).................................... 225 75 75 76 78 227 227
CONSOLIDATED BALANCE SHEET DATA
Cash and investments................................ $ 45 $ 167 $ 143 $ 1,674 $ 665 $ 10 $ 101
Working capital..................................... 4,176 2,022 2,374 3,205 993 4,626 2,361
Total assets........................................ 7,710 6,612 5,221 5,687 2,330 7,867 6,922
Long-term debt excluding current maturities......... 1,795 156 387 319 362 1,972 132
Redeemable preferred stock.......................... 6,737 6,737 5,741 5,731 1,783 6,737 6,737
Shareholders' (deficit) equity (1).................. (2,271) (3,089) (2,295) (2,032) (1,171) (2,069) (2,751)
Book value per common and common equivalent share
(3)................................................ (30.11) (40.98) (30.53) (27.10) (15.05) (27.44) (36.50)
</TABLE>
UNAUDITED PROTOCOL AND PRYON PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
AT OR FOR THREE
AT OR FOR YEAR ENDED DECEMBER MONTHS ENDED MARCH
31, 31,
------------------------------- --------------------
1995 1994 1993 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Sales................................................................. $ 59,602 $ 48,158 $ 43,327 $ 16,239 $ 12,944
Income from operations................................................ 6,010 4,098 3,823 1,881 781
Income before cumulative effect of change in accounting principle..... 5,398 3,434 2,954 1,553 813
Net income............................................................ 5,398 3,434 3,054 1,553 813
Net income per common and common equivalent share before cumulative
effect of change in accounting principle............................. 0.59 0.39 0.34 0.16 0.09
Net income per common and common equivalent share..................... 0.59 0.39 0.35 0.16 0.09
Weighted average common and common equivalent shares outstanding...... 9,204 8,828 8,817 9,562 9,137
CONSOLIDATED BALANCE SHEET DATA
Cash and investments.................................................. $ 24,267 $ 26,441
Working capital....................................................... 29,484 31,939
Total assets.......................................................... 57,460 59,149
Long-term debt excluding current maturities........................... 1,795 1,972
Shareholders' equity (1).............................................. 45,433 47,083
Book value per common and common equivalent share..................... 4.87 4.91
</TABLE>
- --------------------------
(1) No cash dividends were declared or paid by either Protocol or Pryon during
any of the periods presented.
(2) Common equivalent shares include dilutive weighted average preferred shares
outstanding as if the preferred shares had been converted to common shares
on a one-to-one basis, as well as dilutive weighted average options to
purchase common stock assumed to be outstanding in accordance with the
treasury stock method. The computation of common equivalent shares
outstanding assumes that no options to purchase Pryon common stock will be
exercised prior to the merger.
(3) Book value per share amounts are computed by dividing total shareholders'
equity by the total number of common and common equivalent shares
outstanding at the end of the year. Preferred shares are not included and
other common stock equivalents are included only if dilutive.
9
<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents comparative per share data for Protocol and
Pryon on a historical basis and combined per share data on an unaudited pro
forma basis. The combined data gives effect to the Merger on a pooling of
interests basis assuming an exchange ratio resulting in 6.4693 shares of
Protocol Common Stock being issued in exchange for each share of Pryon Stock in
the merger. The assumed exchange ratio is based on an assumed Protocol Market
Value of $20.50, which was the closing price of Protocol Common Stock on May 10,
1996. The number of shares of Protocol Common Stock that will actually be issued
upon consummation of the Merger is subject to adjustment based on the Protocol
Market Value. See "THE MERGER -- Terms of the Merger -- Conversion of Pryon
Stock in the Merger." This data should be read in conjunction with the selected
historical financial information, the pro forma combined condensed financial
statements and the separate historical financial statements of Protocol and
Pryon and the notes thereto incorporated by reference or included elsewhere in
this Joint Proxy Statement/Prospectus. The unaudited pro forma combined
financial data is not necessarily indicative of the actual results or financial
position that would have been achieved had the Merger been consummated at the
beginning of the years presented, and should not be construed as representative
of future operations.
<TABLE>
<CAPTION>
AT OR FOR THREE
AT OR FOR YEAR ENDED DECEMBER MONTHS ENDED MARCH
31, 31,
------------------------------- --------------------
1995 1994 1993 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
HISTORICAL -- PROTOCOL:
Net income per share..................................... $ 0.61 $ 0.56 $ 0.47 $ 0.17 $ 0.07
Book value per share (1)................................. 5.45 4.79 4.21 5.45 4.81
HISTORICAL -- PRYON:
Net income (loss) per share.............................. 3.65 (10.55) (3.51) 0.89 1.49
Book value per share (1)................................. (30.11) (40.98) (30.53) (27.44) (36.50)
PRO FORMA -- COMBINED NET INCOME
Net income per Protocol share............................ 0.59 0.39 0.35 0.16 0.09
Net income per Pryon share (2)........................... 3.79 2.52 2.24 1.04 0.58
PRO FORMA -- COMBINED BOOK VALUE
Book value per Protocol share (3)(4)..................... 4.87 4.91
Book value per Pryon share (2)........................... 31.52 31.78
</TABLE>
- ------------------------
(1) The historical book value per share is computed by dividing total
shareholders' equity by the total number of common shares and share
equivalents outstanding at the end of the year.
(2) The Pryon equivalent pro forma amounts of net income and book value are
computed by multiplying the pro forma combined amount per Protocol share by
an assumed exchange ratio of 6.4693 shares of Protocol Common Stock for each
share of Pryon Stock. The number of shares of Protocol Common Stock that
will actually be issued upon consummation of the Merger is subject to
adjustment based on the Protocol Market Value. See "THE MERGER -- Terms of
the Merger."
(3) Protocol and Pryon estimate that they will incur direct and indirect costs
of $1.6 million in connection with the Merger, relating mainly to investment
banker fees and legal and accounting services. These nonrecurring costs will
be charged to operations in the fiscal quarter in which the merger is
consummated. The pro forma combined book value per share data reflect these
estimated transaction costs and their tax effects as if such costs were
incurred as of December 31, 1995, but the effects of these costs are not
reflected in the pro forma combined net income per share data.
(4) The pro forma combined book value per share of Protocol Common Stock is
computed by dividing pro forma shareholders' equity by the pro forma number
of common shares and share equivalents outstanding at the end of the period.
10
<PAGE>
COMPARATIVE PER SHARE MARKET INFORMATION
PROTOCOL
The Protocol Common Stock is quoted on the Nasdaq National Market. The table
below sets forth for the fiscal periods indicated the high and low sales prices
per share of Protocol Common Stock on the Nasdaq National Market as reported in
published financial sources.
<TABLE>
<CAPTION>
PRICE PER SHARE OF
PROTOCOL COMMON
STOCK
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1993
First Quarter........................................................................ $ 9.25 $ 6.00
Second Quarter....................................................................... 9.13 5.38
Third Quarter........................................................................ 10.75 8.00
Fourth Quarter....................................................................... 11.75 8.88
FISCAL 1994
First Quarter........................................................................ 11.25 9.25
Second Quarter....................................................................... 10.00 5.88
Third Quarter........................................................................ 9.50 6.00
Fourth Quarter....................................................................... 10.25 7.75
FISCAL 1995
First Quarter........................................................................ 12.00 8.75
Second Quarter....................................................................... 13.00 8.50
Third Quarter........................................................................ 11.88 9.25
Fourth Quarter....................................................................... 11.50 9.88
FISCAL 1996
First Quarter........................................................................ 18.00 10.38
Second Quarter (through May 31)...................................................... 25.13 15.63
</TABLE>
On February 20, 1996, the last full trading day prior to announcement of the
execution of the Merger Agreement, the reported Nasdaq National Market closing
price per share of Protocol Common Stock was $13.625. On May 31, 1996, the most
recent available date prior to printing this Joint Proxy Statement/Prospectus,
the reported Nasdaq National Market closing price per share of Protocol Common
Stock was $24.88. On that date, there were approximately 4,000 beneficial
holders of Protocol Common Stock. Protocol shareholders and Pryon shareholders
are urged to obtain current market quotations.
Protocol has never paid cash dividends on shares of Protocol Common Stock.
It is not anticipated that any cash dividends will be paid on Protocol Common
Stock in the foreseeable future.
PRYON
There is no public market for shares of Pryon Stock. There were 32 holders
of record of Pryon Common Stock as of June 3, 1996.
Pryon has never paid cash dividends on shares of Pryon Common Stock. It is
not anticipated that any cash dividends will be paid on Pryon Common Stock in
the foreseeable future. Pryon is restricted under its existing loan and security
agreement from paying cash dividends or from making any other distribution with
respect to shares of its capital stock.
11
<PAGE>
RISK FACTORS
The following factors should be considered carefully by the shareholders of
Protocol Systems, Inc. and Pryon Corporation in connection with voting on the
Issuance and the Merger. These factors should be considered in conjunction with
the other information included or incorporated by reference in this Joint Proxy
Statement/Prospectus.
RISKS RELATING TO THE MERGER
INTEGRATION OF THE BUSINESSES. The Merger involves the combination of two
companies that have previously operated independently. Although Pryon is
expected to be operated as a wholly owned subsidiary of Protocol, the transition
will require substantial attention from management of both companies. The
difficulties involved in the management and coordination of two geographically
separate organizations, the integration of two companies' product offerings, and
the transfer of marketing and sales responsibilities for Pryon's direct products
could cause disruption of, or loss of momentum in, one or both of the companies'
businesses, which could have a material adverse effect on the results of
operations or financial condition of the companies.
EXPENSES RELATED TO THE MERGER. The Merger will result in aggregate pre-tax
expense to Protocol estimated at approximately $1.6 million. This amount
includes estimated costs of consummating the Merger, including fees and charges
of financial advisors, attorneys, and accountants. These costs will negatively
affect Protocol's results of operations in the quarter in which the Merger is
consummated.
SHARES ELIGIBLE FOR FUTURE SALE. If the Merger is approved by the
shareholders of Protocol and Pryon, Protocol will issue to the shareholders of
Pryon 2,320,843 shares of Protocol Common Stock, subject to adjustment if the
average trading price of Protocol Common Stock for the thirty trading days
ending on June 14, 1996 is greater than $13.486 or less than $10.643. In
general, these shares will be freely tradable following the Merger, subject to
certain volume and other resale limitations for affiliates of Pryon or Protocol
pursuant to Rules 144 and/or 145 under the Securities Act. See "THE MERGER --
Resale of Protocol Common Stock Issued in the Merger; Affiliates." Future sales
of a substantial number of such shares could adversely affect or cause
substantial fluctuations in the market price of Protocol Common Stock.
CUSTOMER TERMINATION. The announcement and consummation of the Merger could
cause customers and potential customers of Pryon to seek an alternative original
equipment manufacturer ("OEM") supplier for capnography products due to their
concern about being a competitor with Protocol. Since a customer terminating its
relationship with Pryon would be required to re-design and then re-certify its
instrumentation with regulatory authorities, such termination's may not be
immediate, but could occur over a period of several years. Customer terminations
or the failure to attract new customers could have a material adverse effect on
the business, financial condition and results of operations of Protocol and
Pryon.
DISTRIBUTOR TERMINATION. Protocol and Pryon intend to transfer sales and
marketing responsibility for Pryon's direct standalone instruments, the SC-300
(combined Mainstream and Sidestream CO(2) monitor) and the SC-210 (Sidestream
CO(2) monitor), to Protocol's direct sales force in the United States. In making
this transition, Pryon's current U.S. distributors of these products have been
terminated. As a result of this transition, sales of these devices could
decrease and distributors could return unsold equipment and/or demonstration
monitors, both events which could have a material adverse effect on the
business, financial condition and results of operations of Protocol and Pryon. A
similar transition will be made with international distributors.
RISKS RELATING TO BOTH PROTOCOL AND PRYON
FLUCTUATION OF OPERATING RESULTS. A variety of factors may cause
period-to-period fluctuations in the operating results of Protocol and Pryon
following the Merger. Such factors include, but are not limited to, the
integration of the businesses noted above, competitive pricing pressures,
revenue and expenses related to new products or revisions to existing products,
delays in regulatory approvals and
12
<PAGE>
changes in distribution channels or product mix, or changes in capital spending
practices of health care providers due to changes in legislation or industry
cost reform. In addition, Protocol's customers generally order on an as needed
basis and expect product shipment within 30-45 days of order placement. As a
result, Protocol does not carry a significant backlog and must commit to a
production schedule before receiving the actual customer order. Singularly or in
combination, these factors can adversely affect the companies' operating results
and financial condition.
ORIGINAL EQUIPMENT MANUFACTURER CUSTOMERS. Both Protocol and Pryon sell
products to OEM customers, i.e., companies that incorporate components or
subassemblies manufactured by Protocol or Pryon into their own completed
products or systems which are then sold to the end user under their label, or
sell completed products manufactured by Protocol or Pryon under their own label.
Selling into OEM distribution channels involves inherent risks including a
concentration of sales in fewer customers; lack of visibility into the end user
markets being served; inability to control or forecast an OEM customer's design
process, priorities, or time to market; and complete dependence on the OEM
customer's design, regulatory approvals, marketing and sales capabilities and
success. An OEM customer's schedule, demand forecast, inventory position, and
end user sales success can change rapidly, often without adequate forewarning,
and could have a material adverse effect on the business, the results of
operations or financial condition of the companies.
COMPETITION AND CHANGES IN TECHNOLOGY. The medical device industry is
characterized by rapidly evolving technology and increased competition. Many
competitors have substantially greater financial, technical and marketing
resources than either Protocol or Pryon. There can be no assurance that some of
these competitors will not succeed in developing technologies and products that
are more effective than those of Protocol or Pryon, or that would render some
products offered by Protocol or Pryon obsolete or non-competitive. Competition
based on price is expected to become an increasingly important factor in
customer purchasing patterns as a result of cost containment pressures on, and
consolidation in, the health care industry. Such competition has exerted, and is
likely to continue to exert, downward pressure on the prices Protocol and Pryon
are able to charge for their products. There can be no assurance that Protocol
and/or Pryon will be able to offset such downward price pressure through
corresponding cost reductions. Any failure to offset such pressure could have a
material adverse effect on the business, financial condition and results of
operation of the companies.
DEPENDENCE ON SUPPLIERS. Both Protocol and Pryon rely on a number of
single-source suppliers to provide certain parts for their products, including
pulse oximetry, electroluminescent (EL) display subassemblies, telemetry
transmitters and receivers, and vacuum florescent displays. The interruption of
certain sources of supply could disrupt each company's ability to manufacture
products or cause the companies to incur costs associated with the development
of alternative sources, either of which could have an effect on the companies'
financial performance. The long purchasing lead times associated with some
components limit the companies' ability to quickly adjust production volumes to
meet changes in customer demand. An extended interruption or reduction in the
supply of any key components could have a material adverse effect on Protocol or
Pryon's business, financial condition and results of operations.
COST CONTAINMENT PROGRAMS. Both domestic and international health care
providers and governments are attempting to control the rate of increase and/or
reduce the cost of health care in their respective countries. In the United
States, major third-party payors of hospital services (Medicare, Medicaid and
private health care insurance companies) have substantially revised payment
methodologies to contain health care costs. The introduction of various Medicare
cost containment incentives, combined with closer scrutiny of health care
expenditures by both private health insurers and employers, has resulted in
increased contractual sales and discounts given by medical equipment suppliers.
These cost containment measures have also caused greater selectivity in the
purchase of medical equipment. Health care industry cost containment measures
are expected to continue and could adversely affect future sales of Protocol and
Pryon's products.
13
<PAGE>
PRODUCT DEFECTS; PRODUCT LIABILITY. In the event either Protocol or Pryon's
products prove defective, the companies may be required to recall or redesign
such products. Such a recall or redesign could cause the companies to incur
considerable expenses, disrupt sales and adversely affect the reputation of the
companies and their products. The manufacturing and marketing of medical
instruments involve an inherent risk of product liability. Although neither
Protocol nor Pryon has experienced any product liability claims, there can be no
assurance they will not experience such claims in the future. Although the
companies maintain product liability insurance, there can be no assurance that
such coverage will be adequate or that such coverage will continue to be
available on acceptable terms. The companies' businesses could be adversely
affected by successful product liability claims in excess of its product
liability coverage.
GOVERNMENT REGULATION. The development, testing, manufacturing and
marketing of medical devices are subject to regulation by the United States Food
and Drug Administration (the "FDA") and foreign regulatory agencies. There has
been a trend in recent years inside and outside the United States to more
stringent regulation of, and enforcement of requirements applicable to, medical
device manufacturers. Although both Protocol and Pryon have successfully passed
all previous regulatory audits, there can be no assurance that the same results
will be achieved in the future. Domestic and foreign government regulations
could delay or prevent product introductions, interfere with or mandate
cessation of production and marketing of existing products, or cause product
recalls.
DEPENDENCE ON KEY PERSONNEL. The future success of both Protocol and Pryon
is dependent on a number of key management and technical employees. Competition
for highly skilled people with extensive experience in medical electronics,
systems software, and miniaturization is intense. Both companies will be
dependent on the continued services and management experience of their executive
officers. If such executive officers were to leave, the operating results of the
combined companies could be adversely affected. The future success of both
companies will also be dependent on their ability to continue to attract key
managerial and technical personnel.
PROTECTION OF INTELLECTUAL PROPERTY. Both Protocol and Pryon rely on a
combination of patents, trademarks, copyrights and other intellectual property
law, non-disclosure agreements and other protective measures to preserve their
proprietary rights concerning their products. Such protection, however, will not
preclude competitors from developing products similar to either company's
products. In addition, the laws of certain foreign countries do not protect
intellectual property rights to the same extent as the laws of the United
States. Although both companies will continue to implement protective measures
and intend to defend their proprietary rights vigorously, there can be no
assurance that these efforts will be successful.
ANTI-TAKEOVER PROVISIONS. Protocol's Shareholder Rights Plan, certain
provisions of its restated Articles and Bylaws and the Oregon Business
Corporation Act may have the effect of making it more difficult for a third
party to acquire control of Protocol through either a tender offer or a proxy
contest for the election of directors. This could limit the price that certain
investors might be willing to pay in the future for shares of Protocol Common
Stock and could make the removal of incumbent directors more difficult.
14
<PAGE>
ANNUAL MEETING OF PROTOCOL SHAREHOLDERS
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to holders of
Protocol Common Stock in connection with the solicitation of proxies by the
Protocol Board for use at the Protocol Annual Meeting to be held on Wednesday,
July 10, 1996, at Protocol's offices at 8500 S.W. Creekside Place, Beaverton,
Oregon 97008, commencing at 10:00 a.m., local time, and at any adjournments or
postponements thereof. This Joint Proxy Statement/Prospectus and the
accompanying forms of proxy are first being mailed to shareholders of Protocol
and Pryon on or about June 5, 1996.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Protocol Annual Meeting, shareholders of record of Protocol as of the
close of business on May 6, 1996, will consider and vote upon (i) the issuance
of Protocol Common Stock in exchange for shares of Pryon Stock, and upon the
exercise of options to be issued by Protocol in exchange for currently
outstanding options exercisable for shares of Pryon Common Stock, in connection
with the Merger Agreement; (ii) the election of two directors to the Protocol
Board, each to hold office for a three-year term; (iii) an amendment to the
Protocol 1992 Plan to increase from 875,000 to 1,336,422 shares the number of
shares of Protocol Common Stock authorized for issuance thereunder to enable the
replacement of outstanding options to purchase Pryon Common Stock with options
to purchase Protocol Common Stock (approximately 211,422 shares) and to increase
the number of shares generally available for future grants under the Plan
(approximately 250,000 shares); (iv) amendments to the Protocol 1993 Plan to
increase the size of certain option grants thereunder and to increase the
maximum number of options that may be granted under the Plan in any year; (v)
ratification of the appointment of KPMG Peat Marwick LLP as Protocol's
independent auditors for the fiscal year ending December 31, 1996; and (vi) such
other business as may properly be brought before the Protocol Annual Meeting.
Holders of Protocol Common Stock will not be entitled to dissenters' rights
as a result of the Issuance. See "THE MERGER -- Terms of the Merger."
THE PROTOCOL BOARD HAS APPROVED THE ISSUANCE AND THE MERGER AGREEMENT AND
RECOMMENDS THAT PROTOCOL SHAREHOLDERS VOTE "FOR" APPROVAL OF THE ISSUANCE, "FOR"
THE NOMINEES FOR DIRECTORS, "FOR" AMENDMENT OF THE PROTOCOL 1992 PLAN, "FOR"
APPROVAL OF THE AMENDMENTS TO THE PROTOCOL 1993 PLAN AND "FOR" THE RATIFICATION
OF THE APPOINTMENT OF KPMG PEAT MARWICK LLP. SEE "BACKGROUND OF AND REASONS FOR
THE MERGER," "ELECTION OF PROTOCOL DIRECTORS", "APPROVAL OF AMENDMENT TO
PROTOCOL 1992 STOCK INCENTIVE PLAN," "APPROVAL OF AMENDMENTS TO PROTOCOL 1993
STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS" AND "RATIFICATION OF APPOINTMENT OF
PROTOCOL INDEPENDENT AUDITORS."
As of the date of this Joint Proxy Statement/Prospectus, the Protocol Board
of Directors does not know of any other matters to be presented for action by
the shareholders at the Protocol Annual Meeting. Protocol's Bylaws require that
notice with respect to matters to be presented for action by the shareholders at
an annual meeting and nominations for director be delivered to the Secretary of
the Company not less than 60 days nor more than 90 days prior to the date of an
annual meeting, unless notice or public disclosure of the date of the meeting
occurs less than 60 days prior to the date of such meeting, in which event,
shareholders may deliver such notice not later than the 10th day following the
day on which notice of the date of the meeting was mailed or public disclosure
thereof was made. If any other matters not now known are properly brought before
the meeting, the persons named in the accompanying proxy will vote such proxy in
accordance with the determination of a majority of the Protocol Board of
Directors.
RECORD DATE; SHARES ENTITLED TO VOTE; VOTE REQUIRED
The close of business on May 6, 1996 (the "Protocol Record Date") has been
fixed as the record date for determining the holders of Protocol Common Stock
who are entitled to notice of and to vote at the Protocol Annual Meeting. As of
the Protocol Record Date, there were approximately 4,000
15
<PAGE>
beneficial holders of the 7,443,223 shares of Protocol Common Stock then
outstanding and entitled to vote. The holders of record on the Protocol Record
Date of Protocol Common Stock are entitled to one vote per Protocol Common
Share. The presence in person or by proxy of the holders of shares representing
a majority of the voting power of the Protocol Common Stock entitled to vote is
necessary to constitute a quorum for the transaction of business at the Protocol
Annual Meeting. Under Section 6(i) of Part III of Schedule D to the Bylaws of
the National Association of Securities Dealers, Inc. (the "NASD"), the
affirmative vote of a majority of the total votes cast on the proposal is
required for approval of the Issuance. The affirmative vote of the holders of a
majority of the outstanding shares of Protocol Common Stock is required to amend
the Protocol 1992 Plan. The affirmative vote of the holders of a majority of the
shares of Protocol Common Stock present in person or by proxy at the Protocol
Annual Meeting is required to amend the Protocol 1993 Plan. If a quorum is
present, Protocol's bylaws provide that directors are elected by a plurality of
the votes cast by the shares entitled to vote. Holders of Protocol Common Stock
are not entitled to cumulate votes in the election of directors.
Abstention from voting and broker nonvotes will have the practical effect of
voting against the Issuance and the approval of the amendments to the Protocol
Stock Option Plans since they represent one less vote for such approval.
Abstention from voting and broker nonvotes on the election of directors will
have no effect on the determination of whether a plurality exists with respect
to a given nominee.
PROXIES; PROXY SOLICITATION
Shares of Protocol Common Stock represented by properly executed proxies
received at or prior to the Protocol Annual Meeting that have not been revoked
will be voted at the Protocol Annual Meeting in accordance with the instructions
contained therein. Shares of Protocol Common Stock represented by properly
executed proxies for which no instruction is given will be voted "FOR" approval
of the Issuance, "FOR" election of the nominees for director, "FOR" approval of
the amendment to the Protocol 1992 Plan, "FOR" approval of the amendments to the
Protocol 1993 Plan and "FOR" the ratification of the appointment of KPMG Peat
Marwick LLP. Protocol shareholders are requested to complete, sign, date and
return promptly the enclosed proxy card in the postage-prepaid envelope provided
for this purpose to ensure that their shares are voted. A shareholder may revoke
a proxy at any time before its exercise by submitting a later-dated proxy with
respect to the same shares, by delivering written notice of revocation to the
Secretary of Protocol or by attending the Protocol Annual Meeting and voting in
person. Mere attendance at the Protocol Annual Meeting will not in and of itself
revoke a proxy.
If the Protocol Annual Meeting is postponed or adjourned for any reason, at
any subsequent reconvening of the Protocol Annual Meeting all proxies will be
voted in the same manner as such proxies would have been voted at the original
convening of the Protocol Annual Meeting (except for any proxies that have
theretofore effectively been revoked or withdrawn), notwithstanding that they
may have been effectively voted on the same or any other matter at a previous
meeting.
PROXY SOLICITATION. Protocol will bear the cost of soliciting proxies from
its shareholders. In addition to solicitation by mail, directors, officers and
employees of Protocol may solicit proxies by telephone, telegram or otherwise.
Such directors, officers and employees will not be additionally compensated for
such solicitation, but may be reimbursed for out-of-pocket expenses incurred in
connection therewith. Brokerage firms, fiduciaries and other custodians who
forward soliciting material to the beneficial owners of Protocol Common Stock
held of record by them will be reimbursed for their reasonable expenses incurred
in forwarding such material.
16
<PAGE>
SPECIAL MEETING OF PRYON SHAREHOLDERS
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to holders of Pryon
Common Stock, Pryon Series A Preferred Stock and Pryon Series B Preferred Stock
in connection with the solicitation of proxies by the Pryon Board of Directors
for use at the Special Meeting of Pryon shareholders to be held on July 8, 1996,
at Pryon's offices at N93 W14575 Whittaker Way, Menomonee Falls, Wisconsin
53051, commencing at 10:00 a.m., local time, and at any adjournments or
continuances thereof. This Joint Proxy Statement/Prospectus and the accompanying
form of proxy is first being mailed to shareholders of Pryon on or about June 5,
1995.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Pryon Special Meeting, shareholders of record of Pryon as of the
close of business on June 3, 1996 will consider and vote upon a proposal to
approve and adopt the Merger Agreement and the Merger. The Merger Agreement
provides that, upon the terms and subject to the conditions thereof, Merger Sub
will merge into Pryon, Pryon will become a wholly owned subsidiary of Protocol,
and all shares of Pryon Common Stock, Pryon Series A Preferred Stock and Pryon
Series B Preferred Stock issued and outstanding immediately prior to the
Effective Time (other than shares as to which dissenters' rights of appraisal
have been duly sought, perfected and are not subsequently withdrawn) and all
shares of Pryon Common Stock issuable upon exercise of Pryon Employee Stock
Options will, collectively, be exchanged for 2,320,843 shares of Protocol Common
Stock (subject to adjustment under certain circumstances), to be allocated among
the shares of Pryon Common Stock, Pryon Series A Preferred Stock, Pryon Series B
Preferred Stock and Pryon Employee Stock Options in accordance with the rights
of each such class or series as set forth in the Pryon's Articles of
Incorporation. See "THE MERGER -- Terms of the Merger." No fractional shares of
Protocol Common Stock will be issued in the Merger. Any fractional amount
resulting from the Merger will be rounded up or down to the nearest full share
of Protocol Common Stock. See "THE MERGER -- Terms of the Merger -- Fractional
Shares."
Holders of Pryon Common Stock will be entitled to dissenters' rights as a
result of the Merger. See "THE MERGER -- Rights of Dissenting Pryon
Shareholders."
THE PRYON BOARD HAS APPROVED THE MERGER AGREEMENT AND THE MERGER AND
RECOMMENDS THAT PRYON SHAREHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT. See "BACKGROUND OF AND REASONS FOR THE MERGER" and "CONFLICTS
OF INTEREST."
RECORD DATE; SHARES ENTITLED TO VOTE; VOTE REQUIRED
The close of business on June 3, 1996 (the "Pryon Record Date") has been
fixed as the record date for determining the holders of Pryon Common Stock,
Pryon Series A Preferred Stock and Pryon Series B Preferred Stock who are
entitled to notice of and to vote at the Special Meeting. As of the Pryon Record
Date, there were 75,408 shares of Pryon Common Stock, 58,505 shares of Pryon
Series A Preferred Stock and 80,599 shares of Pryon Series B Preferred Stock
outstanding and entitled to vote. The holders of record of shares of Pryon
Common Stock on the Pryon Record Date are entitled to one vote per share of
Pryon Common Stock. The holders of record of shares of Pryon Series A Preferred
Stock and Series B Preferred Stock are entitled to one vote per share of
Preferred Stock. The presence in person or by proxy of the holders of shares
representing a majority of the voting power of the Pryon Stock entitled to vote,
and a separate majority of the Pryon Preferred Stock entitled to vote, is
necessary to constitute a quorum for the transaction of business at the Special
Meeting. The affirmative vote of holders of shares representing (i) a majority
of the number of shares of Pryon Stock outstanding and (ii) 66 2/3% of the sum
of the number of shares of (A) Pryon Series A Preferred Stock and (B) Pryon
Series B Preferred Stock (collectively, the "Pryon Preferred Stock") outstanding
is necessary to approve and adopt the Merger Agreement and Merger.
Abstentions from voting will have the practical effect of voting against the
approval and adoption of the Merger Agreement and the Merger since they
represent one less vote for adoption of such
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proposals. It is a condition of the Merger that holders of not more than 5% of
the total number of shares of Pryon Common Stock that would be outstanding if
all outstanding shares of Pryon Preferred Stock were converted into Pryon Common
Stock exercise dissenter's rights. See "THE MERGER -- Conditions; Waivers."
Certain shareholders of Pryon owning an aggregate of 189,629 shares of Pryon
Stock and representing 79.2%, 86.6% and 98.3% of the outstanding Pryon Common
Stock, Pryon Series A Preferred Stock and Pryon Series B Preferred Stock,
respectively, have entered into an agreement with Protocol to vote all of their
shares of Pryon Stock for approval of the Merger and the Merger Agreement.
Accordingly, approval of the Merger and the Merger Agreement at the Pryon
Special Meeting is assured.
PROXIES; PROXY SOLICITATION
Shares of Pryon Stock represented by properly executed proxies received at
or prior to the Pryon Special Meeting that have not been revoked will be voted
at the Special Meeting in accordance with the instructions contained therein.
Shares of Pryon Stock represented by properly executed proxies for which no
instruction is given will be voted "FOR" approval and adoption of the Merger
Agreement and the Merger. Pryon shareholders are requested to complete, sign,
date and return promptly the enclosed form of proxy in the postage-prepaid
envelope provided for this purpose to ensure that their shares are voted. A
shareholder may revoke a proxy by submitting at any time prior to the vote on
the Merger Agreement and the Merger a written notice of revocation to the
Secretary of Pryon or by attending the Pryon Special Meeting and voting in
person. Mere attendance at the Pryon Special Meeting will not in and of itself
revoke a proxy.
If the Pryon Special Meeting is continued or adjourned for any reason, at
any subsequent reconvening of the Special Meeting all proxies will be voted in
the same manner as such proxies would have been voted at the original convening
of the Special Meeting (except for any proxies that have theretofore effectively
been revoked or withdrawn), notwithstanding that they may have been effectively
voted on the same or any other matter at a previous meeting.
Pryon will bear the cost of soliciting proxies from its shareholders. In
addition to solicitation by mail, directors, officers and employees of Pryon may
solicit proxies by telephone, telegram or otherwise. Such directors, officers
and employees of Pryon will not be additionally compensated for such
solicitation, but may be reimbursed for out-of-pocket expenses incurred in
connection therewith.
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BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND
The acquisition of a complementary business has been an ongoing objective of
Protocol's business strategy. Protocol continually evaluates potential
acquisition or merger opportunities and considers potential alliances,
combinations, joint development programs and other strategic transactions with
other participants in the medical device industry.
Over the past several years, Pryon's management has from time to time
engaged in discussions with its Board of Directors and numerous companies in the
medical industry in an effort to explore the evolution of the medical device
industry and the future of Pryon in that industry. During the course of such
discussions, Pryon has considered various alliances and combinations, including
product development, distribution and marketing alliances, business combinations
and related transactions.
Protocol entered into an OEM relationship with Pryon in 1990, with the
objective of incorporating Pryon CO(2) technology into the Protocol Propaq line
of portable monitors. Although an agreement was not reached, Protocol and Pryon
entered into discussions regarding the merger of the two companies at that time.
Pryon obtained equity financing from venture capital sources. Protocol worked
closely with Pryon from 1990 to 1992 to introduce the mainstream CO(2) option to
the Propaq product line in November of 1992. During the period from November
1992 until October 1995, Protocol developed the market for the CO(2) option
while Pryon continued to address the OEM market, adding customers including
Nellcor Puritan Bennett, SpaceLabs Medical, Marquette Electronics, Hellige, NEC,
Nihon Kohden, Medical Data Electronics and others. During the years 1993, 1994
and 1995, purchases by Protocol of Pryon products totalled $1,045,000,
$1,009,000 and $1,741,000, respectively.
On October 23, 1995, Mr. Moon, Chairman, Chief Executive Officer and
President of Protocol met with Mr. Carsten, Chairman, Chief Executive Officer
and President of Pryon while attending the American Society of Anesthesiology
meeting in Atlanta, Georgia. Preliminary discussions were held regarding the
possibility of a combination of the two companies. Mr. Moon visited Pryon with
Mr. Carsten on October 24, 1995 for the purpose of becoming better informed
about the business of Pryon and the changes that had occurred in various aspects
of Pryon's business during the preceding three years. On November 9, 1995 Pryon
retained the services of Cowen & Company ("Cowen") to assist Pryon in
considering strategic business alternatives. On November 22, 1995 and November
28, 1995 in response to the aforementioned and continued discussions, Mr.
Carsten provided Mr. Moon with certain non-confidential financial information to
further explore a potential combination.
On December 1, 1995, as part of a regularly scheduled meeting of the
Protocol Board of Directors, Mr. Moon made a presentation to the Protocol Board
concerning the strategic potential of a combination with Pryon. Alternative
possibilities, including the established OEM supplier relationship with Pryon,
were also discussed. On December 14, 1995, as part of a regularly scheduled
meeting of the Pryon Board of Directors, Mr. Carsten presented alternative
strategies, the risks and benefits of continued operations as an independent
company, and the strategic alternatives of a business combination. The potential
of a combination with Protocol was discussed.
On January 2, 1996, Protocol and Pryon executed and delivered a Mutual
Confidentiality Agreement and Protocol retained Wessels, Arnold & Henderson,
L.L.C. ("Wessels") to act as its financial advisor. On January 22, 1996 a
meeting of the Protocol Board of Directors was held by telephone conference
call. Based on the information provided by Pryon under the Confidentiality
Agreement and a review of the strategic considerations of a combination by the
senior management of Protocol and other information, the Protocol Board of
Directors authorized Mr. Moon to proceed with the negotiation of a combination
of the two companies.
Due diligence information was exchanged between the two companies. On
February 5 and 6, 1996, Mr. Moon, Mr. Swanson and Mr. Fee, accompanied by
representatives of Wessels, visited Pryon to conduct their due diligence review.
Other Protocol officers, including Mr. Gray, Mr. Welch and Mr. Hollstein,
visited Pryon on February 7 through February 9, 1996, to perform due diligence
work in
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their respective areas of responsibility. On February 7, 1996, Mr. Carsten, Mr.
Kolasinski and three other members of the Pryon Board of Directors, and
representatives of Cowen & Company visited the Protocol facility in Beaverton,
Oregon. Mr. Moon presented the overview of Protocol, its products and strategic
direction. The terms of a combination were discussed in principle and items for
clarification and further due diligence were also discussed. The meeting ended
with general agreement between the parties regarding the positive aspects of a
business combination. Mr. Moon provided a summary of the outcome of the meeting
to the Protocol Board and was authorized to continue with the negotiation.
A definitive Agreement and Plan of Merger to merge the two companies was
drafted by Protocol and presented to Pryon for review. Between February 14 and
February 20, 1996, several telephone calls between Mr. Moon and Mr. Carsten and
their respective advisors resulted in agreement to the terms of a tax-free
reorganization as described elsewhere in this document. On February 16, the
Protocol Board of Directors met with senior executives of Protocol and
Protocol's outside financial and legal advisors to consider approval of the
Merger Agreement. Mr. Moon reviewed the background of the Merger. Protocol's
outside legal advisor reviewed key terms and conditions of the Merger Agreement.
Protocol's outside financial adviser, Wessels, reviewed its financial analysis
of the terms and conditions of the Merger and, at the conclusion of its
presentation, delivered to the Board its opinion as to the fairness, from a
financial point of view, to Protocol of the consideration to be paid pursuant to
the Merger. See "Opinion of Protocol Financial Advisor." On February 20, 1996,
Protocol and Pryon signed the Merger Agreement and Protocol issued a press
release providing the essential details of the Agreement.
The Merger Agreement was amended effective as of May 31, 1996 to change the
termination date of the Merger Agreement and to change the definition of
"Protocol Market Value." The Merger Agreement originally provided that either
Protocol or Pryon could terminate the Merger Agreement if the Merger was not
consummated on or before June 30, 1996. That date was changed to July 12, 1996
in order to permit the Pryon Special Meeting and the Protocol Annual Meeting to
be held before the date giving rise to the parties rights of termination. The
Merger Agreement originally provided that the Protocol Market Value would be the
average closing price of Protocol Common Stock during the twenty trading days
ending on the sixth trading day preceding the Effective Time. As amended, the
Protocol Market Value will be the average closing price of Protocol Common Stock
during the thirty trading days ending on June 14, 1996. The effect of this
change is to increase the amount of time between the date on which the Protocol
Market Value is determined and the dates of the meetings of Protocol and Pryon
shareholders. As originally structured, the Protocol Market Value would not have
been determinable until shortly before the meetings of Pryon and Protocol
shareholders. As amended, the Protocol Market value will be determinable on June
14, 1996, approximately three weeks before the meetings of Protocol and Pryon
shareholders, making it possible for such shareholders to base their voting
decisions on the actual Protocol Market Value and exchange ratio.
JOINT REASONS FOR THE MERGER
Protocol and Pryon have identified several mutual benefits of the Merger
that they believe will contribute to the success of both companies including:
COMPLEMENTARY PRODUCTS AND MARKETS. The products of the two companies
complement each other with no duplication or overlap. It is expected that all of
the products developed by each company will continue to be manufactured and sold
after the Merger. While both companies have experience selling in both the
medical OEM and end user markets, it is believed that, following the Merger,
both companies will benefit by allowing Pryon to focus on the unique needs of
OEM customers while Protocol continues to focus on end user markets.
COMPLEMENTARY TECHNOLOGIES. Pryon's core technology and expertise is in the
design and development of highly sophisticated electro-mechanical sensors for
measuring CO(2); Protocol's core technology includes highly integrated
multi-parameter vital sign monitors along with extensive networking software and
signal processing algorithms. While each company's core expertise is
complementary to the other, there is little technology overlap or duplication of
expertise between the two companies.
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COMPATIBLE CULTURES. Both companies have compatible corporate cultures
which have emphasized the development of state-of-the-art medical technologies,
an intense focus on product quality, open communication and an entrepreneurial
spirit. The two companies have a long history of working together as supplier
and customer.
PROTOCOL'S REASONS FOR THE MERGER
In addition to the mutual reasons for the Merger stated above, Protocol's
Board of Directors believes the following strategic factors will also contribute
to the success of the combined companies:
CORE TECHNOLOGY. Protocol's strategic intent is to develop or own the core
technologies embodied in its products. Protocol believes technology ownership is
essential in order to provide customers innovative and cost-effective products
in today's highly competitive health care industry.
ORIGINAL EQUIPMENT MANUFACTURING (OEM) BUSINESS. Since its inception,
Protocol has manufactured products for sale by other companies. From 1989
through 1994 Protocol sold portable vital sign monitors to Siemens on an OEM
basis, and currently sells a closed-loop drug delivery device (the GenESA
device) to Gensia, Inc. on an OEM basis. It is Protocol's belief that Pryon's
OEM business will provide added sales volume and greater financial stability to
Protocol, allow sale of Protocol's technologies into market segments it might
not directly address, and help to position its key technologies as "standards"
in the industry.
GROWTH AND VERTICAL INTEGRATION. Pryon has established itself as a leading
supplier of CO(2) technology to many of the world's premier medical instrument
companies. Protocol expects to expand the CO(2) business and to develop other
Protocol or Pryon technologies for the OEM marketplace. By integrating a major
supplier, the merger will enable Protocol to maintain a competitive financial
posture in today's increasingly competitive health care environment.
In the course of its deliberations in arriving at its unanimous decision to
approve the Merger, the Protocol Board reviewed and considered with Protocol's
management a number of other factors relevant to the Merger. The factors the
Board considered included, but were not limited to, (a) information concerning
Protocol and Pryon's respective businesses, historical financial performance,
operations, products and technologies; (b) their strategic direction and future
product offerings and opportunities; (c) an analysis of the respective future
contributions to revenue, operating profits and net profits of the combined
company; (d) compatibility of the management and corporate cultures of Protocol
and Pryon; (e) premiums to market and multiples paid in other comparable merger
and acquisition transactions; (f) the structure and content of the proposed
Merger Agreement, including the ability to account for the transaction as a
pooling of interests; (g) a financial presentation by Wessels, including the
opinion of Wessels that the consideration to be paid to the holders of capital
stock of Pryon pursuant to the Merger Agreement was fair from a financial point
of view to Protocol; and (h) reports from management, financial and legal
advisors as to the results of their due diligence investigation of Pryon. For a
discussion of many of the foregoing matters, see "Opinion of Financial Advisor"
below.
The Protocol Board also considered a variety of potentially negative factors
in its deliberations concerning the Merger, including (a) the potentially
dilutive effect of issuing Protocol Common Stock in the Merger; (b) the expenses
to be incurred in connection with the Merger and the effect of such expenses on
the results of operations in the quarter the Merger is consummated; (c) the risk
of losing current OEM customers due to their competitive posture with Protocol;
(d) the dependence of Pryon on the continued participation of key management
personnel, and (e) other risks described under "Risk Factors" above. In view of
the wide variety of factors considered, both positive and negative, the Protocol
Board did not find it practical to, and did not, quantify or otherwise assign
relative weights to the specific factors considered, but did determine that the
anticipated benefits of the Merger outweighed the potentially negative factors
considered.
PRYON'S REASONS FOR THE MERGER
INDUSTRY CONSOLIDATION. The health care industry is undergoing significant
consolidation as companies position themselves to compete in an era of health
care reform and downsizing. It is
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Pryon's belief that larger companies with significant brand-name recognition
will be better able to compete in this market. Following the Merger, Pryon
believes that the combined organization's strong financial position,
public-company status and reputation with health care end users will help it to
better market its products. Pryon believes that access to Protocol's dedicated
direct sales force in the United States for the distribution of Pryon's
stand-alone instruments significantly increases the revenue opportunity
available to Pryon over that available through its own network of independent
distributors. Additionally, Pryon believes that the greater financial resources
of the combined company will increase Pryon's attractiveness as a key, long-term
supplier of OEM technologies.
OWNERSHIP IN COMBINED COMPANY. The Merger will enable Pryon shareholders to
convert all of their Pryon shares into publicly tradable shares of Protocol
Common Stock on a tax-free basis while continuing to maintain a significant
equity interest in a larger company with greater financial, sales and
distribution capabilities. In addition, Pryon shareholders will receive a
significant premium over the price originally paid for their Pryon Stock.
In reaching its unanimous decision to enter into and endorse the Merger
Agreement, the Pryon Board reviewed and considered a number of relevant factors.
The factors the Board considered included, but were not limited to (a)
information concerning Protocol and Pryon's respective businesses, historical
financial performance, operations, products and technologies; (b) current
financial market conditions and historical market prices, volatility and trading
information with respect to Protocol Common Stock; (c) the consideration to be
received by Pryon shareholders in the Merger and its relation to Pryon's
expected contribution to the earnings of the combined company; (d) the terms and
conditions of the Merger, including the parties' representations, warranties and
obligations thereunder and the fact that the Merger will enable the shareholders
to exchange their shares on a tax-free basis; (e) the effects of the Merger on
Pryon's customers and business; (f) the prospects of Pryon as an independent
company; (g) the financial advice of Cowen & Company, Pryon's financial advisor;
and (h) the reports of management, legal and other financial advisors regarding
their due diligence investigations of Protocol.
The Pryon Board also considered a number of potentially negative factors in
deliberations concerning the Merger including, but not limited to, the
possibility that the Merger might not be consummated, and the effects of the
public announcement of the Merger Agreement on Pryon's financial position,
results of operations and its ability to attract and retain key personnel. In
view of the wide variety of factors considered, both positive and negative, the
Pryon Board did not find it practical to, and did not, quantify or otherwise
assign relative weights to the specific factors considered, but did determine
that the anticipated benefits of the Merger outweighted the potentially negative
factors considered.
RECOMMENDATION OF PROTOCOL BOARD
The Protocol Board has determined the Issuance and the Merger to be fair to
and in the best interests of Protocol and its shareholders and has approved the
Issuance and the Merger Agreement. The Protocol Board recommends that Protocol
shareholders vote FOR the Issuance and the amendment of the Protocol 1992 Plan.
The Protocol Board's recommendations are based upon a number of factors
discussed in this Joint Proxy Statement/Prospectus.
OPINION OF PROTOCOL FINANCIAL ADVISOR
OPINION OF WESSELS, ARNOLD & HENDERSON. Wessels has acted as financial
advisor to Protocol in connection with the Merger. Pursuant to an engagement
letter dated January 2, 1996 (the "Wessels Engagement Letter"), Protocol
retained Wessels to furnish financial advisory and investment banking services
with respect to a possible merger between Protocol and Pryon and to render an
opinion as to the fairness, from a financial point of view, to Protocol of the
consideration to be paid in any proposed merger. The amount of consideration to
be paid to Pryon shareholders in the Merger was determined through negotiations
between Protocol management and Pryon management and not by Wessels, although
Wessels did assist Protocol in these negotiations.
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Wessels rendered its oral opinion on February 16, 1996 (confirmed in writing
on February 20, 1996) to the Protocol Board of Directors that, as of such date
and based on the procedures followed, factors considered and assumptions made by
Wessels as set forth therein, the consideration to be paid to the holders of
capital stock of Pryon pursuant to the Merger Agreement is fair, from a
financial point of view, to Protocol.
THE COMPLETE TEXT OF THE OPINION DATED FEBRUARY 20, 1996 (THE "WESSELS
OPINION") IS ATTACHED HERETO AS APPENDIX B AND THE SUMMARY OF THE OPINION SET
FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION. SHAREHOLDERS OF PROTOCOL ARE URGED TO READ SUCH OPINION CAREFULLY AND
IN ITS ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE FACTORS
CONSIDERED, THE ASSUMPTIONS MADE AND SCOPE OF THE REVIEW UNDERTAKEN BY, AS WELL
AS LIMITATIONS ON THE REVIEW UNDERTAKEN BY, WESSELS IN RENDERING ITS OPINION.
PROTOCOL BELIEVES THAT ALL MATERIAL ELEMENTS OF THE WESSELS OPINION ARE
SUMMARIZED IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
The Wessels Opinion applies only to the fairness of the consideration to be
paid to the Pryon shareholders pursuant to the terms of the Merger Agreement and
should not be deemed to constitute a recommendation by Wessels to Protocol
shareholders to vote in favor of any matter presented in this Joint Proxy
Statement/Prospectus. Protocol shareholders should note that the opinion
expressed by Wessels was provided for the use of the Protocol Board of Directors
in its evaluation of the Merger. The Protocol Board of Directors did not impose
any limitations on the scope of the investigation of Wessels with respect to
rendering its opinion.
In preparing the Wessels Opinion, Wessels among other things: (i) reviewed
and analyzed the financial terms of the Merger Agreement; (ii) reviewed and
analyzed certain financial and other information relating to Protocol and Pryon
furnished to it by both companies, including certain internal financial and
other information prepared by management; (iii) reviewed certain publicly
available information about Protocol and Pryon; (iv) held discussions with the
managements of Protocol and Pryon concerning the business, past and current
business operations, financial condition and future prospects of both companies,
including certain information prepared by the management of Protocol concerning
potential cost savings and synergies that could result from the Merger; (v)
reviewed the financial performance of publicly traded companies which it deemed
comparable to Pryon; (vi) compared the financial terms of the Merger with those
of certain merger transactions, to the extent publicly available, which it
deemed relevant; (vii) prepared discounted cash flow analyses of Pryon; and
(viii) analyzed the pro forma earnings per share of the combined company.
In arriving at the Wessels Opinion, Wessels did not independently verify any
of the foregoing information and assumed and relied on the accuracy and
completeness of all such information. Furthermore, Wessels did not obtain any
independent appraisal of the properties or assets and liabilities of Protocol or
Pryon or of any of their subsidiaries. With respect to the financial and
operating forecasts (and assumptions and bases therefor) of Protocol and Pryon
which Wessels reviewed, including potential cost savings and synergies, Wessels
assumed that such forecasts have been reasonably prepared and reflect the best
available estimates and judgments of such respective managements and that such
forecasts will be realized in the amounts and in the time periods currently
estimated by the managements of Protocol and Pryon. Wessels also assumed that
the Merger will be accounted for as a pooling of interests under generally
accepted accounting principles. Events occurring after the date of the Wessels
Opinion may materially affect the assumptions used in preparing the Wessels
Opinion. Although Wessels believes that its review, as described within, is an
adequate basis for the opinion that Wessels expresses, the Wessels Opinion is
necessarily based upon market, economic, and other conditions that exist and can
be evaluated as of the date of the opinion, and on information available to
Wessels as of such a date. Wessels expressed no opinion regarding the
liquidation value of any entity nor as to the price at which shares of Protocol
Common Stock may trade at any future time.
The following paragraphs summarize the most significant quantitative and
qualitative analyses performed by Wessels in connection with delivering the
Wessels Opinion to the Protocol Board of
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Directors and does not purport to be a complete description of the analyses
performed by Wessels. The information presented below is based on the financial
condition of Protocol and Pryon as of a date or dates shortly before the Merger
Agreement was executed on February 20, 1996 and stock price information through
the close of the market on February 15, 1996.
COMPARABLE COMPANY ANALYSIS. Wessels used a comparable company analysis to
analyze Pryon's operating performance relative to a group of publicly traded
companies which Wessels deemed for purposes of its analysis to be comparable to
Pryon. In such analysis, Wessels compared the value to be achieved by Pryon
shareholders in the Merger, expressed as a multiple of certain operating data,
to the market trading values of the comparable companies expressed as a multiple
of the same operating results. Wessels compared multiples of selected financial
data for Pryon with those of the following publicly traded companies: Datascope
Corporation, Marquette Electronics, Inc., Nellcor Puritan Bennett, Inc.,
Protocol and SpaceLabs Medical, Inc. (collectively referred to as the
"Comparable Companies"). Although the Comparable Companies were considered
comparable to Pryon for the purpose of its analysis based on certain
characteristics of their respective businesses, none of such companies possessed
characteristics identical to those of Pryon. Wessels calculated valuation
multiples for Pryon based on an aggregate equity value of Protocol Common Stock
to be issued pursuant to the Merger Agreement of approximately $28.4 million and
an aggregate enterprise value (implied value of Common Stock plus cost of long
term debt and certain transaction related expenses, less cash and marketable
securities) of approximately $29.5 million. Pryon's multiples of futures
earnings were based in part on the projected earnings as provided by Pryons'
management. Comparable Companies' multiples of future earnings were based on
projected earnings as estimated by recognized security analysts, as well as the
stock price values and other information available on or before February 15,
1996. This analysis produced a mean multiple of aggregate enterprise value of
latest 12-month revenues for the Comparable Companies of 2.0, as compared to 2.5
for Pryon. The mean multiple of aggregate enterprise value to latest 12-month
operating income for the Comparable Companies was 14.7, as compared to 30.3 for
Pryon. The multiple of aggregate equity value to projected earnings for the
Comparable Companies and for Pryon was as follows: (i) a mean of projected
calendar 1996 earnings of 18.8 for the Comparable Companies, as compared to 17.4
for Pryon, and (ii) a mean of projected calendar 1997 earnings of 15.0 for the
Comparable Companies, as compared to 14.9 for Pryon. The mean aggregate equity
valuation to projected calendar 1996 earnings ratio as a multiple of three-year
growth rate was 58% for Pryon, as compared to a mean of 122% for the Comparable
Companies.
COMPARABLE TRANSACTIONS. Wessels compared multiples of selected financial
data relating to the Merger with multiples paid in, and other financial data
from 13 completed acquisitions since November of 1993 (collectively referred to
as the "Comparable Acquisitions"). These transactions were selected based
primarily on the acquired company's involvement in the medical device industry
as well as the aggregate enterprise value paid to acquire the acquired company.
Wessels noted that none of the acquired companies involved in these transactions
had a business that was directly comparable to Pryon. This analysis produced a
mean multiple of aggregate enterprise value to latest 12-month revenues for the
Comparable Acquisitions of 3.8, as compared to 2.5 for Pryon. The mean multiple
of aggregate enterprise value to latest 12-month operating income for the
Comparable Acquisitions (for companies with operating income) was 22.5, as
compared to 30.3 for Pryon. The mean multiple of aggregate equity value to
latest 12-month net income for the Comparable Acquisitions (for the companies
with net income) was 31.3, as compared to 35.5 for Pryon. The mean multiple of
aggregate equity value to projected forward fiscal year net income for the
Comparable Acquisitions (for the companies with net income) was 30.9, as
compared to 17.4 for Pryon.
PRO FORMA MERGER ANALYSIS. Wessels analyzed the potential effect of the
Merger on the projected combined income statement of Pryon and Protocol for
Protocol's fiscal years ending December 31, 1996 and December 31, 1997 using
projected results of operations of Pryon and Protocol for periods subsequent to
the Merger and related assumptions based in part on information provided by the
management of Pryon and Protocol, including the effect of cost savings and
synergies in the Merger.
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This analysis concluded that the Merger would not affect Protocol's projected
earnings per share for the year ending 1996 and would increase Protocol's
projected earnings per share for the year ending 1997 by approximately $0.03 per
share.
DISCOUNTED CASH FLOW ANALYSIS. Wessels estimated present values of Pryon
using a discounted cash flow analysis of Pryon's projections of future
operations based in part on information provided by Pryon's management. Wessels
calculated present values of Pryon's projected operating cash flows after net
investment, depreciation and amortization, and changes to working capital for
the four years ending 1996 to 1999 using discount rates ranging from 21% to 29%.
Wessels calculated a terminal value using terminal multiples of operating income
ranging from 13.2 to 16.2 of Pryon's projected calendar year 1999 operating
income. The terminal value was discounted to present value using the same
discount rates as the cash flows. Wessels calculated the implied valuation of
Pryon by adding the present value of the cash flows and the terminal value. The
implied value of Pryon based on this analysis ranged from $32.9 million to $48.8
million, with a midpoint of $40.1 million.
Wessels noted that the valuation multiples of Pryon are generally higher
than the valuation multiples of the Comparable Companies and Comparable
Acquisitions, when calculated using historical operating data, and generally
lower than the valuation multiples of the Comparable Companies and Comparable
Acquisitions, when calculated using forecast operating data. Wessels also noted
that the valuation multiples of Pryon are generally higher than the valuation
multiples of the Comparable Acquisitions, when using historical operating data,
and lower than the valuation multiples of the Comparable Acquisitions, when
calculated using forecast operating data. Wessels believes that valuation
multiples based on historical operating data are generally less relevant than
valuation multiples based on forecast operating data, and that a determination
as to the fairness of the Merger from a financial point of view depends in part
upon Pryon's forecast operating results.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Wessels
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all factors and analyses, could create an incomplete or misleading
view of the processes underlying its opinion. In arriving at its fairness
determination, Wessels considered the results of all such analyses. In view of
the wide variety of factors considered in connection with its evaluation of the
fairness of the Merger consideration, Wessels did not find it practicable to
assign relative weights to the factors considered in reaching its opinion. No
company or transaction used in the above analysis as a comparison is identical
to Pryon or Protocol or the proposed Merger. The analyses were prepared solely
for purposes of Wessels providing its opinion as to the fairness of the Merger
consideration pursuant to the Merger Agreement and do not purport to be
appraisals or necessarily reflect the prices at which businesses or securities
actually may be sold. Analyses based upon forecasts of future results are not
necessarily indicative of actual future results, which may be significantly more
or less favorable than suggested by such analyses. As described above, the
Wessels Opinion, including presentation to the Protocol Board of Directors, was
one of many factors taken into consideration by the Protocol Board of Directors
in making its determination to approve the Merger Agreement.
Wessels is a nationally recognized investment banking firm and is regularly
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements and valuations for corporations.
Wessels is familiar with Protocol, having acted as a managing underwriter of the
initial public offering of Protocol Common Stock in March 1992. Protocol
selected Wessels as its financial advisor based on Wessels' familiarity with
Protocol, its knowledge of the health care industry and its experience in
mergers and acquisitions and in securities valuation generally. In the ordinary
course of business, Wessels acts as a market maker and broker in the publicly
traded securities of Protocol and receives customary compensation in connection
therewith, and also provides research coverage on Protocol. In the ordinary
course of business, Wessels actively trades in the publicly traded
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<PAGE>
securities of Protocol for its own account and for the accounts of its customers
and, accordingly, may at any time hold a long or short position in such
securities which positions, on occasion, may be material in size relative to the
volume of trading activity.
Pursuant to the Wessels Engagement Letter, Protocol paid Wessels a retainer
fee of $25,000 (the "Retainer Fee") and a non-refundable opinion fee of $125,000
(the "Opinion Fee") upon the rendering of the Wessels Opinion. In addition,
pursuant to the Wessels Engagement Letter, Protocol has agreed to pay Wessels,
upon consummation of the Merger, as defined in the Wessels Engagement Letter, a
transaction fee (the "Transaction Fee") of $400,000. Payment of the Transaction
Fee is contingent upon consummation of the Merger; the Retainer Fee and the
Opinion Fee will be credited against the Transaction Fee. Protocol has also
agreed to reimburse Wessels for its reasonable out-of-pocket expenses and to
indemnify Wessels against certain liabilities relating to or arising out of
services performed by Wessels as financial advisor to Protocol. The terms of the
Wessels Engagement Letter, which are customary in transactions of this nature,
were negotiated at arm's length between Protocol and Wessels, and the Protocol
Board of Directors was aware of such arrangement at the time of its approval of
the Merger Agreement.
RECOMMENDATION OF PRYON BOARD
The Pryon Board has determined the Merger to be fair to and in the best
interests of Pryon and its shareholders and has approved the Merger Agreement
and the Merger. The Pryon Board recommends that Pryon shareholders approve the
Merger Agreement and the Merger. See "CONFLICTS OF INTEREST."
ADVICE OF PRYON'S FINANCIAL ADVISOR
Cowen & Company has acted as financial advisor to Pryon in connection with
the Merger. Pursuant to an engagement letter dated November 9, 1995 (the "Cowen
Engagement Letter"), Pryon retained Cowen to furnish financial advisory and
investment banking services with respect to assisting Pryon in evaluating
strategic business alternatives. Cowen was selected by Pryon as its financial
advisor because Cowen is a nationally recognized investment banking firm and
because the principals of Cowen have substantial experience in transactions
similar to the Merger and are familiar with Pryon and its businesses. As part of
its investment banking business, Cowen is continually engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions
and valuations for corporate and other purposes. In addition, in the ordinary
course of its business, Cowen trades the equity securities of Protocol for its
own account and for the accounts of its customers, and accordingly, may at any
time hold a long or short position in such securities.
In advising Pryon, Cowen: (i) assisted Pryon in preparing a descriptive
memorandum for the purposes of describing Pryon to prospective acquirors; (ii)
developed a list of prospective acquirors that might be interested in acquiring
Pryon; (iii) assisted in performance of financial analysis with respect to
Protocol; (iv) provided counsel with respect to and participated in discussions
and negotiations with Protocol; and (v) provided advice with respect to the
pricing, financing, structure and form of transaction with Protocol. In
addition, Cowen: (a) reviewed certain information, furnished to it by Pryon, of
a business and financial nature regarding Pryon; (b) discussed with Pryon's
management Pryon's competitive position, current and anticipated future
conditions in the respiratory industry, and the potential strategic synergies of
the combination with Protocol; and (c) reviewed certain publicly available
filings of Protocol with the Securities and Exchange Commission, including
consolidated financial statements for the fiscal years ended December 31, 1992,
1993, and 1994 and the fiscal quarters ended September 31, 1995. Cowen held
meetings and discussions with representatives of the management of Pryon and
Protocol to discuss the business operations, historical financial results and
future prospects of Pryon, Protocol and the combined company. In addition,
Cowen: (i) reviewed the Merger Agreement; (ii) compared Protocol and Pryon from
a financial point of view, with certain other companies deemed relevant; (iii)
analyzed pro forma earnings of the combined company; (iv) analyzed
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<PAGE>
pro forma ownership in the combined company by Pryon's current shareholders; and
(v) reviewed historical market prices and trading volumes of Protocol Common
Stock from January 1995 through January 1996, and compared those trading
histories with other companies deemed relevant.
Cowen assumed and relied, without independent verification, upon the
accuracy and completeness of the financial and other information that was
available to it from public sources, that was provided to it by Pryon or their
representatives, or that was otherwise reviewed by it. In addition, with respect
to the financial projections furnished to Cowen by Pryon management, Cowen
assumed the attainability of the financial results therein and that they were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the future financial performance by Pryon, Protocol and the
combined company. Because such projections are inherently subject to
uncertainty, none of Pryon, Protocol, Cowen or any other person assumes
responsibility for their accuracy. Cowen did not make any independent valuation
or appraisal of the assets or liabilities of Pryon or Protocol, nor has Cowen
been furnished with any such appraisals. Cowen made no independent
investigations of any legal matters affecting Pryon or Protocol. Cowen's advice
was necessarily based on economic, market and other conditions as in effect on,
and the information made available to it as of, February 20, 1996.
To provide contextual data and comparative market information for the
purposes of advising Pryon's Board of Directors to negotiate exclusively with
Protocol rather than undertake an extensive auction process, Cowen performed the
following analyses:
MARKET TRADING ANALYSIS. Cowen compared selected historical operating and
financial ratios for Pryon to the corresponding data and ratios of certain other
companies whose securities are publicly traded and which Cowen believes have
operating, market valuation, and trading valuations similar to what might be
expected of Pryon. These companies included Acquitron Medical, Inc., Allied
Healthcare Products, Chad Therapeutics, Inc., Criticare Systems Inc., Healthdyne
Technologies, Inc., Infrasonics, Inc., Invacare Corporation, Marquette
Electronics, Nellcor Puritan Bennett, Novametrix Medical Systems, Protocol,
ResMed, Respironics Inc., and Vital Signs (the "Selected Companies"). Such data
and ratios include the market capitalization of common stock plus total debt
less cash and equivalents ("Adjusted Price") of such Selected Companies as a
multiple of revenues. Cowen also examined the ratios of the current prices of
the Selected Companies to the estimated earnings per share ("EPS") (as estimated
by Institutional Brokers Estimating System and First Call) for the following
fiscal years for these companies. Such analysis indicated that, of the Selected
Companies, (i) the median values of Adjusted Price as a multiple of latest
twelve months' revenue was 1.7x, as compared to the corresponding multiples for
Pryon implied by Protocol's offer of 2.4x; and (ii) the median values of price
per share as a multiple of estimated EPS for the following fiscal year was
22.2x, as compared to the corresponding multiples for Pryon implied by
Protocol's offer of 25.3x (using fully taxed net income for Pryon).
PRO FORMA EARNINGS ANALYSIS. Cowen analyzed the potential effect of the
Merger on the projected combined income statement of Pryon and Protocol for
Protocol's fiscal years ending December 31, 1996 and 1997. This analysis was
based on: a) projections for Pryon as provided by Pryon's management; b)
Protocol's estimated EPS as estimated by Institutional Brokers Estimating System
and First Call; and c) Protocol's prevailing market price of $12.00 per share as
of January 24, 1996. This analysis concluded that the Merger would increase
Protocol's projected EPS for the year ending 1996 by approximately $0.02 and
would decrease Protocol's projected EPS for the year ending 1997 by
approximately $0.01. Cowen's pro forma earnings analysis excluded the possible
effect of cost savings and synergies in the Merger.
PRO FORMA OWNERSHIP ANALYSIS OF THE COMBINED ENTITY. Cowen analyzed pro
forma ownership in the combined entity by Pryon's shareholders. Cowen's analysis
concluded that based on Protocol's then prevailing stock price of $12.00 per
share, Pryon's shareholders would own approximately 23% of the combined entity.
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<PAGE>
PROTOCOL'S HISTORICAL STOCK PRICE TRADING HISTORY. Cowen reviewed the
historical market prices and trading volumes of Protocol Common Stock between
January 3, 1995 and January 24, 1996. Cowen observed that during this period
approximately 91% of Protocol's shares traded between prices of $9.00 and $12.00
per share and that the average daily volume of Protocol shares traded was
approximately 62,800 during this period.
The summary set forth above is a description the material elements of the
analyses performed by Cowen. In performing its analyses, Cowen made numerous
assumptions with respect to industry performance, business and economic
conditions and other matters. These analyses performed by Cowen are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than those suggested by such analyses.
Cowen was not requested to, and did not, opine as to the fairness, from a
financial point of view, of the consideration to be received by Pryon
stockholders in the Merger. Pursuant to the Cowen Engagement Letter, Pryon has
agreed to pay certain fees to Cowen for its financial advisory services relating
to the Merger. Upon consummation of the Merger, Cowen will be entitled to
receive a transaction fee (the "Cowen Transaction Fee") in the amount equal to
2.0% of the aggregate consideration paid by Protocol to Pryon's shareholders, up
to $25 million, and an amount equal to 3.0% of the aggregate value of the
consideration paid by Protocol to Pryon's shareholders in excess of $25 million,
and an additional $50,000 if the aggregrate consideration paid by Protocol to
Pryon's shareholders exceeds $31 million. If the Merger is not consummated,
Pryon has agreed to pay Cowen an advisory fee of $75,000 in consideration for
Cowen's professional services. Additionally, Pryon has agreed to reimburse Cowen
for its out-of-pocket expenses (including the reasonable fees and expenses of
its counsel) incurred or accrued during the period of, and in connection with,
Cowen's engagement. Pryon has also agreed to indemnify Cowen against certain
liabilities, including liabilities under the federal securities laws, relating
to or arising out of services performed by Cowen as financial advisor to Pryon
in connection with the Merger, unless such liabilities arise out of Cowen's
gross negligence or willful misconduct.
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<PAGE>
THE MERGER
THE DESCRIPTION OF THE MERGER AGREEMENT SET FORTH BELOW DOES NOT PURPORT TO
BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER
AGREEMENT A COPY OF WHICH IS ATTACHED AS APPENDIX I TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND INCORPORATED BY REFERENCE HEREIN.
TERMS OF THE MERGER
THE MERGER. Subject to the terms and conditions of the Merger Agreement,
Merger Sub will merge with and into Pryon at the Effective Time. The separate
corporate existence of Merger Sub will then cease, and Pryon will be the
surviving corporation in the Merger (the "Surviving Corporation").
ARTICLES OF INCORPORATION AND BYLAWS. The Merger Agreement provides that
the Articles of Incorporation of Merger Sub as in effect immediately prior to
the Effective Time will become the articles of incorporation of the Surviving
Corporation, except that Article I thereof will be amended to read as follows:
"The name of this corporation is Pryon Corporation." The bylaws of Merger Sub as
in effect immediately prior to the Effective Time will become the bylaws of the
Surviving Corporation.
DIRECTORS AND OFFICERS. The directors of Merger Sub at the Effective Time
will become the directors of the Surviving Corporation until their successors
have been duly elected or appointed and qualified or until their earlier death,
resignation or removal; except that such directors will act promptly after the
Effective Time to increase the number of directors of the Surviving Corporation
from two to three members and to appoint Daniel F. Carsten to fill the vacancy
so created. The officers of Pryon at the Effective Time will become the officers
of the Surviving Corporation until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal.
See "THE MERGER -- Management and Operations of Pryon After the Merger."
CONVERSION OF PRYON STOCK IN THE MERGER. At the Effective Time, all shares
of Pryon Common Stock, Pryon Series A Preferred Stock and Pryon Series B
Preferred Stock issued and outstanding immediately prior to the Effective Time
(other than shares as to which dissenters' rights of appraisal have been duly
sought, perfected and are not subsequently withdrawn) and all shares of Pryon
Common Stock issuable upon exercise of the Pryon Employee Stock Options will,
collectively, be exchanged for 2,320,843 shares of Protocol Common Stock (the
"Aggregate Merger Consideration") (subject to adjustment as described below), to
be allocated among the shares of Pryon Common Stock, Pryon Series A Preferred
Stock, Pryon Series B Preferred Stock and Pryon Employee Stock Options in
accordance with the rights of each such class or series as set forth in Pryon's
Articles of Incorporation. (See "Comparative Rights of Pryon Shareholders and
Protocol Shareholders -- Classes of Stock -- Liquidation Preferences and
Participation Rights" for a description of the rights and preferences of Pryon
Stock). If the Protocol Market Value (as defined below) equals or exceeds
$12.45, each share of Pryon Preferred Stock and each share of Pryon Common Stock
will be exchanged for the same number of shares of Protocol Common Stock. The
Merger Agreement provides that the Aggregate Merger Consideration will be
adjusted if the Protocol Market Value (as defined below) is less than $10.643
per share or greater than $13.486 per share. The "Protocol Market Value" will be
the average of the per share closing price of Protocol Common Stock on the
Nasdaq National Market for the thirty (30) consecutive trading days ending on
June 14, 1996 as quoted in The Wall Street Journal or other reliable financial
newspaper or publication. If the Protocol Market Value is less than $10.643,
then the Aggregate Merger Consideration will be increased to that number of
shares of Protocol Common Stock which is equal to the number obtained by
dividing $24,700,000 by the Protocol Market Value. If the Protocol Market Value
is more than $13.486, then the Aggregate Merger Consideration will be decreased
to that number of shares of Protocol Common Stock which is equal to the number
obtained by dividing $31,300,000 by the Protocol Market Value.
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<PAGE>
The following table shows, at various assumed Protocol Market Values the
total number of shares of Protocol Common Stock that would be issued upon
consummation of the Merger and the number of such shares that would be issued in
respect of each share of (i) Pryon Common Stock, (ii) Pryon Series A Preferred
Stock and (iii) Pryon Series B Preferred Stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PROTOCOL COMMON STOCK
TO BE ISSUED IN RESPECT OF ONE SHARE OF
TOTAL NUMBER OF PRYON
MARKET VALUE OF SHARES OF -------------------------------------------
ASSUMED PROTOCOL AGGREGATE MERGER PROTOCOL SERIES A SERIES B
MARKET VALUE CONSIDERATION COMMON STOCK TO PREFERRED PREFERRED
PER SHARE (IN MILLIONS) BE ISSUED(1) COMMON STOCK STOCK STOCK
- ----------------- ----------------- ----------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 10.00 $ 24.7 2,470,000 9.07 10.33 12.25
10.65 24.7 2,320,843 8.52 9.71 11.50
12.46 28.9 2,320,843 9.83 9.83 9.83
13.48 31.3 2,320,843 9.83 9.83 9.83
14.00 31.3 2,235,714 9.47 9.47 9.47
15.00 31.3 2,086,667 8.84 8.84 8.84
16.00 31.3 1,956,250 8.29 8.29 8.29
17.00 31.3 1,841,176 7.80 7.80 7.80
18.00 31.3 1,738,889 7.37 7.37 7.37
19.00 31.3 1.647,368 6.98 6.98 6.98
20.00 31.3 1,565,000 6.63 6.63 6.63
21.00 31.3 1,490,476 6.32 6.32 6.32
22.00 31.3 1,422,727 6.03 6.03 6.03
23.00 31.3 1,360,870 5.77 5.77 5.77
24.00 31.3 1,304,167 5.53 5.53 5.53
25.00 31.3 1,252,000 5.30 5.30 5.30
26.00 31.3 1,203,846 5.10 5.10 5.10
27.00 31.3 1,159,259 4.91 4.91 4.91
28.00 31.3 1,117,857 4.74 4.74 4.74
</TABLE>
- ------------------------
(1) Includes shares of Protocol Common Stock to be issued upon exercise of
Replacement Options.
The closing price of Protocol Common Stock was $24.88 on May 31, 1996. The
average closing price of Protocol Common Stock for the thirty (30) consecutive
trading days ending on May 31, 1996 was $21.14, which, if used as the Protocol
Market Value, would result in the issuance of 6.27 shares of Protocol Common
Stock in exchange for each share of Pryon Stock upon consummation of the Merger.
Assuming a Protocol Market Value of $21.14, a total of approximately 1,345,886
shares of Protocol Common Stock and Replacement Options for a total of
approximately 134,895 shares of Protocol Common Stock would be issued upon
consummation of the Merger. The Protocol Common Stock to be issued in the
Merger, including Protocol Common Stock issuable upon exercise of Replacement
Options, would represent approximately 16% of the shares of Protocol Common
Stock outstanding after the Merger, assuming a Protocol Market Value $21.14.
Because the number of shares of Protocol Common Stock to be issued in the Merger
is subject to adjustment if the Protocol Market Value is less than $10.643 per
share or greater than $13.486 per share, fluctuations in the market price of
Protocol Common Stock during the thirty consecutive trading days ending on June
14, 1996 will impact the number of shares of Protocol Common Stock issued in the
Merger in exchange for each share of Pryon Stock. At any time after June 14,
1996, shareholders of Protocol and Pryon may obtain information as to the actual
Protocol Market Value by calling Protocol at (503) 526-8500. The market value of
Protocol Common Stock that the Pryon shareholders ultimately receive will be
subject to fluctuations in the market price of Protocol Common Stock and could
be more or less than its market value on the date of this Joint Proxy
Statement/Prospectus or more or less than the Protocol Market Value. Protocol
and Pryon shareholders are advised to obtain current market quotations for
Protocol Common Stock. No assurance can be given as to the market price of
Protocol Common Stock at any time before the Effective Time or as to the market
price of Protocol Common Stock at any time thereafter. If the actual Protocol
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<PAGE>
Market Value is less than $20.00 or more than $26.00, Protocol and Pryon will
recirculate a supplement to this Joint Proxy Statement/Prospectus containing
information as to the actual Protocol Market Value and the shareholders of
Protocol and Pryon will be given an opportunity to change their votes.
CONVERSION OF PRYON EMPLOYEE STOCK OPTIONS IN THE MERGER. At the Effective
Time, each Pryon Employee Stock Option that is outstanding immediately prior to
the Effective Time will be converted into a Replacement Option to purchase the
number of shares of Protocol Common Stock (rounded up or down to the nearest
whole share) equal to the product of (i) the number of shares of Pryon Common
Stock which the option holder would have been entitled to receive had such
holder exercised the Pryon Employee Stock Option in full immediately prior to
the Effective Time (whether or not the Pryon Employee Stock Option would than
have been exercisable, and (ii) the Exchange Ratio. The per share exercise price
for a Replacement Option will be equal to the aggregate exercise price for such
replaced Pryon Employee Stock Option divided by the total number of full shares
of Protocol Common Stock deemed to be purchasable pursuant to the Replacement
Option. At or after the Effective Time, option agreements for Replacement
Options will be issued pursuant to Protocol's 1992 Stock Incentive Plan to
holders of Pryon Employee Stock Options. Replacement Options will have terms
which are substantially identical to the terms of the Pryon Employee Stock
Options they replace.
ADJUSTMENTS. If, prior to the Effective Time, Protocol should split or
combine the Protocol Common Stock, or pay a stock dividend or other stock
distribution in Protocol Common Stock, or otherwise change the Protocol Common
Stock into any other securities, or make any other dividend on or distribution
of the Protocol Common Stock, then the exchange ratio will be appropriately
adjusted to reflect such split, combination, dividend or other distribution or
change.
FRACTIONAL SHARES. No fractional shares of Protocol Common Stock will be
issued in the Merger. Any fractional amount resulting from the Merger will be
rounded up or down to the nearest full share of Protocol Common Stock.
EFFECTIVE TIME OF THE MERGER
Promptly following receipt of all required governmental approvals and
satisfaction or waiver of the other conditions to the Merger, the Merger will be
consummated and become effective at the time at which the articles of merger to
be filed pursuant to the WBCA are received for filing by the Secretary of State
of the State of Wisconsin or such later date and time as may be specified in
such articles of merger. See "THE MERGER -- Conditions; Waivers."
EXCHANGE OF PRYON STOCK
Prior to the Closing, Protocol will select First Interstate Bank of Oregon,
N.A. or such other person or persons reasonably satisfactory to Pryon to act as
exchange agent for the Merger (the "Exchange Agent"). As soon as practicable
after the Effective Time, (i) the Exchange Agent will deliver to each holder of
certificates representing shares of Pryon Stock (other than dissenting shares),
a form letter of transmittal and instruction for use in effecting the surrender
of such certificates for conversion into shares of Protocol Common Stock and
(ii) Protocol will make available, and the holders of Pryon Stock (other than
dissenting shares) will be entitled to receive, upon surrender to the Exchange
Agent of one or more certificates representing shares of Pryon Stock for
cancellation and such other documents reasonably requested by the Exchange
Agent, certificates representing the number of shares of Protocol Common Stock
into which such holder's Pryon Stock is converted in the Merger, less shares to
be delivered to the Escrow Agent pursuant to the Escrow Agreement. After the
Effective Time, certificates representing Pryon Stock (other than dissenting
shares) will represent solely the right to receive Protocol Common Stock.
ESCROW OF PROTOCOL COMMON STOCK
The Merger Agreement provides that Protocol will withhold on a pro rata
basis ten percent (10%) of the shares of Protocol Common Stock to be received by
each holder of Pryon Stock upon consummation of the Merger (the "Escrow
Shares"). The Escrow Shares will be delivered to First Interstate Bank of
Oregon, N.A. as escrow agent (the "Escrow Agent"). The Escrow Shares will be
held by the
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Escrow Agent for a period ending on the first anniversary of the Closing Date.
Subject to certain limitations set forth in the Merger Agreement, the Escrow
Shares will be subject to claims by Protocol to satisfy Pryon's obligations
under the Merger Agreement to reimburse Protocol for any and all losses,
damages, liabilities, costs and expenses incurred by Protocol by reason of,
arising out of or in connection with any breach or inaccuracy of any
representation or warranty of Pryon contained in the Merger Agreement or the
failure by Pryon to perform any agreement or covenant required of Pryon under
the Merger Agreement.
QUOTATION OF PROTOCOL COMMON STOCK ON NASDAQ NATIONAL MARKET
In the Merger Agreement, Protocol has agreed to use all reasonable efforts
to (i) register under the Securities Act the shares of Protocol Common Stock
that are to be issued pursuant to the Merger Agreement and upon exercise of
Replacement Options granted to employees of Pryon and (ii) cause such shares of
Protocol Common Stock to be quoted for trading on the Nasdaq National Market.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties thereto. The Merger Agreement includes representations and warranties by
Pryon as to (i) the corporate organization and qualification of Pryon, (ii) the
capitalization of Pryon, (iii) subsidiaries of Pryon, (iv) the authority of
Pryon to enter into the Merger Agreement and the Merger Agreement's
noncontravention of any agreement, law or charter or bylaw provision and the
absence of the need for governmental or third-party consents to the Merger, (v)
the accuracy of Pryon's financial statements, (vi) the absence of certain
changes and events, (vii) pending and threatened litigation, (viii) the accuracy
of information supplied by Pryon for inclusion in this Joint Proxy
Statement/Prospectus, (ix) the terms, existence, operations, liabilities and
compliance with applicable laws of Pryon's employee benefit plans and certain
other matters relating to the Employee Retirement Income Security Act of 1974,
as amended, (x) approval of the Merger Agreement by the Pryon Board of Directors
and the Board's recommendations to shareholders to approve the Merger Agreement,
(xi) brokers, finders and financial advisors employed by Pryon, (xii) compliance
with applicable laws, (xiii) the absence of undisclosed liabilities, (xiv) the
payment of taxes, (xv) the absence of defaults on agreements, (xvi) ownership
and rights to use intellectual property and noninfringement on the intellectual
property rights of others, (xvii) certain accounting matters, (xviii) the
absence of circumstances that could result in a material adverse change in
Pryon's business, financial condition or results of operations, (xix) the
absence of negotiations for the sale of Pryon to any other party, (xx) employee
nondisclosure and employment agreements, (xxi) title to Pryon's assets, (xxii)
Pryon's inventories and accounts receivable, (xxiii) Pryon's property, contracts
and other matters, (xxiv) Pryon's suppliers and customers, (xxv) Pryon's
products and product warranties, (xxvi) Pryon's compliance with environmental
laws and the absence of any notices with respect to environmental matters,
(xxvii) transactions between Pryon and certain related persons, (xxviii) the
absence of illegal payments, (xxix) Pryon's business and corporate records,
(xxx) Pryon's insurance policies, (xxxi) Pryon's bank accounts, (xxxii) the
inapplicability of certain takeover provisions of Wisconsin law, (xxxiii) the
inapplicability of the Investment Company Act to Pryon, and (xxxiv) the absence
of a present intention by Pryon shareholders to dispose of the shares of
Protocol Common Stock to be issued pursuant to the Merger Agreement.
The Merger Agreement also includes representations and warranties by
Protocol as to (i) the corporate organization and qualification of Protocol,
(ii) the capitalization of Protocol, (iii) subsidiaries of Protocol, (iv) the
authority of Protocol to enter into the Merger Agreement and the Merger
Agreement's noncontravention of any agreement, law or charter or bylaw provision
and the absence of the need for governmental or third party consents to the
Merger, (v) the accuracy of Protocol's financial statements, (vi) the absence of
certain changes and events, (vii) pending and threatened litigation, (viii) the
accuracy of information supplied by Protocol for inclusion in this Joint Proxy
Statement/Prospectus, (ix) approval of the Merger Agreement by the Protocol's
Board of Directors and the Board's recommendations to shareholders to approve
the issuance of Protocol Common Stock, (x) brokers, finders and financial
advisors employed by Protocol, (xi) the absence of undisclosed liabilities,
(xii) ownership and rights to use intellectual property and noninfringement on
the intellectual property rights of others, (xiii) certain accounting matters,
(xiv) the absence of
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circumstances that could result in a material adverse change in Protocol's
business, financial condition or results of operations, (xv) the receipt of a
fairness opinion from Protocol's financial advisor, (xvi) compliance with
applicable laws, (xvii) Protocol's suppliers and customers, (xviii) Protocol's
products, and (xix) the inapplicability of the Investment Company Act to
Protocol.
BUSINESS OF PRYON PENDING THE MERGER
Pryon has agreed that, prior to the Effective Time or earlier termination of
the Merger Agreement, except as contemplated by the Merger Agreement, it will
conduct its operations according to its ordinary course of business consistent
with past practice, seek to preserve intact its current business organization,
keep available the service of its current officers and employees and preserve
its relationship with customers, suppliers and others. Pryon has also agreed
that prior to the Effective Time, unless Protocol agrees in writing or as
otherwise permitted by the Merger Agreement, it will not:
(i) except for shares of Pryon Common Stock issued upon exercise of
Pryon Employee Stock Options outstanding as of February 20, 1996, issue,
deliver, sell, dispose or, pledge or otherwise encumber, or authorize or
propose the issuance, sale, disposition, pledge or other encumbrance of, any
additional shares of its capital stock or any securities or rights
convertible into, exchangeable for or evidencing the right to subscribe for
any shares of its capital stock, or any other securities in respect of, in
lieu of or in substitution for Pryon Common Stock outstanding as of February
20, 1996;
(ii) redeem, purchase or otherwise acquire, or propose to redeem,
purchase or otherwise acquire, any of its outstanding securities;
(iii) split, combine, subdivide or reclassify any shares of its capital
stock or declare, set aside for payment or pay any dividend, or otherwise
make any payments to shareholders in their capacity as such;
(iv) (a) grant any material increases in the compensation of any of its
directors, officers or key employees, except in the ordinary course of
business and consistent with past practice, (b) pay or agree to pay any
pension, retirement allowance or other material employee benefit not
required or contemplated by any of the existing benefit, severance, pension
or employment plans, agreements or arrangements as in effect on February 20,
1996 to any such director, officer or key employee, whether past or present,
(c) enter into any new or materially amend any existing employment agreement
with any such director, officer or key employee, (d) enter into any new or
materially amend any existing severance agreement with any such director,
officer or key employee, or (e) except as may be required to comply with
applicable law, amend any existing, or become obligated under any new,
employee plan or benefit arrangement;
(v) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization of Pryon;
(vi) make any acquisition, by means of merger, consolidation or
otherwise, (a) of any direct or indirect ownership interest in or assets
comprising any business enterprise or operation or (b) except in the
ordinary course of business and consistent with past practice, of any other
assets;
(vii) adopt any amendments to the Articles of Incorporation of Pryon or
the Bylaws of Pryon;
(viii) other than borrowings in the ordinary course under Pryon's existing
bank line of credit which, together with existing borrowings, do not in the
aggregate exceed the current maximum borrowing availability thereunder,
incur any indebtedness for borrowed money or guarantee any such indebtedness
(Pryon specifically acknowledging and agreeing that it shall not borrow
money under its term loan and equipment purchase credit facilities, other
than what it has already borrowed under such credit facilities), or, except
in the ordinary course of business and consistent with past practice, make
any loans, advances or capital contributions to, or investments in, any
other person;
(ix) engage in the conduct of any business the nature of which is
materially different from the business Pryon is currently engaged in;
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(x) enter into any agreements providing for acceleration of payment or
performance or other consequence as a result of a change of control of
Pryon;
(xi) enter into any contract, arrangement or understanding requiring the
purchase of equipment, materials, supplies or services over a period greater
than 12 months and for the expenditure of greater than $25,000 per year
which is not cancelable without penalty on 30 days' or less notice, except
in the ordinary course of business for the distribution of products or the
production of inventory; or
(xii) authorize, recommend, propose or announce an intention, or enter
into any contract, agreement, commitment or arrangement, to do any of the
foregoing.
CERTAIN COVENANTS OF PROTOCOL
Protocol has agreed that prior to the Effective Time or earlier termination
of the Merger Agreement, Protocol will carry on its business consistent with its
past practices, will notify Pryon of the occurrence of any event having a
material adverse effect upon its business prospects or financial condition and
without the prior written consent of Pryon, will not: (i) take any action or
permit any action to be taken other than in the ordinary course of business
which is inconsistent with preserving its existing business organization and
relations with employees, customers, suppliers and others with whom it has a
business relationship and with protecting its rights and properties; or (ii)
conduct its business other than in compliance with all applicable laws and
regulations in all material respects.
VOTING AGREEMENTS
Certain Shareholders of Pryon owning an aggregate of 189,629 shares of Pryon
Stock and representing 88.4% of all outstanding Pryon Stock and also
representing 79.2%, 86.6% and 98.3% of the outstanding shares of Pryon Common
Stock, Pryon Series A Preferred Stock and Pryon Series B Preferred Stock,
respectively, have entered into an agreement with Protocol to vote all of their
shares of Pryon Stock for approval of the Merger and the Merger Agreement. Such
shareholders have also agreed that, so long as the Merger Agreement is in
effect, to vote all of their shares of Pryon Stock against any transaction other
than the Merger, in any vote or written consent of Pryon's shareholders
concerning any other proposed merger, consolidation, share exchange or similar
transaction involving Pryon, or any sale of all or a significant portion of the
assets of or equity interest in Pryon, or any other transaction that would
involve the transfer or potential transfer of control of Pryon. Such
shareholders have also agreed not to sell, transfer, assign, or otherwise convey
any of such shareholder's shares of Pryon Stock, unless the person or entity
receiving such shares of Pryon Stock becomes a party to the voting agreement.
NO SOLICITATION
Under the Merger Agreement, Pryon has agreed that, prior to the Closing or
earlier termination of the Merger Agreement, neither Pryon nor any of its
officers, employees, representatives, agents or affiliates will, directly or
indirectly, encourage, solicit or engage in discussions or negotiations with any
third party concerning any merger, consolidation, share exchange or similar
transaction involving Pryon or any purchase of all or a significant portion of
the assets of or equity interest in Pryon, or any other transaction that would
involve the transfer or potential transfer of control of Pryon.
CONDITIONS; WAIVERS
CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER. The respective
obligations of Pryon, Protocol and Merger Sub to effect the Merger are subject
to the satisfaction or waiver of certain conditions, including the following:
(i) the Merger Agreement and the transactions contemplated thereby shall have
been approved and adopted by the requisite vote of the holders of Pryon Stock,
(ii) the Issuance shall have been approved by the requisite vote of the holders
of Protocol Common Stock, (iii) no preliminary or permanent injunction or other
order by any federal or state court in the United States which prevents the
consummation of the Merger shall have been issued and remain in effect, (iv)
holders of not more than 5% of the total number of shares of Pryon Common Stock
that would be outstanding if all outstanding shares of Pryon Preferred Stock
were converted into Pryon Common Stock shall have exercised dissenters' rights
under applicable law, (v) the Registration
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Statement of which this Joint Proxy Statement/Prospectus is a part shall have
been declared effective and shall be effective at the Effective Time, no stop
order suspending effectiveness of the Registration Statement shall have been
issued, and no proceeding by the SEC to suspend the effectiveness of the
Registration Statement shall have been initiated and continuing and all
necessary authorizations under state securities laws and the Securities Exchange
Act shall have been received, and (vi) prior to the filing of the Registration
Statement, Protocol shall have received an opinion of KPMG Peat Marwick LLP to
the effect that the Merger will be accounted for as a pooling of interests, and
a letter from Price Waterhouse LLP, Pryon's independent accountants, to the
effect that, subject to customary qualifications, no event has occurred with
respect to Pryon that would preclude the Merger from being accounted for as a
pooling of interests.
CONDITIONS TO THE OBLIGATIONS OF PROTOCOL AND MERGER SUB. The respective
obligations of Protocol and Merger Sub to effect the Merger are subject to the
satisfaction or waiver of the following additional conditions: (i) Pryon shall
have performed or complied in all material respects with all agreements and
conditions contained in the Merger Agreement required to be performed or
complied with on or prior to the Effective Time and the representations and
warranties of Pryon contained in the Merger Agreement shall be true in all
material respects when made and on and as of the Effective Time as if made on
and as of such date, and Protocol and Merger Sub shall have received a
certificate of the President of Pryon to that effect, (ii) all permits,
consents, authorizations, approvals, registrations, qualifications, designations
and declarations required to be obtained shall have been obtained and, to the
extent required to be submitted prior to the Effective Time, all filings and
notices required to be submitted shall have been submitted by Pryon, (iii)
Protocol shall have received an opinion of Michael Best & Friedrich, dated the
Closing Date, in substantially the form attached to the Merger Agreement, (iv)
Protocol shall have received an Exchange Ratio Certificate, signed by the Chief
Financial Officer of Pryon, which allocates the Aggregate Merger Consideration
among the outstanding classes and series of Pryon Stock, (v) Protocol shall have
received an opinion of KPMG Peat Marwick LLP to the effect that the Merger will
be treated as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, (vi) Protocol shall have received a letter from Wessels,
Arnold & Henderson immediately prior to the date on which this Joint Proxy
Statement/Prospectus is mailed to Protocol shareholders and immediately prior to
the Closing Date confirming its opinion that the consideration to be paid to the
holders of capital stock of Pryon is fair, from a financial point of view, to
Protocol, (vii) the audited results of Pryon's operations for the year ended
December 31, 1995 shall reflect net sales of not less than $12.2 million and net
income of not less than $775,000 and Pryon's audited balance sheet amounts as of
December 31, 1995 shall be substantially the same as the amounts presented on
the unaudited balance sheet delivered to Protocol; (viii) Protocol shall have
had the opportunity to review Pryon's most recent internal unaudited financial
statements and such interim results shall meet certain benchmarks described in
the Merger Agreement, (ix) Protocol shall have received a letter from Pryon's
Chief Financial Officer to the effect that there has been no material adverse
change in the financial condition or results of operations of Pryon since the
last audited financial statements, (x) all shareholder, voting or other
agreements with respect to the capital stock of Pryon, other than the Voting
Agreement entered into in connection with the Merger, shall have been
terminated, (xi) Protocol shall have received written evidence that
noncompetition agreements with Daniel F. Carsten, Robert M. Ricciardelli and
Robert M. Sommer will not be affected by the Merger and shall continue in
effect, and (xii) Pryon and the holders of Pryon Stock shall have executed and
delivered to Protocol, an escrow agreement with respect to 10% of the shares of
Protocol Common Stock to be received by the Pryon shareholders in the Merger.
CONDITIONS TO THE OBLIGATIONS OF PRYON. The obligations of Pryon to effect
the Merger are subject to the satisfaction or waiver of the following additional
conditions: (i) Protocol and Merger Sub shall have performed or complied with in
all material respects with all agreements and conditions contained in the Merger
Agreement required to be performed or complied with at or prior to the Effective
Time and the representations and warranties of Protocol and Merger Sub contained
in the Merger Agreement shall be true in all material respects when made and on
and as of the Effective Time as if made on and as of such date and Pryon shall
have received a certificate of the President of Protocol and
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Merger Sub to that effect, (ii) all permits, consents, authorizations,
approvals, registrations, qualifications, designations and declarations required
to be obtained shall have been obtained, and, to the extent required to be
submitted prior to the Effective Time, all filings and notices required to be
submitted shall have been submitted by Protocol, (iii) Pryon shall have received
an opinion of Ater Wynne Hewitt Dodson & Skerritt, dated the Closing Date, in
substantially the form attached to the Merger Agreement, and (iv) Pryon shall
have received an opinion of Michael Best & Friedrich to the effect that the
Merger will be treated as a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code.
TERMINATION; AMENDMENT.
The Merger Agreement may be terminated at any time prior to the Effective
Time, before or after approval of the Pryon and Protocol shareholders by mutual
consent of the Board of Directors of Protocol and the Board of Directors of
Pryon. The Merger Agreement also may be terminated: (i) by either Protocol or
Pryon if the Merger has not been consummated on or before July 12, 1996
(provided the terminating party is not otherwise in material breach of its
representations, warranties, covenants or agreements under the Merger
Agreement); (ii) by Pryon if any of the conditions to Pryon's obligations
described above have not been met or waived by Pryon at such time as the
condition is no longer capable of satisfaction, including the failure to obtain
any required approval of its shareholders at a duly held meeting of shareholders
or at an adjournment thereof (provided that Pryon is not otherwise in material
breach of its representations, warranties, covenants or agreements under the
Merger Agreement, which breach is a direct and proximate cause of the failed
condition); (iii) by Protocol if any of the conditions to its obligations
described above have not been met or waived by Protocol at such time as the
condition is no longer capable of satisfaction, including the failure to obtain
any required approval of its shareholders at a duly held meeting of shareholders
or at an adjournment thereof (provided Protocol is not otherwise in material
breach of its representations, warranties, covenants or agreements under the
Merger Agreement, which breach is the direct and proximate cause of the failed
condition; (iv) by either of Protocol or Pryon if there has been a material
breach on the part of the other party of any representation, warranty, covenant
or agreement set forth in the Merger Agreement, which breach has not been cured
within fifteen business days following receipt by the breaching party of written
notice of such breach; (v) by either of Protocol or Pryon upon written notice to
the other party if any governmental authority of competent jurisdiction shall
have issued a final permanent order enjoining or otherwise prohibiting the
consummation of the transactions contemplated by the Merger Agreement and in any
such case the time for appeal or petition for reconsideration of such order
shall have expired without such appeal or petition being granted. In the event
of termination of the Merger Agreement by either Protocol or Pryon as provided
in the preceding sentence, the Merger Agreement shall become void; there shall
be no liability on the part of either Pryon, Protocol or Merger Sub.
The Merger Agreement may be amended at any time, but only by written
instrument signed on behalf of each of the parties to the Merger Agreement. No
amendments may be made after such time as the shareholders of Pryon and the
shareholders of Protocol have approved the Merger Agreement which changes the
consideration to be paid in the Merger or which in any way materially adversely
affects the rights of the shareholders of either Protocol or Pryon without
further approval of the adversely affected shareholders.
At any time prior to the Effective Time, the parties to the Merger
Agreement, by or pursuant to action taken by their respective Boards of
Directors may: (i) extend the time for performance of any of the obligations of
the parties; (ii) waive any inaccuracies in the representations and warranties
of any other party contained in the Merger Agreement or in any document
delivered pursuant thereto by any other party; and (iii) waive compliance with
any of the agreements or conditions contained in the Merger Agreement; provided
that, no such waiver shall materially adversely affect the rights of the
shareholders of Pryon or the shareholders of Protocol as the case may be. Any
agreement on the part of any party to the Merger Agreement of any such extension
or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
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INDEMNIFICATION AGREEMENTS
The Merger Agreement provides that during the period beginning on the
Closing Date and ending on the second anniversary thereof, Protocol will cause
the the surviving corporation's articles of incorporation and bylaws to include
Pryon's current provisions regarding indemnification of officers and directors.
Pryon has agreed to indemnify and hold harmless Protocol from and against
and will reimburse Protocol with respect to all losses, damages (including lost
profits and punitive damages), liabilities, costs, and expenses (including
reasonable attorney fees), but in no event consequential, indirect or
speculative damages, or damages based upon a multiple of lost (or anticipated)
earnings, profits, income or the like ("Indemnifiable Damages") incurred by
Protocol by reason of or arising out of or in connection with the breach or
inaccuracy of any representation or warranty of Pryon contained in the Merger
Agreement or the failure of Pryon to perform any agreement or covenant required
by the Merger Agreement to be performed by it. The Merger Agreement provides
that (a) Pryon will not be liable for or with respect to the first $200,000 of
the aggregate of Indemnifiable Damages, and (b) if the Merger closes,
Indemnifiable Damages in excess of such $200,000 amount shall be recovered by
Protocol solely in accordance with the provisions of the Escrow Agreement.
Protocol has agreed to indemnify and hold harmless Pryon from and against
and will reimburse Pryon with respect to any and all Indemnifiable Damages
incurred by Pryon by reason of or arising out of or in connection with the
breach or inaccuracy of any representation or warranty of Protocol or Merger Sub
contained in the Merger Agreement or the failure of Protocol to perform any
agreement or covenant required by the Merger Agreement to be performed by it.
The Merger Agreement provides that Protocol will not be liable for or with
respect to the first $200,000 of the aggregate of Indemnifiable Damages.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of Pryon
Stock. This section reflects the tax opinion of Michael Best & Friedrich
delivered to Pryon in connection with the Merger, which opinion is filed as an
exhibit to the Registration Statement of which this Joint Proxy
Statement/Prospectus is a part (the "Tax Opinion"). The Tax Opinion includes an
opinion to the effect that the Merger will constitute a "reorganization" within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"). The Tax Opinion is based on certain assumptions and is subject to
certain limitations and qualifications. The Tax Opinion also is based on certain
factual representations made by Protocol, Merger Sub, Pryon and others, which
representations tax counsel will neither investigate nor verify. Of particular
importance will be certain factual representations relating to the "continuity
of interest" requirement. To satisfy the continuity of interest requirement,
Pryon shareholders must not, pursuant to a plan or intent existing at or prior
to the Merger, dispose of or transfer so much of either (i) their capital stock
of Pryon in anticipation of the Merger or (ii) the Protocol Common Stock to be
received in the Merger (collectively, "Planned Dispositions"), such that the
Pryon shareholders, as a group, would no longer have a significant equity
interest in the Pryon business being conducted by Protocol after the Merger.
Planned Dispositions include, among other things, shares disposed of pursuant to
the exercise of any dissenters' rights. While case law may support a lesser
percentage, the continuity of interest requirement will be met as long as Pryon
shareholders do not have a plan or intention to sell, exchange or otherwise
dispose of a number of shares of Protocol Common Stock received in the Merger
(taking all Planned Dispositions into account) that would reduce the number of
shares of Protocol Common Stock owned by such shareholders after the Merger to a
number of shares having a value as of the date of the Merger less than 50
percent of the value of all the formerly outstanding shares of Pryon held by
such shareholders as of that date. If the continuity of interest requirement is
not satisfied, the Merger would not be treated as a "reorganization."
Pryon shareholders should be aware that this discussion does not deal with
all federal income tax considerations that may be relevant to particular Pryon
shareholders, in light of their particular
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circumstances, such as shareholders who are dealers in securities, foreign
persons, or shareholders who acquired their shares in connection with stock
option or stock purchase plans or in other compensatory transactions. In
addition, the Tax Opinion does not address the tax consequences of transactions
effectuated prior to or after the Merger (whether or not such transactions are
in connection with the Merger) including, without limitation, the exercise of
options to acquire Pryon Common Stock in anticipation of the Merger.
Furthermore, no foreign, state or local tax considerations are addressed herein.
The discussion is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Regulations thereunder, administrative rulings and practice
and court decisions as of the date hereof. All of the foregoing are subject to
change (which change could be retroactive) and any such change could affect the
continuing validity of the Tax Opinion. The Internal Revenue Service (the
"Service") has not been asked to rule upon the tax consequences of the Merger to
any person and no such request will be made. Unlike a ruling from the Service,
an opinion of counsel is not binding on the Service and there can be no
assurance, and none is hereby given that the Service will not take a position
contrary to one or more positions reflected herein or that the Tax Opinion will
be upheld by the courts if challenged by the Service. Accordingly, PRYON
SHAREHOLDERS AND OPTION HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER.
Subject to the limitations and qualifications described herein and in the
Tax Opinion, the Merger qualifies as a reorganization within the meaning of
Section 368 of the Code, and the following tax consequences will result:
(1) No gain or loss will be recognized by holders of capital stock of
Pryon upon their receipt in the Merger of Protocol Common Stock in exchange
therefor;
(2) The aggregate tax basis of the Protocol Common Stock received in the
Merger will be the same as the aggregate tax basis of Pryon capital stock
surrendered in exchange therefor;
(3) The holding period of the Protocol Common Stock received in the
Merger will include the period for which the Pryon Stock surrendered in
exchange therefor was held, provided that the Pryon capital stock is held as
a capital asset at the time of the Merger;
(4) A shareholder who exercises dissenters' rights with respect to a
share of Pryon Stock and receives payment for such share in cash will
generally recognize gain or loss for federal income tax purposes, measured
by the difference between the holder's basis in such share and the amount of
cash received, provided that the payment is neither essentially equivalent
to a dividend within the meaning of Section 302 of the Code nor has the
effect of a distribution of a dividend within the meaning of Section
356(a)(2) of the Code (collectively, a "Dividend Equivalent Transaction"). A
sale of Pryon Stock pursuant to an exercise of dissenters' rights will
generally not be a Dividend Equivalent Transaction if, as a result of such
exercise, the shareholder exercising dissenters' rights owns no shares of
Protocol Common Stock (either actually or constructively within the meaning
of Section 318 of the Code). If however, a shareholder's sale for cash of
Pryon Stock pursuant to an exercise of dissenters' rights is a Dividend
Equivalent Transaction, then such shareholder will generally recognize
income for federal income tax purposes in an amount up to the entire amount
of cash so received.
A successful challenge by the Service to the "reorganization" status of the
Merger (as a result of a failure of the "continuity of interest" requirement or
otherwise) would result in a Pryon shareholder recognizing gain or loss with
respect to each share of Pryon Stock surrendered equal to the difference between
the shareholder's basis in such share and the fair market value, as the
Effective Time, of the Protocol Common Stock received in exchange therefor. In
such event, a shareholder's aggregate basis in the Protocol Common Stock so
received would equal its fair market value and the holding period for such stock
would begin the day after the Merger.
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THE FOREGOING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A COMPLETE
ANALYSIS OR LISTING OF ALL POTENTIAL TAX EFFECTS RELEVANT TO A DECISION WHETHER
TO VOTE IN FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
MERGER. THE DISCUSSION DOES NOT ADDRESS THE TAX CONSEQUENCES THAT MAY BE
RELEVANT TO A PARTICULAR PRYON SHAREHOLDER SUBJECT TO SPECIAL TREATMENT UNDER
CERTAIN FEDERAL INCOME TAX LAWS, SUCH AS DEALERS IN SECURITIES, BANKS, INSURANCE
COMPANIES, TAX-EXEMPT ORGANIZATIONS, NON-UNITED STATES PERSONS AND SHAREHOLDERS
WHO ACQUIRED THEIR SHARES OF PRYON COMMON STOCK PURSUANT TO THE EXERCISE OF
PRYON STOCK OPTIONS OR OTHERWISE AS COMPENSATION, NOR DOES IT ADDRESS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCALITY OR FOREIGN
JURISDICTION. THE DISCUSSION IS BASED UPON THE CODE, TREASURY REGULATIONS
THEREUNDER AND ADMINISTRATIVE RULINGS AND PRACTICE AND COURT DECISIONS AS OF THE
DATE HEREOF, ALL OF THE FOREGOING ARE SUBJECT TO CHANGE (WHICH CHANGE COULD BE
RETROACTIVE) AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF THIS
DISCUSSION. PRYON SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER
TO THEM.
RESALE OF PROTOCOL COMMON STOCK ISSUED IN THE MERGER; AFFILIATES
The Protocol Common Stock to be issued to Pryon shareholders in connection
with the Merger will be freely transferable under the Securities Act, except for
Protocol Common Stock issued to any person deemed to be an affiliate of Pryon
for purposes of Rule 145 under the Securities Act at the Effective Time
("Affiliates"). Affiliates may not sell their Protocol Common Stock acquired in
connection with the Merger except pursuant to an effective registration
statement under the Securities Act covering such shares, or in compliance with
Rule 145 promulgated under the Securities Act or another applicable exemption
from the registration requirements of the Securities Act. Pryon has delivered a
disclosure statement to Protocol identifying all persons who may be deemed to be
Affiliates. Each Affiliate listed in that disclosure statement has agreed not to
sell, transfer or otherwise dispose of any Protocol Common Stock received in the
Merger in violation of the Securities Act, and that such Affiliate will not,
after the earlier of (i) the mailing of this Joint Proxy Statement/Prospectus
and (ii) the thirtieth day prior to the Effective Time, sell any Protocol Common
Stock or any shares of Pryon Stock or otherwise reduce such Affiliate's risk
relative to any Protocol Common Stock until after such time as consolidated
financial statements which reflect at least 30 days of post-Merger operations
have been published by Protocol, except as permitted by Staff Accounting
Bulletin No. 76 issued by the Commission.
ACCOUNTING TREATMENT
It is expected that the Merger will be treated as a pooling of interests for
accounting and financial reporting purposes. See "THE MERGER -- Conditions;
Waivers."
MANAGEMENT AND OPERATIONS OF PRYON AFTER THE MERGER
After the Merger, the articles of incorporation and bylaws of Merger Sub
will be the articles of incorporation and bylaws of Pryon as the Surviving
Corporation (except that the name will be changed to Pryon Corporation) and
Pryon will be a wholly owned subsidiary of Protocol. Pryon will operate as one
of Protocol's business units, and Protocol currently intends to maintain Pryon's
corporate headquarters in Menomonee Falls, Wisconsin. After the Merger, Pryon
will have access to resources generally available to Protocol's other business
units, will participate in appropriate activities with other Protocol business
units and will operate under the direction and guidance of Protocol's senior
management and the Protocol and Pryon Boards.
EXPENSES AND FEES
Protocol and Pryon will each pay their own expenses in connection with the
Merger.
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RIGHTS OF DISSENTING PRYON SHAREHOLDERS
The following is a brief summary of the rights of shareholders of Pryon who
dissent from the Merger. It is qualified in its entirety by reference to the
applicable statutory provisions of the WBCL attached hereto as Appendix C. Under
the OBCA, holders of Protocol Common Stock will not be entitled to dissenters'
rights as a result of the Merger because Protocol is not a constituent
corporation to the Merger.
If the Merger is consummated, holders of record of Pryon Stock who (a)
deliver to Pryon before the vote is taken written notice of their intent to
demand payment if the Merger Agreement is approved, (b) refrain from voting in
favor of the Merger Agreement, by either voting against the adoption of the
Merger Agreement or abstaining from voting, and (c) comply with the provisions
of Sections 180.1301 through 180.1331 of the WBCL, will then be entitled to have
the "fair value" of their shares at the time of the Merger paid to them.
The following is a brief summary of Sections 180.1301 through 180.1331 of
the WBCL, which sets forth the procedures for demanding statutory dissenters'
rights. This summary is qualified in its entirety by reference to Sections
180.1301 through 180.1331 of the WBCL, the text of which is attached hereto in
Appendix C.
If the Merger is approved and consummated, those shareholders of Pryon who
elect to exercise their dissenters' rights and who properly and timely perfect
such rights will be entitled to receive the "fair value" in cash for their
shares of Pryon Stock. Pursuant to Section 180.1301(4) of the WBCL, such "fair
value" means the value of the shares immediately before the effectuation of the
Merger, excluding any appreciation or depreciation in anticipation of the
Merger, unless such exclusion would be inequitable.
A shareholder who elects to exercise his or her dissenters' rights must
perfect such rights by delivering to Pryon prior to the vote at the Special
Meeting written notice of his or her intent to demand payment, and not vote his
or her shares in favor of the Merger Agreement, by either voting against the
adoption of the Merger Agreement or abstaining from voting.
If a shareholder fails to deliver written notice to Pryon of the
shareholder's intent to demand payment prior to the vote at the Special Meeting
or if the shareholder votes his or her shares in favor of the Merger Agreement,
such shareholder will lose the right to receive the fair value of his or her
shares.
If the Merger is approved, within ten days after such approval, Pryon will
deliver to those shareholders who deliver to Pryon prior to the vote written
notice of their intent to demand payment and who refrain from voting in favor of
the Merger Agreement a written dissenters' notice (the "Dissenters' Notice").
The Dissenters' Notice shall set forth where the shareholder must send the
payment demand, where and when certificates for such shares must be deposited
and the date by which Pryon must receive the payment demand (which date must not
be fewer than 30 days nor more that 60 days after the date on which the
Dissenters' Notice is delivered). In addition, the Dissenters' Notice must
include (a) a form for demanding payment which includes the date of the first
announcement to the shareholders of the terms of the Merger and requires the
shareholder to certify whether he or she acquired beneficial ownership of the
shares before that date, and (b) a copy of the sections of the WBCL pertaining
to dissenters' rights.
A shareholder who is sent a Dissenters' Notice must demand payment in
writing, certifying whether he or she acquired beneficial ownership of the
shares before the date specified in such notice and deposit his or her
certificates in accordance with the Dissenters' Notice. A shareholder who does
not demand payment by the date set in the Dissenters' Notice or who does not
deposit his or her certificates where required and by the date set in the
Dissenter's Notice is not entitled to a dissenters' right of payment for his or
her shares.
40
<PAGE>
Upon the later of consummation of the Merger or receipt of the payment
demand, Pryon shall pay each shareholder who has complied with the requirements
set forth above the amount that Pryon estimates to be the fair value of such
shares, plus accrued interest. The payment must be accompanied by the latest
available financial statements of Pryon, a statement of the estimate of the fair
value of the shares, an explanation of how the interest was calculated, a
statement of the dissenters' rights if the dissenter is dissatisfied with the
payment and a copy of the sections of the WBCL pertaining to dissenters' rights.
If (a) the dissenter believes that the amount paid by Pryon is less than the
fair value of his or her shares or that the interest due is incorrectly
calculated, (b) Pryon fails to make payment within 60 days after the date set in
the Dissenters' Notice for demanding payment, or (c) the Merger is not
consummated and Pryon does not return to the dissenter the deposited
certificates within 60 days after the date set in the Dissenters' Notice for
demanding payment, the dissenter may notify Pryon of his or her estimate of the
fair value of his or her shares and the amount of interest due and demand
payment of his or her estimate, less any payment previously received. The
dissenter must notify Pryon of his or her demand in writing within 30 days after
Pryon made or offered payment for the dissenters' shares. If, within 60 days
after receipt by Pryon of a demand described in this paragraph, the demand
remains unsettled, Pryon shall bring a special proceeding and shall petition the
court to determine the fair value of the shares and accrued interest thereon. If
Pryon does not bring the special proceeding within such 60-day period, it shall
pay each dissenter whose demand remains unsettled the amount demanded. The
dissenter shall be entitled to judgment for the amount by which the court finds
the fair value of his or her shares plus interest exceeds the amount paid by
Pryon.
The Merger Agreement provides that it may be terminated by Protocol in the
event that holders of more than 5% of the total number of shares of Pryon Common
Stock that would be outstanding if all outstanding shares of Pryon Preferred
Stock were converted into Pryon Common Stock exercise dissenters' rights.
CONFLICTS OF INTEREST
PRYON BOARD OF DIRECTORS AND MANAGEMENT. As of the Record Date,
non-employee directors of the Pryon Board beneficially owned an aggregate of
116,797 shares of Pryon Stock. See "STOCK OWNED BY PRYON MANAGEMENT AND
PRINCIPAL SHAREHOLDERS." Assuming a Protocol Market Value of $13.48 per share or
more, the aggregate dollar value of Protocol Common Stock to be received by
these non-employee directors in respect of outstanding shares of Pryon Stock
would be approximately $15,489,143, representing approximately 49.5% of the
aggregate consideration to be received by all holders of Pryon Stock and Pryon
Employee Stock Options.
As of the Record Date, the executive officers of Pryon owned an aggregate of
42,740 shares of Pryon Stock and held options to acquire 13,100 shares of Pryon
Common Stock, exercisable at prices ranging from $2.00 to $8.00 per share. See
"STOCK OWNED BY PRYON MANAGEMENT AND PRINCIPAL SHAREHOLDERS." Assuming a
Protocol Market Value of $13.48 per share or more, the aggregate dollar value of
Protocol Common Stock to be received by these executive officers in respect of
outstanding shares of Pryon Stock would be approximately $5,668,179,
representing approximately 18.1% of the aggregate consideration to be received
by all holders of Pryon Stock and Pryon Employee Stock Options. Pursuant to the
Merger Agreement, all outstanding Pryon Employee Stock Options, including those
held by the executive officers of Pryon, will convert into Replacement Options
to acquire Protocol Common Stock. See "THE MERGER -- Terms of the Merger --
Conversion of Pryon Employee Stock Options in the Merger." Assuming a Protocol
Market Value of $13.48 per share or more, the aggregate dollar value of Protocol
Common Stock issuable upon the exercise of Replacement Options to be received by
the executive officers would be approximately $1,737,322.
Pryon is indebted to each of Daniel F. Carsten, Robert H. Ricciardelli and
Robert M. Sommer, which indebtedness is evidenced by a Pryon Promissory Note,
each dated July 1, 1995, and each in the principal amount of $75,429.00 (the
"Promissory Notes"), plus any accrued and unpaid interest. The
41
<PAGE>
indebtedness evidenced by the Promissory Notes is subordinate to certain
indebtedness of Pryon to its senior bank lender. Pursuant to the Merger
Agreement, Protocol has committed at or within ten days after the Closing to
cause Pryon to pay in full each of the Promissory Notes. In addition, officers
and employees of Pryon will become eligible for option grants under the Protocol
1992 Plan.
42
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Condensed Statements of
Operations and Balance Sheet give effect to the Merger on a pooling of interests
basis of accounting. These Unaudited Pro Forma Combined Condensed Financial
Statements have been prepared from the historical consolidated financial
statements of Protocol and Pryon and should be read in conjunction therewith.
The historical financial statements of Protocol and of Pryon are contained or
incorporated by reference in this Joint Proxy Statement/Prospectus. See
"FINANCIAL STATEMENTS" and "AVAILABLE INFORMATION."
This unaudited pro forma combined information is not necessarily indicative
of actual or future operating results or financial position that would have
occurred or will occur upon consummation of the Merger.
The Unaudited Pro Forma Combined Condensed Balance Sheet gives effect to the
Merger as if it had occurred on March 31, 1996, combining the balance sheets of
Protocol and Pryon as of that date. The Unaudited Pro Forma Combined Condensed
Statements of Operations give effect to the Merger as if it had occurred on
January 1, 1993, combining the results of Protocol and Pryon for each of the
three years in the period ended December 31, 1995, and each of the three month
periods ended March 31, 1996 and 1995.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 1996
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ------------------------------
-------------------- ADJUSTMENTS (NOTE
PROTOCOL PRYON 4) COMBINED
--------- --------- ------------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Current assets
Cash.................................................... $ 12,082 $ 10 $ 12,092
Short term investments.................................. 3,034 0 3,034
Accounts receivable -- net.............................. 12,587 1,778 $ (206) 14,159
Inventories............................................. 6,578 3,844 (181) 10,241
Deferred income taxes................................... 1,333 0 240 1,573
Other current assets.................................... 269 221 490
--------- --------- ------- ---------
Total current assets.................................. 35,883 5,853 (147) 41,589
Long term investments..................................... 11,315 0 11,315
Property and equipment
Machinery and equipment................................. 5,728 2,112 7,840
Office furniture and fixtures........................... 1,001 943 1,944
Leasehold improvements.................................. 237 404 641
--------- --------- ---------
Total................................................. 6,966 3,459 10,425
Less: accumulated depreciation.......................... (4,700) (1,696) (6,396)
--------- --------- ---------
Net property and equipment............................ 2,266 1,763 4,029
Other assets
Capitalized software -- net............................. 231 251 482
Other................................................... 1,734 0 1,734
--------- --------- ---------
Total other assets.................................... 1,965 251 2,216
--------- --------- ------- ---------
Total assets.......................................... $ 51,429 $ 7,867 $ (147) $ 59,149
--------- --------- ------- ---------
--------- --------- ------- ---------
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements
43
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ------------------------------
-------------------- ADJUSTMENTS (NOTE
PROTOCOL PRYON 4) COMBINED
--------- --------- ------------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Current liabilities
Current portion -- long term debt....................... $ 0 $ 88 $ 88
Accounts payable........................................ 2,242 824 $ (206) 2,860
Accrued salaries, etc................................... 2,049 34 2,083
Income taxes payable.................................... 972 0 972
Reserve for warranties.................................. 915 155 1,070
Deferred revenue........................................ 139 0 139
Other................................................... 712 126 1,600 2,438
--------- --------- ------- ---------
Total current liabilities............................. 7,029 1,227 1,394 9,650
Long-term debt
Line of credit.......................................... 0 1,571 1,571
Notes payable -- shareholders........................... 0 226 226
Notes payable -- bank................................... 0 175 175
--------- --------- ------- ---------
Total long-term debt.................................. 0 1,972 1,972
Deferred income taxes..................................... 444 0 444
Series A Redeemable Preferred Stock....................... 0 1,888 (1,888) 0
Series B Redeemable Preferred Stock....................... 0 4,849 (4,849) 0
Shareholders' equity......................................
Common stock (Shares outstanding -- Protocol: 7,424;
Pryon: 102; Adjustments: 1,286; Pro Forma Combined:
8,812)................................................. 74 10 4 88
Additional paid-in capital.............................. 27,965 1 6,225 34,191
Unrealized holding gain on investments.................. 23 0 23
Retained earnings/(Accumulated deficit)................. 15,948 (1,572) (1,541) 12,835
Foreign currency translation adjustment................. (54) 0 (54)
Less: treasury stock (Pryon -- 27 shares)............... 0 (508) 508 0
--------- --------- ------- ---------
Total shareholders' equity............................ 43,956 (2,069) 5,196 47,083
--------- --------- ------- ---------
Total liabilities and shareholders' equity................ $ 51,429 $ 7,867 $ (147) $ 59,149
--------- --------- ------- ---------
--------- --------- ------- ---------
Ending number of common and common equivalent shares
outstanding.............................................. 8,072 75 1,445 9,592
Book value per common and common equivalent share......... 5.45 (27.44) 4.91
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements
44
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
HISTORICAL -- PROTOCOL HISTORICAL -- PRYON
------------------------------- -------------------------------
1995 1994 1993 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Sales......................................... $ 49,067 $ 41,166 $ 37,132 $ 12,276 $ 8,001 $ 7,240
Cost of sales................................. 22,194 18,172 16,392 7,242 5,435 5,213
--------- --------- --------- --------- --------- ---------
Gross profit.............................. 26,873 22,994 20,740 5,034 2,566 2,027
Operating expenses:
Research and development.................... 6,190 4,780 3,936 1,529 1,353 1,140
Selling, general and administrative......... 15,588 13,555 12,563 2,492 1,856 1,116
--------- --------- --------- --------- --------- ---------
Total operating expenses.................. 21,778 18,335 16,499 4,021 3,209 2,256
--------- --------- --------- --------- --------- ---------
Income (loss) from operations............... 5,095 4,659 4,241 1,013 (643) (229)
Other income (expense):
Interest income............................. 1,159 817 768 5 5 16
Interest expense............................ 0 0 (20) (186) (146) (51)
Other....................................... (48) (19) 9 (14) (10) 0
--------- --------- --------- --------- --------- ---------
Total other income (expense).............. 1,111 798 757 (195) (151) (35)
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes............. 6,206 5,457 4,998 818 (794) (264)
Provision for income taxes.................... 1,528 1,311 1,590 0 0 0
--------- --------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle............... 4,678 4,146 3,408 818 (794) (264)
Cumulative effect of change in accounting
principle.................................... 0 0 100 0 0 0
--------- --------- --------- --------- --------- ---------
Net income (loss)......................... $ 4,678 $ 4,146 $ 3,508 $ 818 $ (794) $ (264)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Weighted average number of common and common
equivalent shares outstanding................ 7,701 7,456 7,459 225 75 75
Net income (loss) per common and common
equivalent share before cumulative effect of
change in accounting principle............... 0.61 0.56 0.46 3.65 (10.55) (3.51)
Net income (loss) per common and common
equivalent share............................. 0.61 0.56 0.47 3.65 (10.55) (3.51)
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements
45
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
PRO FORMA-ADJUSTMENTS PRO FORMA-COMBINED
------------------------------- -------------------------------
1995 1994 1993 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Sales........................................ $ (1,741) $ (1,009) $ (1,045) $ 59,602 $ 48,158 $ 43,327
Cost of sales................................ (1,643) (1,092) (856) 27,793 22,515 20,749
--------- --------- --------- --------- --------- ---------
Gross profit............................... (98) 83 (189) 31,809 25,643 22,578
Operating expenses:
Research and development................... 7,719 6,134 5,076
Selling, general and administrative........ 18,080 15,411 13,679
--------- --------- ---------
Total operating expenses................. 25,799 21,545 18,755
--------- --------- --------- --------- --------- ---------
Income (loss) from operations.............. (98) 83 (189) 6,010 4,098 3,823
Other income (expense)
Interest income............................ 1,164 822 784
Interest expense........................... (186) (146) (72)
Other...................................... (62) (29) 9
--------- --------- ---------
Total.................................... 916 647 721
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes............ (98) 83 (189) 6,926 4,745 4,544
Provision for income taxes................... 0 0 0 1,528 1,311 1,590
--------- --------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle.............. (98) 83 (189) 5,398 3,434 2,954
Cumulative effect of change in accounting
principle................................... 0 100
--------- --------- --------- --------- --------- ---------
Net income (loss).......................... $ (98) $ 83 $ (189) $ 5,398 $ 3,434 $ 3,054
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Weighted average number of common and common
equivalent shares outstanding............... 1,278 1,297 1,283 9,204 8,828 8,817
Net income per common and common equivalent
share before cumulative effect of change in
accounting principle........................ 0.59 0.39 0.34
Net income per common and common equivalent
share....................................... 0.59 0.39 0.35
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements
46
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
PRO FORMA- PRO FORMA- COMBINED
HISTORICAL-PROTOCOL HISTORICAL-PRYON ADJUSTMENTS
-------------------- -------------------- -------------------- --------------------
1996 1995 1996 1995 1996 1995 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Sales................................. $ 13,789 $ 10,176 $ 3,135 $ 3,059 $ (685) $ (291) $ 16,239 $ 12,944
Cost of Sales......................... 6,308 4,579 1,755 1,791 (708) (264) 7,355 6,106
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit........................ 7,481 5,597 1,380 1,268 23 (27) 8,884 6,838
Operating expenses:
Research and development............ 1,795 1,695 459 369 2,254 2,064
Selling, general and
administrative..................... 4,083 3,465 666 528 4,749 3,993
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses........ 5,878 5,160 1,125 897 0 0 7,003 6,057
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations.............. 1,603 437 255 371 23 (27) 1,881 781
Other income (expenses)
Interest income..................... 329 277 2 1 331 278
Interest expense.................... 0 0 (50) (43) (50) (43)
Other............................... (9) (20) (5) 9 (14) (11)
--------- --------- --------- --------- --------- --------- --------- ---------
Total........................... 320 257 (53) (33) 0 0 267 224
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes............ 1,923 694 202 338 23 (27) 2,148 1,005
Provision for income taxes............ 595 192 0 0 595 192
--------- --------- --------- --------- --------- --------- --------- ---------
Net income.......................... $ 1,328 $ 502 $ 202 $ 338 $ 23 $ (27) $ 1,553 $ 813
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Weighted average number of common and
common equivalent shares
outstanding.......................... 8,042 7,632 227 227 1,293 1,278 9,562 9,137
Net income per common and common
equivalent share..................... 0.17 0.07 0.89 1.49 0.16 0.09
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
47
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
NOTE 1. -- BASIS OF PRESENTATION
The Unaudited Pro Forma Combined Condensed Financial Statements reflect an
assumed exchange ratio of 6.4693 shares of Protocol Common Stock for one share
of Pryon Stock. The assumed exchange ratio is based on an assumed Protocol
Market Value of $20.50, which was the closing price of Protocol Common Stock on
May 10, 1996. At the assumed exchange ratio, 1,387,742 shares of Protocol Common
Stock would be exchanged for 214,512 shares of Pryon Stock and 139,090
Replacement Options would be exchanged for 21,500 options to purchase Pryon
Common Stock upon completion of the Merger. The actual number of shares of
Protocol Common Stock and Replacement Options to be issued will be determined at
the Effective Time of the Merger based upon the Protocol Market Value.
NOTE 2. -- PRO FORMA EARNINGS PER SHARE
Net income per common and common equivalent share amounts are based on the
weighted average number of common shares outstanding and dilutive common
equivalent shares assumed to be outstanding during the period using the treasury
stock method, giving effect to the Merger as if it had been consummated at the
beginning of the years presented at the assumed exchange ratio described in Note
1. The Replacement Options described in Note 1 are considered to be common stock
equivalents for purposes of calculating the weighted average number of common
and dilutive common equivalent shares outstanding.
NOTE 3. -- TRANSACTION COSTS
Protocol and Pryon estimate that they will incur direct and indirect costs
of $1.6 million in connection with the Merger, relating mainly to investment
banker fees and legal and accounting services. These nonrecurring costs will be
charged to operations in the fiscal quarter in which the Merger is consummated.
The Unaudited Pro Forma Combined Condensed Balance Sheet reflects these
estimated transaction costs and their tax effects as if such costs were incurred
as of March 31, 1996, but the effects of these costs are not reflected in the
Unaudited Pro Forma Combined Condensed Statements of Operations.
NOTE 4. -- CONFORMING ADJUSTMENTS AND INTERCOMPANY TRANSACTIONS.
There have been no adjustments required to conform the accounting policies
of the combined company. Intercompany transactions, reflecting purchases of
products and services by Protocol from Pryon during the years presented and the
resulting accounts receivable and payable balances, are eliminated under the
column heading "Pro Forma -- Adjustments".
48
<PAGE>
BUSINESS OF PROTOCOL
Protocol designs, manufactures and markets patient monitoring instruments
and systems utilizing innovative design, advanced software concepts and leading
electronic technology. Protocol's products are designed to address hospitals'
needs for more efficient and flexible utilization of patient monitoring
equipment. Protocol's Propaq monitors combine multiple physiologic measurement
and display capabilities into a single lightweight instrument, permitting the
use of the monitor in a variety of hospital settings. Propaq monitors are
available in a variety of configurations and can measure electrocardiogram
(ECG); blood pressure, both invasively and non-invasively; arterial blood oxygen
saturation level (pulse oximetry); respiration (impedance pneumography)
end-tidal carbon dioxide, and body temperature. The Propaq monitor can also be
configured to receive wireless communication of ECG signals from a portable
transmitter. The Acuity System further increases monitoring flexibility by
allowing a clinician to observe and control up to 32 Propaq monitors from a
dedicated UNIX-based workstation.
BUSINESS OF PRYON
GENERAL
Pryon is a leading supplier of capnography products for medical
instrumentation manufacturers. Pryon designs, manufactures and markets both
mainstream and sidestream sensors and instrumentation to monitor end-tidal
carbon dioxide ("CO(2)") levels present in the respired breath of critically ill
and other patients. This CO(2) data, coupled with other clinical signs and
information, provides clinicians with a noninvasive means to assess the
patient's ventilation, perfusion and circulatory status. In addition, Pryon has
expanded its mission in the medical market to provide complete airway monitoring
systems, using its strong market presence in CO(2) monitoring as leverage.
Pryon's base technology consists primarily of small sensing devices
utilizing infrared spectroscopy to measure clinical levels of CO(2). Used with
Pryon's electronic control hardware and software, these sensors monitor CO(2) on
a continuous breath-to-breath basis. Pryon's CO(2) sensors have clinical
advantages including their small size, light weight and no requirement for
routine user calibration. These attributes have allowed Pryon to sell sensors
and electronic subsystems to a number of OEM manufacturers of various patient
monitoring systems. These companies, in turn, package the Pryon technology in
their own multi-parameter monitoring instruments. Pryon also manufactures for
Nellcor Puritan Bennett a complete standalone instrument that incorporates
Nellcor Puritan Bennett's oximetry and Pryon's CO(2) capability.
In 1994, Pryon began manufacturing the SC-300 CO(2) Monitor, a stand alone
instrument that incorporates both mainstream and sidestream CO(2) monitoring
modalities. Pryon has established a worldwide distribution network of anesthesia
and respiratory care dealers to market the product under the Pryon name. A
follow-up product, the SC-210 CO(2) Monitor, was introduced in August 1995. This
device utilizes the SC-300 platform and provides sidestream monitoring only and
is thus a more cost effective alternative for those customers requiring CO(2)
monitoring for non-intubated patients only.
Pryon was incorporated in April 1988 under the laws of the state of
Wisconsin.
INDUSTRY
The health care industry in general is governed by increasingly stringent
government regulations both in the United States and internationally. The United
States Food and Drug Administration ("FDA") is the primary agency in the United
States providing regulatory oversight of the health care industry. The trend in
recent years has been toward increased regulation and enforcement of
requirements applicable to companies operating within this environment. This
trend has caused companies to experience longer approval cycles, more
uncertainty, greater risk and higher expenses. Currently, there are no
indications that this trend will not continue in the short or long-term, either
in the United States or internationally.
49
<PAGE>
In addition, the health care industry in the United States is experiencing a
period of extensive change. Managed care and other health care provider
organizations have increased significantly in terms of both the number of
individuals receiving medical benefits under such arrangements and their
influence over the practices and pricing involving the purchase of medical
devices. Health care reform ideas, cost containment initiatives and changes in
laws and regulations have been and will continue to be proposed by the current
administration and various other federal, state and local government
representatives. Market driven reforms are resulting in industry-wide
consolidation of the companies providing equipment and other products to large,
national buyer groups providing health care services.
Medical device manufacturers are characterized by rapid technological
changes and increased competition. There are many companies that currently
offer, or are in the process of developing, products that compete with products
offered by the major OEM customers of Pryon. This competition could result in
new technologies or products that are more effective than those currently
produced by Pryon's OEM customers. Competition in the captive measurement
capnography segment of the medical device market has decreased over the past
five years as many companies have abandoned their own technology in favor of OEM
providers. Pryon believes it is currently the only company with both sidestream
and mainstream capnography technology. Generally, mainstream capnography is
available from Pryon, Novametrix and Andros. Hewlett Packard has mainstream
technology but is not making it available to others. Sidestream capnography is
available from Pryon and Spegas Industries, with a few companies having a
sidestream device for use in their own products.
PRODUCTS
Pryon manufactures solutions for CO(2) monitoring applications that include
mainstream and sidestream CO(2) sensors for OEM applications and stand alone
monitors for both OEM and direct distribution channels. Pryon also manufactures
a line of consumable products that are used in conjunction with its CO(2)
sensors.
CO(2) SENSORS. Pryon offers a sidestream CO(2) sensor and related hardware
and software on an OEM basis for use 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. This sensor has been manufactured by Pryon since 1989. In
1991, Pryon began producing its mainstream CO(2) sensors on an OEM basis.
Mainstream technology is used in hospital venues for intubated patients.
STAND ALONE CO(2) MONITORS. In addition to the SC-300 and SC-210 CO(2)
monitors it manufactures and markets directly through its worldwide distributor
network, Pryon designed and is manufacturing a complete stand alone instrument,
the N-6000 UltraCap, for Nellcor Puritan Bennett. This product incorporates
Nellcor Puritan Bennett's oximetry and Pryon's mainstream CO(2) monitoring
capability.
CONSUMABLE PRODUCTS. With almost every CO(2) system Pryon produces, there
is a need for a continuing stream of consumable products over the life of the
product. In mainstream monitoring there are airway adapters, in both adult and
neonatal embodiments, that must be used with each sensor. These airway adapters
are predominantly single-patient use. Sidestream systems require a disposable
water trap.
STRATEGY
Pryon's strategy has been and will continue to be the development and
support of current and new OEM customers and opportunities. Pryon's continually
expanding OEM customer base and strong instrument and sensor sales from existing
OEM customers has contributed to its 70% compounded growth rate in revenues
since 1991. In addition, establishing a dedicated, well trained direct sales
force increases the revenue opportunity available to Pryon with respect to its
direct stand alone instruments and consumable products over that of its current
independent distributor network.
50
<PAGE>
The capnography market is expected to grow at a rate above the growth rate
in the medical device industry as a whole. Several regulatory, economic and
demographic trends are contributing to this growth. The respiratory market as a
whole, which includes capnography, is expanding with the aging population,
improving technologies and the shift in the location of treatment from the
hospital to lower cost venues such as sub-acute facilities and the home. Over
the past several years, a number of recommendations and requirements for
capnography usage have been initiated that will result in positive effects on
the demand for capnography products in the hospital markets. These include: (i)
the incorporation by the American Society of Anesthesiologists ("ASA") of
capnography as a standard of care in operating rooms; (ii) an addition to the
ASA GUIDELINES FOR SEDATION AND ANALGESIA BY NON-ANESTHESIOLOGISTS asserting
that when ventilation cannot be directly observed capnography is a useful
adjunct, and that oximetry is not a substitute for monitoring ventilatory
function; (iii) the urging by the American College of Emergency Physicians for
the use of capnography in the emergency room; and (iv) the recommendation by the
U.S. Society of Critical Care Medicine for capnography in the ICU. Expansion of
the capnography market into non-hospital care areas such as outpatient surgery,
pre-hospital EMS and home care will be driven by the trend towards providing
patient care in lower cost venues, and the need for verifying intubation and
assessing the likely outcome of cardiopulmonary resuscitation. Pryon currently
has and is developing additional products to address these growth opportunities.
In addition, it will continue to develop training and clinical support programs
to further the acceptance and utilization of capnography as a standard of
patient care.
Pryon believes its CO(2) technology has a number of clinical advantages
including its small size, light weight, no requirement for routine calibration
and a high degree of immunity to patient contaminants.
CUSTOMER SUPPORT AND SERVICE
In addition to offering quality products and technology to its customers,
Pryon believes that providing technical support and clinical education is
fundamental to achieving success in the market. Towards that end, Pryon supplies
complete engineering, manufacturing and quality assurance support to its OEM
customers and provides custom adaptations of its technology, if necessary, to
meet customer requirements. Further, Pryon prepares and produces an clinical
education program and provides product and clinical training on a worldwide
basis to both its OEM customers and distributors of its direct products.
MARKETING AND CUSTOMERS
Since shipping its first products in 1989, Pryon's marketing strategy has
focused heavily on establishing and developing OEM customer relationships.
Pryon's OEM customers include leading U.S. and international patient monitoring
systems manufacturers, including Nellcor Puritan Bennett, Protocol Systems,
SpaceLabs Medical, Marquette Electronics, Medical Data Electronics, PaceTech,
Hellige GmbH, Nihon Kohden, NEC, Schiller AG., G. Stemple GmbH, Digicare
Biomedical Technology, Anamed, Bese and BASCO CS Ltd. During 1995 and 1996,
Pryon has added additional new OEM customers. During 1995, Pryon entered into a
new 7 year capnography supply agreement with one of its current customers. Since
the typical time period from signing of an OEM agreement to shipment of
production volume is 12 to 18 months, which includes the time required by the
customer for development and incorporation of the Pryon technology into the host
system and obtainment of the required governmental approvals, Pryon does not
anticipate any substantial revenue from these new customers until 1997.
Pryon began its direct distribution effort in 1994 and by the end of 1995
had direct product distribution domestically and internationally in most major
markets. Pryon utilizes independent respiratory care and medical equipment
dealers throughout the U.S. and internationally. A few selected territories
within the U.S. are covered with independent manufacturers representatives.
Pryon has three individuals dedicated to managing its domestic and international
distribution efforts.
51
<PAGE>
MANUFACTURING
Pryon manufactures and assembles its products at its facility in Menomonee
Falls, Wisconsin, and currently employs a total of 61 persons in manufacturing,
including four manufacturing engineers.
Over the past three years, Pryon has made capital and other investments to
enhance its manufacturing process and systems to improve product quality and
reliability. Investments included production specific systems, personnel and
capital equipment, including computerized in-process test stations, automatic
computerized calibration, specialized test fixtures and an airway adapter test
system. In addition, Pryon 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 ISO9001 and EN46001 certifications in
November 1995. Pryon's most recent FDA inspection concluded in January 1995. No
Form 483 was issued.
RESEARCH AND DEVELOPMENT
Pryon invests heavily in research and development to enhance and leverage
its core technology and to continually develop new products and technologies.
Pryon employs 19 people in its engineering and research and development groups
with the majority of the personnel in these areas having been with Pryon for
over four years.
FACILITIES
Pryon's administrative, manufacturing, engineering, research and
development, and marketing and sales facilities are located in Menomonee Falls,
Wisconsin, and consist of approximately 26,000 square feet under a lease which
expires on June 30, 1997. Pryon moved to this facility in January 1991. Pryon
believes that its existing facilities are adequate to meet its requirements at
least through 1997.
EMPLOYEES
Pryon currently has 106 employees, including 61 in manufacturing, 19 in
engineering and research and development, nine in quality assurance, nine in
marketing and sales, seven in administration, finance and MIS and one in
regulatory affairs. None of Pryon's employees are represented by a collective
bargaining agreement. Pryon believes its employee relations are good and has
never experienced a work stoppage. Pryon occasionally uses temporary employees
to meet fluctuating demand in manufacturing.
52
<PAGE>
SELECTED PRYON FINANCIAL DATA
The following selected historical financial data of Pryon have been derived
from Pryon's historical financial statements. Pryon's audited Balance Sheets as
of December 31, 1995 and 1994, its audited Statements of Operations for the
years 1995, 1994 and 1993, its unaudited Balance Sheet as of March 31, 1996 and
its unaudited Statements of Operations for the three-month periods ended March
31, 1996 and 1995 are included elsewhere in this Joint Proxy
Statement/Prospectus and should be read in conjunction with such financial
statements and the notes thereto. Pryon's other audited historical financial
statements for 1993, 1992 and 1991 are not included herein.
<TABLE>
<CAPTION>
AT OR FOR THREE
MONTHS ENDED MARCH
AT OR FOR YEAR ENDED DECEMBER 31, 31,
----------------------------------------------------- --------------------
1995 1994 1993 1992 1991 1996 1995
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data
Sales.............................................. $ 12,276 $ 8,001 $ 7,240 $ 3,066 $ 1,460 $ 3,135 $ 3,059
Cost of sales...................................... 7,242 5,435 5,213 2,132 632 1,755 1,791
--------- --------- --------- --------- --------- --------- ---------
Gross profit....................................... 5,034 2,566 2,027 934 828 1,380 1,268
Operating expenses:
Research and development......................... 1,529 1,353 1,140 924 674 459 369
Selling, general and administrative.............. 2,492 1,856 1,116 839 791 666 528
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses........................... 4,021 3,209 2,256 1,763 1,465 1,125 897
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations...................... 1,013 (643) (229) (829) (637) 255 371
Other income (expense):
Interest expense................................. (186) (146) (51) (46) (39) (50) (43)
Other............................................ (9) (5) 16 20 55 (3) 10
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes.................. 818 (794) (264) (855) (621) 202 338
Provision for income taxes......................... 0 0 0 0 0 0 0
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).................................. $ 818 $ (794) $ (264) $ (855) $ (621) $ 202 $ 338
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per common and common equivalent
share............................................. $ 3.65 $ (10.55) $ (3.51) $ (11.20) $ (7.85) $ 0.89 $ 1.49
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Consolidated Balance Sheet Data
Cash and investments............................... $ 45 $ 167 $ 143 $ 1,674 $ 665 $ 10 $ 101
Working capital.................................... 4,176 2,022 2,374 3,205 993 4,626 2,361
Total assets....................................... 7,710 6,612 5,221 5,687 2,330 7,867 6,922
Long-term debt excluding current maturities........ 1,795 156 387 319 362 1,972 132
Redeemable preferred stock......................... 6,737 6,737 5,741 5,731 1,783 6,737 6,737
Shareholders' (deficit) equity..................... (2,271) (3,089) (2,295) (2,032) (1,171) (2,069) (2,751)
Book value per common and common
equivalent share.................................. (30.11) (40.98) (30.53) (27.10) (15.05) (27.44) (36.50)
</TABLE>
53
<PAGE>
PRYON MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
FIRST QUARTER 1996 COMPARED TO FIRST QUARTER 1995
SALES. Sales for the first quarter of 1996 increased 2.5% to $3.1 million
from $3.0 million in the first quarter of 1995. Original Equipment Manufacturer
(OEM) sales for the first quarter of 1996 totaled $2.7 million or 84.9% of sales
as compared to $2.8 million or 90.8% of first quarter 1995 sales. Sales of
Pryon's directly marketed products increased 75.1% to $371,000 in the first
quarter of 1996 from $212,000 in the first quarter of 1995. Service and other
revenues totaled $103,000 and $70,000 for the first quarter of 1996 and 1995,
respectively.
Sales to three significant OEM customers, Nellcor Puritan Bennett, SpaceLabs
Medical and Protocol Systems, accounted for 48.5% and 63.5% of first quarter
sales of Pryon in 1996 and 1995, respectively. First quarter of 1996 sales to
these customers decreased $421,000 from the prior year as a result of the
inability of one of these customers to supply Pryon with the materials necessary
to complete the manufacturing of its product by Pryon. This supply problem was
corrected at the end of March 1996. Sales to other current and new OEM customers
in the first quarter of 1996 increased $305,000 from the prior year.
In August 1994, Pryon introduced its first direct product -- the SC-300
CO(2) Monitor. Sales of this product were modest in the first quarter of 1995.
Pryon believes its dealer network initially had some difficulty marketing the
product but Pryon continued efforts in market development and providing dealers
with assistance in identifying and closing sales opportunities. These efforts
resulted in increased sales of the SC-300 during the first quarter of 1996 and
Pryon's second direct product -- the SC-210 CO(2) Monitor, which was introduced
in September 1995.
An important component of Pryon's sales is its line of consumable products.
With almost every CO(2) system Pryon produces, there is a need for a continuing
stream of consumable products over the life of the system. Sales of OEM and
direct consumable products increased 14.8% to $498,000 in the first quarter of
1996 from $434,000 in the prior year. Pryon produced 15.9% and 14.2% of its
total sales in the first quarter of 1996 and 1995, respectively from sales of
its consumable products. As the total installed population of Pryon CO(2)
systems grows, the consumable products' contribution is expected to increase.
GROSS PROFIT. Gross profit as a percentage of sales increased from 41.5% in
the first quarter of 1995 to 44.0% in 1996. The increase in gross profit as a
percentage of sales was attributable in large part to the increase in direct
sales as a percentage of total sales and to the reduction in sales to one of
Pryon's OEM customers which currently has a lower margin than other products. In
addition, Pryon experienced continued improvements in manufacturing overhead
expense absorption and direct labor efficiencies in the first quarter of 1996.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 24.4%
to $459,000 in the first quarter of 1996 from $369,000 in the prior year.
One-time expenses were incurred during the first quarter of 1996 relating to new
product development effort including its DuET CO(2) System, which will provide
OEM customers with both mainstream and sidestream capabilities in a single,
small configuration. As a percentage of sales, research and development expenses
increased to 14.7% in the first quarter of 1996 from 12.1% in 1995.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 26.1% to $666,000 in the first quarter of 1996 from $528,000
in 1995. A significant increase in payroll and related costs as well as travel
expenses were incurred during the first quarter of 1996 over 1995 as a result of
Pryon adding three employees to manage its domestic and international network of
dealers established to market the Company's direct products. Additional
increases were the result of costs
54
<PAGE>
associated with expanding Pryon's management information systems, continued
development of training materials and other employee related costs. As
percentage of sales, selling, general and administrative expenses increased to
21.2% in the first quarter of 1996 from 17.3% in 1995.
OTHER EXPENSES. Other expense (net) increased to $53,000 in the first
quarter of 1996 from $33,000 in 1995 as a result of increased interest expense
on borrowings required to fund the Company's working capital needs and $15,000
in non-recurring engineering charges received during the first quarter of 1995.
PROVISION FOR INCOME TAXES. The Company did not provide for income taxes in
the first quarter of 1996 and 1995 as its net operating loss carryforwards were
sufficient to cover all reported income for each period. As of March 31, 1996,
the Company had approximately $1.1 million in net operating loss carryforwards
to offset future taxable income.
1995 COMPARED TO 1994
SALES. Sales increased 53.4% to $12.3 million in 1995 from $8.0 million in
1994. Original Equipment Manufacturer (OEM) sales for 1995 totaled $11.1 million
or 90.1% of sales as compared to $7.1 million or 88.5% of 1994 sales. Sales of
Pryon's directly marketed products increased 39.0% to $852,000 from $613,000 in
1994. Service and other revenues during 1995 and 1994 were $361,000 and
$307,000, respectively.
Sales to three significant OEM customers, Nellcor Puritan Bennett, SpaceLabs
Medical and Protocol Systems, accounted for 67.6% and 64.8% of total sales of
Pryon in 1995 and 1994, respectively. These customers accounted for $3.2 million
of the $4.0 million increase in OEM sales in 1995 over 1994, with the noted
increase the result of one of the OEM customers receiving products for a full
year in 1995 and a general increase in market demand for CO(2) monitoring. The
1995 increase was also attributed to increases in sales to other current and new
OEM customers.
In August 1994, Pryon introduced its first direct product -- the SC-300
CO(2) Monitor. The majority of direct sales for 1994 were demonstration units
purchased by Pryon's network of independent anesthesia and respiratory care
dealers which was established during the year. Sales of this product were modest
through the first half of 1995. Pryon believes its dealer network initially had
some difficulty marketing the product but Pryon continued efforts in market
development and providing dealers with assistance in identifying and closing
sales opportunities. In the last four months of 1995, SC-300 sales accelerated
and Pryon introduced its second direct product -- the SC-210 CO(2) Monitor.
An important component of Pryon's sales is its broad line of consumable
products. With almost every CO(2) system Pryon produces, there is a need for a
continuing stream of consumable products over the life of the system. Sales of
OEM and direct consumable products increased 111.9% to $1.5 million in 1995 from
$720,000 in 1994. Sales of its consumable products produced 12.4% and 9.0% of
its total sales in 1995 and 1994, respectively. As the total installed
population of Pryon CO(2) systems grows, the consumable products contribution to
total sales is expected to increase.
GROSS PROFIT. Gross profit as a percentage of sales increased from 32.1% in
1994 to 41.0% in 1995. The $4.3 million increase in sales in 1995 over 1994
allowed for significant improvements in manufacturing overhead expense
absorption. The significant investment in equipment and personnel made during
1993 and 1994 produced substantial direct labor efficiencies during 1995. In
addition, the average selling price of Pryon's direct instruments increased 8.2%
from 1994 to 1995.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 13.0%
to $1.5 million in 1995 from $1.4 million in 1994. One-time expenses were
incurred in completing the development of the SC-210, which was introduced in
1995. Pryon also incurred significant expenses related to new product
development efforts, including Pryon's family of hand-held monitoring devices,
which will incorporate sidestream CO(2), oximetry and pulmonary mechanics in
various single and multiple parameter configurations, and its DuET CO(2) System,
which will provide OEM customers with both
55
<PAGE>
mainstream and sidestream capabilities in a single, small configuration. Further
increases in research and development costs were incurred in the development of
a new infrared source to be used in most of Pryon's CO(2) systems. Expenses
incurred during 1994 included significant costs related to the development of
the SC-300. As a percentage of sales, research and development expenses
decreased to 12.5% in 1995 from 16.9% in 1994.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 34.3% to $2.5 million in 1995 from $1.9 million in 1994. A
significant increase in payroll and related costs as well as travel expenses was
incurred during 1995 as a result of the addition of three employees to manage
Pryon's network of domestic and international dealers established to market
Pryon's direct products. Additional increases were the result of continued
development of product literature and training materials, one-time costs
associated with Pryon's ISO-9000 certification and other employee-related costs.
As a percentage of sales, selling, general and administrative expenses decreased
to 20.3% in 1995 from 23.2% in 1994.
OTHER EXPENSE. Other expense (net) increased to $195,000 in 1995 from
$151,000 in 1994 as a result of increased interest expense on borrowings
required to fund the Company's growth in working capital needs due to the 53.4%
increase in sales realized during 1995.
PROVISION FOR INCOME TAXES. Pryon's 1995 provision for income taxes was
offset by utilization of net operating loss carryforwards. As of December 31,
1995, the Company had $1.3 million in net operating loss carryforwards to offset
future taxable income. A valuation reserve has been recorded against the entire
deferred tax asset at December 31, 1995, as a result of Pryon's history of
operating losses and the uncertainty associated with distribution and acceptance
of its direct products.
1994 COMPARED TO 1993
SALES. Sales increased 10.5% to $8.0 million in 1994 from $7.2 million in
1993. Original Equipment Manufacturer (OEM) sales for 1994 totaled $7.1 million
or 88.5% of sales as compared to $7.0 million or 96.4% of 1994 sales. Sales of
Pryon's direct products which began in August 1994 totaled $613,000 in 1994.
Service and other revenues in 1994 and 1993 totaled $307,000 and $259,000,
respectively.
Sales to three significant OEM customers, Nellcor Puritan Bennett, SpaceLabs
Medical and Protocol Systems, accounted for 64.8% of total sales of Pryon in
1994. Sales to two of these customers, Nellcor Puritan Bennett and Protocol
Systems accounted for 71.9% of total sales in 1993.
In August 1994, Pryon introduced its first direct product, the SC-300 CO(2)
Monitor. The majority of direct sales for 1994 were demonstration units
purchased by Pryon's network of independent anesthesia and respiratory care
dealers which was established during the year. Sales by dealers to end use
customers were modest. Direct sales of instruments and consumables accounted for
$613,000 or 7.7% of Pryon's total sales for 1994.
Sales of OEM and direct consumable products increased 18.8% to $720,000 in
1994 from $606,000 in 1993. The increase is attributed to the growing installed
base of CO(2) systems.
GROSS PROFIT. Gross profit as a percentage of sales increased to 32.1% in
1994 from 28.0% in 1993. During 1994 and 1993, Pryon invested significant
resources in capital and personnel in the manufacturing area to develop the
infrastructure necessary to support its growing customer demand, which
substantially depressed margins in each year. The increase was primarily the
result of changes in product mix with an additional $1.5 million of 1994 over
1993 sales coming from higher margin OEM sensor products and direct product
sales.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 18.7%
to $1.4 million in 1994 from $1.1 million in 1993. Pryon invested substantial
one-time resources in the development and introduction of its initial direct
product offering, the SC-300. In addition, substantial
56
<PAGE>
research and development expenses were incurred related to other new product
development efforts and OEM customer technical support. As a percentage of
sales, research and development expenses increased to 16.9% in 1994 from 15.7%
in 1993.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 66.2% to $1.9 million in 1994 from $1.1 million in 1993.
Marketing and sales expenses increased significantly as the development of a
worldwide dealer distribution network was initiated. Personnel related costs,
travel expenses and the costs associated with product literature, advertising
and training materials for the new product were significant in 1994. In
addition, costs relating to implementation of a new management information
system further contributed to the increase in expenses in 1994. As a percentage
of sales, selling, general and administrative expenses increased to 23.2% in
1994 from 15.4% in 1993.
OTHER EXPENSE. Other expense (net) increased to $151,000 in 1994 from
$34,000 in 1993 as a result of increased interest expense on borrowings required
to fund the Company's growth in working capital needs and significant investment
in development of a worldwide dealer distribution network.
PROVISION FOR INCOME TAXES. The Company did not provide for income taxes in
1994 as it reported a loss for the year. As of December 31, 1994, the Company
had $2.1 million in net operating loss carryforwards to offset future taxable
income. Pryon adopted Statement of Financial Accounting Standards No. 109 ("FAS
109"), Accounting for Income Taxes on a prospective basis, effective January 1,
1993. The adoption of FAS 109 had no cumulative effect on the financial position
of Pryon.
LIQUIDITY AND CAPITAL RESOURCES
During 1995, Pryon secured a new bank facility totaling $2.8 million to fund
its growth requirements in working capital and capital acquisitions. The
facility consists of three components; a $2.3 million line of credit, a $250,000
term note which was used to retire previously outstanding term debt and an
additional $250,000 term note to fund future capital acquisitions. At March 31,
1996, borrowings of $1.7 million on the line of credit and $225,000 on the term
note were outstanding. Available borrowings under the line of credit agreement
are limited by certain calculations based upon accounts receivable and inventory
balances of Pryon. As of March 31, 1996, Pryon had $377,000 of additional
available borrowings under its line of credit and $250,000 available under term
note agreements. Pryon also has $226,000 of notes payable outstanding to certain
of its officers and shareholders. Pryon is required to make quarterly
prepayments of principal on these notes based upon a formula which is dependent
upon its reported quarterly earnings, subject to the debt subordination
agreement with its bank.
Working capital increased to $4.8 million at March 31, 1996 from $4.2
million at December 31, 1995 and $2.4 million at March 31, 1995. Operating
activities generated a net cash use of $182,000 in the first quarter of 1996 as
compared to $48,000 in the first quarter of 1995. Accounts receivable and
inventories increased $165,000 and $75,000, respectively, during the first
quarter of 1996 as collections from and sales of direct products to US dealers
slowed following the announcement of Protocol's acquisition of Pryon. Pryon does
not anticipate any material issue with respect to collection of accounts
receivable from terminated dealers. Accounts payable and other accrued expenses
were reduced by $359,000 during the first quarter of 1996. Capital expenditures
during the first quarter of 1996 and 1995 totaled $126,000 and $186,000,
respectively. Pryon does not anticipate future capital expenditures to exceed
historical levels and believes its current financial position is sufficient to
fund these acquisitions.
57
<PAGE>
PROTOCOL MANAGEMENT
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers of Protocol.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
James B. Moon 50 President, Chief Executive Officer and Chairman of the Board of
Directors
Craig M. Swanson 53 Vice President, Finance, Chief Financial Officer and Secretary
James P. Fee, Jr. 50 Vice President, Marketing and Sales
Lawrence C. Gray 48 Vice President, Engineering
Carl P. Hollstein, Jr. 56 Vice President, Manufacturing
Allen L. Oyler 50 Vice President, Human Resources and Administration
James P. Welch 44 Vice President, Quality Systems
</TABLE>
Information concerning the principal occupation of Mr. Moon is set forth
under "Election of Directors." Information concerning the principal occupation
during at least the last five years of the executive officers of Protocol who
are not also directors of Protocol is set forth below.
CRAIG M. SWANSON. Mr. Swanson joined Protocol in 1988 as Vice President,
Finance, and Chief Financial Officer. He was elected Secretary in 1990. Before
joining Protocol, Mr. Swanson was President and Chief Operating Officer of
Receptor Corporation, a biotechnology company, from 1987 to 1988, and Chief
Financial Officer of Scientific Computer Systems Corporation from 1984 to 1987.
Mr. Swanson has more than 10 years of public accounting experience with Price
Waterhouse and Arthur Young & Company.
JAMES P. FEE, JR. Mr. Fee joined Protocol in 1988 as Vice President,
Marketing and Sales. Mr. Fee spent the previous 14 years with Physio Control
Corporation, a manufacturer of cardiac defibrillators and subsidiary of Eli
Lilly and Company. From 1987 to November 1988, Mr. Fee was Vice President of
Marketing and from 1982 to 1987 Vice President of Sales and Service of Physio
Control Corporation.
LAWRENCE C. GRAY. Mr. Gray joined Protocol in 1991 as Director, Systems
Engineering, and became Vice President, Engineering in February 1995. Prior to
joining Protocol, Mr. Gray was Director of Engineering for Racal-Milgo
Information Systems.
CARL P. HOLLSTEIN, JR. Mr. Hollstein joined Protocol in 1993 as Vice
President, Manufacturing. Before joining Protocol, Mr. Hollstein was a
self-employed management consultant from 1991 to 1993. From 1978 to 1991, Mr.
Hollstein worked for Intel Corporation, holding a variety of positions,
including Engineering Manager; General Manager, Development Systems Operation;
and Director of Quality Systems Group.
ALLEN L. OYLER. Mr. Oyler joined Protocol in 1993 as Director, Human
Resources and was elected Vice President, Human Resources and Administration
effective January 1, 1994. Prior to joining Protocol, Mr. Oyler was Director,
Human Resources at SpaceLabs, Inc. from 1984 to 1993.
JAMES P. WELCH. Mr. Welch joined Protocol in 1991 as Vice President,
Engineering, and became Vice President, Quality Systems in July 1994. Prior to
joining Protocol, Mr. Welch served for ten years as director of hospital
clinical engineering, special assistant to the Office of Technology Affairs and
associate director of the anaesthesia bioengineering unit at Massachusetts
General Hospital, in Boston, Massachusetts.
58
<PAGE>
PROTOCOL EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
compensation of Protocol's Chief Executive Officer and each of the five other
most highly compensated executive officers of Protocol (the "named executive
officers") for the fiscal years ending December 31, 1993, 1994 and 1995 or such
period as the named executive officer has served as an executive officer of
Protocol.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION -----------------------
--------------------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS STOCK OPTIONS GRANTED
- ------------------------------------------------------- --------- ----------- --------- -----------------------
<S> <C> <C> <C> <C>
James B. Moon ......................................... 1995 $ 158,351 $ 40,500 --
President, Chief Executive Officer and Chairman of 1994 149,226 35,299 40,000
the Board of Directors 1993 140,229 33,694 25,000
Craig M. Swanson ...................................... 1995 125,651 32,284 --
Vice President, Finance, Chief Financial Officer and 1994 119,438 21,190 24,000
Secretary 1993 115,189 18,762 12,000
James P. Fee, Jr. ..................................... 1995 115,598 74,818 --
Vice President, Marketing and Sales 1994 109,381 51,439 24,000
1993 100,145 39,149 10,000
Lawrence C. Gray ...................................... 1995 115,309 25,485 10,000
Vice President, Engineering
Carl P. Hollstein, Jr. ................................ 1995 107,794 24,107 --
Vice President, Manufacturing 1994 99,516 17,655 --
1993 59,863 9,538 30,000
James P. Welch ........................................ 1995 107,794 24,107 --
Vice President, Quality Systems 1994 100,000 17,673 --
1993 100,112 16,315 6,000
</TABLE>
STOCK OPTIONS
The following table sets forth information concerning options granted to the
named executives during the year ended December 31, 1995 under Protocol's 1992
Stock Incentive Plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
NUMBER OF PRICE APPRECIATION FOR
SECURITIES PERCENT OF TOTAL OPTION TERM (2)
UNDERLYING OPTIONS OPTIONS GRANTED TO EXERCISE PRICE EXPIRATION ----------------------
NAME GRANTED (1) EMPLOYEES IN 1995 PER SHARE DATE 5% 10%
- ------------------------------ ------------------ --------------------- --------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
James B. Moon................. -- -- -- -- -- --
Craig M. Swanson.............. -- -- -- -- -- --
James P. Fee, Jr.............. -- -- -- -- -- --
Lawrence C. Gray.............. 10,000 6.8 $ 8.75 01/03/05 $ 55,028 $ 139,452
Carl P. Hollstein, Jr......... -- -- -- -- -- --
James P. Welch................ -- -- -- --
</TABLE>
- ------------------------
(1) Options granted in 1995 become exercisable starting 12 months after the
grant date, with one-quarter of the options becoming exercisable at that
time and with an additional one-quarter of the options becoming exercisable
on the second, third and fourth anniversary dates of the option grant,
respectively.
(2) The amounts shown are hypothetical gains based on the indicated assumed
rates of appreciation of the Common Stock compounded annually for a ten-year
period. Actual gains, if any, on stock
59
<PAGE>
option exercises are dependent on the future performance of the Common Stock
and overall stock market conditions. There can be no assurance that the
Common Stock will appreciate at any particular rate or at all in future
years.
OPTION EXERCISES AND HOLDINGS
The following table provides information, with respect to the named
executive officers, concerning the exercise of options during the last fiscal
year and unexercised options held as of December 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FY-END OPTIONS AT FY-END (2)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James B. Moon............................ -- -- 29,250 36,250 $ 93,063 $ 55,938
Craig M. Swanson......................... 25,000 $ 234,500 76,167 24,000 518,529 78,000
James P. Fee, Jr......................... 4,000 36,720 87,334 23,000 629,867 76,250
Lawrence C. Gray......................... 3,000 21,975 17,500 11,500 137,462 24,438
Carl P. Hollstein, Jr.................... -- -- 15,000 15,000 48,750 48,750
James P. Welch........................... -- -- 22,334 3,000 153,204 5,250
</TABLE>
- ------------------------
(1) The value realized is based on the difference between the market price at
the time of exercise of the options and the applicable exercise price.
(2) The value of unexercised in-the-money options is based on the difference
between $10.50, which was the closing price of the Common Stock on December
29, 1995 and the applicable exercise price.
DIRECTOR COMPENSATION
The members of Protocol's Board of Directors are reimbursed for actual
out-of-pocket and travel expenses incurred in attending Board meetings. In
addition, nonemployee members of the Board of Directors receive a $5,000 annual
retainer, $1,000 for each Board meeting attended and $500 for each meeting of a
committee of the Board attended. Under Protocol's 1993 Stock Option Plan for
Nonemployee Directors (the "1993 Plan"), each person who becomes a nonemployee
director automatically receives an initial option to purchase 3,000 shares of
Protocol's Common Stock immediately following the annual meeting at which such
director is first elected to the Board of Directors. Each nonemployee director
automatically receives additional annual grants of options to purchase 3,000
shares after each annual meeting of shareholders, provided the nonemployee
director continues to serve in that capacity. Each option expires ten years from
the date of its grant. Outstanding options will expire earlier if an optionee
terminates service as a director before the end of the ten year term. The
exercise price of options granted under the 1993 Plan may not be less than the
fair market value of a share of Common Stock on the date of grant of the option.
Options become fully vested and exercisable on the date of grant. Dr. Newbower
is precluded from participating in the 1993 Plan by the policies of his
employer, Massachusetts General Hospital. Accordingly, Dr. Newbower receives an
additional $2,000 for each Board meeting attended in lieu of receiving stock
options under the 1993 Plan. Subject to shareholder approval at the Protocol
Annual Meeting, the Board of Directors has approved certain amendments to the
1993 Plan that would increase the size of the option grants under the 1993 Plan.
See "APPROVAL OF AMENDMENTS TO PROTOCOL 1993 STOCK OPTION PLAN FOR NONEMPLOYEE
DIRECTORS."
COMPENSATION COMMITTEE REPORT
Under rules established by the SEC, Protocol is required to provide certain
data and information in regard to the compensation and benefits provided to
Protocol's Chief Executive Officer and the four other most highly compensated
executive officers. In fulfillment of this requirement, the Compensation
Committee has prepared the following report for inclusion in this Proxy
Statement.
60
<PAGE>
COMPENSATION PHILOSOPHY. The Compensation Committee of the Board of
Directors, which is responsible for reviewing and evaluating the compensation of
Protocol's executive officers, approves and recommends to the Board of Directors
compensation and award levels for executive officers of Protocol. With regard to
compensation actions affecting Mr. Moon, all of the nonemployee members of the
Board of Directors act as the approving body.
The executive compensation program of Protocol has been designed to:
- Support a pay for performance policy that is tied to corporate and
individual performance;
- Motivate executive officers to achieve strategic business initiatives and
reward them for their achievement;
- Provide compensation opportunities which are comparable to those offered
by similarly-sized medical and technology-based companies;
- Align the interest of executives with the long-term interest of
shareholders through award opportunities that can result in ownership of
Common Stock.
Currently, the executive compensation program is comprised of salary, cash
bonus opportunities and long-term incentive opportunities in the form of stock
options, along with benefits offered to all employees of Protocol. As an
executive's level of responsibility increases, a greater portion of his or her
potential total compensation opportunity is based on performance incentives and
less on salary and employee benefits, causing greater variability in the
individual's total compensation level from year-to-year.
SALARIES. The salaries of Protocol's executive officers for 1995 were
established effective June 25, 1995. In establishing the salaries of Protocol's
executive officers the Compensation Committee considered information about
salaries paid by companies of comparable size in the electronics and medical
electronics industry, individual performance, position, and internal
comparability considerations. The Compensation Committee did not assign specific
weights to any of these factors.
BONUS PLAN. Bonuses represent an opportunity for each executive officer to
earn additional cash compensation in an amount tied to a percentage of each such
officer's base salary. The percentages of base salary targeted for bonus payout
for executive officers for 1995 were established by the Compensation Committee.
Actual bonus payments to such executive officers depend upon the extent to which
Protocol achieves its profit plan for the year. Actual bonus payments to
executive officers (other than Mr. Fee) for 1995 ranged from 22% to 26% of base
salary, reflecting Protocol's partial achievement of its profit plan for 1995.
Mr. Fee's bonus plan for 1995 was based on Company sales and expense levels, and
such bonus payment amounted to approximately 65% of base salary for 1995.
STOCK PLANS. The long-term, performance-based compensation of executive
officers takes the form of option awards under Protocol's 1992 Stock Incentive
Plan (the "1992 Plan"), which is designed to align a significant portion of the
executive compensation program with long-term shareholder interests. The 1992
Plan permits the granting of several different types of stock-based awards. The
Compensation Committee believes that equity-based compensation ensures that
Protocol's executive officers have a continuing stake in the long-term success
of Protocol. All options granted by Protocol have been granted with an exercise
price equal to the market price of Protocol's Common Stock on the date of grant
and, accordingly, will only have value if Protocol's stock price increases. In
granting options under the 1992 Plan, the Compensation Committee generally takes
into account each executive's responsibilities, relative position in Protocol
and past grants.
CHIEF EXECUTIVE OFFICER COMPENSATION. Effective June 25, 1995, the Board of
Directors acting on the recommendation of the Compensation Committee, increased
Mr. Moon's salary from $150,000 to $165,000. In developing its recommendation as
to Mr. Moon's compensation, the Committee considered a number of factors,
including surveys and analyses of compensation levels in similarly-sized
companies in the same industry, analyses of compensation levels in similar
companies in Protocol's local geographic area and Protocol's improved
performance in revenue and net income in 1994 as
61
<PAGE>
compared to 1993. Mr. Moon received a bonus for 1995 of $40,500, which was paid
in accordance with the terms of a bonus plan established by the Compensation
Committee for Mr. Moon for 1995. The 1995 bonus plan for Mr. Moon established a
target bonus of 42% of his base salary. The plan also established a specific
objective target level for Protocol's 1995 net operating income before taxes
that had to be achieved for Mr. Moon to receive the target bonus. Mr. Moon's
actual bonus for 1995 amounted to approximately 26% of his base salary for 1995,
reflecting partial achievement of target levels of sales, net income and stock
price.
COMPENSATION COMMITTEE
William New, Jr.
Keith R. Larson
Frank E. Samuel, Jr.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1995, the members of the
Compensation Committee were Messrs. Larson and Samuel and Dr. New.
STOCK PERFORMANCE GRAPH
The following graph compares the monthly cumulative total returns for
Protocol, the Nasdaq Stock Market Index and an index of peer companies selected
by Protocol.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
NASDAQ
<S> <C> <C> <C>
Protocol Stock Market Self-Determined
Systems, Inc. (US Companies) Peer Group
3/24/92 100.000 100.000 100.000
3/31/92 93.617 97.473 96.782
4/30/92 72.340 93.292 93.049
5/29/92 46.808 94.500 102.804
6/30/92 42.553 90.795 96.849
7/31/92 55.319 94.006 100.791
8/31/92 53.191 91.144 91.521
9/30/92 59.574 94.542 97.424
10/30/92 54.255 98.268 104.093
11/30/92 56.383 106.086 116.019
12/31/92 65.957 108.988 111.888
1/29/93 76.596 113.125 97.301
2/26/93 63.830 108.921 81.591
3/31/93 59.574 112.071 74.994
4/30/93 48.936 107.272 68.700
5/28/93 59.574 113.883 74.530
6/30/93 67.021 114.214 73.619
7/30/93 76.596 114.317 72.560
8/31/93 81.915 120.238 73.196
9/30/93 89.362 123.806 72.210
10/29/93 87.234 126.588 75.437
11/30/93 85.106 122.792 75.491
12/31/93 91.489 126.208 74.041
1/31/94 78.723 130.041 81.321
2/28/94 91.489 128.841 84.049
3/31/94 85.106 120.917 76.828
4/29/94 63.830 119.340 80.259
5/31/94 66.090 119.632 82.130
6/30/94 53.191 116.260 79.936
7/29/94 61.702 117.638 78.872
8/31/94 70.213 125.139 82.484
9/30/94 76.596 124.800 83.405
10/31/94 78.723 127.278 92.274
11/30/94 78.723 123.059 95.770
12/30/94 76.596 123.417 94.615
1/31/95 84.043 124.116 96.429
2/28/95 74.468 130.681 97.245
3/31/95 92.553 134.549 102.069
4/28/95 80.851 138.793 102.824
5/31/95 79.787 142.382 110.600
6/30/95 85.106 153.944 113.041
7/31/95 92.553 165.248 126.520
8/31/95 100.532 168.586 129.622
9/30/95 97.872 172.474 127.130
10/31/95 85.106 171.491 142.024
11/30/95 88.298 175.502 144.611
12/29/95 89.362 174.562 146.523
1/31/96 106.383 175.364 151.462
2/29/96 123.404 182.059 158.173
3/31/96 143.617 182.838 151.982
4/30/96 165.957 197.881 121.431
</TABLE>
The total cumulative return on investment (change in stock price plus
reinvested dividends) for each of the periods for Protocol, the peer group and
the Nasdaq Stock Market Index is based on the stock price or index on March 24,
1992, the date of Protocol's initial public offering.
The above graph compares the performance of Protocol with that of the Nasdaq
Stock Market Index and a group of peer companies with the investment weighted on
market capitalization. Companies in the peer group are as follows: SpaceLabs
Medical, Inc., Datascope Corp., Criticare Systems, Inc., Nellcor Puritan Bennett
and Marquette Electronics, Inc.
62
<PAGE>
SECTION 16 REPORTS
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act") requires Protocol's directors and officers, and persons who own more than
10% of a registered class of Protocol's equity securities, to file initial
reports of ownership and reports of changes in ownership with the Securities and
Exchange Commission. Such persons also are required to furnish Protocol with
copies of all Section 16(a) reports they file.
Based solely on its review of the copies of such reports received by it with
respect to fiscal 1995, or written representations from certain reporting
persons, Protocol believes that all filing requirements applicable to its
directors, officers and persons who own more than 10% of a registered class of
Protocol's equity securities have been complied with for fiscal 1995.
63
<PAGE>
STOCK OWNED BY PROTOCOL MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of the Common Stock as of May 6, 1996, with respect to: (i) each person known by
Protocol to beneficially own more than 5% of the outstanding shares of Common
Stock, (ii) each of Protocol's continuing directors and nominees, (iii) each of
Protocol's named executive officers, and (iv) all directors and executive
officers as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK PERCENT OF COMMON
NAME AND BUSINESS ADDRESS BENEFICIALLY OWNED (1) STOCK OUTSTANDING
- --------------------------------------------------------------------- ----------------------- ---------------------
<S> <C> <C>
Wellington Management Company (2) ................................... 802,900 10.8
75 State Street
Boston, MA 02109
INVESCO PLC (3) ..................................................... 671,200 9.0
11 Devonshire Square
London EC2M 4YR
England
U.S. Bancorp (4) .................................................... 639,406 8.6
111 S.W. Fifth Avenue
Suite 1540
Portland, OR 97204
David F. Bolender ................................................... 3,000 *
Ronald S. Newbower .................................................. -- --
Frank E. Samuel, Jr. ................................................ 6,000 *
William New, Jr., M.D. .............................................. 33,000 *
Steven E. Wynne ..................................................... -- --
James B. Moon ....................................................... 90,777 1.2
Craig M. Swanson (5) ................................................ 114,096 1.5
James P. Fee, Jr. ................................................... 83,650 1.1
Carl P. Hollstein, Jr. .............................................. 25,949 *
Lawrence C. Gray .................................................... 20,500 *
James P. Welch ...................................................... 24,471 *
Executive Officers and Directors as a group (12 persons) . 410,324 5.3
</TABLE>
- ------------------------
*less than one percent
(1) Beneficial ownership is determined in accordance with rules of the SEC, and
includes voting power and investment power with respect to shares. Shares
issuable upon the exercise of outstanding stock options that are currently
exercisable or become exercisable within 60 days from March 15, 1996, are
considered outstanding for the purpose of calculating the percentage of
Common Stock owned by such person, but not for the purpose of calculating
the percentage of Common Stock owned by any other person. The number of
shares that are issuable upon the exercise of options that are currently
exercisable or exercisable within 60 days of May 6, 1996, is as follows: Mr.
Samuel -- 6,000; Dr. New -- 33,000; Mr. Moon -- 34,075; Mr. Swanson --
79,167; Mr. Fee -- 79,834; Mr. Gray -- 20,500; Mr. Hollstein -- 22,500; Mr.
Welch -- 23,834; and all directors and officers as a group -- 305,910. The
table does not include shares subject to options that will be granted to
Messrs. Bolender, New, Samuel and Wynne under the 1993 Stock Option Plan for
Nonemployee Directors immediately after the Protocol Annual Meeting.
64
<PAGE>
(2) This information as to beneficial ownership is based on a Schedule 13G filed
by Wellington Management Company ("WMC") with the Securities and Exchange
Commission on February 9, 1996. The Schedule 13G states that WMC, in its
capacity as investment advisor, may be deemed to be the beneficial owner of
802,900 shares of Protocol's Common Stock, which are owned by numerous
investment counseling clients. The Schedule 13G states that WMC has shared
voting power as to 189,000 shares and has shared dispositive power as to
802,900 shares of Common Stock.
(3) This information as to beneficial ownership is based on a Schedule 13G filed
by INVESCO PLC, INVESCO North American Group, Ltd., INVESCO, Inc., INVESCO
North American Holdings, Inc. and INVESCO Funds Group, Inc. with the
Securities and Exchange Commission on February 14, 1996. The Schedule 13G
states that the reporting persons have shared voting and dispositive power
over all of the 671,200 shares of Common Stock beneficially owned by them.
(4) This information as to beneficial ownership is based on information provided
to Protocol by U.S. Bancorp Capital Corp. on March 25, 1996 as to the number
of shares of Protocol Common Stock beneficially owned by U.S. Bancorp
Capital Corp. as of December 29, 1995.
(5) Includes 6,500 shares of Common Stock owned by trusts as to which Mr.
Swanson serves as trustee.
65
<PAGE>
PRYON MANAGEMENT
EXECUTIVE OFFICERS
The executive officers of Pryon are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- --- --------------------------------------------------------------
<S> <C> <C>
Daniel F. Carsten 48 President
William M. Hand 45 Vice President-Engineering
Robert A. Dalnodar 50 Vice President-Manufacturing
Robert H. Ricciardelli 48 Vice President-Research
Edward M. Kolasinski 37 Vice President, Chief Financial Officer and Secretary
</TABLE>
Information concerning these executive officers is set forth below.
DANIEL F. CARSTEN. Mr. Carsten is a co-founder of the Company and has
served as President since its founding in 1988. Prior to founding the Company,
Mr. Carsten was Vice President of Marketing and Sales of Bear Medical Systems
from 1982 until 1984. In late 1984, with other senior management of Bear Medical
Systems, Mr. Carsten left Bear Medical Systems and purchased Bird Products
Corporation from 3M in a leveraged buyout. Bird Products Corporation became a
market leader in low cost adult, infant and transport ventilators. Prior to
joining Bear Medical Systems, Mr. Carsten spent 12 years with General Electric
Medical Systems, the last four of which were as Marketing Manager for the
Patient Monitoring Division. Mr. Carsten brings over 25 years experience in the
medical device industry to the Company.
WILLIAM M. HAND. Mr. Hand joined Pryon in 1991 as Vice President of
Engineering. Prior to joining the Company, Mr. Hand spent three years as the
Director of Engineering of Medical Advances. Prior to joining Medical Advances,
Mr. Hand spent 10 years with General Electric Medical Systems, with his last
position as Manager of CT Engineering. Mr. Hand brings over 22 years experience
in the medical device industry to the Company.
ROBERT A. DALNODAR. Mr. Dalnodar joined the Company in 1991 as Vice
President of Manufacturing. Prior to joining the Company, Mr. Dalnodar served as
Manager of Production Engineering at Astronautics Corporation of America for
three years. Prior to that, Mr. Dalnodar held various manufacturing and
engineering positions for 17 years with Greenheck Fan Corporation.
ROBERT H. RICCIARDELLI. Mr. Ricciardelli is a co-founder of the Company and
has served as Vice President of Research since the Company's inception in 1988.
Prior to co-founding the Company, Mr. Ricciardelli was a principal in the
startup of Biochem International where he was responsible for the research and
manufacturing of biomedical sensors. Prior to that, Mr. Ricciardelli spent over
eight years with General Electric Medical System's Blood Gas Program in various
manufacturing and engineering management positions. Mr. Ricciardelli brings over
25 years experience in the medical device industry to the Company.
EDWARD M. KOLASINSKI. Mr. Kolasinski joined the Company in 1990 as Vice
President, Finance and Chief Financial Officer. He was elected Secretary in
1993. Prior to joining the Company, Mr. Kolasinski spent three years as
Controller at Rexnord Corporation. Prior to joining Rexnord, Mr. Kolasinski
spent seven years with Price Waterhouse LLP, the last two of which were as Audit
Manager.
DIRECTORS
The directors of Merger Sub at the Effective Time will become the directors
of the Surviving Company, except that pursuant to the Merger Agreement such
directors will promptly act to increase the number of directors and to appoint
Daniel F. Carsten to fill such vacancy. The directors of Merger Sub are James B.
Moon and Craig M. Swanson.
66
<PAGE>
PRYON EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides information concerning the compensation of
Pryon's Chief Executive Officer and each of the other executive officers of
Pryon (the "named executive officers") for the fiscal year ended December 31,
1995.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION -------------------------
--------------------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS STOCK OPTIONS GRANTED
- -------------------------------------------------------- --------- ----------- --------- -------------------------
<S> <C> <C> <C> <C>
Daniel F. Carsten....................................... 1995 $ 128,832 $ 45,800 --
President and 1994 127,001 -- --
Chief Executive Officer 1993 120,209 -- --
Edward M. Kolasinski.................................... 1995 79,370 25,000 1,000
Vice President Finance, Chief 1994 81,712 -- 1,000
Financial Officer and Secretary 1993 73,979 -- --
William M. Hand......................................... 1995 95,452 27,200 800
Vice President, 1994 91,503 -- 1,000
Engineering 1993 85,344 -- --
Robert A. Dalnodar...................................... 1995 78,524 24,500 1,050
Vice President, 1994 71,310 -- 1,250
Manufacturing 1993 73,485 -- 200
</TABLE>
STOCK OPTIONS
The following table sets forth information concerning options granted to
Pryon named executive officers during the year ended December 31, 1995 under
Pryon's 1991 and 1994 Stock Option Plans.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING PERCENT OF TOTAL
OPTIONS OPTIONS GRANTED TO EXERCISE PRICE EXPIRATION
NAME GRANTED (1) EMPLOYEES IN 1995 PER SHARE (2) DATE
- ----------------------------------------------------- ------------- --------------------- --------------- ----------
<S> <C> <C> <C> <C>
Daniel F. Carsten.................................... -- -- -- --
Edward M. Kolasinski................................. 1,000 16.0% $ 8.00 10/01/05
William M. Hand...................................... 800 12.8 8.00 10/01/05
Robert A. Dalnodar................................... 1,050 16.8 8.00 10/01/05
</TABLE>
- ------------------------
(1) Options granted in 1995 vest March 31, 1996.
(2) On or before the Closing Date, all outstanding options to purchase shares of
Pryon Common Stock issued pursuant to the Pryon Corporation 1991 Stock
Option Plan and the Pryon Corporation 1994 Stock Option Plan, as applicable
("Existing Option') whether or not vested or exercisable, shall be replaced
by an option (a "Replacement Option") to acquire, on the same terms and
conditions as were applicable under the Existing Option, a number of shares
of Protocol Common Stock equal to the product of (a) the Common Stock
Exchange Ratio as determined in accordance with the Agreement and Plan of
Merger and (b) the number of shares of Pryon Common Stock which the holder
would have been entitled to receive upon exercise of the Existing Option
(whether or not the Existing Option would then have been exercisable). The
price per share under the Replacement Option shall be equal to the aggregate
exercise price for the shares subject to the Existing Option divided by the
number of shares of Protocol Common Stock deemed to be purchasable pursuant
to the Replacement Option. The potential realizable value on these options
is reflected in the table below.
67
<PAGE>
OPTION EXERCISE AND HOLDINGS
The following table provides information, with respect to the named
executive officers, concerning the exercise of options during the last fiscal
year and unexercised options held as of December 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE- MONEY OPTIONS AT
OPTION AT YEAR END YEAR END (1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Daniel F. Carsten......................................... 2,700 -- $ 352,134 $ --
Edward M. Kolasinski...................................... 2,300 1,000 297,426 124,620
William M. Hand........................................... 2,100 1,200 271,302 151,944
Robert A. Dalnodar........................................ 1,965 1,335 252,893 167,702
</TABLE>
- ------------------------
(1) The value of unexercised in-the-money options is based on the difference
between $132.62, which is the implicit value of Pryon Common Stock on
February 20, 1996 (the date of the announcement of the definitive agreement
to be acquired by Protocol) and the applicable exercise price.
DIRECTOR COMPENSATION
The members of Pryon's Board of Directors are reimbursed for out-of-pocket
and travel expenses incurred in attending Board meetings. In addition,
nonemployee members of the Board of Directors receive annual compensation in an
amount equal to 5% of the base compensation of the Chief Executive Officer of
Pryon. Two members of the Board have waived this compensation.
CERTAIN TRANSACTIONS AND RELATIONSHIPS WITH PRYON
Pryon is indebted to each of Daniel F. Carsten, Robert H. Ricciardelli and
Robert M. Sommer, which indebtedness is evidenced by a Pryon Promissory Note,
each dated July 1, 1995, and each in the principal amount of $75,429.00 (the
"Promissory Notes"), plus any accrued and unpaid interest. The indebtedness
evidenced by the Promissory Notes is subordinate to certain indebtedness of
Pryon to its senior bank lender. Pursuant to the Merger Agreement, Protocol has
committed at or within ten days after the Closing to cause Pryon to pay in full
each of the Promissory Notes.
68
<PAGE>
STOCK OWNED BY PRYON MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of Pryon Common Stock as of June 3, 1996 with respect to: (i) each person known
by Pryon to beneficially own more than 5% of the outstanding shares of Pryon
Common Stock, (ii) each of the Pryon's directors, (iii) each of Pryon's named
executive officers, and (iv) all Pryon directors and officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OF COMMON STOCK COMMON STOCK
NAME AND BUSINESS ADDRESS BENEFICIALLY OWNED (1) OUTSTANDING
- ---------------------------------------------------------------------- ----------------------- -------------------
<S> <C> <C>
Greylock Capital Limited Partnership (2) ............................. 56,975 24.4%
Greylock Limited Partnership
Howard E. Cox, Jr.
One Federal Street
Boston, MA 02110
Frontenac Venture V Limited Partnership (3) .......................... 40,861 17.5
James E. Crawford, III
135 South La Salle Street
Suite 3800
Chicago, IL 60603
Baird Capital Partners' Limited Partnership (4) ...................... 18,573 8.0
RWBCO II Partners' Limited Partnership
777 East Wisconsin Avenue
Suite 3350
Milwaukee, WI 53202
Venture Capital Fund Limited Partnership (5) ......................... 12,119 5.2
David J. Lubar
777 East Wisconsin Avenue
Milwaukee, WI 53202
Robert M. Sommer (6).................................................. 19,661 8.4
Felix T. Troilo (7)................................................... 6,842 2.9
Daniel F. Carsten..................................................... 24,650 10.6
Robert H. Ricciardelli................................................ 20,490 8.8
William M. Hand....................................................... 3,800 1.6
Robert A. Dalnodar.................................................... 3,440 1.5
Edward M. Kolasinski.................................................. 3,300 1.4
Executive Officers and Directors as a Group (6 Persons)(8)............ 62,522 26.8
</TABLE>
- ------------------------
(1) Beneficial ownership is determined in accordance with rules of the SEC, and
includes voting power and investment power with respect to shares. Pryon's
Series A Preferred Stock and Series B Preferred Stock are Common Stock
equivalents with respect to voting and investment power and have been
included in the calculation as if converted on a one-to-one basis. Shares
issuable upon the exercise of outstanding stock options that are currently
exercisable or become exercisable within 60 days from June 3, 1996 are
considered outstanding for the purpose of calculating the percentage of
Common Stock owned by such persons, but not for the purpose of calculating
the percentage of Common Stock owned by any other person. The number of
shares that are issuable upon the exercise of options that are currently
exercisable or exercisable within
69
<PAGE>
60 days of June 3, 1996 is as follows: Mr. Carsten -- 2,700; Mr.
Ricciardelli -- 500; Mr. Hand -- 3,300; Mr. Dalnodar -- 3,140; Mr.
Kolasinski 3,300; and all directors and officers as a group -- 12,740.
(2) Greylock Capital Limited Partnership and Greylock Limited Partnership
combined ownership in Pryon is represented by 40,302 shares of Pryon Series
A Preferred Stock and 16,673 shares of Pryon Series B Preferred Stock. Mr.
Cox, a director of Pryon, is a general partner of Greylock Capital Limited
Partnership and Greylock Limited Partnership and shares voting and
investment power with respect to such shares. However, he disclaims
beneficial ownership of such shares except as to his proportionate
partnership interest therein.
(3) Frontenac Venture V Limited Partnership ownership in Pryon is represented by
40,681 shares of Pryon Series B Preferred Stock. Mr. Crawford, a director of
Pryon, is a general partner of the general partner of Frontenac Venture V
Limited. Partnership and may be deemed to be the beneficial owner of the
Pryon Stock owned by the partnership.
(4) Baird Capital Partners' Limited Partnership and RWBCO II Partners' Limited
Partnership combined ownership in Pryon is represented by 18,573 shares of
Pryon Series B Preferred Stock.
(5) Venture Capital Fund Limited Partnership ownership in Pryon is represented
by 9,024 shares of Pryon Series A Preferred Stock and 3,095 shares of Pryon
Series B Preferred Stock. Mr. Lubar, a director of Pryon, is the President
of Lubar & Co., the general partner of Venture Capital Fund Limited
Partnership, and may be deemed to be the beneficial owner of the Pryon Stock
owned by the partnership.
(6) Mr. Sommer's ownership in Pryon is represented by 752 shares of Pryon Series
A Preferred Stock, 18,409 shares of Common Stock and 500 shares issuable
upon exercise of options.
(7) Mr. Troilo's ownership in Pryon is represented by 6,016 shares of Pryon
Series A Preferred Stock and 826 shares of Pryon Series B Preferred Stock.
(8) Executive officers of Pryon as a group own 1,411 shares of Pryon Series A
Preferred Stock.
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ELECTION OF PROTOCOL DIRECTORS
At the Protocol Annual Meeting, two directors will be elected, each for a
three-year term. Unless otherwise specified on the proxy, it is the intention of
the persons named in the proxy to vote the shares represented by each properly
executed proxy for the election as directors of the persons named below as
nominees. The Board of Directors believes that the nominees will stand for
election and will serve if elected as directors. However, if either of the
persons nominated by the Board of Directors fails to stand for election or is
unable to accept election, the proxies will be voted for the election of such
other person as the Board of Directors may recommend.
Under Protocol's bylaws, the directors are divided into three classes
composed of two directors each. The term of office of only one class of
directors expires in each year, and their successors are elected for terms of
three years and until their successors are elected and qualified. There is no
cumulative voting for election of directors.
If the Merger is consummated, the Protocol Board will increase the size of
the Protocol Board of Directors from six to seven members and appoint Daniel F.
Carsten to the Protocol Board for a term expiring at the 1997 Annual Meeting of
Protocol Shareholders. See "PRYON MANAGEMENT" for certain information about Mr.
Carsten.
INFORMATION AS TO NOMINEES AND CONTINUING DIRECTORS. The following table
sets forth the names of the Board of Directors' nominees for election as a
director and those directors who will continue to serve after the Protocol
Annual Meeting. Also set forth is certain other information with respect to each
such person's age at April 1, 1996, principal occupation or employment during
the past five years, the periods during which he has served as a director of
Protocol and positions currently held with Protocol.
<TABLE>
<CAPTION>
DIRECTOR EXPIRATION
AGE SINCE OF TERM POSITIONS HELD WITH PROTOCOL
--- ----------- ----------- ----------------------------
<S> <C> <C> <C> <C>
NOMINEES:
Steven E. Wynne...................................... 44 -- 1999 --
David F. Bolender.................................... 63 -- 1999 --
CONTINUING DIRECTORS:
Ronald S. Newbower, Ph.D............................. 52 1994 1997 Director
Frank E. Samuel, Jr.................................. 56 1994 1997 Director
William New, Jr., M.D................................ 53 1992 1998 Director
James B. Moon........................................ 50 1987 1998 Chairman of the Board,
President, Chief Executive
Officer and Director
</TABLE>
STEVEN E. WYNNE. Mr. Wynne has served as President and Chief Executive
Officer of adidas America since 1995. Mr. Wynne was a partner in the law firm of
Ater Wynne Hewitt Dodson & Skerritt, Protocol's legal counsel, from 1984 to
1996.
DAVID F. BOLENDER. Mr. Bolender is Chairman of the Board of Directors of
Electro Scientific Industries, Inc. and has served in that capacity since 1992.
From January 1989 to December 1991 Mr. Bolender served as President of the
Electric Operations Group of PacifiCorp. Mr. Bolender serves on the Board of
Directors of U.S. Bank of Oregon.
RONALD S. NEWBOWER, PH.D. Dr. Newbower was elected to the Board of
Directors in 1994. Dr. Newbower has been Senior Vice President, Research and
Technology, since 1994 and was Vice President for Research and Technology
Affairs of the Massachusetts General Hospital ("MGH") and Associate General
Director for Research and Technology Affairs of MGH from 1990 to 1994. Dr.
Newbower has held appointments at MGH since 1973, where he has served as Deputy
Director of the Division of Research Affairs, Director of Technology Development
of the Office of Technology Affairs, and Director of the Department of
Biomedical Engineering. He is currently also Associate
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Professor of Anaesthesia, Harvard-MIT Division of Health Sciences and
Technology, Associate Professor of Anaesthesia, Harvard Medical School, and
Lecturer in Electrical Engineering, Massachusetts Institute of Technology.
FRANK E. SAMUEL, JR. Mr. Samuel was elected to the Board of Directors in
1994. Mr. Samuel has been President of Edison Biotechnology Center, an economic
development organization for the biomedical technology field in the state of
Ohio, since February 1995. Prior to that date, Mr. Samuel was an independent
consultant engaged in the business of advising senior management on governmental
policy and regulation of health care and medical technology since 1990. Mr.
Samuel was President of the Health Industry Manufacturers Association ("HIMA"),
a national trade association representing medical technology manufacturers, from
1984 to 1989. Mr. Samuel also serves on the Boards of Directors of STERIS
Corporation and Life Technologies, Inc.
WILLIAM NEW, JR., M.D. Dr. New was elected to the Board of Directors in
1992. Dr. New was a founder of Nellcor, a manufacturer of electronic patient
monitoring and measurement instruments. He served as a member of the Board of
Directors of Nellcor from 1981 to 1989, and as Chairman from 1981 to 1988. Since
August 1991, Dr. New has been Chairman of the Board of Directors of Natus
Medical, Inc., which designs and manufactures infant hearing assessment
products. Since August 1991, Dr. New also has served as Chief Executive Officer
of the Novent Group, a medical industry consulting firm.
JAMES B. MOON. Mr. Moon joined Protocol in September 1986 and became its
President and Chief Executive Officer in 1987. He also serves as Chairman of the
Board of Directors. Mr. Moon came to Protocol from SpaceLabs, Inc., a medical
instrument manufacturer, where he was director of systems architecture for five
years. Previously, he was an engineering manager for Intel Corporation. Mr. Moon
also serves on the Board of Directors of OrCAD, Inc.
BOARD OF DIRECTORS COMMITTEES AND NOMINATIONS BY SHAREHOLDERS. The Board of
Directors acts as a nominating committee for selecting nominees for election as
directors. Protocol's bylaws also permit shareholders to make nominations for
the election of directors, if such nominations are made pursuant to timely
notice in writing to Protocol's Secretary. To be timely, notice must be
delivered to, or mailed to and received at, the principal executive offices of
Protocol not less than 60 days nor more than 90 days prior to the date of the
meeting, provided that at least 60 days' notice or prior public disclosure of
the date of the meeting is given or made to shareholders. If less than 60 days'
notice or prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder to be timely must be received by
Protocol not later than the close of business on the tenth day following the
date on which such notice of the date of the meeting was mailed or such public
disclosure was made. A shareholder's notice of nomination must also set forth
certain information specified in Article III, Section 3.15 of Protocol's bylaws
concerning each person the shareholder proposes to nominate for election and the
nominating shareholder.
The Board of Directors has appointed a standing Audit Committee which,
during the fiscal year ended December 31, 1995, conducted four meetings. The
members of the Audit Committee currently are Messrs. Larson and Dishlip. The
Audit Committee reviews the scope of the independent annual audit, the
independent public accountants' letter to the Board of Directors concerning the
effectiveness of Protocol's internal financial and accounting controls and the
Board of Directors' response to that letter, if deemed necessary. The Board of
Directors also has appointed a Compensation Committee which reviews executive
compensation and makes recommendations to the full Board regarding changes in
compensation, and also administers Protocol's stock option plans. During the
fiscal year ended December 31, 1995, the Compensation Committee held one
meeting. The members of the Compensation Committee currently are Messrs. Larson,
Samuel and Dr. New.
During 1995 Protocol's Board of Directors held six meetings. Each incumbent
director attended more than 75% of the aggregate of the total number of meetings
held by the Board of Directors and the total number of meetings held by all
committees of the Board on which he served during the period that he served.
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See "Management -- Executive Compensation" for certain information regarding
compensation of directors.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
ELECTION OF ITS NOMINEES FOR DIRECTOR. If a quorum is present, Protocol's bylaws
provide that directors are elected by a plurality of the votes cast by the
shares entitled to vote. Abstentions and broker non-votes are counted for
purposes of determining whether a quorum exists at the Protocol Annual Meeting,
but are not counted and have no effect on the determination of whether a
plurality exists with respect to a given nominee.
APPROVAL OF AMENDMENT TO PROTOCOL 1992 STOCK INCENTIVE PLAN
A total of 875,000 shares of Common Stock have been reserved for issuance
under Protocol's 1992 Stock Incentive Plan (the "1992 Plan"). As of May 6, 1996,
only 121,276 shares remained available for grant under the 1992 Plan. The Board
of Directors believes that the availability of stock incentives is an important
factor in Protocol's ability to attract and retain experienced and competent
employees and to provide an incentive to them to exert their best efforts on
behalf of Protocol. The Board of Directors believes that additional shares will
be needed under the 1992 Plan to provide appropriate incentives. Accordingly, on
March 7, 1996, the Board of Directors approved an amendment to the 1992 Plan,
subject to shareholder approval, to reserve an additional 461,422 shares of
Common Stock under the 1992 Plan, thereby increasing the total number of shares
reserved for issuance under the Plan from 875,000 shares to 1,336,422 shares.
Protocol has utilized stock option grants broadly to recognize key
performers at every level throughout the organization. Grants have also been
used to provide a link between employees and the performance of Protocol.
Protocol believes it is critical in developing the organization to provide an
opportunity for employees to be equity holders and to understand the part their
contributions can have in the success of the organization. Of the proposed
461,422 additional shares, approximately 211,422 shares (subject to adjustment
based upon the exchange ratio determined according to the Merger Agreement) are
to be used for the replacement of outstanding Pryon employee stock options, and
the balance, approximately 250,000 shares, is targeted for recruitment of
employees and future incentives for employees of Protocol and Pryon following
the Merger. The shares specified here for Pryon option replacements are included
in the additional shares being requested as part of the Merger Agreement.
The following is a summary of the basic terms and provisions of the 1992
Plan.
The 1992 Plan, which was approved by Protocol's shareholders on January 21,
1992, provides for grants of both "incentive stock options" within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and
"non-qualified stock options" which are not qualified for treatment under
Section 422 of the Code, and for direct stock grants and sales to employees or
consultants of Protocol. The purposes of the 1992 Plan are to attract and retain
the best available personnel for positions of substantial responsibility, to
provide additional incentives to the employees and consultants of Protocol and
to promote business. The 1992 Plan is administered by the Compensation Committee
of the Board of Directors.
The term of each option granted under the 1992 Plan will be ten years from
the date of grant, or such shorter period as may be established at the time of
the grant. An option granted under the 1992 Plan may be exercised at such times
and under such conditions as determined by the Compensation Committee. If a
person who has been granted an option ceases to be an employee or consultant of
Protocol, such person may exercise that option only during the three month
period after the date of termination, and only to the extent that the option was
exercisable on the date of termination. No option granted under the 1992 Plan is
transferable other than at death, and each option is exercisable during the life
of the optionee only by the optionee. In the event of the death of a person who
has
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<PAGE>
received an option, the option generally may be exercised by a person who
acquired the option by bequest or inheritance during the twelve month period
after the date of death to the extent that such option was exercisable at the
date of death.
The exercise price of options granted under the 1992 Plan may not be less
than the fair market value of a share of Common Stock on the date of grant of
the option. The consideration to be paid upon exercise of an option, including
the method of payment, will be determined by the Compensation Committee and may
consist entirely of cash, check, promissory note, shares of Common Stock or any
combination of such methods of payment as permitted by the Compensation
Committee.
Certain options authorized to be granted under the 1992 Plan are intended to
qualify as incentive stock options for federal income tax purposes. Under
federal income tax law currently in effect, the optionee will recognize no
income upon grant or upon a proper exercise of an incentive stock option. If an
employee exercises an incentive stock option and does not dispose of any of the
option shares within two years following the date of grant and within one year
following the date of exercise, then any gain realized upon subsequent
disposition of the shares will be treated as income from the sale or exchange of
a capital asset. If an employee disposes of shares acquired upon exercise of an
incentive stock option before the expiration of either the one-year holding
period or the two-year waiting period, any amount realized will be taxable as
ordinary compensation income in the year of such disqualifying disposition to
the extent that the lesser of the fair market value of the shares on the
exercise date or the fair market value of the shares on the date of disposition
exceeds the exercise price. Protocol will not be allowed any deduction for
federal income tax purposes at either the time of the grant or exercise of an
incentive stock option. Upon any disqualifying disposition by an employee,
Protocol will be entitled to a deduction to the extent the employee realized
ordinary income.
Certain options authorized to be granted under the 1992 Plan will be treated
as non-qualified stock options for federal income tax purposes. Under federal
income tax law presently in effect, no income is realized by the grantee of a
non-qualified stock option pursuant to the 1992 Plan until the option is
exercised. At the time of exercise of a non-qualified stock option, the optionee
will realize ordinary compensation income, and Protocol will be entitled to a
deduction, in the amount by which the market value of the shares subject to the
option at the time of exercise exceeds the exercise price. Protocol's deduction
is conditioned upon withholding on the income amount. Upon the sale of shares
acquired upon exercise of a non-qualified stock option, the excess of the amount
realized from the sale over the market value of the shares on the date of
exercise will be taxable.
The 1992 Plan will continue in effect until January 1, 2002, unless earlier
terminated by the Board of Directors, but such termination will not affect the
terms of any options outstanding at that time. The Board of Directors may amend,
terminate or suspend the 1992 Plan at any time, provided that no amendment
regarding amount, price or timing of the grants may be made more than once every
six months other than to comport with changes in certain Securities Exchange Act
and Internal Revenue Code requirements. Amendments that would materially
increase the number of shares that may be issued, materially modify the
requirements as to eligibility for Plan participation, or materially increase
the benefits to Plan participants must be approved by shareholders.
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<PAGE>
Set forth below is information as to the number of stock options that have
been granted under the 1992 Plan to the persons and groups identified in the
table as of May 6, 1996. The closing price of the Common Stock on the Nasdaq
Stock Market was $24.88 on May 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
NAME AND PRINCIPAL POSITION GRANTED
- ------------------------------------------------------------------------------------ ------------------
<S> <C>
James B. Moon ...................................................................... 90,000
President, Chief Executive Officer and
Chairman of the Board
Craig M. Swanson ................................................................... 48,000
Vice President, Finance, Chief Financial Officer
and Secretary
James P. Fee, Jr. .................................................................. 46,000
Vice President, Marketing and Sales
Lawrence C. Gray, .................................................................. 22,000
Vice President, Engineering
Carl P. Hollstein, Jr., ............................................................ 40,000
Vice President, Manufacturing
James P. Welch ..................................................................... 21,000
Vice President, Quality Systems
Executive Officers as a group (7 persons)........................................... 301,000
Directors (other than Executive Officers)
as a group (5 persons)............................................................. 20,000
Employees (other than Executive Officers)
as a group (219 persons)........................................................... 488,333
</TABLE>
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL. The
proposal must be approved by the affirmative vote of holders of a majority of
the outstanding shares of Protocol Common Stock. Abstentions and broker
non-votes are treated as "no" votes in determining whether the proposal is
approved. The proxies will be voted for or against the proposal, or as an
abstention, in accordance with the instructions specified on the proxy form. If
no instructions are given, proxies will be voted for approval of the amendment
to the 1992 Plan.
APPROVAL OF AMENDMENTS TO PROTOCOL 1993 STOCK OPTION PLAN
FOR NONEMPLOYEE DIRECTORS
The Board of Directors has approved, and recommends shareholder adoption of,
amendments to Protocol's 1993 Plan that would (i) increase the size of the stock
option granted to a nonemployee director upon such director's first election or
appointment to the Board of Directors from 3,000 shares to 10,000 shares, and
provide for vesting of the option over a three-year period and (ii) increase
from 30,000 to 60,000 the maximum number of shares that may be covered by
options granted under the 1993 Plan in any fiscal year. The purpose of the 1993
Plan is to promote the interests of Protocol and its shareholders by
strengthening Protocol's ability to attract and retain experienced and
knowledgeable nonemployee directors and to encourage them to acquire an
increased proprietary interest in Protocol. The Board believes that the proposed
amendments will further strengthen Protocol's ability to attract and retain
experienced and knowledgeable nonemployee directors. The following is a summary
of the Plan and should be read together with the full text of the Plan.
The 1993 Plan is a formula-based stock option plan that is administered by
the Compensation Committee of the Board of Directors. Only nonemployee members
of the Board of Directors are eligible to participate in the 1993 Plan. In
general, immediately following the annual meeting of shareholders at which such
director is first elected to the Board of Directors each nonemployee
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<PAGE>
member of the Board of Directors receives an initial option to purchase 3,000
shares of Protocol Common Stock which is immediately exercisable (each, an
"Initial Grant"). Under the proposed amendments, this would be increased to
10,000 shares vesting over a three-year period. Thereafter, each director who
has already received an Initial Grant receives an immediately exercisable option
to purchase an additional 3,000 shares of Protocol Common Stock annually after
each annual meeting of shareholders. Each nonemployee director who serves on the
Board of Directors before receiving an Initial Grant also receives at the time
of such director's Initial Grant an option in an amount equal to 250 shares for
each month such director served on the Board of Directors before the Initial
Grant.
Each option expires ten years from the date of its grant. Outstanding
options will expire earlier if an optionee terminates service as a director
before the end of the ten year term. If an optionee terminates service as a
director for any reason other than retirement, total disability or death, the
option will expire automatically on the date of termination. If an optionee dies
or terminates service due to retirement or disability, the options then
outstanding will expire one year after the date of death or termination or on
the stated grant expiration date, whichever is earlier. Options are not
assignable during the lifetime of the optionee except by a qualified domestic
relations order.
The exercise price of options granted under the 1993 Plan may not be less
than the fair market value of a share of Common Stock on the date of grant of
the option. Payment of the option exercise price may be in cash or, to the
extent permitted by the Compensation Committee, by delivery of previously owned
Protocol stock having a fair market value equal to the option exercise price or
a combination of cash and stock. The Compensation Committee may also permit
certain "cashless" option exercises by allowing optionees to surrender portions
of their options in payment for the stock to be received.
The number of options which may be granted under the 1993 Plan may not
exceed 30,000 in any year, subject to stock splits and similar events. A total
of 340,000 shares of Common Stock have been reserved for issuance upon exercise
of stock options granted under the 1993 Plan. Options that are forfeited or
terminated will again be available for grant. If the amendments to the 1993 Plan
are approved at the Protocol Annual Meeting, options to purchase an aggregate of
26,000 shares of Common Stock will be granted to Protocol's five nonemployee
directors immediately after the Protocol Annual Meeting. If the amendments to
the 1993 Plan are not approved at the Protocol Annual Meeting, options to
purchase an aggregate of 12,000 shares of Protocol Common Stock will be granted
to Protocol's five nonemployee directors immediately after the Protocol Annual
Meeting. The closing price of Protocol Common Stock on the Nasdaq Stock Market
was $24.88 on May 31, 1996.
All options granted under the Plan are non-statutory and are not intended to
qualify under Section 422 of the Code. No gain will be recognized by the
optionee at the time of a grant. Generally, at exercise, ordinary income will be
recognized by the optionee in an amount equal to the difference between the
option exercise price and the fair market value of the shares on the date of
exercise, and Protocol will receive a tax deduction for the same amount. At the
time the optionee disposes of the shares, the appreciation or depreciation of
the shares since the option was exercised will be treated a either a short- or
long-term capital gain or loss, depending on how long the shares have been held.
The Plan continues in effect until terminated by the Board of Directors or
by shareholders, but such termination will not affect the terms of any options
outstanding at that time. The Board of Directors may amend, terminate or suspend
the 1993 Plan at any time, provided that no amendment regarding amount, price or
timing of the grants may be made more than once every six months other than to
comport with changes in certain Securities Exchange Act and Internal Revenue
Code requirements. Amendments that would materially increase the number of
shares that may be issued, materially modify the requirements as to eligibility
for Plan participation, or materially increase the benefits to Plan participants
must be approved by shareholders.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL. The
proposal must be approved by the holders of at least a majority of the of the
shares of Protocol Common Stock present in person or by proxy at the Protocol
Annual Meeting. Abstentions and broker non-votes are treated as
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<PAGE>
"no" votes in determining whether the proposal is approved. The proxies will be
voted for or against the proposal, or as an abstention, in accordance with the
instructions specified on the proxy form. If no instructions are given, proxies
will be voted for approval of the amendments to the 1993 Plan.
RATIFICATION OF APPOINTMENT OF PROTOCOL INDEPENDENT AUDITORS
The Board of Directors has appointed KPMG Peat Marwick LLP to act as
independent auditors for Protocol for the fiscal year ending December 31, 1996,
subject to ratification of such appointment by Protocol's shareholders.
Unless otherwise indicated, properly executed proxies will be voted in favor
of ratifying the appointment of KPMG Peat Marwick LLP to audit the books and
accounts of Protocol for the fiscal year ending December 31, 1996.
A representative of KPMG Peat Marwick LLP is expected to be present at the
Protocol Annual Meeting and will be given an opportunity to make a statement if
he or she desires to do so and will be available to respond to appropriate
questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL.
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DESCRIPTION OF PROTOCOL CAPITAL STOCK
The authorized capital stock of Protocol consists of 30,000,000 shares of
Common Stock, par value $0.01 per share, and 10,000,000 shares of Preferred
Stock, par value $0.01 per share. The following summary description of
Protocol's capital stock does not purport to be complete and is qualified in its
entirety by the provisions of Protocol's Fourth Restated Articles of
Incorporation and Restated Bylaws, which have been filed as exhibits to the
Registration Statement, of which this Prospectus is a part.
Protocol's charter documents provide for staggered terms for directors,
allow the removal of directors only for cause and authorize the issuance of
Preferred Stock without shareholder approval. These provisions, together with
Protocol's Shareholder Rights Plan, may have the effect of lengthening the time
required for a person to acquire control of Protocol through a proxy contest or
the election of a majority of the Board of Directors and may deter any potential
unfriendly offers or other efforts to obtain control of Protocol. This could
deprive Protocol's shareholders of opportunities to realize a premium for
Protocol's Common Stock and could make removal of incumbent directors more
difficult. At the same time, these provisions may have the effect of inducing
any persons seeking control of Protocol to negotiate terms acceptable to the
Board of Directors.
COMMON STOCK
As of May 6, 1996, 7,443,223 shares of Protocol Common Stock were
outstanding and held by approximately 4,000 shareholders. Holders of Protocol
Common Stock are entitled to receive such dividends as may from time to time be
declared by Protocol's Board of Directors out of funds legally available
therefor. Holders of Protocol's Common Stock are entitled to one vote per share
on all matters on which shareholders are entitled to vote and do not have any
cumulative voting rights. Holders of Protocol Common Stock have no preemptive,
conversion, redemption or sinking fund rights. In the event of a liquidation,
dissolution or winding up of Protocol, holders of Protocol Common Stock are
entitled to share equally and ratably in the assets of Protocol, if any,
remaining after the payment of all of Protocol's debts and liabilities and the
liquidation preference of any outstanding class or series of Preferred Stock.
The outstanding shares of Protocol Common Stock are fully paid and
nonassessable. The rights, preferences and privileges of holders of Protocol
Common Stock are subject to any series of Preferred Stock which Protocol may
issue in the future as described below.
PREFERRED STOCK
Protocol is authorized to issue up to 10,000,000 shares of Preferred Stock.
The Board of Directors has the authority to issue Preferred Stock in one or more
series and to fix the number of shares constituting any such series, the voting
powers, designations, preferences and relative, participating, optional or other
special rights and qualifications, limitations or restrictions thereof,
including the dividend rights, dividend rate, terms of redemption, redemption
price or prices, conversion and voting rights and liquidation preferences of the
shares constituting any series, without any further vote or action by the
shareholder of Protocol. The issuance of Preferred Stock by the Board of
Directors could adversely affect the rights of holders of Protocol Common Stock.
For example, issuance of Preferred Stock could result in a series of securities
outstanding that would have preference over the Protocol Common Stock with
respect to dividends and in liquidation and that could (upon conversion or
otherwise) enjoy all of the rights appurtenant to the Protocol Common Stock.
The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by others to obtain control of
Protocol through merger, tender offer, proxy or consent solicitation or
otherwise by making such attempts more difficult to achieve or more costly. The
Board of Directors may issue Preferred Stock without shareholder approval and
with voting rights that could adversely affect the voting power of holders of
Protocol Common Stock. Other than as provided in the Protocol Rights Agreement,
there are no agreements or understandings for the issuance of Preferred Stock,
and the Board of Directors has no present intention of issuing any shares of
Preferred Stock. See "Description of Protocol Capital Stock -- Shareholder
Rights Plan."
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OREGON CONTROL SHARE AND BUSINESS COMBINATION STATUTES
Protocol is subject to the Oregon Control Share Act (Oregon Business
Corporation Act ("OBCA") SectionSection60.801-60.816) (the "Control Share Act").
The Control Share Act generally provides that a person (the "Acquiring Person")
who acquires voting stock of an Oregon corporation in a transaction which
results in such Acquiring Person holding more than 20%, 33% or 50% of the total
voting power of such corporation (a "Control Share Acquisition") cannot vote the
shares it acquires in the Control Share Acquisition ("control shares") unless
voting rights are accorded to such control shares by the holders of a majority
of the outstanding voting shares, excluding the control shares held by the
Acquiring Person and shares held by the officers and inside directors of
Protocol ("interested shares"), and by the holders of a majority of the
outstanding voting shares, including interested shares. The term "Acquiring
Person" is broadly defined to include persons acting as a group.
The Acquiring Person may, but is not required to, submit to Protocol an
"Acquiring Person Statement" setting forth certain information about the
Acquiring Person and its plans for acquiring the Protocol stock. The Statement
may also request that Protocol call a special meeting of shareholders to
determine whether the control shares will be allowed to retain voting rights. If
the Acquiring Person does not request a special meeting of shareholders, the
issue of voting rights of control shares will be considered at the next annual
or special meeting of shareholders. If the Acquiring Person's control shares are
accorded voting rights and represent a majority or more of all voting power,
shareholders who do not vote in favor of the restoration of such voting rights
will have the right to receive the appraised "fair value" of their shares, which
may not be less than the highest price paid per share by the Acquiring Person
for the control shares.
Protocol is also subject to the Oregon Business Combination Act (OBCA
SectionSection60.825-60.845) (the "Business Combination Act"). The Business
Combination Act generally provides that in the event a person or entity acquires
15% or more of the voting stock of an Oregon corporation (an "Interested
Shareholder"), the corporation and the Interested Shareholder, or any affiliated
entity, may not engage in certain business combination transactions for a period
of three years following the date the person became an Interested Shareholder.
Business combination transactions for this purpose include (a) a merger or plan
of share exchange, (b) any sale, lease, mortgage or other disposition of the
assets of the corporation where the assets have an aggregate market value equal
to 10% or more of the aggregate market value of the corporation's assets or
outstanding capital stock and (c) certain transactions that result in the
issuance of capital stock of the corporation to the Interested Shareholder.
These restrictions do not apply if (i) the Interested Shareholder, as a result
of the transaction in which such person became an Interested Shareholder, owns
at least 85% of the outstanding voting stock of the corporation (disregarding
shares owned by directors who are also officers, and certain employee benefit
plans), (ii) the Board of Directors approves the share acquisition or business
combination before the Interested Shareholder acquires 15% or more of the
corporation's voting stock or (iii) the Board of Directors and the holders of at
least two-thirds of the outstanding voting stock of the corporation
(disregarding shares owned by the Interested Shareholder) approve the
transaction after the Interested Shareholder acquires 15% or more of the
corporation's voting stock.
SHAREHOLDER RIGHTS PLAN
In March 1992, the Protocol Board of Directors approved a shareholder rights
plan and declared a dividend of one preferred share purchase right (a "Right")
for each outstanding share of Common Stock. The Board of Directors also
authorized the issuance of one Right with respect to each share of Common Stock
issued between the record date of the Rights dividend (the "Record Date") and
the earliest of the Distribution Date, the Final Expiration Date (as such terms
are hereinafter defined) or the date, if any, on which the Rights are redeemed.
Each Right entitles the registered holder to purchase from Protocol one
one-hundredth of a share of Series D Junior Participating Preferred Stock, par
value $.01 per share, of Protocol (the "Preferred Shares"), at a price $40.00
per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement between the Company and First Interstate Bank of Oregon, N.A., as
Rights Agent, dated March 20, 1992 (the "Rights Agreement").
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The Rights Agreement provides that until the earlier to occur of (i) ten
days following a public announcement that a person or group of affiliated or
associated persons (the "Acquiring Person") has acquired beneficial ownership of
20% or more of the outstanding shares of Protocol Common Stock, or (ii) ten
business days (or such later date as may be determined by action of the Protocol
Board of Directors prior to such time as any person or group of affiliated or
associated persons becomes an Acquiring Person) following commencement of, or
announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 20% or more of such outstanding shares of Protocol Common Stock (the
earlier of such dates being called the "Distribution Date"), the Rights will be
evidenced, with respect to any shares of Protocol Common Stock outstanding as of
the Record Date, by the certificate representing such shares of Common Stock.
The Rights will not be exercisable until the Distribution Date. Until the
Distribution Date (or earlier redemption or expiration of the Rights), the
Rights will be transferred with and only with the Protocol Common Stock. As soon
as practicable following the Distribution Date, a separate certificate
evidencing the Rights ("Right Certificate") will be mailed to holders of record
of the Protocol Common Stock as of the close of business on the Distribution
Date, and such separate Right Certificate alone will evidence the Rights.
In the event that Protocol is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power is sold, proper provision will be made so that each holder of a Right will
thereafter have the right to receive, upon the exercise thereof at the then
current exercise price of the Right, that number of shares of common stock of
the acquiring company which at the time of such transaction will have a market
value of two times the exercise price of the Right. In the event that any person
or group of affiliated or associated persons becomes an Acquiring Person, proper
provision will be made so that each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will thereafter be void), will
thereafter have the right to receive upon exercise that number of shares of
Protocol Common Stock having a market value of two times the exercise price of
the Right.
The Rights Agreement provides that at any time after any person or group
becomes an Acquiring Person and prior to the acquisition by such person or group
of 50% or more of the outstanding shares of Common Stock, the Protocol Board of
Directors may exchange the Rights (other than Rights owned by such person or
group which have become void), in whole or in part, at an exchange ratio of one
share of Protocol Common Stock, or one one-hundredth of a Preferred Share, per
Right (subject to adjustment). At any time prior to the expiration of two
business days following notice to Protocol and to the Acquiring Person or group
of the acquisition by such person or group of beneficial ownership of 20% or
more of the outstanding shares of Protocol Common Stock (provided that the Board
may extend such two-day period prior to its expiration), the Board of Directors
would be able to redeem the Rights in whole, but not in part, at a price of $.01
per Right (the "Redemption Price"). The redemption of the Rights may be made
effective at such time, on such basis and with such conditions as the Board of
Directors in its sole discretion establishes. Immediately upon any redemption of
the Rights, the right to exercise the Rights would terminate and the only right
of the holders of Rights would be to receive the Redemption Price.
The Rights Agreement may be amended by the Board of Directors without the
consent of the holders of the Rights, including an amendment to lower the 20%
threshold described above to not less than 10%, except that from and after such
time as any person or group of affiliated or associated persons becomes an
Acquiring Person, no such amendment may adversely affect the interests of the
holders of the Rights.
Until a Right is exercised, the holder thereof, as such, has no rights as a
shareholder of Protocol, including, without limitation, the right to vote or to
receive dividends. The Rights will expire ten years
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after the date of the Rights Agreement (the "Final Expiration Date"), unless the
Final Expiration Date is extended or unless the Rights are earlier redeemed by
the Company, in each case, as described above.
TRANSFER AGENT
The transfer agent and registrar for Protocol Common Stock is First
Interstate Bank of Oregon, N.A.
COMPARATIVE RIGHTS OF PRYON SHAREHOLDERS
AND PROTOCOL SHAREHOLDERS
If the Merger is consummated, holders of Pryon Common Stock will become
holders of Protocol Common Stock and the rights of the former Pryon shareholders
will be governed by the OBCA and by the Articles of Incorporation of Protocol
(the "Protocol Articles") and the Bylaws of Protocol. The rights of Protocol
shareholders under the OBCA and the Protocol Articles and Bylaws differ in
certain limited respects from the rights of Pryon shareholders under the
Wisconsin Business Corporation Law (the "WBCL") and the Articles of
Incorporation of Pryon (the "Pryon Articles") and Bylaws. Certain differences
between the rights of Protocol shareholders and Pryon shareholders are
summarized below.
CLASSES OF STOCK
The WBCL authorizes a corporation to have one or more classes of stock. All
rights of shares of a class must have preferences, limitations and relative
rights identical with those of other shares of the same class, unless the class
is divided into series.
Pryon's Articles of Incorporation provide for two classes: Pryon Common
Stock and Pryon Preferred Stock. The Pryon Preferred Stock is divided into two
series: Series A Preferred Stock and Series B Preferred Stock.
The following is a description of the preferences, limitations and relative
rights of the Pryon Stock.
DIVIDENDS. Dividends on Pryon Common Stock may be declared as, if and when
declared by the Board.
Pryon Preferred Stock is entitled to participate with the Pryon Common Stock
in any dividends declared, with such participation on a "common-equivalent"
basis. That is, if a dividend on Pryon Common Stock is declared, each share of
Pryon Series A or Pryon Series B Preferred Stock is entitled to a dividend equal
to the product of (i) the dividend declared on the Pryon Common Stock and (ii)
the number of shares of Pryon Common Stock into which the Pryon Preferred Stock
is then convertible. Because Pryon Preferred Stock is convertible into Pryon
Common Stock on a 1:1 basis, the net effect is that all the Pryon Common Stock
and Pryon Preferred Stock is ratably entitled to the same dividend per share if
any is declared.
CONVERSION RIGHTS. Pryon Series A Preferred Stock and Pryon Series B
Preferred Stock are convertible into shares of Pryon Common Stock based upon a
formula at the option of the holder and, automatically, upon the closing of a
designated-sized public offering. Application of the conversion formula results
in each share of Pryon Series A and Series B Preferred Stock presently being
convertible into one share of Pryon Common Stock.
LIQUIDATION PREFERENCES AND PARTICIPATION RIGHTS. Upon the occurrence of
certain "Liquidation Events," which include the liquidation, dissolution or
winding up of Pryon and certain mergers (including the Merger) involving Pryon
(unless the holders of 2/3 of the Preferred Stock otherwise decide), the holders
of Pryon Preferred Stock have priority claims on Pryon's assets, as follows:
First, the holders of Pryon Series B Preferred Stock, as a series, are
entitled to receive, prior to all other classes or series, an amount equal to
$61.23 (plus accrued but unpaid dividends) per share
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("Tier 1 Preference"). Second, the holders of Pryon Series A Preferred Stock, as
a series, are next entitled to receive, prior to all other classes or series, an
amount equal to $33.24 (plus accrued but unpaid dividends) per share ("Tier 2
Preference"). Third, the holders of Pryon Common Stock, as a class, are entitled
to receive a priority distribution of $2,000,000 (or an amount per share
determined by dividing $2,000,000 by the number of shares of Pryon Common Stock
at the time outstanding) ("Tier 3 Preference"). Fourth, if any assets remain
after the Tier 1, Tier 2 and Tier 3 Preferences, all shares of Pryon Stock
participate equally in a distribution of the remaining assets, with each share
of Pryon Preferred Stock deemed for this purpose to be equivalent to the number
of shares of Pryon Common Stock into which it is then convertible (the "Tier 4
Participation Preference"). However, subject to the next paragraph, if, as a
result of the Tier 1 Preference and their share of the Tier 4 Participation
Preference, the holders of Pryon Series B Preferred Stock would receive $122.46
(plus any accrued but unpaid dividends) per share in total (the "Series B
Initial Amount"), then the holders of Pryon Series B Preferred Stock would no
longer participate in a distribution of the remaining assets (although the
holders of Pryon Common Stock and Pryon Series A Preferred Stock would).
If the assets available for distribution were distributed to all shares of
Pryon Stock (with each share of Preferred Stock deemed for this purpose to be
equivalent to the number of shares of Pryon Common Stock into which it is then
convertible), and if under such a distribution holders of Pryon Series B
Preferred Stock would receive the Series B Initial Amount, then all of the
foregoing preferences become inapplicable, and the assets of Pryon would be
distributed to the holders of Pryon Stock pro rata, with each share of Preferred
Stock deemed for this purpose to be equivalent to the number of shares of Pryon
Common Stock into which it is then convertible. The provisions of this paragraph
will apply if the Protocol Market Value equals or exceeds $12.45 per share.
VOTING RIGHTS. Each share of Pryon Common Stock is entitled to one vote per
share. Each share of Pryon Preferred Stock is entitled to the number of votes
equal to the number of shares of Pryon Common Stock into which it is then
convertible. As noted, both Pryon Series A and Series B are presently
convertible into Pryon Common Stock on a one-for-one basis. Except as otherwise
provided, holders of Pryon Common Stock and Pryon Preferred Stock vote together
as a single voting group.
Pryon's Articles also provide for special class voting rights in the event
Pryon proposes to effect certain actions, such as altering the rights of the
Pryon Preferred Stock, creating certain new classes or series of stock, certain
reclassifications, merger or consolidation, certain sales of assets,
liquidation, payment of dividends, redemption of stock and changing the
conversion rights of Pryon Preferred Stock. Depending upon the action, these
class voting rights would require either (i) a majority vote of the outstanding
Pryon Series B Preferred Stock and a majority of the sum of the outstanding
Pryon Series A Preferred Stock and Pryon Series B Preferred Stock, or (ii) a 2/3
vote of the sum of the outstanding Pryon Series A and Series B Preferred Stock,
in each case voting as a separate voting group.
In addition, if certain "Events of Noncompliance" specified in Pryon's
Articles occur, the holders of Pryon Preferred Stock (acting by a 2/3 vote and
voting as a separate voting group) have the right to elect a majority of the
corporation's Board of Directors, who may serve until such Event of
Noncompliance is cured.
REDEMPTION PROVISIONS. Pryon Common Stock is not subject to any redemption
provisions.
Pryon Preferred Stock is subject to the following provisions:
(a) MANDATORY. On December 31, 1997, Pryon is obliged to redeem all of
the Pryon Series A and Series B Preferred Stock at a price equal to $61.23
and $33.24 (plus accrued but unpaid dividends) per share, respectively. If
the assets of the corporation are insufficient, such asset as are available
will first be distributed to the holder of Pryon Series B Preferred Stock,
then to the holders of Pryon Series A Preferred Stock.
There is no sinking fund.
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(a) OPTIONAL. Pryon Preferred Stock is also subject to special
optional redemption provisions. If a "Change of Control" transaction
specified in Pryon's Articles occurs, those holders of Pryon Series A and
Series B Preferred Stock not participating in the Change of Control event
(acting by the decision of holders of 2/3 of such shares not participating
in the Change of Control event) may elect to require Pryon to redeem their
Preferred Stock. The redemption price, in such case, is the "Change of
Control Redemption Price," which generally means the amounts per share which
the holders of Pryon Preferred Stock would have received as a liquidation
preference or participation right if a Liquidation Event occurred and, if,
under such provisions, the total assets of Pryon available for distribution
were calculated by multiplying (x) the price per share paid or transferred
for the shares of Pryon Common Stock participating in the Change of Control
(assuming the conversion of all Pryon Preferred Stock) by (y) the total
number of shares of Pryon Common Stock outstanding at the time of the Change
of Control (assuming the conversion of all Pryon Preferred Stock).
Furthermore, upon an Event of Noncompliance, upon the request of holders
of 70% of the Pryon Preferred Stock, the holders thereof may compel Pryon to
redeem the Pryon Series A Preferred Stock and Pryon Series B Preferred Stock
at $61.23 and $33.24 (plus accrued but unpaid dividends) per share,
respectively.
The OBCA authorizes a corporation to have one or more classes of stock.
Protocol's Articles authorize common stock and preferred stock. See "DESCRIPTION
OF PROTOCOL CAPITAL STOCK."
AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS
The WBCL authorizes a corporation's Board of Directors to adopt certain
amendments to the corporation's Articles of Incorporation without shareholder
action, including, without limitation, deleting the names and addresses of the
initial directors and making specified changes to the corporation's name. The
Board of Directors may propose other amendments to the shareholders. Unless the
WBCL, the corporation's Articles of Incorporation or the Board of Directors as a
condition to its recommendation to the shareholders requires a greater
proportion, the amendment must be approved by a majority of the votes entitled
to be cast by each voting group entitled to vote thereon, as well as by a
majority of the votes entitled to be cast by any voting group with respect to
which the amendment would create dissenters' rights.
The Pryon Articles require separate votes of not less than a majority of the
outstanding Pryon Series B Preferred Stock and a majority of the outstanding
Pryon Preferred Stock in order to (i) materially and adversely alter or change
the rights, preferences or privileges of the Pryon Preferred Stock, (ii) create
any new class or series of shares having certain preferences over or on parity
with the Pryon Preferred Stock, (iii) reclassify any shares of Pryon Common
Stock into shares having certain preferences superior to or on parity with the
Pryon Preferred Stock, or (iv) otherwise amend the Pryon Articles or Section
6.04 of Pryon's Bylaws (dealing with restrictions or transfer of stock).
The WBCL authorizes a corporation's Board of Directors to amend, repeal or
adopt new Bylaws, unless (i) the corporation's Articles of Incorporation or the
WBCL reserves such power exclusively to the shareholders, or (ii) the
shareholders, in adopting, amending or repealing a particular bylaw, expressly
provide that the Board of Directors may not amend, repeal or readopt such bylaw.
OBCA authorizes a corporation's Board of Directors to adopt certain
amendments to the corporation's Articles of Incorporation without shareholder
action, including without limitation, deleting the names and addresses of the
initial directors and making specified changes to the corporation's name. The
Board of Directors may propose other amendments to the shareholders. Unless the
OBCA, the corporation's Articles of Incorporation or the Board of Directors as a
condition to its recommendation to the shareholders requires a greater
proportion, the amendment must be approved by a majority of the votes entitled
to be cast by each voting group entitled to vote thereon, as well as by a
majority of the votes entitled to be cast by any voting group with respect to
which the amendment would create
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dissenters' rights. The Protocol Articles require a vote of not less than 75% of
the votes entitled to be cast for the election of directors to amend any
provision of Article V. Article V sets the number of directors, provides for the
classification of directors, and prescribes a means for the removal of
directors. The OBCA authorizes a corporation's Board of Directors to amend,
repeal or adopt new Bylaws, unless (i) the corporation's Articles of
Incorporation or the OBCA reserve such power exclusively to the shareholders, or
(ii) the shareholders, in amending or repealing a particular bylaw, expressly
provide that the Board of Directors may not amend or repeal such bylaw.
SHAREHOLDER POWER TO CALL SPECIAL SHAREHOLDERS' MEETING
The WBCL provides that a special meeting of shareholders may be called by a
corporation's Board of Directors, the holders of at least 10% of all the votes
entitled to be cast on any issue proposed to be considered at the proposed
special meeting, or such other persons as are authorized under the corporation's
Articles of Incorporation or Bylaws. The Bylaws of Pryon authorize the
President, the Board of Directors or the Chairman of the Board of Directors (if
the Board designates one) to call a special meeting of shareholders.
The OBCA provides that a special meeting of shareholders may be called by a
corporation's Board of Directors, the holders of at least 10% of all the votes
entitled to be cast on any issue proposed to be considered at the proposed
special meeting, or such other persons as are authorized under the corporation's
Articles of Incorporation or Bylaws. The Bylaws of Protocol authorize the
President to call a special meeting of shareholders.
APPROVAL OF CERTAIN CORPORATE TRANSACTIONS
Under the WBCL, a merger or share exchange must be recommended by the Board
of Directors to the shareholders, and the shareholders must approve the merger
or share exchange by a majority of the votes of each voting group entitled to
vote thereon, unless the WBCL, the corporation's Articles of Incorporation or
the corporation's Bylaws adopted under authority granted by the corporation's
Articles of Incorporation require a greater proportion. Under Pryon's Articles
of Incorporation, all Pryon Stock votes together as a single voting group.
Pryon's Articles also require that a merger or consolidation of Pryon must be
approved by the vote of not less than a two-thirds vote of the outstanding
Preferred Stock voting as a separate voting group.
The WBCL also provides that a merger need not be approved by the
shareholders of the surviving corporation if (i) the Articles of Incorporation
of the surviving corporation will not differ after the merger, except for
certain specified changes, (ii) no change occurs in the number, designations,
preferences, limitations and relative rights of shares held by those
shareholders who are shareholders prior to the merger, (iii) the number of
voting shares outstanding immediately after the merger, plus the voting shares
issuable as a result of the merger, will not exceed by more than 20% the total
number of voting shares of the surviving corporation outstanding immediately
prior to the merger, and (iv) the number of participating shares outstanding
immediately after the merger, plus the number of participating shares issuable
as a result of the merger, will not exceed by more than 20% the total number of
participating shares outstanding immediately prior to the merger. Participating
shares are those shares that entitle their holders to participate without
limitation in distributions.
The WBCL provides that, in general, a corporation may sell, lease, exchange
or otherwise dispose of all, or substantially all, of its property or assets, or
dissolve, if the Board of Directors recommends the proposed transaction to the
shareholders and the shareholders approve the transaction by a majority of the
votes of each voting group entitled to vote thereon, unless a greater proportion
is specified by the WBCL, the corporation's Articles of Incorporation, or the
corporation's Bylaws adopted under authority granted by the corporation's
Articles of Incorporation. Pryon's Articles of Incorporation require that such a
sale of assets or dissolution must also be approved by the vote of not less than
two-thirds of the outstanding Pryon Preferred Stock voting as a separate voting
group.
Under the OBCA, a merger or share exchange must be recommended by the Board
of Directors to the shareholders, and the shareholders must approve the merger
or share exchange by a majority of
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the votes of each voting group entitled to vote thereon, unless the OBCA, the
corporation's Articles of Incorporation or the Board of Directors require a
greater proportion. The Protocol Articles do not specify a greater proportion.
The OBCA also provides that a merger need not be approved by the shareholders of
the surviving corporation if (i) the Articles of Incorporation of the surviving
corporation will not differ after the merger, except for certain specified
changes, (ii) no change occurs in the number, designations, preferences,
limitations, and relative rights of shares held by those shareholders who are
shareholders prior to the merger, (iii) the number of voting shares outstanding
immediately after the merger, plus the voting shares issuable as a result of the
merger, will not exceed by more than 20% the total number of voting shares of
the surviving corporation outstanding immediately prior to the merger, and (iv)
the number of participating shares outstanding immediately after the merger,
plus the number of participating shares issuable as a result of the merger, will
not exceed by more than 20% the total number of participating shares outstanding
immediately prior to the merger. Participating shares are those shares that
entitle their holders to participate without limitation in distributions.
The OBCA provides that, in general, a corporation may sell, lease, exchange
or otherwise dispose of all, or substantially all, of its property or assets, or
dissolve, if the Board of Directors recommends the proposed transaction to the
shareholders and the shareholders approve the transaction by a majority of the
votes of each voting group entitled to vote thereon, unless a greater proportion
is specified in the corporation's Articles of Incorporation or by the Board of
Directors. The Protocol Articles do not specify a greater proportion.
DISSENTERS' RIGHTS
Under the WBCL, a shareholder is entitled to dissent from and to obtain
payment of the fair value of his shares in the event of certain corporate
actions. The actions which trigger a shareholder's dissenter rights include (i)
certain mergers and share exchanges, (ii) certain sales of all or substantially
all of the corporation's assets, and (iii) other corporate actions (including,
if the corporation's Articles of Incorporation so provide, certain amendments to
the Articles of Incorporation if such amendment materially and adversely affects
certain rights of the dissenter's shares) taken pursuant to a shareholder vote
to the extent the corporation's Articles of Incorporation, Bylaws or a
resolution of the Board of Directors provides that a shareholder may dissent.
Neither Pryon's Articles of Incorporation or Bylaws, nor any resolutions of its
Board of Directors, make any such provision.
Under the OBCA, a shareholder is entitled to dissent from and to obtain
payment of the fair value of his shares in the event of certain corporate
actions. The actions which trigger a shareholder's dissenter rights include
certain mergers and share exchanges, certain sales of all or substantially all
of the corporation's assets, and an amendment to the corporation's Articles of
Incorporation that materially and adversely affects the shareholder by altering
or abolishing a preemptive right to acquire other securities or by reducing the
number of shares owned by the shareholder to a fraction of a share.
Under the OBCA, dissenters' rights are not available to shareholders of a
corporation if the shares of such corporation are listed on a national
securities exchange or quoted on the NASDAQ National Market System. Because
Protocol's shares are quoted on the NASDAQ National Market System, Protocol
shareholders are not entitled to dissenters' rights with respect to certain
corporate transactions.
ANTI-TAKEOVER PROVISIONS
The WBCL contains several "anti-takeover" provisions.
The WBCL provides for a "fair price" provision which generally applies only
to issuing public corporations. Under such provision, restrictions are imposed
upon merger and share exchange transactions with, or sales of substantially all
of a corporation's assets to, a 10% shareholder. Such
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transactions must meet one of two requirements: (i) the transaction must be
approved by a shareholder vote of 80% of all shareholders and two-thirds of
"disinterested" shareholders (which generally excludes the 10% shareholder); or
(ii) the payment of a statutory fair price in a two-step merger, share exchange
or asset sale.
The WBCL restricts business combinations with a 10% shareholder. Generally,
unless a 10% shareholder received approval of the corporation's Board of
Directors of either an acquisition of 10% or more of the corporation's shares or
a statutorily-defined "business combination" before the shareholder acquires
such 10% interest, then (i) the proposed business combination is barred for a
period of three years, and (ii) after three years the business combination may
proceed if it meets certain shareholder voting requirements or fair price
standards. The WBCL's business combination provisions are generally applicable
only to corporations having a class of voting stock registered under Section
12(g) of the Securities Exchange Act of 1934 if the corporation has its
principal place of business or significant business operations in Wisconsin and
more than 10% of its shares are held by Wisconsin residents.
The WBCL contains a "control share" law. Under the WBCL, subject to various
exceptions, the voting rights of a shareholder owning in excess of 20% of an
issuing public corporation's stock are reduced to one-tenth vote per share for
the excess unless the full voting rights of such shareholder are restored
pursuant to a shareholder vote.
The provisions of the WBCL relating to its "fair price," "business
combination" and "control share" provisions are not applicable to Pryon.
The OBCA contains an anti-takeover statute commonly referred to as a
"control share law." Oregon's control share law provides that a person who
acquires control shares acquires the voting rights with respect to such control
shares only upon receipt of a majority vote of shares held by the pre-existing,
disinterested shareholders of the target corporation. "Control shares" are
shares acquired within a 90 day period that would, when added to all other
shares held by the acquiring person, cause such person's total voting power (but
for the control share law) to exceed any of three threshold levels: 20%,
33 1/3%, or 50% of the total outstanding voting shares. As each threshold level
is exceeded a new vote is required. The provisions of the Oregon control share
law apply equally to transactions approved or opposed by the target
corporation's Board of Directors.
Upon exceeding any of the statutory thresholds, the acquiring person has the
right to require that the shareholders consider within 50 days of his demand his
right to vote the control shares (provided that the acquiring person undertakes
to pay the cost of such shareholders' meeting). At the shareholders' meeting,
the acquiring person may not vote any shares held by him on the issue of voting
rights with respect to the control shares, and may not vote his control shares
on any other matter brought before the meeting. Shares held by officers and
employee directors of the target corporation are also prohibited from voting on
the issue of the acquiring person's voting rights. The only significant
exception to the control share law's restriction on voting rights is for shares
acquired pursuant to a merger.
In order to be covered by Oregon's control share law, a corporation must be
an Oregon corporation and satisfy certain other tests. Protocol believes that it
currently satisfies such tests and, as a result, is covered by the control share
law.
Both Protocol and Pryon believe that Oregon's control share law could have,
in certain circumstances, a deterrent effect on potential takeovers. Because
Oregon's control share law effectively limits the ability for a potential
acquiror to gain control of a corporation, it may have the effect of
discouraging potential acquirors from making offers to purchase the target
corporation's shares, which offers some shareholders might feel are in their
best interests.
The OBCA contains a statute commonly known as the "Business Combination
Act," which provides that in the event a person or entity acquires 15% or more
of the voting shares of an Oregon corporation (an "Interested Shareholder"), the
corporation and the Interested Shareholder, or any
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affiliated entity, may not engage in certain business combination transactions
for a period of three years following the date the person became an Interested
Shareholder. Business combination transactions include, among other things, (i)
merger or consolidation with, disposition of assets to or with, or issuance or
redemption of stock to or from, the Acquiring Person, or (iii) the Acquiring
Person's receipt of any disproportionate benefit as a shareholder. These
restrictions do not apply if (i) the Interested Shareholder, as a result of the
transaction in which such person became an Interested Shareholder, owns at least
85% of the outstanding voting shares of the corporation (disregarding shares
owned by directors who are also officers, and certain employee benefit plans),
(ii) the Board of Directors approves the share acquisition or business
combination before the Interested Shareholder acquired 15% or more of the
corporation's voting shares, or (iii) the Board of Directors and the holders of
a least two-thirds of the outstanding voting shares of the corporation
(disregarding shares owned by the Interested Shareholder) approve the
transaction after the Interested Shareholder acquires 15% or more of the
corporation's voting shares.
Both Protocol and Pryon believe that the Business Combination Act will have
the effect of encouraging any potential acquiror to negotiate with Protocol's
Board of Directors and will also discourage certain potential acquirors
unwilling to comply with its requirements.
"BLANK CHECK" PREFERRED STOCK
The Pryon Articles permit the Board of Directors to determine the rights,
preferences, privileges and restrictions of authorized but unissued Preferred
Stock, commonly referred to as "Blank Check" Preferred Stock. The issuance of
Preferred Stock with extraordinary rights may be used to deter hostile takeover
attempts.
The Protocol Articles permit the Board of Directors to determine the rights,
preferences, privileges and restrictions of authorized but unissued Preferred
Stock, commonly referred to as "Blank Check" Preferred Stock. The issuance of
preferred stock with extraordinary rights may be used to deter hostile takeover
attempts.
REMOVAL OF DIRECTORS
Under the WBCL, shareholders may remove one or more directors of a
corporation with or without cause, unless the corporation's Articles of
Incorporation or Bylaws provide that directors may be removed only for cause.
The Pryon Articles make no such provision.
Under the OBCA, shareholders may remove one or more directors of a
corporation with or without cause, unless the corporation's Articles of
Incorporation provide that directors may be removed only for cause. The Protocol
Articles provide that all or any number of the directors may be removed only for
cause, and at a meeting of the shareholders called expressly for that purpose,
by the vote of 75% of the votes then entitled to be cast for the election of
directors.
CLASSIFIED BOARD OF DIRECTORS
The WBCL permits the establishment in the corporation's Articles of
Incorporation or, if the Articles of Incorporation so authorize, Bylaws, of a
classified board under which directors can be divided into as many as three
classes having staggered terms of office, with one class of directors coming up
for election each year. The Pryon Articles do not provide for a classified Board
of Directors.
The OBCA permits, if a corporation has six or more directors, the
establishment in the corporation's Articles of Incorporation or Bylaws of a
classified board under which directors can be divided into as many as three
classes having staggered terms of office, with one class of directors coming up
for election each year. The Protocol Articles and the Bylaws of Protocol provide
for a classified Board of Directors, with three classes and staggered terms.
SIZE OF BOARD OF DIRECTORS
Both the WBCA and the OBCA provide that the size of a corporation's Board of
Directors may be specified in, or fixed in accordance with, the corporation's
Articles of Incorporation or Bylaws. The
87
<PAGE>
Bylaws of Pryon provide that the number of directors may be set or changed by
the vote of the Board of Directors or the shareholders. The Protocol Articles
and the Bylaws of Protocol provide that the number of directors may be set or
changed by the vote of the Board of Directors or the shareholders.
DIVIDENDS AND REPURCHASE OF SHARES
The WBCL permits a corporation, unless otherwise restricted by the
corporation's Articles of Incorporation, to make a distribution to its
shareholders, unless, after giving effect to such distribution, (i) the
corporation would be unable to pay its debts as they became due in the usual
course of business, or (ii) the corporation's total assets would be less than
the sum of its total liabilities plus, unless the corporation's Articles of
Incorporation provide otherwise, the amount that would be needed, if the
corporation were to be dissolved at the time of distribution, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
are superior to those shareholders receiving the distribution.
The OBCA permits a corporation, unless otherwise restricted by the
corporation's Articles of Incorporation, to make a distribution to its
shareholders, unless, after giving effect to such distribution, (i) the
corporation would be unable to pay its debts as they became due in the usual
course of business, or (ii) the corporation's total assets would be less than
the sum of its total liabilities plus, unless the corporation's Articles of
Incorporation provide otherwise, the amount that would be needed, if the
corporation were to be dissolved at the time of distribution, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
are superior to those shareholders receiving the distribution. The Protocol
Articles do not contain any restrictions regarding distributions to
shareholders. In addition, the OBCA permits a corporation to acquire its own
shares.
CLASS VOTING
The WBCL provides that the holders of outstanding shares of a class are
entitled to vote as a separate voting group with respect to amendments to the
corporation's Articles of Incorporation that would affect such class in certain
ways, including, without limitation, changing the aggregate number of authorized
shares of such class, affecting an exchange or reclassification of all or part
of the shares of such class into shares of another class, changing the
designation, rights or preferences of all or part of the shares of such class,
or limiting or denying an existing preemptive right of all or part of the shares
of such class. In addition, the WBCL requires separate voting by voting groups
with respect to a Plan of Merger that contains one or more proposed amendments
to the Articles of Incorporation, which amendments would require voting by the
holders of outstanding shares of a class as a separate voting group.
The OBCA provides that the holders of outstanding shares of a class are
entitled to vote as a separate voting group with respect to amendments to the
corporation's Articles of Incorporation that would affect such class in certain
ways, including without limitation, changing the aggregate number of authorized
shares of such class, affecting an exchange or reclassification of all or part
of the shares of such class into shares of another class, changing the
designation, rights or preferences of all or part of the shares of such class,
or limiting or denying an existing preemptive right of all or part of the shares
of such class. In addition, the OBCA requires separate voting by voting groups
with respect to a Plan of Merger that contains one or more proposed amendments
to the Articles of Incorporation, which amendments would require voting by the
holders of outstanding shares of a class as a separate voting group.
LEGAL OPINION
The legality of the Protocol Common Stock to be issued in connection with
the Merger is being passed upon for Protocol by Ater Wynne Hewitt Dodson &
Skerritt, LLP, Portland, Oregon.
88
<PAGE>
DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
Any shareholder proposal intended for inclusion in the proxy statement and
form of proxy relating to Protocol's 1997 annual meeting of shareholders must be
received by Protocol not later than December 9, 1996, pursuant to the proxy
soliciting regulations of the Securities and Exchange Commission (the "SEC"). In
addition, Protocol's Bylaws require that notice of shareholder proposals and
nominations for director be delivered to the Secretary of Protocol not less than
60 days nor more than 90 days prior to the date of an annual meeting, unless
notice or public disclosure of the date of the meeting occurs less than 60 days
prior to the date of such meeting, in which event, shareholders may deliver such
notice not later than the 10th day following the day on which notice of the date
of the meeting was mailed or public disclosure thereof was made. Nothing in this
paragraph shall be deemed to require Protocol to include in its proxy statement
and form of proxy for such meeting any shareholder proposal which does not meet
the requirements of the SEC in effect at the time.
EXPERTS
The consolidated financial statements and consolidated financial statement
schedules of Protocol and its subsidiaries as of December 31, 1995 and 1994 and
for each of the years in the three year period ended December 31, 1995,
incorporated by reference in this Joint Proxy Statement/Prospectus have been so
incorporated in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, and given on the authority of said firm as experts
in auditing and accounting. The report of KPMG Peat Marwick LLP covering the
December 31, 1995 and 1994 Financial Statements refers to a change in accounting
for income taxes to adopt the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards (SFAS) No.109, "Accounting
for Income Taxes" and a change in the method of accounting for certain
investments in debt and equity securities to adopt the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
The financial statements of Pryon as of December 31, 1995 and 1994, and for
each of the three years in the period ended December 31, 1995, included in this
Joint Proxy Statement/Prospectus have been so included in reliance upon the
report of Price Waterhouse LLP, independent accountants, and given on the
authority of said firm as experts in auditing and accounting.
89
<PAGE>
PRYON CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Report of Independent Accountants................................................................... F-1
Consolidated Financial Statements:
Consolidated Balance Sheets....................................................................... F-2
Consolidated Statements of Operations............................................................. F-3
Consolidated Statements of Shareholders' (Deficit) Equity......................................... F-4
Consolidated Statements of Cash Flows............................................................. F-5
Notes to Consolidated Financial Statements........................................................ F-6 - F-11
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Pryon Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and shareholders' (deficit) equity and of
cash flows present fairly, in all material respects, the financial position of
Pryon Corporation and its subsidiary at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
March 11, 1996
F-1
<PAGE>
PRYON CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
MARCH 31, ------------- -------------
-------------
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................................ $ 10,064 $ 45,230 $ 166,640
Accounts receivable, less allowance for doubtful accounts of $52,000,
$52,000 and $40,000 in 1996, 1995 and 1994, respectively............ 1,777,536 1,613,282 1,352,823
Inventories.......................................................... 3,844,325 3,769,428 3,252,710
Other current assets................................................. 221,179 196,558 57,766
------------- ------------- -------------
Total current assets............................................... 5,853,104 5,624,498 4,829,939
------------- ------------- -------------
PROPERTY AND EQUIPMENT
Machinery and equipment.............................................. 2,112,410 1,777,310 1,457,829
Office furniture and equipment....................................... 942,986 889,886 629,822
Leasehold improvements............................................... 403,601 392,092 365,855
Construction in progress............................................. -- 273,856 --
------------- ------------- -------------
3,458,997 3,333,144 2,453,506
Less: accumulated depreciation....................................... (1,696,077) (1,512,651) (942,262)
------------- ------------- -------------
1,762,920 1,820,493 1,511,244
------------- ------------- -------------
OTHER ASSETS
Capitalized software development costs -- net........................ 251,397 255,397 196,001
Other................................................................ -- 9,493 75,079
------------- ------------- -------------
251,397 264,890 271,080
------------- ------------- -------------
$ 7,867,421 $ 7,709,881 $ 6,612,263
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES
Line of credit....................................................... $ -- $ -- $ 1,150,000
Notes payable -- Shareholders........................................ -- 226,287
Current maturities of long-term debt................................. 50,000 50,000 57,000
Current maturities of capital lease obligation....................... 37,851 49,816 44,816
Accounts payable..................................................... 824,161 776,544 946,638
Accrued compensation and employee benefits........................... 33,660 358,008 115,043
Accrued warranties................................................... 155,081 145,081 145,475
Other current liabilities............................................ 126,067 69,337 122,917
------------- ------------- -------------
Total current liabilities.......................................... 1,226,820 1,448,786 2,808,176
------------- ------------- -------------
LONG-TERM DEBT
Line of credit....................................................... 1,571,038 1,381,035 --
Notes payable -- Shareholders........................................ 226,287 226,287 --
Notes payable -- Bank................................................ 175,000 187,500 106,652
Capital lease obligation............................................. -- -- 49,816
------------- ------------- -------------
1,972,325 1,794,822 156,468
------------- ------------- -------------
SERIES A REDEEMABLE PREFERRED STOCK, $.10 stated value; 60,000 shares
authorized, 58,505 shares issued and outstanding...................... 1,887,998 1,887,998 1,887,998
------------- ------------- -------------
SERIES B REDEEMABLE PREFERRED STOCK, $.10 stated value; 80,599 shares
authorized, issued and outstanding.................................... 4,848,514 4,848,514 4,848,514
------------- ------------- -------------
SHAREHOLDERS' (DEFICIT) EQUITY
Common stock, $.10 par value; 419,401 shares authorized, 101,920,
101,920 and 101,880 shares issued and outstanding at March 31, 1996,
December 31, 1995 and 1994, respectively............................ 10,192 10,192 10,188
Additional paid-in capital........................................... 918 918 722
Accumulated deficit.................................................. (1,571,743) (1,773,746) (2,592,200)
------------- ------------- -------------
(1,560,633) (1,762,636) (2,581,290)
------------- ------------- -------------
Less -- Treasury stock, 26,512 shares at cost........................ (507,603) (507,603) (507,603)
------------- ------------- -------------
(2,068,236) (2,270,239) (3,088,893)
------------- ------------- -------------
$ 7,867,421 $ 7,709,881 $ 6,612,263
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
PRYON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------------------------------- ----------------------------
1995 1994 1993 1996 1995
-------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES............................ $ 12,276,320 $ 7,892,059 $ 7,203,276 $ 3,135,084 $ 3,058,643
OTHER REVENUES....................... -- 108,880 37,000 -- --
-------------- ------------- ------------- ------------- -------------
12,276,320 8,000,939 7,240,276 3,135,084 3,058,643
COST OF GOODS SOLD................... 7,242,545 5,435,324 5,213,142 1,754,838 1,790,728
-------------- ------------- ------------- ------------- -------------
GROSS PROFIT......................... 5,033,775 2,565,615 2,027,134 1,380,246 1,267,915
OPERATING EXPENSES:
Research and development........... 1,528,823 1,352,831 1,139,776 459,489 369,348
General and administrative......... 1,240,060 1,009,158 850,916 343,974 260,884
Marketing and selling.............. 1,252,315 846,846 265,627 321,946 267,177
-------------- ------------- ------------- ------------- -------------
4,021,198 3,208,835 2,256,319 1,125,409 897,409
-------------- ------------- ------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS........ 1,012,577 (643,220) (229,185) 254,837 370,506
OTHER INCOME (EXPENSE):
Interest income.................... 5,010 5,236 16,529 2,060 1,259
Interest expense................... (185,380) (146,071) (50,927) (49,927) (42,599)
Other.............................. (13,753) (9,880) (230) (4,967) 8,499
-------------- ------------- ------------- ------------- -------------
(194,123) (150,715) (34,628) (52,834) (32,841)
-------------- ------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES.... 818,454 (793,935) (263,813) 202,003 337,665
PROVISION FOR INCOME TAXES........... -- -- -- -- --
-------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS).................... $ 818,454 $ (793,935) $ (263,813) $ 202,003 $ 337,665
-------------- ------------- ------------- ------------- -------------
-------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS) PER SHARE.......... $ 3.65 $ (10.55) $ (3.51) $ .89 $ 1.49
-------------- ------------- ------------- ------------- -------------
-------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
PRYON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL
-------------------- ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- --------- --------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992............ 101,500 $ 10,150 (26,512) $ (507,603) $ -- $ (1,534,452) $ (2,031,905)
Net (loss)............................ -- -- -- -- -- (263,813) (263,813)
Issuance of common stock.............. 200 20 -- -- 380 -- 400
--------- --------- --------- ----------- ----- ------------ ------------
Balance at December 31, 1993............ 101,700 10,170 (26,512) (507,603) 380 (1,798,265) (2,295,318)
Net (loss)............................ -- -- -- -- -- (793,935) (793,935)
Issuance of common stock.............. 180 18 -- -- 342 -- 360
--------- --------- --------- ----------- ----- ------------ ------------
Balance at December 31, 1994............ 101,880 10,188 (26,512) (507,603) 722 (2,592,200) (3,088,893)
Net income............................ -- -- -- -- -- 818,454 818,454
Issuance of common stock.............. 40 4 -- -- 196 -- 200
--------- --------- --------- ----------- ----- ------------ ------------
Balance at December 31, 1995............ 101,920 10,192 (26,512) (507,603) 918 (1,773,746) (2,270,239)
Net income............................ -- -- -- -- -- 202,003 202,003
--------- --------- --------- ----------- ----- ------------ ------------
Balance at March 31, 1996 (Unaudited)... 101,920 $ 10,192 (26,512) $ (507,603) $ 918 $ (1,571,743) $ (2,068,236)
--------- --------- --------- ----------- ----- ------------ ------------
--------- --------- --------- ----------- ----- ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
PRYON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------------------------- ------------------------
1995 1994 1993 1996 1995
------------- ------------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................... $ 818,454 $ (793,935) $ (263,813) $ 202,003 $ 337,665
Adjustments to reconcile net income
(loss) to net cash provided by (used
for) operating activities:
Depreciation and amortization........ 642,389 478,366 328,979 187,426 152,780
(Decrease) increase in cash due to
changes in:
Accounts receivable................ (260,459) (367,600) 78,173 (164,254) (325,790)
Inventory.......................... (516,718) (651,213) (625,669) (74,897) 14,993
Other current assets............... (73,301) (25,553) 129,318 (24,621) (31,810)
Other assets....................... 95 (132) (74,947) 9,493 --
Accounts payable................... (170,094) 434,750 (1,693) 47,617 (121,624)
Deferred revenue................... -- (183,150) (758,350) -- --
Other current liabilities.......... 188,992 97,064 113,263 (257,618) (81,882)
------------- ------------- ------------- ----------- -----------
Net cash provided by (used for) operating
activities.............................. 629,358 (1,011,403) (1,074,739) (74,851) (55,668)
------------- ------------- ------------- ----------- -----------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Additions to property and equipment.... (879,638) (567,106) (804,172) (125,853) (185,967)
Additions to capitalized software
development costs..................... (131,397) (100,000) (96,000) -- --
------------- ------------- ------------- ----------- -----------
Net cash used for investing activities... (1,011,035) (667,106) (900,172) (125,853) (185,967)
------------- ------------- ------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Series B redeemable
preferred stock -- net................ -- 995,902 10,042 -- --
Issuance of common stock............... 200 360 400 -- 200
Capital lease obligation............... (44,816) -- -- (11,965) (10,764)
Net proceeds (payments) of notes
payable............................... 73,848 (94,261) 83,329 (12,500) (13,448)
Proceeds from line of credit........... 231,035 800,000 350,000 190,003 200,000
------------- ------------- ------------- ----------- -----------
Net cash provided by financing
activities.............................. 260,267 1,702,001 443,771 165,538 175,988
------------- ------------- ------------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................. (121,410) 23,492 (1,531,140) (35,166) (65,647)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD.................................. 166,640 143,148 1,674,288 45,230 166,640
------------- ------------- ------------- ----------- -----------
END OF PERIOD............................ $ 45,230 $ 166,640 $ 143,148 $ 10,064 $ 100,993
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
SUPPLEMENTAL DISCLOSURE
Cash paid during the period:
Interest............................. $ 178,827 $ 135,009 $ 51,267 $ 51,716 $ 52,334
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
NON-CASH TRANSACTIONS
Equipment capitalized under capital
leases................................ $ -- $ 134,951 $ -- $ -- $ --
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
PRYON CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS -- Pryon Corporation (the "Company") is a Wisconsin
corporation located in Menomonee Falls, Wisconsin. The Company was founded in
1988 and is engaged in the design, manufacture and sale of carbon dioxide
monitoring devices for medical applications. Distribution of these devices is
made on a world-wide basis through original equipment manufacturers and direct
distribution channels. International sales totalled $1,701,000, $951,000 and
$929,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
QUARTERLY INFORMATION -- The financial statements at March 31, 1996 and
for the three month periods ended March 31, 1996 and 1995 are unaudited,
however, in the opinion of management, all adjustments, consisting solely of
normal recurring adjustments, necessary for a fair presentation of the financial
position at these dates and the results of operations and cash flows for these
periods have been included. The results for the three month period ended March
31, 1996 are not necessarily indicative of the results that may be expected for
the full year or any other interim period.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary, Pryon
World-Wide Corporation, a foreign sales corporation, which was incorporated in
July 1993. All intercompany transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS -- Cash equivalents are stated at cost, which
approximates market. The Company considers all highly liquid debt instruments
with a maturity of three months or less at the date of purchase to be cash
equivalents. At December 31, 1995 and 1994, money market mutual funds
approximating $500 and $10,200, respectively, are included as cash equivalents.
INVENTORIES -- Inventories are valued at the lower of cost, determined by
the first-in, first-out method or market.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost.
Properties are depreciated using the straight-line method for financial
reporting purposes and accelerated methods for income tax purposes. Properties
are depreciated over their estimated useful lives which range from three to five
years for machinery, equipment and office furniture and eleven years for
leasehold improvements. Expenditures which substantially increase value or
extend useful lives are capitalized. Expenditures for maintenance and repairs
are charged against income as incurred. Depreciation expense totalled $570,388,
$418,866 and $254,443 for the years ended December 31, 1995, 1994 and 1993,
respectively.
RESEARCH AND DEVELOPMENT -- Research and development costs are primarily
expensed as incurred. Development costs related to software used in the
Company's products are charged to research and development expense as incurred.
Subsequent software development costs incurred to develop a product master are
capitalized. Costs totalling $131,000 and $100,000 were capitalized during 1995
and 1994, respectively. Amortization of these costs is computed using the
straight-line method over the estimated period of benefit. The Company reviews
the carrying value of these costs for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
DEFERRED AND OTHER REVENUES -- The Company often receives one-time,
non-refundable fees for engineering services and advanced payments from
customers under sales agreements. The fees for engineering charges are deferred
and recognized ratably as income over the period that the engineering services
are performed. Income recognized from engineering services for the years ended
December 31, 1994 and 1993 has been included as other revenues on the
accompanying statements of operations ($0 in 1995). Advanced payments for future
delivery of products are deferred
F-6
<PAGE>
PRYON CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and recognized as sales in accordance with actual delivery terms of the sales
agreements. In all other cases, the Company recognizes revenue at the time of
shipment of products. Additionally, the Company provides for estimated product
warranty costs and returns at the time of shipment.
INCOME TAXES -- Deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the financial
reporting and tax bases of assets and liabilities. A valuation allowance is
recorded against all deferred tax assets, including net operating loss and other
tax basis carryforwards, for the amount which management considers it will
likely not realize.
EARNINGS PER SHARE -- Earnings per share amounts are computed based upon
the weighted average number of shares actually outstanding plus the shares that
would be outstanding assuming exercise of dilutive stock options and the
conversion of the Series A and Series B redeemable preferred stock. The number
of common and common stock equivalent shares used in the computation were
227,045 and 226,645 for the periods ended March 31, 1996 and 1995, respectively,
and 224,520, 75,278 and 75,088 for the years ended December 31, 1995, 1994 and
1993, respectively. Dilutive stock options and the Series A and Series B
redeemable preferred stock were antidilutive for the years ended December 31,
1994 and 1993.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 2 -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------- ----------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Raw materials.............................................. $ 1,250,260 $ 1,324,411 $ 1,121,012
Work in process............................................ 2,206,378 2,184,903 2,000,809
Finished goods............................................. 387,687 260,114 130,889
------------- ------------- -------------
$ 3,844,325 $ 3,769,428 $ 3,252,710
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
NOTE 3 -- LINE OF CREDIT
During 1995 the Company entered into a $2,250,000 line of credit and term
notes agreement with a bank. Available borrowings under the line of credit
agreement are limited by certain calculations that are based on eligible
accounts receivable and inventories of the Company. The line of credit bears
interest at the bank's prime rate plus 1% (9.5% at December 31, 1995). The
interest rate on the line of credit may be reduced by .25% subsequent to
December 31, 1995, provided the Company attains certain financial milestones.
The line of credit is due in 1998 and is secured by substantially all of the
assets of the Company. Borrowings outstanding on the line of credit were
$1,381,000 at December 31, 1995. The line of credit and term notes agreement
contains certain financial covenants and other restrictions.
In 1994 the Company maintained a $2,000,000 line of credit and term note
agreement with a bank. Available borrowings under the line of credit agreement
were limited by certain calculations that were based on the assets and net
income of the Company. The line of credit bore interest at the bank's prime rate
plus .5% (9.0% at December 31, 1994) and required the Company to pay an
additional annual facility fee of $10,000. The line of credit was due on demand
and was secured by substantially all of the assets of the Company. Borrowings
outstanding on the line of credit and term note agreement contained certain
restrictions and requirements with regard to significant changes in
F-7
<PAGE>
PRYON CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- LINE OF CREDIT (CONTINUED)
ownership or management of the Company and dividend distributions without prior
bank approval. In addition, the Company was required to maintain certain minimum
net worth levels. In 1995, the Company repaid the amount outstanding under this
agreement.
NOTE 4 -- LONG-TERM DEBT
During 1995 the Company entered into a $250,000 term note with a bank. The
note bears interest at the bank's prime rate plus 1.25% (9.75% at December 31,
1995) and is secured by substantially all of the assets of the Company. The note
is for a four year term, with monthly payments of principal and interest
commencing October 31, 1995. The monthly principal payments total $4,167 with
the remaining unpaid balance due on July 31, 1998. Borrowings outstanding under
the term note were $237,500 at December 31, 1995.
During 1995 the Company entered into a $250,000 term note with a bank to
finance capital expenditures. The Company may take advances against the note for
80% of capital expenditures approved by the bank. Borrowings against the note
bear interest at the bank's prime rate plus 1.25% (9.75% at December 31, 1995)
and are secured by substantially all of the assets of the Company. Advances are
to be repaid in equal monthly installments over a four year period commencing on
the month subsequent to the advance, with the remaining unpaid balance due on
July 31, 1998. No advances were outstanding under the term note at December 31,
1995.
In 1994 the Company had a $240,000 term note with a bank. The note bore
interest at the bank's prime rate plus 1% (9.5% at December 31, 1994) and was
secured by substantially all of the assets of the Company. The note was for a
four year term, with monthly payments of principal and interest due commencing
July 31, 1993 in the amount of $5,800 and the remaining unpaid balance due on
June 30, 1997. Borrowings outstanding under the term note were $163,652 at
December 31, 1994. In 1995, the Company repaid the amounts outstanding under the
term note.
In August 1990, in accordance with the Stock Purchase Agreement relating to
the issuance of the Series A redeemable preferred stock (see Note 5), the
Company issued $226,287 of notes payable to certain officers and shareholders of
the Company. On July 2, 1995, the existing notes payable were canceled and new
notes were issued which extended the maturity date of the unpaid principal
balance to June 30, 1997 and modified the quarterly prepayment formula. Interest
on the outstanding balance is payable monthly and is computed based on a bank's
prime rate, plus 2% (10.5% at December 31, 1995). The Company is required to
make quarterly prepayments of principal based on a formula which is dependent
upon the Company's reported quarterly earnings. No payments have been made as of
December 31, 1995 by the Company. The notes are subordinated to the line of
credit and term notes with a bank. Accordingly, all quarterly prepayments of
principal are subject to prior approval of the bank.
The Company leases certain computer equipment under a capital lease
agreement. See Note 6.
Future obligations under long-term debt agreements in effect at December 31,
1995 are as follows:
<TABLE>
<S> <C>
1996................................................... $ 50,000
1997................................................... 276,287
1998................................................... 1,518,535
----------
$1,844,822
----------
----------
</TABLE>
NOTE 5 -- SERIES A AND SERIES B REDEEMABLE PREFERRED STOCK
The Company has authorized 60,000 shares of $.10 stated value Series A
redeemable preferred stock. At December 31, 1995, 1994 and 1993 there were
58,505 shares of Series A redeemable preferred stock outstanding.
F-8
<PAGE>
PRYON CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- SERIES A AND SERIES B REDEEMABLE PREFERRED STOCK (CONTINUED)
At December 31, 1995, 1994 and 1993, there were 80,599, 80,599 and 64,267
shares of $.10 stated value Series B redeemable preferred stock authorized,
respectively, and 80,599, 80,599 and 64,104 shares outstanding, respectively. In
December 1994, the Company issued 16,495 of these shares. In connection with the
1994 issuance, the Company incurred $14,087 of legal fees which were offset
against the related proceeds of the issuance. During March 1993, the Company
issued 164 shares of Series B redeemable preferred stock. The issuance price for
each of these transactions was $61.23 per share.
Each share of Series A and Series B redeemable preferred stock is
convertible, at any time, into the number of shares of common stock based upon a
conversion ratio, as defined in the Stock Purchase Agreements. The Conversion
Price is equal to the initial issuance price for each share of redeemable
preferred stock. The Conversion Price is subject to adjustment upon the issuance
of common stock or other convertible securities. Based upon the Conversion
Price, at December 31, 1995 the holders of Series A and Series B redeemable
preferred stock may convert their shares into 139,104 shares of common stock.
The preferred shareholders are entitled to one vote per common share which would
be issuable upon conversion of the preferred stock. The preferred shareholders
are entitled to participate with the holders of the common stock in any
dividends declared, paid or accrued. The Series B redeemable preferred shares
have priority over Series A redeemable preferred shares and common stock upon
liquidation of the Company. In addition, Series A redeemable preferred shares
have priority over common stock upon liquidation.
The Company is required to redeem all of the shares of Series A and Series B
redeemable preferred shares on December 31, 1997. The redemption price shall be
an amount equal to the original issuance price per share plus any declared but
unpaid dividends. If the assets of the Company are insufficient to pay the
holders of the preferred shares the full amounts to which they shall be entitled
at the date of redemption, funds to the extent legally available shall be
distributed according to the liquidation preference of the preferred shares. The
Series A and Series B redeemable preferred shares require compliance with
certain nonfinancial covenants concerning continuity of operations, corporate
existence and management and certain other items. If an event of noncompliance
has occurred and is continuing, the Company shall, upon the written request of
70% of the preferred shareholders, redeem the preferred shares then outstanding
at the original issuance price.
NOTE 6 -- LEASES
The Company has secured agreements for $750,000 of operating leases with
certain leasing companies to provide for capital equipment requirements. The
various lease terms of the agreements expire in January 1996 through July 1997.
The Company leases certain computer equipment under a capital lease
agreement. Equipment under capital leases are included within the office
furniture and equipment caption in the accompanying balance sheets.
Future minimum lease payments required under long-term operating and capital
lease agreements in effect at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING TOTAL
--------- ----------- -----------
<S> <C> <C> <C>
1996.............................................................. $ 52,728 $ 231,090 $ 283,818
1997.............................................................. -- 121,614 121,614
1998.............................................................. -- 6,392 6,392
1999.............................................................. -- 2,664 2,664
--------- ----------- -----------
52,728 $ 361,760 $ 414,488
----------- -----------
----------- -----------
Less imputed interest............................................. (2,912)
---------
$ 49,816
---------
---------
</TABLE>
F-9
<PAGE>
PRYON CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- LEASES (CONTINUED)
Total rentals charged to operations approximated $341,000, $284,000 and
$192,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Total depreciation charged to operations for items under capital leases was
approximately $38,000, $21,000 and $0, respectively, for the years ended
December 31, 1995, 1994 and 1993.
NOTE 7 -- INCOME TAXES
The provision (benefit) for income taxes for the year ended December 31
consisted of the following:
<TABLE>
<CAPTION>
1995
------------
<S> <C>
Current...............................................................
Federal............................................................. $ 278,399
State............................................................... 64,687
Deferred.............................................................. (343,086)
------------
$ --
------------
------------
</TABLE>
The Company had no current or deferred provision for income taxes in 1994 or
1993.
Deferred tax assets at December 31 are comprised of the following:
<TABLE>
<CAPTION>
1995 1994
------------ --------------
<S> <C> <C>
Net operating loss carryforwards.......................................... $ 521,711 $ 843,976
Research and development credit carryforwards............................. 300,075 244,729
Other deferred tax assets -- net.......................................... 91,951 101,936
------------ --------------
Gross deferred tax asset.................................................. 913,737 1,190,641
Deferred tax asset valuation reserve...................................... (913,737) (1,190,641)
------------ --------------
Net deferred tax asset.................................................... $ -- $ --
------------ --------------
------------ --------------
</TABLE>
Other deferred tax items consist primarily of depreciation, inventory
capitalization and other accrued liabilities which will be deducted for tax
purposes in future periods.
Effective January 1, 1993, the Company adopted the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", on a prospective
basis and recorded a deferred tax valuation reserve of ($825,240) at December
31, 1993.
At December 31, 1995, the Company has the following net operating loss
carryforwards to offset future taxable income:
<TABLE>
<CAPTION>
INCOME TAX
REPORTING EXPIRES
------------- ------------
<S> <C> <C>
Federal net operating loss................................................ $ 1,315,121 2003-2009
State net business loss................................................... 1,431,284 2003-2009
</TABLE>
The net operating loss carryforwards may be limited upon a future change in
ownership.
Based on the Company's recent history of operating losses and the
uncertainty surrounding its ability to maintain a distribution network,
therefore its future revenue sources (See Note 10 -- Subsequent Event),
management has determined that taxable income sufficient to fully recognize all
deferred tax assets is not likely.
NOTE 8 -- SHAREHOLDERS' EQUITY
COMMON STOCK -- At December 31, 1995, 1994 and 1993, there were 419,401,
419,401 and 435,733 shares of $.10 par value common stock authorized,
respectively.
F-10
<PAGE>
PRYON CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS -- On January 21, 1992 and on September 1, 1994, the
Company's Board of Directors approved and adopted the 1991 Stock Option Plan and
the 1994 Stock Option Plan (the "Plans"), respectively. Under the provisions of
the Plans, the Company may grant to key employees, directors and consultants,
either nonqualified or incentive stock options to purchase up to 24,000 shares
of its common stock. The Board of Directors of the Company, which administers
the Plans may, at its discretion, grant stock appreciation rights with respect
to these options. All stock options and stock appreciation rights expire at
specified intervals ranging from five to ten years from the date of grant. The
vesting period for the stock options and stock appreciation rights issued varies
by Plan participant in accordance with the individual terms of employment and
cumulative length of service to the Company.
The Company granted options under the Plans to certain employees to purchase
6,250, 5,050 and 1,200 shares of common stock during fiscal 1995, 1994 and 1993,
respectively. Exercise prices ranged from $6.00 to $8.00 per share in 1995, were
$5.00 per share during 1994 and ranged from $4.00 to $5.00 per share during
1993. These stock options expire in the period January, 1997 to October, 2004.
During 1995, options were exercised to purchase 40 shares of common stock at an
exercise price of $5.00 per share. During 1994 and 1993, respectively, options
were exercised to purchase 180 and 200 shares of common stock at an exercise
price of $2.00 per share. Options forfeited in 1995, 1994 and 1993 under the
Plans totalled 2,880. In accordance with the Plans provisions, forfeited shares
revert back to the Plans and are eligible to be regranted. At December 31, 1995
and 1994 there were 21,500 and 15,210 options outstanding and 13,645 and 12,420
options exercisable, respectively.
NOTE 9 -- SALES TO MAJOR CUSTOMERS
Sales to three customers accounted for approximately 39%, 15% and 14%,
respectively, of the Company's total sales for the year ended December 31, 1995
and approximately 42%, 10% and 13%, respectively, for the year ended December
31, 1994. Sales to two customers accounted for approximately 58% and 14%,
respectively, of the Company's total sales for the year ended December 31, 1993.
At December 31, 1995, 23%, 20% and 10% of the Company's accounts receivables
relate to the accounts of three customers, respectively. At December 31, 1994,
24%, 17% and 11% of the Company's accounts receivables relate to the accounts of
three customers, respectively.
NOTE 10 -- SUBSEQUENT EVENT
On February 20, 1996, the Company entered into a definitive agreement to be
acquired by Protocol Systems, Inc. ("Protocol"), a manufacturer of patient
monitoring instruments and systems based in Beaverton, Oregon. In accordance
with the agreement, the Company's shareholders will receive 2,320,843 shares of
Protocol's common stock in exchange for all of the outstanding capital stock of
the Company, subject to adjustment under certain circumstances based on the
market price of Protocol's common stock during a specified period prior to the
closing of the transaction. The acquisition, which is expected to be accounted
for as a pooling of interests, is not expected to be completed before June, 1996
and is subject to the approval of the shareholders of both the Company and
Protocol in addition to the completion and/or achievement of certain specified
actions or operating result benchmarks. Protocol may waive any of the stipulated
conditions during final negotiations. Protocol intends to operate the Company as
a wholly-owned subsidiary and to continue engineering, manufacturing and
original equipment manufacturers sales activities at the Company's current
facility.
F-11
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF
FEBRUARY 20, 1996
AMONG
PROTOCOL SYSTEMS, INC.,
PROTOCOL MERGER CORPORATION
AND
PRYON CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
-----------
<C> <S> <C>
ARTICLE 1
DEFINITIONS............................................................................................ A-1
1.1 Defined Terms............................................................................... A-5
1.2 Other Defined Terms......................................................................... A-5
1.3 Usage of Terms.............................................................................. A-6
ARTICLE 2
THE MERGER; EFFECTIVE TIME; CLOSING................................................................. A-6
2.1 The Merger.................................................................................. A-6
2.2 Effective Time.............................................................................. A-6
2.3 Closing..................................................................................... A-6
ARTICLE 3
TERMS OF MERGER........................................................................................ A-6
3.1 Articles of Incorporation................................................................... A-6
3.2 Bylaws...................................................................................... A-6
3.3 Directors................................................................................... A-6
3.4 Officers.................................................................................... A-7
3.5 Effects of Merger........................................................................... A-7
ARTICLE 4
MERGER CONSIDERATION; EXCHANGE OR CANCELLATION OF SHARES IN THE MERGER................................. A-7
4.1 Merger Consideration; Conversion or Cancellation of Shares in the Merger.................... A-7
4.2 Stock Options............................................................................... A-8
4.3 Payment for Shares.......................................................................... A-9
4.4 Fractional Shares........................................................................... A-9
4.5 Closing of the Company's Transfer Books..................................................... A-10
4.6 Escrow of Shares............................................................................ A-10
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................................................... A-10
5.1 Organization and Qualification.............................................................. A-10
5.2 Capitalization.............................................................................. A-10
5.3 Subsidiaries................................................................................ A-10
5.4 Authority Relative to this Agreement........................................................ A-11
5.5 Company Action.............................................................................. A-11
5.6 Financial Statements........................................................................ A-11
5.7 Absence of Certain Changes or Events........................................................ A-12
5.8 Litigation.................................................................................. A-12
5.9 Taxes....................................................................................... A-13
5.10 Compliance with Permits, Applicable Laws and Agreements..................................... A-13
5.11 Employee Plans and Benefit Arrangements..................................................... A-14
5.12 Employee Contracts and Non-Disclosure Agreements............................................ A-16
5.13 Real Property............................................................................... A-16
5.14 Tangible Personal Property.................................................................. A-16
5.15 Intangible Property......................................................................... A-17
5.16 Title to Assets............................................................................. A-18
5.17 Inventories and Receivables................................................................. A-18
5.18 Contracts................................................................................... A-18
5.19 Suppliers and Customers..................................................................... A-19
</TABLE>
(i)
<PAGE>
<TABLE>
<C> <S> <C>
5.20 Products; Product Warranties................................................................ A-19
5.21 Environmental Matters....................................................................... A-19
5.22 Transactions with Certain Persons........................................................... A-20
5.23 Absence of Certain Payments................................................................. A-20
5.24 Records..................................................................................... A-21
5.25 Insurance................................................................................... A-21
5.26 Bank Accounts, Directors and Officers....................................................... A-21
5.27 Takeover Provisions Inapplicable............................................................ A-22
5.28 Financial Advisor........................................................................... A-22
5.29 Accounting Matters.......................................................................... A-22
5.30 Other Negotiations.......................................................................... A-22
5.31 Investment Company Act...................................................................... A-22
5.32 No Company Material Adverse Effect.......................................................... A-22
5.33 Information in Disclosure Documents......................................................... A-22
5.34 Disposition of Protocol Common Shares....................................................... A-23
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PROTOCOL............................................................. A-23
6.1 Organization and Qualification.............................................................. A-23
6.2 Capitalization.............................................................................. A-23
6.3 Subsidiaries................................................................................ A-24
6.4 Authority Relative to this Agreement........................................................ A-24
6.5 Protocol Action............................................................................. A-25
6.6 Reports and Financial Statements............................................................ A-25
6.7 Absence of Certain Changes or Events........................................................ A-25
6.8 Litigation.................................................................................. A-26
6.9 Fairness Opinion............................................................................ A-26
6.10 Compliance with Permits, Applicable Laws and Agreements..................................... A-26
6.11 Suppliers and Customers..................................................................... A-26
6.12 Products.................................................................................... A-26
6.13 Financial Advisor........................................................................... A-27
6.14 Accounting Matters.......................................................................... A-27
6.15 Investment Company Act...................................................................... A-27
6.16 Information in Disclosure Documents......................................................... A-27
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF MERGER SUB........................................................... A-28
7.1 Organization................................................................................ A-28
7.2 Capitalization.............................................................................. A-28
7.3 Authority Relative to this Agreement........................................................ A-28
7.4 Merger Sub Action........................................................................... A-28
7.5 Interim Operations of Merger Sub............................................................ A-28
ARTICLE 8
CONDUCT OF BUSINESS PENDING THE MERGER................................................................. A-29
8.1 Conduct of Business of the Company.......................................................... A-30
8.2 Conduct of Business of Protocol............................................................. A-30
8.3 Conduct of Business of Merger Sub........................................................... A-30
8.4 Notice of Breach............................................................................ A-30
ARTICLE 9
ADDITIONAL AGREEMENTS.................................................................................. A-30
9.1 Meetings of Shareholders.................................................................... A-30
9.2 Registration Statement/Proxy Materials...................................................... A-31
9.3 Affiliates of Protocol and the Company...................................................... A-32
</TABLE>
(ii)
<PAGE>
<TABLE>
<C> <S> <C>
9.4 Registration and Quotation of Protocol Common Shares........................................ A-32
9.5 Tax Treatment of Merger..................................................................... A-32
9.6 Reasonable Efforts.......................................................................... A-32
9.7 Other Transactions.......................................................................... A-33
9.8 Access to Information....................................................................... A-33
9.9 Employee Matters............................................................................ A-33
9.10 Payment of Shareholder Notes Payable........................................................ A-34
9.11 Indemnification of Officers and Directors................................................... A-34
ARTICLE 10
CONDITIONS PRECEDENT................................................................................... A-34
10.1 Conditions to Each Party's Obligations...................................................... A-34
10.2 Conditions to Obligations of Protocol and Merger Sub........................................ A-35
10.3 Conditions to Obligations of the Company.................................................... A-36
ARTICLE 11
TERMINATION, AMENDMENT AND WAIVER...................................................................... A-38
11.1 Termination................................................................................. A-38
11.2 Effect of Termination....................................................................... A-38
11.3 Amendment................................................................................... A-38
11.4 Waiver...................................................................................... A-39
ARTICLE 12
SURVIVAL AND INDEMNIFICATION........................................................................... A-39
12.1 Indemnification by the Company.............................................................. A-39
12.2 Indemnification by Protocol................................................................. A-39
12.3 Survival.................................................................................... A-39
12.4 Limitations Upon Indemnification............................................................ A-40
ARTICLE 13
GENERAL PROVISIONS..................................................................................... A-40
13.1 Expenses.................................................................................... A-40
13.2 Public Announcements........................................................................ A-40
13.3 Notices, Etc................................................................................ A-41
13.4 Attorneys' Fees............................................................................. A-41
13.5 Severability................................................................................ A-41
13.6 Remedies Cumulative......................................................................... A-41
13.7 No Third-Party Beneficiaries................................................................ A-41
13.8 Jurisdiction................................................................................ A-41
13.9 Governing Law............................................................................... A-42
13.10 Assignment.................................................................................. A-42
13.11 Names, Captions, Etc........................................................................ A-42
13.12 Schedules................................................................................... A-42
13.13 Exhibits.................................................................................... A-42
13.14 Entire Agreement............................................................................ A-42
13.15 Counterparts................................................................................ A-42
Signature Page....................................................................................... A-44
</TABLE>
(iii)
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (hereinafter called this "Agreement"), dated as
of February 20, 1996, among PROTOCOL SYSTEMS, INC., an Oregon corporation
("Protocol"), PROTOCOL MERGER CORPORATION, a Wisconsin corporation ("Merger
Sub"), and PRYON CORPORATION, a Wisconsin corporation (the "Company"):
RECITALS
A. Protocol and the Company desire to effect a business combination by
means of the merger of Merger Sub with and into the Company.
B. The Boards of Directors of Protocol, Merger Sub and the Company each
have determined that it is in the best interest of their respective shareholders
for Merger Sub to merge with and into the Company, upon the terms and subject to
the conditions of this Agreement.
C. For federal income tax purposes, it is intended that the Merger shall
qualify as a reorganization within the meaning of Section 368(a) of the Code.
D. The parties intend that the Merger be recorded for accounting purposes
as a pooling of interests.
E. Protocol, Merger Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger.
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements set forth herein, the parties hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINED TERMS
As used in this Agreement, the following terms shall have the respective
meanings set forth below:
"Affiliate": As defined in Rule 12b-2 under the Exchange Act.
"Aggregate Ceiling Price": $31,300,000.
"Aggregate Floor Price": $24,700,000.
"Aggregate Merger Consideration": 2,320,843 Protocol Common Shares.
"Articles of Merger": The articles of merger with respect to the merger of
Merger Sub with and into the Company, containing the provisions required by, and
executed in accordance with, Section 180.1105 of the WBCL.
"Authorization": Any consent, approval or authorization of, expiration or
termination of any waiting period requirement by, or filing, registration,
qualification, declaration or designation with, any Governmental Authority or
other Person.
"Business Records": All originals and copies of all operating data and
records of the Company including, without limitation, financial, accounting and
bookkeeping books and records, Device Master Records, customer complaint files,
product quality documentation, purchase and sale orders and invoices, sales and
sales promotional data, advertising materials, marketing analyses, past and
present price lists, past and present customer service files, credit files,
warranty files, batch and product serial number records and files, written
operating methods and procedures, specifications,
A-1
<PAGE>
operating records and other information related to the Tangible Personal
Property, reference catalogues, insurance files, personnel records and other
records, on whatever media, pertaining to the Company, or to customers or
suppliers of, or any other parties having contracts or other business
relationships with, the Company.
"Closing": The closing of the Merger as described in Article 2.
"Closing Date": The date on which the Closing occurs.
"Code": The Internal Revenue Code of 1986, as amended, and all regulations
promulgated thereunder, as in effect from time to time.
"Company": Pryon Corporation, a Wisconsin corporation.
"Company Common Stock": Common Stock, $0.10 par value per share, of the
Company.
"Company Disclosure Schedule": The disclosure schedule dated the date of
this Agreement, delivered by the Company to Protocol and attached hereto.
"Company's Knowledge" or its like: That which any Company Senior Management
Member actually knows or with reasonable diligence should know.
"Company Senior Management Members": Daniel F. Carsten, Edward M.
Kolasinski, Robert H. Ricciardelli, William Hand, Anthony Dalnodar, Kathleen
Slater, Gunter Frey, Lisa Henke and Robert M. Sommer.
"Company Series A Preferred Stock": Series A Preferred Stock, $0.10 par
value per share, of the Company.
"Company Series B Preferred Stock": Series B Preferred Stock, $0.10 par
value per share, of the Company.
"Confidentiality Agreement": The letter agreement between the Company and
Protocol dated January 26, 1996.
"Contract": Any written or oral contract, open order, lease and other
agreement in which the Company is a party or by which the Company is bound
(other than the Employee Contracts and the Minor Contracts) including, without
limitation, all distributor, sales representative and dealer agreements,
purchase and supply contracts, leases, maintenance contracts, license and
royalty agreements, government contracts, partnering agreements, indebtedness
instruments, letters of credit, performance bonds, currency contracts,
agreements with respect to guaranties, suretyships, covenants not to compete,
confidentiality or indemnification by or for the benefit of the Company or by
which the Company is bound, purchase and sale orders and all other contracts and
agreements whatsoever, and all amendments relating to any of the foregoing.
"Corporate Records": The Company's articles of incorporation (including all
amendments thereto), bylaws (including all amendments thereto), minutes,
unanimous written consents, resolutions, stock records, stock transfer ledger,
cancelled certificates and other documents customarily contained in the
corporate minute book for such an entity.
"Employee Contract": Any written or oral contract, agreement, arrangement,
policy, program, plan or practice (exclusive of any such contract which is
terminable within thirty (30) days without liability to the Company) directly or
indirectly providing for or relating to any employment, consulting,
remuneration, compensation or benefit, severance or other similar arrangement,
insurance coverage (including any self-insured arrangements),
medical-surgical-hospital or other health benefits, workers' compensation,
disability benefits, supplemental employment benefits, vacation benefits and
other forms of paid or unpaid leave, retirement benefits, tuition reimbursement,
deferred compensation, savings or bonus plans, profit-sharing, stock options,
stock appreciation rights, or other forms of incentive compensation or
post-retirement compensation or benefit, employment guarantee
A-2
<PAGE>
or security, or limitation on right to discipline or discharge, or relating to
confidentiality, noncompetition or the like which (i) is not an Employee Plan,
(ii) has been entered into or maintained, as the case may be, by the Company and
(iii) covers any one or more Employee.
"Environmental Laws": All present federal, state and local laws (whether
under common law, statute, rule, regulation or otherwise), Permits, and other
requirements of Governmental Authorities relating to the protection of human
health or the environment or to any Environmental Materials. Such laws include,
without limitation, the Comprehensive Environmental Response, Compensation and
Liability Act; Resource Conservation and Recovery Act; Clean Water Act; Clean
Air Act; Hazardous Materials Transportation Act; Toxic Substances Control Act;
Occupational Safety and Health Act; and their state and local counterparts.
"Environmental Materials": Materials that, because of their quantity,
concentration or physical, chemical or infectious characteristics, may cause or
pose a present or potential hazard to human health or the environment when
improperly used, treated, stored, disposed of, generated, manufactured,
transported or otherwise handled. "Hazardous Materials" shall include, but is
not limited to, any and all hazardous or toxic substances, materials or wastes
as defined or listed under the Resource Conservation and Recovery Act, the Toxic
Substances Control Act, the Comprehensive Environmental Response, Compensation
and Liability Act, the Hazardous Materials Transportation Act, the Clean Water
Act, the Clean Air Act or any other of the Environmental Laws. "Environmental
Materials" shall specifically include, but not be limited to, petroleum or
petroleum products, including crude oil and any fraction thereof.
"ERISA": The Employee Retirement Income Security Act of 1974, as amended,
and all regulations promulgated thereunder.
"ERISA Affiliates": Any trade or business, whether or not incorporated, that
is now or has at any time in the past been treated as a single employer with the
Company or its Subsidiaries, if any, under Section 414(b) or (c) of the Code and
the Treasury Regulations thereunder.
"Exchange Act": The Securities Exchange Act of 1934, as amended.
"GAAP": Generally accepted accounting principles in effect from time to
time.
"Governmental Authority": Any federal, state, municipal, political
subdivision or other governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign.
"Intangible Property": All intellectual property rights, including, but not
limited to, patents, patent applications, trademarks, trademark applications and
registrations, service marks, service mark applications and registrations,
copyrights, licenses and customer lists, proprietary processes, formulae,
inventions, trade secrets, know-how, development tools and other proprietary
rights used by the Company pertaining to any product, software or service
manufactured, marketed, licensed or sold by the Company in the conduct of its
business or used, employed or exploited, or available for use, in the
development, license, sale, marketing, distribution or maintenance thereof, and
all documentation and media constituting, describing or relating to the above,
including, but not limited to, manuals, memoranda, know-how, notebooks,
software, records and disclosures.
"Lien": Any mortgage, pledge, lien, charge, encumbrance, security interest
or claim.
"Merger": The merger of Merger Sub with and into the Company as contemplated
by Section 2.1.
"Merger Sub": Protocol Merger Corporation, a Wisconsin corporation and a
direct wholly owned Subsidiary of Protocol.
"Minor Contracts": Any blanket inventory purchase order in an aggregate
amount of less than $25,000 annually and of a duration of less than one year,
any other purchase and sale order under
A-3
<PAGE>
$10,000, or any agreements relating to office equipment, production support
equipment, maintenance, security or utilities, or other contracts and agreements
which, in the aggregate for all contracts and/or agreement with any one Person,
result in the incurrence of annual expenditures of less than $10,000.
"NASD": The National Association of Securities Dealers, Inc.
"Nasdaq/NMS": The NASD Automated Quotations/National Market System.
"Order": Any judgment, writ, injunction, order, directive, ruling or decree
of any arbitrator or any court or other Governmental Authority.
"Peat Marwick": KPMG Peat Marwick, LLP.
"Permits": All permits, licenses, franchises, consents, variances,
exemptions, Authorizations and the like issued by Governmental Authorities to or
for the benefit of the Company or Protocol (as the case may be).
"Person": Any individual or corporation, company, general partnership,
limited partnership, limited liability company, limited liability partnership,
trust, incorporated or unincorporated association, joint venture or other entity
of any kind.
"Proceeding": Any claim, suit, action, arbitration, investigation or
proceeding.
"Protocol": Protocol Systems, Inc., an Oregon corporation.
"Protocol Common Shares": Shares of Common Stock, $.01 par value per share,
of Protocol.
"Protocol Disclosure Schedule": The disclosure schedule dated the date of
this Agreement, delivered by Protocol to the Company and attached hereto.
"Protocol Financial Statements": The financial statements included in the
Protocol SEC Reports.
"Protocol Market Value": The average of the closing sale price of one
Protocol Common Share, as reported on the Nasdaq/NMS, for the thirty (30)
consecutive trading days ending on June 14, 1996.
"Protocol Option Plans": The stock option plans for employees, officers and
directors of Protocol identified in the Protocol SEC Reports.
"Real Property": All real property now or in the past owned or leased by the
Company or any other Person to which the Company is or is deemed to be a
successor in interest, whether directly or indirectly (including, without
limitation, by merger, under applicable Environmental Laws or otherwise), or in
which the Company or any such other Person has now or in the past had any
interest, together with (i) all buildings and improvements located thereon and
(ii) all rights, privileges, interests, easements, hereditaments and
appurtenances relating thereto.
"Release": Any spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, migration, dumping or disposing into
the environment.
"Relevant Company Insider": Any holder of more than 10% of the outstanding
Shares, and/or any executive officer, director, sales manager or purchasing
agent of the Company.
"SEC": The Securities and Exchange Commission.
"Securities Act": The Securities Act of 1933, as amended.
"Shares": Collectively, the shares of Company Common Stock, Company Series A
Preferred Stock and Company Series B Preferred Stock.
"Subsidiary": As to any Person, any other Person of which at least 50% of
the equity or voting interests are owned, directly or indirectly, by such first
Person.
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"Surviving Corporation": The surviving corporation in the Merger.
"Tangible Personal Property": All tangible personal property (other than
inventory) used to conduct the Company's business including, without limitation,
production and processing equipment, warehouse equipment, computer hardware,
furniture and fixtures, transportation equipment, leasehold improvements,
supplies and other tangible assets, together with any transferable manufacturer
or vendor warranties related thereto.
"WBCL": Wisconsin Statutes Annotated, Chapter 180, known as the "Wisconsin
Business Corporation Law."
1.2 OTHER DEFINED TERMS
<TABLE>
<CAPTION>
TERM SECTION
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<S> <C>
Affected Employees 9.9
Applicable Merger Consideration 4.1.1
Authorized Representatives 9.8
Benefit Arrangement 5.11.1
Budget 10.2.7
Certificates 4.3.1.
COBRA 5.11.10.
Company Fairness Opinion 5.28
Company Financial Statements 5.6.1
Company Material Adverse Effect 5.1
Company Option Plans 4.2.1
Company Permits 5.10.1
Company Shareholders Meeting 9.1.1
Company Voting Debt 5.2
Cowen 5.28
Disclosing Party 12.4
Effective Time 2.2
Employee Plan 5.11.1
Employees 5.11.1
Escrow Agent 4.6
Escrow Agreement 4.6
Escrow Shares 4.6
Exchange Ratio Certificate 4.1.1
Existing Option 4.2.1
Indemnifiable Damages 12.4
Insurance 5.25
Issuance 9.1.2
Protocol Fairness Opinion 6.9
Protocol Material Adverse Effect 6.1
Protocol Permits 6.10
Protocol SEC Reports 6.6.1
Protocol Shareholders Meeting 9.1.2
Protocol Voting Debt 6.2
Proxy Statement/Prospectus 9.2.2
Registered Intangible Property 5.15.1
Registration Statement 9.2.1
Related Person 5.22
Replacement Option 4.2.1
Rule 145 Affiliates 9.3.1
Shareholder Notes Payable 5.22
</TABLE>
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<TABLE>
<CAPTION>
TERM SECTION
---------------------------------------- ----------
<S> <C>
Significant Subsidiaries 6.3
Tax 5.9.10
Tax Return 5.9.10
Transfer Agent 4.3.1
Voting Agreement 9.1.1
Wessels 6.9
</TABLE>
1.3 USAGE OF TERMS
Except where the context otherwise requires, words importing the singular
number shall include the plural number and vice versa.
ARTICLE 2
THE MERGER; EFFECTIVE TIME; CLOSING
2.1 THE MERGER
Subject to the terms and conditions of this Agreement, at the Effective
Time, Merger Sub shall be merged with and into the Company in accordance with
the provisions of the WBCL and with the effect provided in Section 180.1106 of
the WBCL. The separate corporate existence of Merger Sub shall thereupon cease
and the Company shall be the Surviving Corporation and shall continue to be
governed by the laws of the State of Wisconsin.
2.2 EFFECTIVE TIME
The Merger shall become effective on the date and at the time (the
"Effective Time") that the Articles of Merger, properly executed, are duly filed
with the Secretary of State of the State of Wisconsin (or such later date and
time as may be specified in the Articles of Merger), which shall be the Closing
Date or as soon as practicable thereafter.
2.3 CLOSING
Subject to the fulfillment or waiver of the conditions set forth in Article
10, the Closing shall take place (a) at the offices of Ater Wynne Hewitt Dodson
& Skerritt, 222 S.W. Columbia, Suite 1800, Portland, Oregon 97201, at 10:00 a.m.
within three business days of the date of receipt of the last of the approvals
required by Sections 10.1.1 and 10.1.2 but not earlier than June 2, 1996, or (b)
at such other place and/or time and/or on such other date as Protocol and the
Company may agree or as may be necessary to permit the fulfillment or waiver of
the conditions set forth in Article 10.
ARTICLE 3
TERMS OF MERGER
3.1 ARTICLES OF INCORPORATION
The articles of incorporation of Merger Sub as in effect immediately prior
to the Effective Time shall be the articles of incorporation of the Surviving
Corporation, except that Article 1 thereof shall be amended to read as follows:
"The name of this corporation is Pryon Corporation."
3.2 BYLAWS
The bylaws of Merger Sub as in effect immediately prior to the Effective
Time shall be the bylaws of the Surviving Corporation.
3.3 DIRECTORS
Subject to the next sentence, the directors of Merger Sub immediately prior
to the Effective Time shall, from and after the Effective Time, be the directors
of the Surviving Corporation until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's articles of incorporation and
bylaws.
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Promptly after the Effective Time, Protocol shall take such action as may be
necessary to cause Daniel F. Carsten to be elected to the board of directors of
the Surviving Corporation, to serve until his successor has been duly elected or
appointed and qualified or until his earlier death, resignation or removal in
accordance with the Surviving Corporation's articles of incorporation and
bylaws. Promptly after the Effective Time, Protocol shall take such action as
may be necessary to cause Daniel F. Carsten to be elected to the board of
directors of Protocol, to serve until his successor has been duly elected or
appointed and qualified or until his earlier death, resignation or removal in
accordance with Protocol's articles of incorporation and bylaws.
3.4 OFFICERS
Subject to the next sentence, the officers of the Company immediately prior
to the Effective Time shall, from and after the Effective Time, be the officers
of the Surviving Corporation until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's articles of incorporation and
bylaws. Promptly after the Effective Time, Protocol shall take such action as
may be necessary to cause Daniel F. Carsten to be elected as the President of
the Surviving Corporation, to serve until his successor has been duly elected or
appointed and qualified or until his earlier death, resignation or removal in
accordance with the Surviving Corporation's articles of incorporation and
bylaws.
3.5 EFFECTS OF MERGER
The Merger shall have the effects set forth in Section 180.1106 of the WBCL.
The corporate existence of the Company, with all its purposes, powers and
objects, shall continue unaffected and unimpaired by the Merger and, as the
Surviving Corporation, the Company shall be governed by the laws of the State of
Wisconsin and succeed to all rights, assets, liabilities and obligations of
Merger Sub in accordance with Section 180.1106 of the WBCL.
ARTICLE 4
MERGER CONSIDERATION; EXCHANGE OR CANCELLATION OF SHARES IN THE MERGER
4.1 MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES IN THE MERGER
Subject to the provisions of this Article 4, at the Effective Time, by
virtue of the Merger and without any action by holders thereof, the shares of
the constituent corporations shall be converted as follows:
4.1.1 (a) All Company Common Shares, Company Series A Preferred Shares and
Company Series B Preferred Shares issued and outstanding immediately prior to
the Effective Time (other than Shares as to which dissenters' rights of
appraisal have been duly sought and are not subsequently withdrawn) and all
Shares issuable upon exercise of Existing Options under the Company Option Plans
shall, collectively, be exchanged for the Aggregate Merger Consideration
(subject to adjustment as provided in Section 4.1.1 (b) below), to be allocated
among such Shares in accordance with the rights of each such class or series as
set forth in the Company's Articles of Incorporation, as conclusively certified
by an instrument signed by the Company's Chief Financial Officer and delivered
to Protocol on the Closing Date (the "Exchange Ratio Certificate").
(b) The Aggregate Merger Consideration shall be adjusted in accordance with
the provisions of this paragraph (b) of Section 4.1.1.
(i) Notwithstanding Section 4.1.1 (a), if the Protocol Market Value is
less than $10.643, then the Aggregate Merger Consideration shall be
increased to that number of Protocol Common Shares which is equal to the
number obtained by dividing the Aggregate Floor Price by the Protocol Market
Value.
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(ii) Notwithstanding Section 4.1.1 (a), if the Protocol Market Value is
more than $13.486, then the Aggregate Merger Consideration shall be
decreased to that number of Protocol Common Shares which is equal to the
number obtained by dividing the Aggregate Ceiling Price by the Protocol
Market Value.
(c) The term "Applicable Merger Consideration" means the Aggregate Merger
Consideration set forth in Section 4.1.1 (a), as adjusted, if at all pursuant to
Section 4.1.1 (b).
4.1.2 If, prior to the Effective Time, Protocol should split or combine the
Protocol Common Shares, or pay a stock dividend or other stock distribution in
Protocol Common Shares, or otherwise change the Protocol Common Shares into any
other securities, or make any other dividend or distribution on the Protocol
Common Shares, then the Applicable Merger Consideration will be appropriately
adjusted to reflect such split, combination, dividend or other distribution or
change.
4.1.3 All Shares to be exchanged for Protocol Common Shares pursuant to
Section 4.1.1 shall cease to be outstanding, shall be cancelled and retired and
shall cease to exist, and each holder of a certificate representing any such
Shares shall thereafter cease to have any rights with respect to such Shares,
except the right to receive for each of the Shares, upon the surrender of such
certificate in accordance with Section 4.3, the number of Protocol Common Shares
specified above, as adjusted for any fractional Protocol Common Shares as
contemplated by Section 4.4.
4.1.4 Each share of Common Stock, $0.01 par value per share, of Merger Sub
issued and outstanding immediately prior to the Effective Time shall be
converted into and become one fully paid and nonassessable share of Common
Stock, $0.01 par value per share, of the Surviving Corporation.
4.2 STOCK OPTIONS
4.2.1 On or before the Closing Date, the Company shall make reasonable
efforts to obtain a written agreement (in form and substance mutually
satisfactory to Protocol and the Company) from each holder of an outstanding
option to purchase Shares (each, an "Existing Option") issued pursuant to the
Pryon Corporation 1991 Stock Option Plan and the Pryon Corporation 1994 Stock
Option Plan, as applicable (the "Company Option Plans"), that each Existing
Option held by such holder, whether or not vested or exercisable, which is
outstanding at the Effective Time shall be replaced by an option (a "Replacement
Option") to acquire, on the same terms and conditions as were applicable under
the Existing Option, a number of Protocol Common Shares (rounded up or down to
the nearest whole share) equal to the product of (a) the exchange ratio for
Company Common Shares as set forth in the Exchange Ratio Certificate and (b) the
number of Shares which the holder would have been entitled to receive had the
holder exercised the Existing Option in full immediately prior to the Effective
Time (whether or not the Existing Option shall then have been exercisable). The
price per share under the Replacement Option shall be equal to the aggregate
exercise price for the Shares subject to the Existing Option divided by the
number of full Protocol Common Shares deemed to be purchasable pursuant to the
Existing Option. Regardless of whether such written agreements are obtained from
the holders of Existing Options, each of the Existing Options shall be converted
without any action on the part of the holder thereof into a Replacement Option
on the terms set forth in this Section.
4.2.2 Promptly after the Effective Time, option agreements for Replacement
Options shall be delivered to holders of Existing Options. Replacement Options
shall have terms which are substantially identical to the terms of the Existing
Options they replace, including, without limitation, substantially identical
vesting schedules. A list of all persons who are holders of Existing Options as
of the date of this Agreement, the number of Shares under option to each holder
as of such date and the exercise price per share under those options has been
delivered to Protocol as part of Section 5.2 of the Company Disclosure Schedule.
4.2.3 Protocol shall take all corporate action necessary to reserve for
issuance a sufficient number of Protocol Common Shares for delivery upon
exercise of the Replacement Options. Promptly after the Effective Time, Protocol
shall file a registration statement or registration statements on Form S-8 with
respect to Protocol Common Shares subject to such Replacement Options and
maintain
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<PAGE>
the effectiveness of any such registration statement or registration statements
(and shall maintain the current status of the prospectus or prospectuses
contained therein) for so long as such Replacement Options remain outstanding.
4.3 PAYMENT FOR SHARES
4.3.1 Prior to the Closing, Protocol shall select First Interstate Bank of
Oregon, N.A. or such other person or persons reasonably satisfactory to the
Company to act as Exchange Agent for the Merger (the "Transfer Agent"). Subject
to Section 4.6, as soon as practicable after the Effective Time, Protocol shall
make available, and each holder of Shares will be entitled to receive, upon
surrender to the Transfer Agent of one or more instruments or certificates
representing the Shares ("Certificates") for cancellation and such other
documents reasonably requested by the Transfer Agent, certificates representing
the number of Protocol Common Shares into which such Shares are converted in the
Merger. Any Fractional Protocol Common Shares to be withheld shall be rounded to
the nearest whole share.
4.3.2 Protocol Common Shares for which Shares shall be exchanged in the
Merger shall be deemed to have been issued at the Effective Time. After the
Effective Time, Certificates representing the Shares shall represent solely the
right to receive Protocol Common Shares.
4.3.3 Any holder of Shares who has not exchanged the Certificates
representing the Shares for Protocol Common Shares in accordance with Section
4.3.1 within six months after the Effective Time shall have no further claim
upon the Transfer Agent and shall thereafter look only to Protocol for payment
in respect of such Shares. If any Certificates representing Shares entitled to
payment pursuant to Section 4.1 shall not have been surrendered for such payment
prior to such date on which any payment in respect thereof would otherwise
escheat to or become the property of any Governmental Authority, the
Certificates evidencing such Shares shall, to the extent permitted by applicable
law, be deemed to be canceled and no money or other property will be due to the
holder thereof.
4.3.4 No dividends or other distributions that are declared or made on
Protocol Common Shares will be paid to Persons entitled to receive certificates
representing Protocol Common Shares pursuant to this Agreement until such
Persons surrender their Certificates representing Shares. Upon such surrender,
there shall be paid to the Person in whose name the certificates representing
such Protocol Common Shares shall be issued any dividends or other distributions
which shall have become payable with respect to such Protocol Common Shares in
respect of a record date after the Effective Time. In no event shall the Person
entitled to receive such dividends be entitled to receive interest on such
dividends.
4.3.5 In the event that any certificates for Protocol Common Shares are to
be issued in a name other than that in which the Certificates representing
Shares surrendered in exchange therefor are registered, it shall be a condition
of such exchange that the Certificate or Certificates so surrendered shall be
properly endorsed or be otherwise in proper form for transfer and that the
Person requesting such exchange shall pay to the Transfer Agent any transfer or
other taxes required by reason of the issuance of Certificates for such shares
of Protocol Common Shares in a name other than that of the registered holder of
the Certificate surrendered, or shall establish to the satisfaction of the
Transfer Agent that such tax has been paid or is not applicable.
4.3.6 Notwithstanding the foregoing, neither the Transfer Agent nor any
party hereto shall be liable to a holder of Shares for any Protocol Common
Shares or dividends thereon delivered to a public official pursuant to any
applicable escheat laws.
4.4 FRACTIONAL SHARES
No fractional Protocol Common Shares shall be issued in the Merger. Any
fractional amount resulting from the exchange as described above shall be
rounded up if in excess of one-half a Protocol Common Share, or down if one-half
a Protocol Common Share or less, to the nearest full share.
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4.5 CLOSING OF THE COMPANY'S TRANSFER BOOKS
At the Effective Time, the stock transfer books of the Company shall be
closed and no transfer of Shares shall be made thereafter. In the event that,
after the Effective Time, Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged for Protocol Common Shares as
provided in Sections 4.1 and 4.4.
4.6 ESCROW OF SHARES
At or immediately subsequent to the Closing, Protocol shall deliver to First
Interstate Bank of Oregon, N.A. (the "Escrow Agent"), as escrow agent, Protocol
Common Shares into which the Shares are exchanged under Section 4.1 but withheld
by Protocol as provided in the next sentence ("Escrow Shares"), to be held by
Escrow Agent as collateral for the indemnification obligations of the Company
under Article 12 hereof and pursuant to the provisions of an escrow agreement
("Escrow Agreement") in substantially the form attached as Exhibit 4.6 to this
Agreement. Protocol shall withhold on a pro rata basis ten percent (10%) of the
Protocol Common Shares to be received by each holder of outstanding Shares and
such Escrow Shares shall be represented by a certificate or certificates issued
in the name of First Interstate Bank of Oregon, N.A., as Escrow Agent.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Protocol and Merger Sub that, except
as set forth in the Company Disclosure Schedule:
5.1 ORGANIZATION AND QUALIFICATION
The Company is a corporation duly organized and validly existing under the
laws of the State of Wisconsin and has the corporate power to carry on its
business as it is now being conducted and currently proposed to be conducted.
The Company has, during its most recently completed reporting year, filed with
the Wisconsin Secretary of State an annual report required by the WBCL. The
Company has not filed articles of dissolution and no corporate action to
dissolve the Company has been taken. The Company is duly qualified as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary, except where the failure to be so
qualified will not have an effect on the business, properties, assets, condition
(financial or otherwise), liabilities, operations or prospects of the Company
taken as a whole in an amount in excess of $25,000 (a "Company Material Adverse
Effect").
5.2 CAPITALIZATION
The authorized capital stock of the Company consists of 419,401 shares of
Company Common Stock, of which 75,408 shares are outstanding as of the date
hereof; 60,000 shares of Series A Preferred Stock, of which 58,505 shares are
outstanding as of the date hereof; and 80,599 shares of Series B Preferred
Stock, of which 80,599 shares are outstanding as of the date hereof. All
outstanding Shares were duly authorized, validly issued, fully paid and
nonassessable (subject to Section 180.0622(2)(b) of the WBCL, as judicially
interpreted). No Shares are held in the Company's treasury. As of the date
hereof, there are no bonds, debentures, notes or other evidences of indebtedness
having the right to vote on any matters on which the Company's shareholders may
vote ("Company Voting Debt") issued or outstanding. There are no options,
warrants, calls or other rights, agreements or commitments outstanding which
obligate the Company to issue, deliver or sell shares of its capital stock or
debt securities, or which obligate the Company to grant, extend or enter into
any such option, warrant, call or other such right, agreement or commitment.
5.3 SUBSIDIARIES
The Company has no Subsidiaries and does not directly or indirectly own any
interest in any other Person.
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5.4 AUTHORITY RELATIVE TO THIS AGREEMENT
5.4.1 The Company has the corporate power to enter into this Agreement and,
subject to approval of this Agreement by the holders of the Shares, to carry out
its obligations hereunder.
5.4.2 The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by the Company's
Board of Directors. Except for the approval of the holders of Shares described
in Section 9.1.1, no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement and the transactions contemplated hereby.
5.4.3 This Agreement constitutes a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms except as
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally and except that the
availability of equitable remedies, including specific performance, is subject
to the discretion of the court before which any proceeding therefor may be
brought.
5.4.4 Except for the approval of the holders of Shares as provided in
Section 9.1.1, the Company is not subject to or obligated under (i) any charter,
by-law, indenture or other loan document provision or (ii) any other Contract,
Permit, Order, lease, instrument, statute, law, ordinance, rule or regulation
applicable to the Company or its properties or assets which would be breached or
violated, or under which there would be a default (with or without notice or
lapse of time, or both), or under which there would arise a right of
termination, cancellation or acceleration of any obligation or the loss of a
material benefit, by its executing and carrying out this Agreement.
5.4.5 Except in connection, or in compliance, with the provisions of the
Securities Act, the Exchange Act, and the corporation, securities or blue sky
laws or regulations of the various states, no Permit or Authorization is
necessary for the consummation by the Company of the Merger or the other
transactions contemplated hereby.
5.5 COMPANY ACTION
The Board of Directors of the Company (at a meeting duly called and held or
pursuant to a unanimous written consent to action) has by the requisite vote of
all directors present (i) determined that the Merger is advisable and in the
best interests of the Company and its shareholders, (ii) approved the Merger in
accordance with the provisions of Section 180.1103 of the WBCL, and (iii)
recommended the approval of this Agreement and the Merger by the holders of the
Shares and directed that the Merger be submitted for consideration by the
Company's shareholders at the Company Shareholders Meeting.
5.6 FINANCIAL STATEMENTS
5.6.1 The Company has previously furnished Protocol with true and complete
copies of its (i) audited balance sheets as of December 31, 1993 and 1994, (ii)
related audited statements of income, stockholders' equity and cash flows for
the periods ending December 31, 1993 and 1994 (including all audit opinions and
all notes accompanying such statements), (iii) unaudited balance sheets as of
December 31, 1995 and January 31, 1996, and (iv) unaudited statements of income
and cash flows for the year-ended December 31, 1995 and month ending January 31,
1996. All such balance sheets and statements covered by (i) through (iv) are
collectively referred to in this Agreement as the "Company Financial
Statements."
5.6.2 The Company Financial Statements are in accordance with the books and
records of the Company and fairly present, in all material respects, the
financial position, results of operations and cash flows of the Company as of
the dates and for the periods indicated, in each case in conformity with GAAP
consistently applied, except (i) as otherwise indicated in such Company
Financial Statements and, (ii) in the case of unaudited Company Financial
Statements, subject to normal year-end adjustments, the absence of footnotes and
other disclosures associated with an audited report. The audited Company
Financial Statements provide fully for all material fixed and non-contingent
liabilities of the Company and disclose or provide fully for all material
contingent liabilities of a type required to be disclosed or provided for in
financial statements in accordance with GAAP.
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5.6.3 To the Company's Knowledge, the Company does not have any liabilities
or obligations (absolute, accrued, contingent or otherwise), which are material
to the Company and which are not disclosed or provided for in the Company
Financial Statements, other than liabilities and obligations incurred between
January 31, 1996 and the date hereof in the ordinary course of the business of
the Company, consistent with past practice and except as otherwise disclosed in
this Agreement, including the Company Disclosure Schedule. To the Company's
Knowledge, there is no basis for any such liability against the Company, whether
absolute, accrued, contingent or otherwise, which is or would have a Company
Material Adverse Effect, not reflected in the Company Financial Statements.
5.7 ABSENCE OF CERTAIN CHANGES OR EVENTS
Since December 31, 1995, there has not been:
5.7.1 any material adverse change in the business, financial condition,
liabilities (net of any corresponding increase in assets), results of operations
or, to the Company's Knowledge, prospects of the Company other than changes in
laws or regulations of general applicability;
5.7.2 any damage, destruction or loss, whether covered by insurance or not,
materially and adversely affecting the financial condition, prospects,
properties or businesses of the Company;
5.7.3 any declaration, payment or setting aside for payment of any dividend
or other distribution (whether in cash, stock or property) with respect to the
capital stock of the Company or any direct or indirect redemption, purchase or
other acquisition of any shares of capital stock of the Company;
5.7.4 any increase in the compensation of or granting of bonuses payable or
to become payable by the Company to any officer or employee whose 1995
calendar-year compensation (salary plus bonus) exceeded $50,000, other than
annual increases or bonuses consistent with the Company's past practices or
pursuant to the terms and provisions of the Employee Contracts and not
exceeding, for any such officer or employee, ten percent (10%) of such officer's
or employee's 1995 calendar-year compensation;
5.7.5 any sale or transfer by the Company of any material tangible or
intangible asset, any lease of real property or equipment, or any cancellation
of any debt or claim, except in the ordinary course of business;
5.7.6 any material change in accounting methods or principles or any
revaluation of any of its assets (including, without limitation, any change in
depreciation or amortization policies or rates);
5.7.7 any amendment or termination of any contract, agreement, or license
to which the Company is a party, except in the ordinary course of business;
5.7.8 any loan by the Company to any Person or guaranty by the Company of
any loan;
5.7.9 any waiver or release of any material right or claim of the Company,
except in the ordinary course of business;
5.7.10 any commencement or notice or, to the Company's Knowledge, threat of
commencement of any civil litigation or any governmental proceeding against or
investigation of the Company or the affairs; or
5.7.11 to the Company's Knowledge, any labor trouble or claim of wrongful
discharge or other unlawful labor practice or action.
5.8 LITIGATION
There is no Proceeding pending or, to the Company's Knowledge, threatened
against the Company which, either alone or in the aggregate, could reasonably be
expected to have a Company Material Adverse Effect, nor is there any Order
outstanding against the Company having, or which in the future could reasonably
be expected to have, either alone or in the aggregate, any Company Material
Adverse Effect.
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5.9 TAXES
5.9.1 The Company has duly filed all Tax Returns required to be filed since
the Company's date of incorporation with any Governmental Authority and all such
Tax Returns were correct and complete in all material respects.
5.9.2 The Company has paid in full all Taxes required to be paid by the
Company for periods occurring since the Company's date of incorporation before
such payment became delinquent and no deficiencies have been or, to the
knowledge of the Company, will be assessed with respect thereto for any such
period through December 31, 1995.
5.9.3 All Taxes which the Company has been required to collect or withhold
since the Company's date of incorporation have been duly collected or withheld
and, to the extent required when due, have been or will be duly paid to the
proper Governmental Authority.
5.9.4 The Tax Returns of the Company have not been examined by any
Governmental Authority for any period since the Company's date of incorporation,
there are no audits known by the Company to be pending of the Company's Tax
Returns, and there are no claims which have been or, to the Company's Knowledge,
or may be asserted relating to the Company's Tax Returns filed for any year
since the Company's date of incorporation.
5.9.5 The Company is not a party to any tax-sharing agreement or similar
arrangement with any other party.
5.9.6 There are no federal, state, local or foreign tax liens upon any of
the properties or assets of the Company and there are no unpaid Taxes which are
or could become a Lien on the properties or assets of the Company, except for
current Taxes not yet due and payable.
5.9.7 There have been no waivers of statutes of limitations by the Company
with respect to any Governmental Authority responsible for assessing or
collecting Taxes.
5.9.8 Correct and complete copies of all Tax Returns of the Company since
the Company's date of incorporation requested by Protocol or any Authorized
Representative have been, or will be, provided to Protocol.
5.9.9 The Company has not agreed or been required to make any adjustment
under Section 481(a) of the Code by reason of a change in accounting method or
otherwise, except for adjustments under Section 481(a) which have been fully
recognized on or before the Closing Date.
5.9.10 For the purpose of this Agreement, any income, excise, franchise,
sales, use, transfer, payroll, personal property, real property, occupancy or
other tax, levy, impost, fee, imposition, assessment or similar charge, together
with any related addition to tax, interest or penalty thereon, of any
Governmental Authority, is referred to as a "Tax." For purposes of this
Agreement, "Tax Return" refers to any type of return or report required to be
filed as a result of any Tax and any return or informational report required to
be filed under the Internal Revenue Code including, but not limited to, IRS
forms 941, 1099 and 5500.
5.10 COMPLIANCE WITH PERMITS, APPLICABLE LAWS AND AGREEMENTS
5.10.1 To the Company's Knowledge, the Company holds all Permits, the
failure of which to hold would have a Company Material Adverse Effect (the
"Company Permits"). To the Company's Knowledge, the Company is in compliance
with the terms of the Company Permits, except for such failures to comply which,
individually or in the aggregate, would not have a Company Material Adverse
Effect.
5.10.2 To the Company's Knowledge, the business of the Company is not being
conducted in violation of any law, ordinance or regulation of any Governmental
Authority, except for possible violations which individually or in the aggregate
do not and would not have a Company Material Adverse Effect.
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5.10.3 To the Company's Knowledge, the Company is not in default (and not
in a circumstance which, with notice or lapse of time, or both, would constitute
a default) under any agreement or instrument to which it is a party, whether or
not such default has been waived, except for any such default which, alone or in
the aggregate with other such defaults, would not have a Company Material
Adverse Effect.
5.10.4 The provisions of this Section 5.10 shall not be construed or
applied to narrow or otherwise restrict the scope of any other representations
and warranties in this Article 5.
5.11 EMPLOYEE PLANS AND BENEFIT ARRANGEMENTS
5.11.1 Section 5.11 of the Company Disclosure Statement sets forth a true
and complete list of all the following: (i) each "employee benefit plan," as
such term is defined in Section 3(3) of ERISA (each, together with the Company
Option Plan, an "Employee Plan"), and (ii) each other plan, program, policy,
contract or arrangement providing for bonuses, pensions, deferred compensation,
stock or stock-related awards, severance pay, salary continuation or similar
benefits, hospitalization, medical, dental or disability benefits, life
insurance or other employee benefits, or compensation to or for any current or
former officers, directors, employees, agents, or independent contractors of the
Company ("Employees") or any beneficiaries or dependents of any Employee,
whether or not insured or funded, (A) pursuant to which the Company has any
material liability or (B) constituting an employment or severance agreement or
arrangement with any officer or director of the Company (each, a "Benefit
Arrangement"). The Company has used its reasonable efforts to provide to
Protocol with respect to each Employee Plan and Benefit Arrangement: (i) a true
and complete copy of all written documents, including amendments, comprising
such Employee Plan or Benefit Arrangement or, if there is no such written
document, an accurate and complete description of such Employee Plan or Benefit
Arrangement; (ii) All Form 5500s or Form 5500-Cs (including all schedules
thereto), if applicable; (iii) the most recent financial statements and
actuarial reports, if any; (iv) the summary plan description currently in effect
and all material modifications thereof, if any; and (v) the most recent Internal
Revenue Service determination letter, if any; and (vi) filings with the
Department of Labor, including, but not necessarily limited to, "top hat"
filings pursuant to Department of Labor Regulation Section 2520.104-23, if any.
Any such Employee Plans and Benefit Arrangements not so provided are not in the
aggregate material to the Company.
5.11.2 (i) The Company has established and maintained in all material
respects each Employee Plan and Benefit Arrangement in accordance with its terms
and in material compliance with all applicable laws, including, but not limited
to, ERISA and the Code; and (ii) to the Company's Knowledge, any third party
trustee has complied in all material respects in the maintenance of each
Employee Plan and Benefit Arrangement with all applicable laws and requirements.
Neither the Company nor any of its Employees, nor, to the best knowledge of the
Company, any other disqualified Person or party-in-interest with respect to any
Employee Plan, have engaged directly or indirectly in any "prohibited
transaction," as such term is defined in Section 4975 of the Code or Section 406
of ERISA, with respect to which the Company could have or has any material
liability.
5.11.3 The Company has no Employee Plan that is subject to Title IV of
ERISA and has had no ERISA Affiliate at any time since the later of the
Company's incorporation or September 2, 1974.
5.11.4 There are no pending or, to the Company's Knowledge, threatened
Proceedings by any Employees or plan participants or the beneficiaries, spouses
or representatives of any of them, against any Employee Plan or Benefit
Arrangement, the assets held thereunder, the trustee of any such assets, or the
Company relating to any of the Employee Plans, other than ordinary and usual
claims for benefits by participants or beneficiaries. Furthermore, there are no
pending, or to the Company's Knowledge, threatened Proceedings by any
Governmental Authority of or against any Employee Plan or Benefit Arrangement,
the trustee of any assets held thereunder, or the Company relating to any of the
Employee Plans or Benefit Arrangements.
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5.11.5 No Employee Plan has been the subject of an IRS or Department of
Labor audit. There are no pending Proceedings or, to the Company's Knowledge,
threatened Proceedings in which the "qualified" status of any Employee Plan is
at issue and in which revocation of the determination letter has been
threatened. Each such Employee Plan has not been amended or operated, since the
receipt of the most recent determination letter, in a manner that would
materially adversely affect the "qualified" status of the Employee Plan. No
distributions have been made from any of the Employee Plans that would violate
in any material respect the restrictions under Treas. Reg. Section
1.401(a)(4)-5(b), and none will have been made by the Effective Time. To the
Company's Knowledge, there has been no termination, partial or otherwise, as
defined in Section 411(d) of the Code and the regulations thereunder, of any
Employee Plan.
5.11.6 The Company has made all required contributions under each Employee
Plan on a timely basis or, if not yet due, adequate accruals therefore have been
provided for in the Company Financial Statements.
5.11.7 Except for the acceleration of Existing Options pursuant to the
Company Option Plan, neither the execution or delivery of this Agreement nor the
consummation of the transactions contemplated hereby (either alone or together
with any additional or subsequent events) constitutes an event under any
Employee Plan, Benefit Arrangement or loan to, or individual agreement or
contract with, an Employee that may result in any payment (whether of severance
pay or otherwise), restriction or limitation upon the assets of any Employee
Plan or Benefit Agreement, acceleration of payment or vesting, increase in
benefits or compensation, or required funding, with respect to any Employee, or
the forgiveness of any loan or other commitment of any Employees.
5.11.8 To the Company's Knowledge, no amounts paid or payable by the
Company to or with respect to any Employee will fail to be deductible for
federal income tax purposes by reason of Section 280G of the Code.
5.11.9 No Employees and no beneficiaries or dependents of Employees are or
may become entitled under any Employee Plan or Benefit Arrangement to
post-employment welfare benefits of any kind, including, without limitation,
death or medical benefits, other than coverage mandated by Section 4980B of the
Code.
5.11.10 The Employee Plans that are group health plans (as defined for the
purposes of Section 4980B of the Code and Part 6 of Subtitle B of Title I of
ERISA, and all regulations thereunder, (such provisions of law and regulations
are hereinafter referred to as "COBRA")) have complied in all material respects
at all times during the past three (3) years, and will continue to comply in all
material respects through the Effective Time, with requirements of COBRA to
provide health care continuation coverage to qualified beneficiaries who have
elected, or may elect to have, such coverage. The Company or its agents who
administer any of the Employee Plans or Benefit Arrangements, have complied in
all material respects at all times during the past three (3) years and will
continue to comply in all material respects through the Effective Time, with the
notification and written notice requirements of COBRA. There are no pending or
to the Company's Knowledge, threatened Proceedings by any current Employee,
former Employee, participants or by the beneficiary, dependent or representative
of any such person, involving the failure of any Employee Plan or Benefit
Arrangement or of any other group health plan ever maintained by the Company to
comply with the health care continuation coverage requirements of COBRA.
5.11.11 There are no agreements with, or pending petitions for recognition
of, a labor union or an association as the exclusive bargaining agent for any of
the Employees of the Company; no such petitions have been pending at any time
within two years of the date of this Agreement, and, to the Company's Knowledge,
there has not been any organizing effort by any union or other group seeking to
represent any Employees of the Company as their exclusive bargaining agent at
any time within two years of the date of this Agreement. There are no labor
strikes, work stoppages or, to the Company's Knowledge, other labor troubles,
other than routine grievance matters, now pending, or threatened, against the
Company.
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5.12 EMPLOYEE CONTRACTS AND NON-DISCLOSURE AGREEMENTS
The Company has provided Protocol with copies of all Employee Contracts for
its current Employees. All of the Company's current salaried Employees who are
considered appropriate by the Company and, to the Company's Knowledge, all of
its former Employees who were considered appropriate at the time and who have
terminated employment since February 20, 1995, have executed a confidentiality
agreement substantially in the form set forth in Section 5.12 of the Company
Disclosure Schedules. All of the Employees are "at-will" employees, and no
Employees have oral or written employment agreements with the Company.
5.13 REAL PROPERTY
5.13.1 Section 5.13 of the Company Disclosure Schedule contains a true,
complete and correct list of the Real Property. (i) The Company owns no Real
Property, (ii) the Company enjoys peaceful and undisturbed possession of the
Real Property leased by the Company, (iii) to the Company's Knowledge, the
Company's interest in the Real Property is not subject to any commitment for
sale or use by any Person other than the Company, (iv) the Company's interest in
the Real Property is not subject to any Lien (other than the Lien of the owner's
mortgagee, if any) which in any material respect interferes with or impairs the
value, transferability or present and continued use thereof in the usual and
normal conduct of the Company's business, (v) no labor has been performed or
material furnished on behalf of or at the request of the Company for the Real
Property for which a mechanic's or materialman's lien or liens, or any other
lien, has been or could be claimed by any Person on the Company's interest in
the Real Property, (vi) the Company's use of the Real Property presently leased
by the Company is in compliance in all material respects with all applicable
zoning laws, and (vii) to the Company's Knowledge, the Real Property presently
leased by the Company, is in compliance in all material respects with all
applicable building code and other laws (other than zoning laws).
5.13.2 To the Company's Knowledge, there are no condemnation or eminent
domain Proceedings pending or contemplated or threatened, against the Real
Property presently leased by the Company or any part thereof, and the Company
has no knowledge of any desire of any Governmental Authority to take or use the
Real Property or any part thereof. To the Company's Knowledge, there are no
existing or, contemplated or threatened, general or special assessments
affecting the Company's interest in the Real Property presently leased by the
Company or any portion thereof. The Company has not received notice of any
pending or threatened Proceeding before any Governmental Authority which relates
to the ownership, maintenance, use or operation of the Company's interest in the
Real Property presently leased by the Company.
5.13.3 The buildings and improvements on the Real Property (including,
without limitation, the heating, air conditioning, mechanical, electrical and
other systems used in connection therewith) are in a condition deemed adequate
by the Company for the intended use, ordinary wear, tear and obsolescence
excepted and to the Company's Knowledge are reasonably free from infestation by
termites, other wood destroying insects, vermin and other pests. There are no
repairs or replacements exceeding $50,000 in the aggregate for all Real Property
presently leased by the Company or $10,000 for any single repair or replacement
which are currently contemplated by the Company or which, in the Company's
reasonable judgment, should be made in order to maintain said buildings and
improvements in a reasonable state of repair.
5.14 TANGIBLE PERSONAL PROPERTY
5.14.1 Section 5.14 of the Company Disclosure Schedule lists each item of
Tangible Personal Property owned by the Company having an original book value in
excess of $5,000, and Section 5.14 of the Company Disclosure Schedule lists each
item of Tangible Personal Property leased by the Company (other than individual
leases of office equipment having an annual rental of less than $5,000).
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5.14.2 The Tangible Personal Property constitutes substantially all
tangible personal property necessary, in the Company's reasonable judgment, to
conduct the business of the Company as presently conducted. All of the Tangible
Personal Property is located at the Real Property and there is no Tangible
Personal Property located at any of the Real Property which is not owned or
leased by the Company.
5.14.3 In the Company's reasonable judgment, the Tangible Personal Property
is, in all material respects, in a condition adequate for its intended use,
ordinary wear and tear and obsolescence excepted. There are no repairs or
replacements exceeding $50,000 in the aggregate for all Tangible Personal
Property or $10,000 for any single item of Tangible Personal Property which are
currently contemplated by the Company or which, in the Company's reasonable
judgment, should be made in order to maintain the Tangible Personal Property in
reasonable working order.
5.15 INTANGIBLE PROPERTY
5.15.1 Section 5.15 of the Company Disclosure Schedule contains a true,
correct and complete list of: (i) United States federal, state and foreign
grants, registrations and applications existing or outstanding with respect to
any Intangible Property owned by the Company, including, without limitation, all
applicable grants, registration, application or serial numbers and other filing
or recording information and all expiration dates pertaining thereto (the
"Registered Intangible Property"); (ii) all license agreements relating to
Intangible Property to which the Company is a party; and (iii) all other
trademarks, tradenames and service marks which constitute Intangible Property.
5.15.2 (i) The Registered Intangible Property is owned exclusively by the
Company and, to the knowledge of the Company, is used exclusively by the
Company, (ii) the Registered Intangible Property owned by the Company is free
and clear of all Liens, (iii) there is no pending or, to the Company's
Knowledge, threatened Proceeding by or before any Governmental Authority
alleging, any infringement or other violation of any right of any third Person
in or to the Intangible Property, (iv) there is not now, and there has not been
during the past five years, any asserted claim of infringement or other
violation of any other intellectual property right of any third Person resulting
from the conduct of the Company, and the Company has no Knowledge that any such
infringement or violation exists or will be alleged, (v) the Company has no
Knowledge of any activity by any third Person which does or might constitute an
infringement or other violation of the Company's rights in or to any Intangible
Property, (vi) the Company has not entered into any license, consent,
indemnification, forbearance to sue, settlement agreement or cross-licensing
arrangement with any Person relating to the Intangible Property or any
intellectual property right of any third Person, (vii) there are no agreements
relating to and materially affecting any Intangible Property of the Company or
the use or ownership thereof, including, without limitation, license agreements,
confidentiality and non-disclosure agreements, assignments or agreements to
assign, development agreements, settlement agreements and other related
agreements; and (viii) the Company is unaware of any information which would or
might materially adversely affect any of the Intangible Property or render any
of the Intangible Property invalid or unenforceable.
5.15.3 The Intangible Property identified in the Company Disclosure
Schedule constitutes, in the Company's reasonable judgment, all Intangible
Property necessary and sufficient to operate the Company's business. The
consummation of the transactions contemplated hereby will not result in the loss
or impairment of any of the Company's rights in the Intangible Property. No
shareholder or Employee of the Company owns, directly or indirectly, in whole or
in part, any rights in any of the Intangible Property. The Company has the right
to use its corporate name and, each tradename or assumed name under which it
conducts its business. No Person has asserted to the Company or, to the
Company's Knowledge, threatened to assert to the Company, any claim or made any
demand to the right to the Company's corporate name or any such tradename or
assumed name or the right to use any such name, and no Proceeding is pending or
threatened, which challenges the right of the Company with respect thereto. To
the Company's Knowledge, no other Person is using any such names as a corporate
name, tradename or assumed name.
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5.16 TITLE TO ASSETS
The Company has good and marketable title to all of its assets as described
in the most recent balance sheet contained in the Company Financial Statements
and in Sections 5.13, 5.14, 5.15, 5.17 and 5.18 of the Company Disclosure
Schedule, free and clear of all Liens.
5.17 INVENTORIES AND RECEIVABLES
5.17.1 The inventories of the Company at December 31, 1995 are shown on the
balance sheet at December 31, 1995 referred to in Section 5.6. Such inventories
and the inventories acquired by the Company subsequent to the date of such
balance sheet consist of items of a quality and quantity, in all material
respects, usable and salable in the normal course of its business over a period
of one year from the date of this Agreement, subject to recorded reserves
reflected on the Company Financial Statements. The values of obsolete materials
and materials below standard quality have been written down on its books of
account to realizable market value, or adequate reserves have been provided
therefor in accordance with GAAP. All items included in such inventories are
owned by the Company, except for sales made subsequent to the date of such
balance sheet in the ordinary course of business, for all of which either the
purchaser has made full payment or the purchaser is obligated to make payment
and such obligation is an asset of the Company in accordance with GAAP. All
inventories of raw materials and finished goods are carried on the December 31,
1995 balance sheet referred to in Section 5.6 and are carried on the books at
the lower of cost (first in-first out) or market.
5.17.2 All receivables of the Company shown on the balance sheet at
December 31, 1995, referred to in Section 5.6 arose in the ordinary course of
business at the aggregate amounts thereof are, to the Company's Knowledge,
collectible at the net recorded amount thereof, and are carried at values
determined in accordance with GAAP consistently applied. The Company has
established reserves for doubtful accounts in accordance with GAAP and to the
extent reflected in the Company Financial Statements. None of the receivables of
the Company is subject to any stated claim of offset, recoupment, setoff or
counterclaim and the Company has no knowledge of any facts or circumstances that
would give rise to any such claim. No receivables are contingent upon the
performance by the Company of any obligation or contract. No Person has any Lien
on any of such receivables, and no agreement for deduction or discount has been
made with respect to any of such receivables.
5.18 CONTRACTS
5.18.1 Schedule 5.18 of the Company Disclosure Schedule contains a true and
correct list of the Contracts. True and correct copies of all of the Contracts
have been delivered to Protocol. Each of the Contracts is valid, binding and
enforceable by the Company in accordance with its terms. Each of the Contracts
was entered into in the ordinary course of business and is not subject to
termination except in accordance with its terms or except as provided by
applicable law.
5.18.2 To the Company's Knowledge, each of the Contracts is in full force
and effect, all fees, rents, royalties and other payments due thereunder are
current, neither the Company nor any other party is in material default
thereunder or in material breach thereof, and the Company has not during the
past five years sought or obtained any waiver of or under any provision of any
Contract (including, without limitation, any waiver from any lender or other
creditor of any term, condition or default under any Contract), (other than
waivers obtained which have no continuing Company Material Adverse Effect). To
the Company's Knowledge, there exists no event or occurrence, condition or act
which constitutes or, with the giving of notice, the lapse of time or the
happening of any future event or condition, would become, a material default by
the Company or any other party under any of the Contracts. The Company has no
Knowledge of any threatened default under any of the Contracts.
5.18.3 The Company is not a party to any Contract:(i) which was not entered
into in the ordinary course of business; (ii) which requires the Company to make
any capital expenditure in excess of $25,000; or (iii) which has a term of
greater than one year (other than Contracts which are cancelable without penalty
in sixty (60) days or less).
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5.19 SUPPLIERS AND CUSTOMERS
To the Company's Knowledge, no substantial supplier or customer (who
accounted for more than 2% of aggregate 1995 annual purchases or more than 2% of
aggregate 1995 annual revenues, as the case may be, of the Company) has
indicated to the Company that it intends to terminate its relationship with the
Company; nor does the Company have Knowledge that any such supplier or customer
intends to terminate such relationship or that any material problem or dispute
with any such supplier or customer exists. In the opinion of the Company, the
Company has good business relationships with each such supplier and customer.
The Company has received no information from any Person that the consummation of
the Merger would or might disrupt the Company's existing relationships with any
such supplier or customer, but Protocol recognizes that the Persons listed in
Section 5.19 of the Company Disclosure Schedule are competitors or potential
competitors of Protocol and, consequently, may threaten to curtail, terminate or
adversely modify, or may in fact curtail, terminate or modify, their business
with the Company as a result of the consummation of the transactions
contemplated hereby. In the event of any such threatened or actual curtailment,
termination or modification, notwithstanding any representation other than those
contained above in this Section 5.19 and notwithstanding any agreement, covenant
or condition (including, without limitation, Sections 10.2.7 and 10.2.8) in this
Agreement to the contrary, Protocol acknowledges that it will (i) not assert any
such event or the financial consequences thereof as a condition to Protocol's
obligation to consummate the transactions contemplated hereby or (ii) have no
claim for breach of representation or warranty, indemnification or otherwise for
any damages or loss of any kind sustained or suffered by Protocol or the Company
as a result of any such curtailment, termination or modification of such
business with such customers.
5.20 PRODUCTS; PRODUCT WARRANTIES
5.20.1 A form of each product warranty relating to products manufactured or
sold by the Company (other than products manufactured and sold to original
equipment manufacturers for which negotiated product warranties may have been
given) at any time during the five-year period preceding the date of this
Agreement is attached to or set forth on Section 5.20.1 of the Company
Disclosure Schedule.
5.20.2 Section 5.20.2 of the Company Disclosure Schedule sets forth a true
and complete list, of (i) all products manufactured, marketed or sold by the
Company that have been recalled or withdrawn (whether voluntarily or otherwise)
at any time during the past five (5) years (for purposes of this paragraph, a
product shall have been recalled or withdrawn if all or a significant number of
products in a product line were recalled or withdrawn) and (ii) to the Company's
Knowledge, all Proceedings (whether completed or pending) at any time during the
past five (5) years seeking the recall, withdrawal, suspension or seizure of any
product sold by the Company.
5.20.3 Except as set forth on Section 5.20.3 of the Company Disclosure
Schedule, the Company has no Knowledge of any material defect in design,
materials, manufacture or otherwise in any products manufactured, distributed or
sold by the Company during the past five (5) years or any defect in repair to,
or replacement of, any such products which could give rise to any Company
Material Adverse Effect.
5.20.4 The average annual cost of all product repairs and replacements
performed by the Company during the past five (5) years did not exceed $500,000.
5.20.5 Except as provided in any of the standard product warranties
described in paragraph 5.20.1 of this Section, the Company has not sold any
products or services which are subject to an extended warranty of the Company
beyond 18 months and which warranty has not yet expired.
5.21 ENVIRONMENTAL MATTERS
5.21.1 To the Company's Knowledge, the Company, and its assets, properties
and operations are now and, at all times prior to the date hereof, have been in
compliance in all material respects with all applicable Environmental Laws. To
the Company's Knowledge, there has been and is no Release or
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threatened Release of any Environmental Material at, on, under, in, to or from
any of the Real Property occupied by the Company which relates to the Company's
operations and activities at the Real Property. The Company has not received any
notice of alleged, actual or potential responsibility for, or any Proceeding
regarding, the presence, Release or threatened Release of any Environmental
Material at any location, whether at the Real Property or otherwise, which
Environmental Materials were allegedly manufactured, used, generated, processed,
treated, stored, disposed or otherwise handled at or transported from the Real
Property occupied by the Company.
5.21.2 The Company has not received any notice of any other Proceeding by
any Person alleging any actual or threatened injury or damage to any Person,
property, natural resource or the environment arising from or relating to the
presence, Release or threatened Release of any Environmental Materials at, on,
under, in, to or from the Real Property or in connection with any operations or
activities thereat. To the Company's Knowledge, neither the Real Property nor
any operations or activities thereat is or has been subject to any judicial or
administrative proceeding, order, consent, agreement or any lien relating to any
applicable Environmental Laws.
5.21.3 To the Company's Knowledge, there are no underground storage tanks
presently located at the Real Property and there have been no Releases of any
Environmental Materials from any underground storage tanks or related piping at
the Real Property occupied by the Company. To the Company's Knowledge, there are
no PCBs located at, on or in the Real Property, nor asbestos or
asbestos-containing material located at, on or in the Real Property.
5.22 TRANSACTIONS WITH CERTAIN PERSONS
Except as disclosed in this Agreement, to the Company's Knowledge, (i) no
Relevant Company Insider, nor any Person related to any Relevant Company Insider
by blood or marriage, nor any corporation, partnership, trust or other entity in
which any such Person has a substantial interest as a shareholder, officer,
director, trustee, partner or otherwise, or any Affiliate of any of the
foregoing (each, a "Related Person"), is presently or at any time during the
past five years has been a party to any material transaction (other than normal
compensation arrangements for Employees) with the Company, including, without
limitation, any contact, agreement or other arrangement (A) providing for the
furnishing of material services to or by, (B) providing for the rental or sale
of real or personal property to or from, or (C) otherwise requiring payments of
an amount in excess of $500 annually to or from (other than for services as
Employees) such Related Person and (ii) no Relevant Company Insider is related
to any other Relevant Company Insider by blood or marriage. There is no
outstanding amount in excess of $500 owing (including, without limitation,
pursuant to any advance, note or other indebtedness instrument) from the Company
to any Related Person or from any Related Person to the Company, other than
three Promissory Notes, each dated July 1, 1995 in the principal amount of
$75,429, payable to each of Daniel F. Carsten, Robert H. Ricciardelli and Robert
M. Sommer (the "Shareholder Notes Payable"). Each of the Related Person
transactions set forth in Section 5.22 of the Company Disclosure Schedule, if
any, was entered into between the Company and the Related Person on an arms
length basis on terms no less favorable to the Company than could be obtained
from an unrelated third party.
5.23 ABSENCE OF CERTAIN PAYMENTS
To the Company's Knowledge, neither the Company nor any of its Employees or
other Persons acting on behalf of any of them, or any Affiliate of any of the
foregoing, have with respect to the Company's business (i) engaged in any
activity, prohibited by the United States Foreign Corrupt Practices Act of 1977
or any other similar law, regulation or Order of any Governmental Authority or
(ii) without limiting the generality of the preceding clause (i), used any
corporate or other funds for unlawful contributions, payments, gifts or
entertainment, or made any unlawful expenditures relating to political activity
to officials of any Governmental Authority. To the Company's Knowledge, none of
the Company or any of its shareholders, Employees or other Persons acting on
behalf of any of them, or any Affiliate of any of the foregoing, has accepted or
received any unlawful contributions, payments, gifts or expenditures.
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5.24 RECORDS
5.24.1 To the Company's Knowledge, no Business Records for the past five
years relating to the Company have been destroyed and all such Business Records
are available upon request, subject to applicable laws and/or contractual
prohibitions or limitations. In addition, to the Company's Knowledge, no
Business Records relating to periods prior to such five-year period which the
Company is required to maintain (including, without limitation, personnel
records and information relevant to current or future tax filings) have not been
destroyed and all such Business Records are available upon request, subject to
applicable laws and/or contractual prohibitions or limitations.
5.24.2 Complete and correct copies of the Corporate Records of the Company
have been delivered to Protocol as part of the Company Disclosure Schedule. The
minutes of the Company contain a complete and accurate record of those meetings
and significant actions of shareholders and directors, and of any executive
committee or other committee of the shareholders or board of directors, for
which minutes were prepared or for which actions were approved by unanimous
written consent and for which no meetings were held. The stock records of the
Company are complete and accurate and contains a complete and accurate record of
all share transactions for the Company from the date of its incorporation.
5.25 INSURANCE
5.25.1 Section 5.25 of the Company Disclosure Schedule contains a complete
and accurate list of (i) all current policies or binders of fire, product
liability, automobile liability, general liability, worker's compensation and
other forms of insurance (showing as to each policy or binder the carrier,
policy number, coverage limits, expiration dates, annual premiums, deductibles,
whether coverage is "occurrence" or "claims made" and a general description of
the type of coverage provided and policy exclusions) maintained by the Company
and relating to the Company's properties and assets or personnel (collectively,
the "Insurance") and (ii) all other "occurrence" basis insurance policies
maintained by the Company at any time during the past five (5) years with
respect to the business.
5.25.2 To the knowledge of the Company, all of the Insurance is, and from
the date of this Agreement to the Effective Time will be, sufficient for
compliance in all material respects with all requirements of applicable law and
of all contracts to which the Company is a party. The Company is not in default
in any material respect under any of the Insurance, and the Company has not
failed, to the Company's Knowledge, to give any notice or to present any claim
under any of the Insurance in a due and timely fashion. No notice of
cancellation, termination, reduction in coverage or increase in premium (other
than reductions in coverage or increases in premiums in the ordinary course) has
been received with respect to any of the Insurance, and all premiums with
respect to any of the Insurance have been, and will from the date of this
Agreement through the Effective Time be, timely paid.
5.25.3 The Company has not experienced claims in excess of current
Insurance coverage and the Insurance is in full force and effect. The Company
will use its best efforts to keep the Insurance in full force and effect by the
Company through the Effective Time. To the Company's Knowledge, there will be no
retrospective insurance premiums or charges on or with respect to any of the
Insurance for any period or occurrence through the Effective Time.
5.26 BANK ACCOUNTS, DIRECTORS AND OFFICERS
Section 5.26 of the Company Disclosure Schedule contains (i) a true,
complete and correct list of all bank accounts and safe deposit boxes maintained
by the Company and all persons entitled to draw thereon, to withdraw therefrom
or with access thereto, (ii) a description of all lock box arrangements for the
Company, (iii) the names of all the directors and officers of the Company and,
(iv) a true, complete and correct list of all powers of attorney executed by the
Company.
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5.27 TAKEOVER PROVISIONS INAPPLICABLE
As of the date hereof and at all times on or prior to the Effective Time,
Sections 180.1130 to and including 180.1150 of the WBCL are, and shall be,
inapplicable to the Merger and the transactions contemplated by this Agreement.
5.28 FINANCIAL ADVISOR
Except for Cowen & Company ("Cowen"), no broker, finder or investment banker
is entitled to any brokerage, finder's or other fee or commission in connection
with the Merger or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company, and (ii) the fees and
commissions payable to Cowen as contemplated by this Section will not exceed the
aggregate amount set forth in that certain letter, dated November 9, 1995, from
Cowen to the Company.
5.29 ACCOUNTING MATTERS
To the Company's Knowledge, the Company has not, through the date hereof,
taken or agreed to take any action that would prevent Protocol or the Company
from accounting for the business combination to be effected by the Merger as a
"pooling of interests."
5.30 OTHER NEGOTIATIONS
Except for the transactions contemplated by this Agreement, there is no
existing commitment by the Company or any of its shareholders to sell all or a
significant part of the assets or the stock of the Company, there is no
outstanding offer by the Company or any of its shareholders to sell all or a
substantial part of the assets or the stock of the Company, and there are no
pending negotiations involving the Company or any of its shareholders for the
sale of all or a substantial part of the assets or stock of the Company.
5.31 INVESTMENT COMPANY ACT
The Company is not an "investment company" within the meaning of the
Investment Company Act of 1940.
5.32 NO COMPANY MATERIAL ADVERSE EFFECT
Except as disclosed in the Company Disclosure Schedule, to the Company's
Knowledge there does not exist any fact or circumstance which, alone or together
with another fact or circumstance, could reasonably be expected to have a
material adverse effect on the business, properties, assets, condition
(financial or otherwise), liabilities, operations or prospects of the Company.
5.33 INFORMATION IN DISCLOSURE DOCUMENTS
5.33.1 None of the information with respect to the Company supplied by or
on behalf of the Company for the purpose of inclusion or incorporation by
reference in the Registration Statement or the Proxy Statement/Prospectus will,
(a) in the case of the Registration Statement, at the time it becomes effective
and at the Effective Time, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading; or (b) in the case of the Proxy Statement/
Prospectus, at the time of mailing the Proxy Statement/ Prospectus, at the time
of the Protocol Shareholders Meeting and at the time of the Company Shareholders
Meeting, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading; provided, however, that this provision shall not apply to statements
or omissions in the Registration Statement or the Proxy Statement/Prospectus
based upon information furnished by or on behalf of Protocol or Merger Sub for
use therein.
5.33.2 If at any time prior to the Effective Time any event with respect to
the Company or its officers and directors shall occur that is required to be
described in the Proxy Statement/Prospectus or the Registration Statement, the
Company shall notify Protocol by reference to this Section and
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cooperate with Protocol in preparing and filing with the SEC and, as required by
law, disseminating to the shareholders of the Company, an amendment or
supplement which accurately describes such event or events.
5.33.3 The information with respect to the Company supplied by or on behalf
of the Company for inclusion or incorporation by reference in the Proxy
Statement/Prospectus will comply as to form in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder;
provided, however, that this provision shall not apply as to information
furnished by or on behalf of Protocol or Merger Sub for use therein.
5.33.4 No representation or warranty made by the Company contained in this
Agreement and no statement contained in any certificate, list, exhibit or other
instrument specified in this Agreement, including without limitation the Company
Disclosure Schedule, contains (or will contain when made) any untrue statement
of a material fact or, to the Company's Knowledge omits (or, to the Company's
Knowledge, will omit when made) to state a material fact necessary to make the
statements contained therein, in light of the circumstances under which they
were (or will be made), not misleading.
5.34 DISPOSITION OF PROTOCOL COMMON SHARES
To the Company's Knowledge, there is no present plan or intention by the
shareholders of the Company who own one percent or more of the outstanding
Shares, and to the Company's Knowledge, there is no present plan or intention on
the part of the remaining shareholders of the Company to sell, exchange, or
otherwise dispose of a number of Protocol Common Shares received in the Merger
that would reduce the Company's shareholders' ownership of Protocol Common
Shares to a number having a value, as of the Effective Time, of less than 50
percent of the value of all of the formerly outstanding Shares of the Company as
of the same date. For purposes of this representation, Shares exchanged for cash
or other property, surrendered by dissenters or exchanged for cash in lieu of
fractional Protocol Common Shares will be treated as outstanding Shares as of
the Effective Time. Moreover, outstanding Shares and Protocol Common Shares held
by the Company's shareholders and otherwise sold, redeemed or disposed of prior
or subsequent to the Effective Time will be considered in making this
representation.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PROTOCOL
Protocol represents and warrants to the Company that, except as set forth in
the Protocol Disclosure Schedule:
6.1 ORGANIZATION AND QUALIFICATION
Protocol is a corporation duly organized and validly existing under the laws
of the State of Oregon and has the corporate power to carry on its business as
it is now being conducted and currently proposed to be conducted. Protocol is
duly qualified as a foreign corporation to do business, and is in good standing,
in each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities make such qualification necessary, except
where the failure to be so qualified will not, individually or in the aggregate,
have a material adverse effect on the business, properties, assets, condition
(financial or otherwise), liabilities, operations or prospects of Protocol and
its Subsidiaries taken as a whole in an amount in excess of $300,000 (a
"Protocol Material Adverse Effect"). Complete and correct copies as of the date
hereof of the articles of incorporation and bylaws of each of Protocol and
Merger Sub have been delivered to the Company as part of the Protocol Disclosure
Schedule.
6.2 CAPITALIZATION
The authorized capital stock of Protocol consists of 30,000,000 Protocol
Common Shares and 10,000,000 Shares of Preferred Stock, par value $0.01 per
share. As of December 31, 1995, 7,400,838 Protocol Common Shares were validly
issued and outstanding, fully paid, and nonassessable and no
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shares of preferred stock were issued and outstanding, and there have been no
material changes in such numbers through the date hereof. As of the date hereof,
there are no bonds, debentures, notes or other evidences of indebtedness having
the right to vote on any matters on which the Protocol's shareholders may vote
("Protocol Voting Debt") issued or outstanding. As of December 31, 1995, except
for options to acquire 954,952 Protocol Common Shares or as otherwise set forth
in the Protocol SEC Reports, there are no options, warrants, calls or other
rights, agreements or commitments outstanding obligating Protocol to issue,
deliver or sell shares of its capital stock or debt securities, or obligating
Protocol to grant, extend or enter into any such option, warrant, call or other
such right, agreement or commitment and there have been no material changes in
such numbers through the date hereof. All of the Protocol Common Shares issuable
in exchange for Shares at the Effective Time in accordance with this Agreement
will be, when so issued, duly authorized, validly issued, fully paid and
nonassessable, and shall be registered under the Securities Act, Exchange Act
and all applicable state securities laws governing the issuance and trading
thereof, and shall be delivered free and clear of all liens, claims, charges and
encumbrances of any kind or nature whatsoever.
6.3 SUBSIDIARIES
There are no "Significant Subsidiaries" (as such term is defined in Rule
1-02 of Regulation S-X of the SEC ("Significant Subsidiaries") of Protocol.
Except for Merger Sub, Protocol does not directly or indirectly own any interest
in any other Person.
6.4 AUTHORITY RELATIVE TO THIS AGREEMENT
6.4.1 Protocol has the corporate power to enter into this Agreement and,
subject to approval of the Issuance by its shareholders, to carry out its
obligations hereunder.
6.4.2 The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by Protocol's
Board of Directors. Except for the approval of Protocol's shareholders described
in Section 9.1.2, no other corporate proceedings on the part of Protocol are
necessary to authorize this Agreement and the transactions contemplated hereby.
6.4.3 This Agreement constitutes a valid and binding obligation of
Protocol, enforceable against Protocol in accordance with its terms except as
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally and except that the
availability of equitable remedies, including specific performance, is subject
to the discretion of the court in which any such proceeding may be brought.
6.4.4 Except for the approval of Protocol's shareholders described in
Section 9.1.2, Protocol is not subject to or obligated under (i) any charter,
by-law, indenture or other loan document provision or (ii) any other contract,
Permit, Order, lease, instrument, statute, law, ordinance, rule or regulation
applicable to Protocol or any of its Subsidiaries or their respective properties
or assets, which would be breached or violated, or under which there would be a
default (with or without notice or lapse of time, or both), or under which there
would arise a right of termination, cancellation or acceleration of any
obligation or the loss of a material benefit, by its executing and carrying out
this Agreement other than, in the case of clause (ii) only, (A) any breaches,
violations, defaults, terminations, cancellations, accelerations or losses
which, either singly or in the aggregate, will not have a Protocol Material
Adverse Effect or prevent the consummation of the transactions contemplated
hereby and (B) the laws and regulations referred to in Section 6.4.5.
6.4.5 Except in connection, or in compliance, with the provisions of the
Exchange Act, the regulations of the Nasdaq/NMS, and the corporation, securities
or blue sky laws or regulations of the various states, no Permit or
Authorization is necessary for the consummation by Protocol of the Merger or the
other transactions contemplated by this Agreement, other than Authorizations,
the failure of which to make or obtain would not have a Protocol Material
Adverse Effect or prevent the consummation of the transactions contemplated
hereby.
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6.5 PROTOCOL ACTION
The Board of Directors of Protocol (at a meeting duly called and held) has
by the requisite vote of all directors present (i) determined that the Merger is
advisable and in the best interests of Protocol and its shareholders, (ii)
approved the Merger in accordance with the provisions of ORS 60.481, and (iii)
recommended the approval of the Issuance and directed that the Issuance be
submitted for consideration by Protocol's shareholders at the Protocol
Shareholders Meeting.
6.6 REPORTS AND FINANCIAL STATEMENTS
6.6.1 Protocol has previously furnished the Company with true and complete
copies of its (i) Annual Report on Form 10-K for the fiscal years ended December
31, 1992, December 31, 1993, and December 31, 1994, as filed with the SEC, (ii)
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1995, June 30,
1995, and September 30, 1995 as filed with the SEC, (iii) proxy statements
related to all meetings of its shareholders (whether annual or special) since
March 24, 1992 and (iv) all other reports or registration statements declared
effective by the SEC since March 24, 1992 (clauses (i) through (iv) being
referred to herein collectively as the "Protocol SEC Reports").
6.6.2 As of their respective dates, the Protocol SEC Reports complied in
all material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such Protocol SEC Reports.
6.6.3 As of their respective dates, the Protocol SEC Reports did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited interim financial
statements of Protocol included in the Protocol SEC Reports comply as to form in
all material respects with applicable accounting requirements of the Securities
Act and with the published rules and regulations of the Commission with respect
thereto.
6.6.4 The financial statements included in the Protocol SEC Reports and
Protocol's audited financial statement (including balance sheet, statement of
income and statement of cash flows) as of and for the period ending December 31,
1995 (i) have been prepared in accordance with GAAP applied on a consistent
basis (except as may be indicated therein or in the notes thereto), (ii) present
fairly, in all material respects, the financial position of Protocol and its
subsidiaries as at the dates thereof and the results of their operations and
cash flows for the periods then ended subject, in the case of the unaudited
interim financial statements, to normal year-end audit adjustments, any other
adjustments described therein and the fact that certain information and notes
have been condensed or omitted in accordance with the Exchange Act and the rules
promulgated thereunder, and (iii) are in accordance with the books of account
and records of Protocol.
6.6.5 To the knowledge of Protocol, neither Protocol nor any of its
Subsidiaries has any liabilities or obligations (absolute, accrued, contingent
or otherwise), which are material to Protocol and its Subsidiaries taken as a
whole and which are not disclosed or provided for in the most recent Protocol
SEC Reports, other than liabilities and obligations incurred between the date of
the most recent Protocol SEC Report and the date hereof in the ordinary course
of Protocol's business, consistent with past practice and except as otherwise
disclosed in this Agreement, including the Protocol Disclosure Schedule. To the
best knowledge of Protocol, there is no basis for any such liability against
Protocol or its Subsidiaries, whether absolute, accrued, contingent or
otherwise, which is or would have a Protocol Material Adverse Effect, not
reflected in the Protocol SEC Reports.
6.7 ABSENCE OF CERTAIN CHANGES OR EVENTS
Since September 30, 1995, there has not been (i) any transaction,
commitment, dispute or other event or condition (financial or otherwise) of any
character (whether or not in the ordinary course of business) individually or in
the aggregate having, or which could reasonably be expected to have, a Protocol
Material Adverse Effect (other than as a result of changes in laws or
regulations of general applicability), (ii) any damage, destruction or loss,
whether or not covered by insurance, which, insofar
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as reasonably can be foreseen, in the future would have a Protocol Material
Adverse Effect, (iii) any entry into any commitment or transaction material to
Protocol and its subsidiaries taken as a whole (including, without limitation,
any borrowing or sale of assets) except in the ordinary course of business
consistent with past practice, or (iv) any commencement or notice, or to
Protocol's knowledge, threat of commencement, of any Proceeding involving
Protocol or its Subsidiaries or the affairs of any of them.
6.8 LITIGATION
Except as disclosed in the Protocol SEC Reports, there is no Proceeding
pending or, to the knowledge of Protocol, threatened against Protocol or any of
its Subsidiaries which, either alone or in the aggregate, could reasonably be
expected to have a Protocol Material Adverse Effect, nor is there any Order
outstanding against Protocol or any of its Subsidiaries having, or which in the
future could reasonably be expected to have, either alone or in the aggregate,
any Protocol Material Adverse Effect.
6.9 FAIRNESS OPINION
Protocol has received the written opinion of Wessels, Arnold & Henderson
("Wessels"), financial advisors to Protocol, dated the date hereof, to the
effect that the Applicable Merger Consideration is fair to the shareholders of
Protocol from a financial point of view ("Protocol Fairness Opinion").
6.10 COMPLIANCE WITH PERMITS, APPLICABLE LAWS AND AGREEMENTS
6.10.1 To the knowledge of Protocol, Protocol holds all Permits, the
failure of which to hold would have a Protocol Material Adverse Effect (the
"Protocol Permits"). To the knowledge of Protocol, Protocol is in compliance
with the terms of the Protocol Permits, except for such failures to comply
which, individually or in the aggregate, would not have a Protocol Material
Adverse Effect.
6.10.2 To the knowledge of Protocol, Protocol's business is not being
conducted in violation of any law, ordinance or regulation of any Governmental
Authority, except for possible violations which individually or in the aggregate
do not and would not have a Protocol Material Adverse Effect.
6.10.3 To the knowledge of Protocol, Protocol is not in default (and not in
a circumstance which, with notice or lapse of time, or both, would constitute a
default) under any agreement or instrument to which it is a party, whether or
not such default has been waived, except for any such default which, alone or in
the aggregate with other such defaults, would not have a Protocol Material
Adverse Effect.
6.10.4 The provisions of this Section 6.10 shall not be construed or
applied to narrow or otherwise restrict the scope of any other representations
and warranties in this Article 6.
6.11 SUPPLIERS AND CUSTOMERS
To Protocol's knowledge, no substantial supplier or customer (who accounted
for more than 2% of aggregate 1995 annual purchases or more than 2% of aggregate
1995 annual revenues, as the case may be, of Protocol) has indicated to Protocol
that it intends to terminate its relationship with Protocol; nor does Protocol
have knowledge that any such supplier or customer intends to terminate such
relationship or that any material problem or dispute with any such supplier or
customer exists. In the opinion of Protocol, it has good business relationships
with each such supplier and customer. Protocol has no reason to believe that the
consummation of the Merger would or might disrupt Protocol's existing
relationships with any such supplier or customer.
6.12 PRODUCTS
Protocol has no knowledge of any material defect in design, materials,
manufacture or otherwise in any products manufactured, distributed or sold by
Protocol during the past five (5) years or any defect in repair to, or
replacement of, any such products which could give rise to any Protocol Material
Adverse Effect.
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6.13 FINANCIAL ADVISOR
Except for Wessels, no broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission in connection with the Merger
or the transactions contemplated by this Agreement based upon arrangements made
by or on behalf of Protocol.
6.14 ACCOUNTING MATTERS
To Protocol's knowledge, neither Protocol nor any of its Affiliates has,
through the date hereof, taken or agreed to take any action that would prevent
Protocol or the Company from accounting for the business combination to be
effected by the Merger as a "pooling of interests."
6.15 INVESTMENT COMPANY ACT
Protocol is not an "investment company" within the meaning of the Investment
Company Act of 1940.
6.16 INFORMATION IN DISCLOSURE DOCUMENTS
6.16.1 None of the information with respect to Protocol supplied by or on
behalf of Protocol for inclusion or incorporation by reference in the
Registration Statement or the Proxy Statement/Prospectus will, (a) in the case
of the Registration Statement, at the time it becomes effective and at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading; or (b) in the case of the Proxy Statement/ Prospectus, at the
time of mailing the Proxy Statement/Prospectus, at the time of the Protocol
Shareholders Meeting and at the time of the Company Shareholders Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading; provided, however, that this provision shall not apply to statements
or omissions in the Registration Statement or the Proxy Statement/Prospectus
based upon information furnished by or on behalf of the Company for use therein.
6.16.2 If at any time prior to the Effective Time any event with respect to
Protocol or its officers and directors shall occur that is required to be
described in the Proxy Statement/Prospectus or the Registration Statement,
Protocol shall notify the Company by reference to this Section and cooperate
with the Company in preparing and filing with the SEC and, as required by law,
disseminating to the shareholders of Protocol, an amendment or supplement which
accurately describes such event or events.
6.16.3 The Registration Statement will comply as to form in all material
respects with the provisions of the Securities Act and the rules and resolutions
promulgated thereunder. The Proxy Statement/Prospectus will comply as to form in
all material respects with the provisions of the Exchange Act and the rules and
regulations promulgated thereunder; provided, however, that this provision shall
not apply as to information furnished by or on behalf of the Company for use
therein.
6.16.4 No representation or warranty made by Protocol contained in this
Agreement and no statement contained in any certificate, list, exhibit or other
instrument specified in this Agreement, including without limitation the
Protocol Disclosure Schedule, contains (or will contain when made) any untrue
statement of a material fact or omits (or will omit when made) to state a
material fact necessary to make the statements contained therein, in light of
the circumstances under which they were (or will be made), not misleading.
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ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF MERGER SUB
Protocol and Merger Sub jointly and severally represent and warrant to the
Company as follows:
7.1 ORGANIZATION
Merger Sub is a corporation duly organized and validly existing under the
laws of the State of Wisconsin. Merger Sub has not filed articles of dissolution
and no corporate action to dissolve Merger Sub has been taken. Complete and
correct copies as of the date hereof of the articles of incorporation and bylaws
of Merger Sub have been delivered to the Company as part of the Protocol
Disclosure Schedule.
7.2 CAPITALIZATION
The authorized capital stock of Merger Sub consists of 9,000 shares of
Common Stock, par value $1.00 per share, 1,000 of which are validly issued and
outstanding, fully paid and nonassessable (subject to Section 180.0622(2)(b) of
the WBCL, as judicially interpreted) and are owned by Protocol free and clear of
all Liens.
7.3 AUTHORITY RELATIVE TO THIS AGREEMENT
7.3.1 Merger Sub has the corporate power to enter into this Agreement and
to carry out its obligations hereunder.
7.3.2 The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by its Board of
Directors and sole shareholder, and no other corporate proceedings on the part
of Merger Sub are necessary to authorize this Agreement and the transactions
contemplated hereby.
7.3.3 This Agreement constitutes a valid and binding obligation of Merger
Sub, enforceable against Merger Sub in accordance with its terms except as
enforcement may be limited to bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally and except that the
availability of equitable remedies, including specific performance, is subject
to the discretion of the court before which any proceeding therefor may be
brought.
7.3.4 Merger Sub is not subject to or obligated under any charter or bylaw
provision which would be breached or violated by its executing and carrying out
this Agreement.
7.3.5 Except as referred to herein or in connection, or in compliance, with
the provisions of the Securities Act, the Exchange Act and the corporation,
securities or blue sky laws or regulations of the various states, no
Authorization is necessary for the consummation by Merger Sub of the Merger or
the transactions contemplated by this Agreement.
7.4 MERGER SUB ACTION
The Board of Directors of Merger Sub (at a meeting duly called and held) has
by the requisite vote of all directors present (i) determined that the Merger is
advisable and in the best interests of Merger Sub and (ii) approved the Merger
in accordance with the provisions of Section 180.1101 of the WBCL.
7.5 INTERIM OPERATIONS OF MERGER SUB
Merger Sub was formed solely for the purpose of engaging in the transactions
contemplated hereby, has engaged in no other business activities and has
conducted its operations only as contemplated hereby.
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ARTICLE 8
CONDUCT OF BUSINESS PENDING THE MERGER
8.1 CONDUCT OF BUSINESS OF THE COMPANY
Except as contemplated by this Agreement or as set forth in the Company
Disclosure Schedule, during the period from the date of this Agreement to the
Effective Time, (a) the Company will conduct its operations according to its
ordinary course of business consistent with past practice, (b) the Company will
not enter into any material transaction other than in the ordinary course of
business consistent with past practice and (c) to the extent consistent with the
foregoing, with no less diligence and effort than would be applied in the
absence of this Agreement, the Company will seek to preserve intact its current
business organizations, keep available the service of its current officers and
employees and preserve its relationships with customers, suppliers and others
having business dealings with it with the objective that their goodwill and
ongoing businesses shall be unimpaired at the Effective Time. Without limiting
the generality of the foregoing, and except as otherwise permitted in this
Agreement, prior to the Effective Time, the Company will not without the prior
written consent of Protocol:
8.1.1 Except for Shares issued upon exercise of options outstanding as of
the date hereof under the Company Option Plans, issue, deliver, sell, dispose
or, pledge or otherwise encumber, or authorize or propose the issuance,
delivery, sale, disposition or pledge or other encumbrance of (i) any additional
shares of its capital stock of any class (including the Shares), or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any shares of its capital stock, or any rights, warrants,
options, calls, commitments or any other agreements of any character to purchase
or acquire any shares of its capital stock or any securities or rights
convertible, into, exchangeable for or evidencing the right to subscribe for any
shares of its capital stock or (ii) any other securities in respect of, in lieu
of or in substitution for Shares outstanding on the date hereof;
8.1.2 Redeem, purchase or otherwise acquire, or propose to redeem, purchase
or otherwise acquire, any of its outstanding securities (including the Shares);
8.1.3 Split, combine, subdivide or reclassify any shares of its capital
stock or declare, set aside for payment or pay any dividend, or make any other
actual, constructive or deemed distribution in respect of any shares of its
capital stock or otherwise may any payments to shareholders in their capacity as
such;
8.1.4 (i) Grant any material increases in the compensation of any of its
directors, officers or key employees, except in the ordinary course of business
consistent with past practice, (ii) pay or agree to pay any pension, retirement
allowance or other material employee benefit not required or contemplated by any
Employee Plan or Benefit Arrangement as in effect on the date hereof to any such
director, officer or key employee, whether past or present, (iii) enter into any
new or materially amend any existing employment agreement with any such
director, officer or key employee, (iv) enter into any new or materially amend
any existing severance agreement with any such director, officer or key employee
or (v) except as may be required to comply with applicable law, amend any
existing, or become obligated under any new, Employee Plan or Benefit
Arrangement;
8.1.5 Adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of the
Company (other than the Merger);
8.1.6 Make any acquisition, by means of merger, consolidation or otherwise,
of (i) any direct or indirect ownership interest in or assets comprising any
business enterprise or operation or (ii) except in the ordinary course and
consistent with past practice, any other assets;
8.1.7 Adopt any amendments to its articles of incorporation or bylaws,
other than to render inapplicable to the transactions contemplated hereby the
rights of refusal contained in Section 6.04 of the Company's bylaws;
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8.1.8 (a) Other than borrowings in the ordinary course under the Company's
existing bank line of credit which, together with existing borrowings, do not in
the aggregate exceed the current maximum borrowing availability thereunder,
incur any indebtedness for borrowed money or guarantee any such indebtedness
(the Company specifically acknowledging and agreeing that the Company shall not
borrow money under its term loan and equipment purchase credit facilities, other
than what it has already borrowed under such credit facilities), or (b) except
in the ordinary course of business consistent with past practice, make any
loans, advances or capital contributions to, or investments in, any other
Person;
8.1.9 Engage in the conduct of any business the nature of which is
materially different than the business the Company is currently engaged in;
8.1.10 Enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Company;
8.1.11 Enter into any contract, arrangement or understanding requiring the
purchase of equipment, materials, supplies or services over a period greater
than 12 months and for the expenditure of greater than $25,000 per year, which
is not cancellable without penalty on 30 days' or less notice, except in the
ordinary course of business for the distribution of products or the production
of inventory; or
8.1.12 Authorize or announce an intention to do any of the foregoing, or
enter into any contract, agreement, commitment or arrangement to do any of the
foregoing.
8.2 CONDUCT OF BUSINESS OF PROTOCOL
Prior to the Effective Time, Protocol will carry on its business consistent
with its past practices, will notify the Company of the occurrence of any event
having a material adverse effect upon its business prospects or financial
condition and without the prior written consent of the Company, will not do any
of the following:
8.2.1 Take any action or permit any action to be taken other than in the
ordinary course of business which is inconsistent with preserving its existing
business organization and relations with employees, customers, suppliers and
others with whom it has a business relationship and with protecting its rights
and properties; or
8.2.2 Conduct its business other than in compliance with all applicable
laws and regulations in all material respects.
8.3 CONDUCT OF BUSINESS OF MERGER SUB
During the period from the date of this Agreement to the Effective Time,
Merger Sub shall not engage in any activities of any nature except as provided
in or contemplated by this Agreement.
8.4 NOTICE OF BREACH
Each party shall promptly give written notice to the other party upon
becoming aware of the occurrence or, to its knowledge, impending or threatened
occurrence, of any event which would cause any of its representations or
warranties to be untrue on the Effective Time or cause a breach of any covenant
contained or referenced in this Agreement and will use its best reasonable
efforts to prevent or promptly remedy the same. Any such notification shall not
be deemed an amendment of the Company Disclosure Schedule or the Protocol
Disclosure Schedule.
ARTICLE 9
ADDITIONAL AGREEMENTS
9.1 MEETINGS OF SHAREHOLDERS
9.1.1 The Company will take all action necessary in accordance with
applicable law and its articles of incorporation and bylaws to convene a meeting
of its shareholders (the "Company Shareholders Meeting") as promptly as
practicable to consider and vote upon the approval of the Merger.
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Subject to the fiduciary duties of the Company's Board of Directors under
applicable law as advised by counsel, the Board of Directors of the Company
shall recommend and declare advisable such approval and the Company shall take
all lawful action to solicit, and use all reasonable efforts to obtain, such
approval. By agreement dated the date hereof (the "Voting Agreement"), a copy of
which is attached hereto as Exhibit 9.1.1 the shareholders owning the requisite
number of Shares necessary to approve the Merger each have agreed to vote in the
manner specified in the Voting Agreement. A correct and complete copy of the
Voting Agreement has been delivered to Protocol.
9.1.2 Protocol will take all action necessary in accordance with applicable
law, Section 1(c) of Schedule D to the Bylaws of NASD, and Protocol's articles
of incorporation and bylaws to convene a meeting of its shareholders (the
"Protocol Shareholders Meeting") as promptly as practicable to consider and vote
upon (a) the approval of the issuance of Protocol Common Shares in the Merger
and (b) the amendment to Protocol's 1992 Stock Option Plan to increase the
number of Protocol Common Shares reserved for issuance thereunder to an amount
sufficient to enable Protocol to issue Protocol Common Shares to all holders of
options under such Plan, including the Replacement Options (collectively, the
"Issuance"). Subject to the fiduciary duties of Protocol's Board of Directors
under applicable law as advised by counsel, the Board of Directors of Protocol
shall recommend and declare advisable such approval and Protocol shall take all
lawful action to solicit, and use all reasonable efforts to obtain, such
approval.
9.1.3 Protocol, as the sole shareholder of Merger Sub, has acted by written
consent to approve the Merger and the adoption of this Agreement by Merger Sub,
which consent Protocol and Merger Sub represent and warrant constitutes the
requisite approval of the Merger and this Agreement by Merger Sub.
9.2 REGISTRATION STATEMENT/PROXY MATERIALS
9.2.1 The Company shall cooperate with Protocol and Protocol shall use all
reasonable efforts to promptly prepare and file with the SEC and cause to be
made effective a Registration Statement (on such appropriate form therefor as
Protocol shall select, including a prospectus which shall be in such form as
permitted in the form of such Registration Statement so selected and a proxy
statement complying with the Exchange Act) under the Securities Act covering the
Protocol Common Shares to be issued in the Merger. As used in this Agreement,
the term Registration Statement refers to and means said Registration Statement
when it becomes effective under the Securities Act, and the term "Proxy
Statement/Prospectus" refers to and means the proxy statement included in the
Registration Statement when it becomes effective. The Registration Statement
will be effective on the date on which the Company mails to the holders of its
Shares the Proxy Statement/Prospectus with respect to the Company Shareholders'
meeting, on the date such meeting is held, and on the Closing Date. Protocol
shall also take any action required to be taken under state blue sky or
securities laws, statutes, codes, ordinances, rules and regulations in
connection with the issuance of shares of Protocol Common Shares contemplated
hereunder.
9.2.2 Protocol and the Company will use all reasonable efforts to have the
Registration Statement, or cause it to be, declared effective as promptly as
practicable, and also will take any other action required to be taken under
federal or state securities laws, and will use all reasonable efforts to cause
the Proxy Statement/Prospectus to be mailed to shareholders of Protocol and the
shareholders of the Company at the earliest practicable date or dates. If at any
time prior to the Effective Time any event relating to or affecting the Company
or Protocol shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for Protocol, to supplement or amend the
Registration Statement in order to make such document not misleading in light of
the circumstances existing at the time approvals of the shareholders of the
Company and Protocol, respectively, are sought, the Company and Protocol will
forthwith prepare and file with the SEC an amendment or supplement to the
Registration Statement so that each document, as so supplemented or amended,
will not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in light of the
circumstances existing at such time, not misleading.
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9.3 AFFILIATES OF PROTOCOL AND THE COMPANY
9.3.1 Set forth in the Company Disclosure Schedule are the names of all
Persons who may be deemed to be "affiliates" of the Company for purposes of Rule
145 under the Securities Act (the "Rule 145 Affiliates") or who may otherwise be
deemed to be Affiliates of the Company. Each such Rule 145 Affiliate has
delivered to Protocol a written agreement that such Rule 145 Affiliate will not
sell, pledge, transfer or otherwise dispose of any Protocol Common Shares issued
to such Rule 145 Affiliate pursuant to the Merger, except pursuant to an
effective registration statement or in compliance with Rule 145 or an exemption
from the registration requirements of the Securities Act.
9.3.2 Each of Protocol and the Company shall use all reasonable efforts to
cause their respective Affiliates not to take any action that would impair
Protocol's ability to account for the Merger as a pooling of interests.
9.3.3 In accordance with the foregoing, each Rule 145 Affiliate has also
agreed in such written agreement that such Rule 145 Affiliate will not, after
the earlier of (i) the mailing of the Proxy Statement/Prospectus or (ii) the
thirtieth (30th) day prior to the Effective Time, sell or in any other way
reduce such Rule 145 Affiliate's risk relative to any Protocol Common Shares
received in the Merger (within the meaning of the SEC's Codification of
Financial Reporting Policies 201.01, reprinted in 7 Fed. Sec. L. Re. (CCH)
72,951, until such time as financial results (including combined sales and net
income) covering at least 30 days of post-merger operations have been published
(which financial results Protocol agrees to publish in accordance with past
practice as part of its applicable Form 10-Q or 10-K filing covering such
period), except as permitted by Staff Accounting Bulletin No. 76 issued by the
SEC.
9.4 REGISTRATION AND QUOTATION OF PROTOCOL COMMON SHARES
9.4.1 Protocol will register the Protocol Common Shares to be issued
pursuant to this Agreement, and upon exercise of the Replacement Options, under
the applicable provisions of the Securities Act.
9.4.2 Protocol will cause the Protocol Common Shares to be issued pursuant
to this Agreement, and upon exercise of the Replacement Options, to be quoted
for trading on the Nasdaq/NMS.
9.5 TAX TREATMENT OF MERGER
Each party agrees to report the Merger on all tax returns and other filings
as a tax-free reorganization under Section 368(a) of the Code except where, in
the opinion of tax counsel to such party, there is not "substantial authority,"
as defined in Section 6662 of the Code, to support such a position.
9.6 REASONABLE EFFORTS
9.6.1 The Company, Protocol and Merger Sub shall, and shall use all
reasonable efforts to cause their respective Subsidiaries to: (a) promptly make
all filings and seek to obtain all Authorizations required under all applicable
laws with respect to the Merger and other transactions contemplated hereby, and
the parties will cooperate with each other with respect thereto; (b) use all
reasonable efforts to promptly take, or cause to be taken, all other actions and
do, or cause to be done, all other things necessary, proper or appropriate to
satisfy the conditions set forth in Article 10 and to consummate and make
effective the transactions contemplated by this Agreement on the terms and
conditions set forth herein as soon a practicable (including seeking to remove
promptly any injunction or other legal barrier that may prevent such
consummation); (c) not take any action which might reasonably be expected to
impair the ability of the parties to consummate the Merger at the earliest
possible time (regardless of whether such action would otherwise be permitted or
not prohibited hereunder); and (d) not take any action (regardless of whether
such action would otherwise be permitted or not prohibited hereunder) that
prevents Protocol from accounting for the Merger as a pooling of interests.
9.6.2 After the time, if any, that the Registration Statement shall have
been declared effective, Protocol shall promptly notify the Company if at any
time it has reason to believe that Peat Marwick
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will not be able to deliver the opinion referred to in Section 10.1.5 at the
Closing, and each of Protocol and the Company shall promptly advise the other of
any fact or circumstance of which it becomes aware (and which has not
theretofore been disclosed to the other) which it believes would adversely
impact the ability to satisfy such condition set forth in Section 10.1.5.
9.6.3 During the period of 60 days prior to the Closing, Protocol will not
repurchase or otherwise acquire in the public market, or announce any intention
or proposal to repurchase or otherwise acquire in the public market, any shares
of its capital stock (other than immaterial numbers of shares in the ordinary
course and consistent with past practice and at prevailing market prices).
9.7 OTHER TRANSACTIONS
Prior to the Closing, neither the Company nor any of its officers,
employees, representatives, agents or Affiliates will, directly or indirectly,
encourage, solicit or engage in discussions or negotiations with any third party
(other than Protocol) concerning any merger, consolidation, share exchange or
similar transaction involving the Company, or any purchase of all or a
significant portion of the assets of or equity interest in the Company, or any
other transaction that would involve the transfer or potential transfer of
control of the Company, other than the transactions contemplated hereby. The
Company will notify Protocol immediately of any inquiries or proposals with
respect to any such transaction that are received by, or any such negotiations
or discussions that are sought to be initiated with, the Company.
9.8 ACCESS TO INFORMATION
Subject to currently existing contractual and legal restrictions applicable
to the Company (which the Company represents and warrants are not material) or
to Protocol (which Protocol represents and warrants are not material), and upon
reasonable notice, each of the Company and Protocol shall during normal business
hours throughout the period prior to the Effective Time or until this Agreement
is terminated (a) afford to officers, employees, counsel, accountants and other
authorized representatives of the other party ("Authorized Representatives")
access to its properties, books and records (including, without limitation, the
work papers of independent accountants); and (b) furnish promptly to such
Authorized Representatives all information concerning its business, properties
and personnel as may reasonably be requested, provided that no investigation
pursuant to this Section shall affect or be deemed to modify any of the
respective representations or warranties made by Protocol or the Company. The
use and protection of all information provided by one party to the other
pursuant to this Section shall be governed by the Confidentiality Agreement.
9.9 EMPLOYEE MATTERS
Protocol intends to review each Employee Plan and Benefit Arrangement for
compatibility with similar programs maintained by Protocol for its employees.
Protocol may decide to have the Surviving Corporation continue in effect, amend,
modify or terminate in their entirety any one or more of the Employee Plans and
Benefit Arrangements, or merge any of the Employee Plans and Benefit
Arrangements into a comparable program maintained by Protocol and adopted by the
Surviving Corporation. Any such amendment, modification or termination shall not
deprive any Person who is an Employee of the Company on the Effective Time
("Affected Employee") of any accrued benefit payment to which the Affected
Employee has become entitled prior to the Effective Time. If Protocol does not
maintain a program similar to one of the Employee Plans or Benefit Arrangements,
there shall be no obligation on the part of Protocol or the Surviving
Corporation to adopt any program upon the discontinuance or termination of such
Employee Plan or Benefit Arrangement. Protocol will cause the Surviving
Corporation to give each Affected Employee full credit for service with the
Company for purposes of eligibility to participate in, vesting and payment of
benefits under, amounts of and eligibility for any subsidized benefit provided
under, any Protocol employee benefit plan or program of whatever kind adopted by
the Surviving Corporation.
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9.10 PAYMENT OF SHAREHOLDER NOTES PAYABLE
At the Closing, or within ten (10) days thereafter, Protocol shall cause the
Company to pay in full the Shareholder Notes Payable.
9.11 INDEMNIFICATION OF OFFICERS AND DIRECTORS
During the period beginning on the Closing Date and ending on the second
anniversary thereof, Protocol will cause the Company to maintain in the
Surviving Corporation's articles of incorporation and bylaws the Company's
current provisions regarding indemnification of officers and directors.
ARTICLE 10
CONDITIONS PRECEDENT
10.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS
The respective obligations of each party to consummate the transactions
contemplated by this Agreement are subject to the fulfillment at or prior to the
Effective Time of each of the following conditions, any or all of which may be
waived in whole or in part by the party being benefitted thereby, to the extent
permitted by applicable law:
10.1.1 COMPANY SHAREHOLDER APPROVAL
This Agreement and the transactions contemplated hereby shall have been duly
approved or ratified by the requisite holders of Shares in accordance with
applicable provisions of the WBCL (including, without limitation, Section
180.1103), and the articles of incorporation and bylaws of the Company.
10.1.2 PROTOCOL SHAREHOLDER APPROVAL
The Issuance shall have been duly approved by the requisite holders of
Protocol Common Shares in accordance with applicable provisions of the Oregon
Business Corporation Act (including, without limitation, ORS 60.487), the
articles of incorporation and bylaws of Protocol and Section 1(c) of Schedule D
to the Bylaws of the NASD.
10.1.3 NO ORDER
There shall not be in effect any Order of any court or Governmental Body of
competent jurisdiction restraining, enjoining or otherwise preventing
consummation of the transactions unacceptable to either of Protocol or the
Company, each in its reasonable judgment (which reasonable judgment shall take
into account, without limitation, the size and scope of the transactions
contemplated hereby and the benefits anticipated to be derived by Protocol or
the Company, as the case may be, from its rights and obligations hereunder).
10.1.4 REGISTRATION STATEMENT AND SECURITIES LAWS AUTHORIZATIONS
The Registration Statement shall have been declared effective and shall be
effective at the Effective Time, and no Stop Order suspending effectiveness
shall have been issued, no Proceeding by the SEC to suspend the effectiveness
thereof shall have been initiated and be continuing, and all necessary
Authorizations under state securities laws or the Securities Act or Exchange Act
relating to the issuance or trading of the Protocol Common Shares shall have
been received.
10.1.5 POOLING OPINIONS
On or before the filing of the Registration Statement with the SEC, Protocol
shall have received an opinion of Peat Marwick, in substantially the form
attached hereto as Exhibit 10.1.5(a) and a letter from Price Waterhouse, LLP,
addressed to the Company's Board of Directors in substantially the form attached
hereto as Exhibit 10.1.5 (b).
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10.1.6 DISSENTERS' RIGHTS
Holders of no more than that number of shares which, if all outstanding
shares of Company Preferred Stock were converted into Company Common Stock at
the specified conversion rates, would equal five percent (5%) of all outstanding
Company Common Stock after giving effect to the conversion, shall have validly
exercised and not withdrawn appraisal rights under applicable law.
10.2 CONDITIONS TO OBLIGATIONS OF PROTOCOL AND MERGER SUB
The respective obligations of Protocol and Merger Sub to consummate the
transactions contemplated by this Agreement are subject to the fulfillment at or
prior to the Effective Time of each of the following conditions, any or all of
which may be waived in whole or part by Protocol and Merger Sub, as the case may
be, to the extent permitted by applicable law.
10.2.1 REPRESENTATIONS AND WARRANTIES TRUE
The representations and warranties of the Company contained in Article 5 and
Section 9.8 (or otherwise required hereby to be made after the date hereof in a
writing expressly referred to herein by or on behalf of the Company pursuant to
this Agreement) shall have been true in all material respects when made and
shall be true in all material respects on and as of the Effective Time as if
made on and as of such date (except to the extent they relate to the date of
this Agreement or any other particular date).
10.2.2 PERFORMANCE
The Company shall have performed or complied in all material respects with
all agreements and conditions contained herein required to be performed or
complied with by it prior to or at the time of Closing.
10.2.3 CERTIFICATES
The Company shall have delivered to Protocol (a) a certificate, dated the
date of the Closing, signed by the President of the Company, certifying as to
the fulfillment of the conditions specified in Sections 10.2.1 and 10.2.2, and
(b) the Exchange Ratio Certificate.
10.2.4 PERMITS AND AUTHORIZATIONS
All Permits and Authorizations described in Sections 5.4 and 5.10 of the
Company Disclosure Schedule shall have been obtained.
10.2.5 TAX OPINION
On the date hereof, Protocol shall have received an opinion of Peat Marwick
in substantially the form attached hereto as Exhibit 10.2.5.
10.2.6 CONFIRMATION OF FAIRNESS OPINION
Immediately prior to (a) the date on which the Proxy Statement/Prospectus is
mailed to the Protocol shareholders and (b) the closing date, Protocol shall
have received a letter from Wessels confirming and restating the Protocol
Fairness Opinion.
10.2.7 RESULTS OF AUDIT; INTERIM FINANCIAL PERFORMANCE
(a) The audited results of the Company's operations for the year ended
December 31, 1995 shall reflect sales by the Company of not less than $12.2
million and Company net income of not less than $775,000. The audited
balance sheet amounts as of December 31, 1995 shall be substantially as
presented on the unaudited balance sheet with the exception of minor
adjustments and/ or reclassifications.
(b) Protocol will also have had the opportunity to review the Company's
most recent internally prepared, unaudited financial statements up to the
time of Closing and shall be satisfied that the interim results of the
Company's operations are consistent with the Company's financial
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forecasts contained in the 1996 Budget presented to the Company's Board of
Directors on December 14, 1995 (the "Budget"). Without limiting the
foregoing, Protocol shall be satisfied that the Company's interim unaudited
results of operations indicate the following: (i) cumulative
revenue-year-to-date and net income-year-to-date of not less than eighty-two
and one-half percent (82.5%) of the budgeted 1996 operating statement
amounts as reflected in the Budget; (ii) gross profit margins greater than
forty percent (40%); and (iii) a current ratio in excess of 1.6. For
purposes of whether the Company's interim unaudited results meet the
requirements set forth in this Section 10.2.7(b) and Section 10.2.8, there
shall not be taken into account either (i) the effects of any transaction
costs (including professional fees) incurred in connection with the
negotiation and execution of this Agreement or (ii) the financial
consequences, if any, described in Section 5.19.
10.2.8 COMPANY CHIEF FINANCIAL OFFICER LETTER
Protocol shall have received from the Company's Chief Financial Officer a
letter, dated the Closing Date, stating that on the basis of his review of the
then most recent internally prepared, unaudited financial statements for the
Company and his knowledge of the financial status and condition of the Company
up to the Closing Date, there has been no materially adverse change in the
financial condition or results of operations of the Company since the last
audited financial statements. For purposes of this Section 10.2.8 and the
letter, "materially adverse" shall be deemed to be (a) a projected shortfall of
the cumulative revenue-to-date or cumulative net income-to-date from the amounts
reflected in the Budget of over seventeen and one-half percent (17.5%); (b) if
gross margins shall have declined below forty percent (40%) on a year-to-date
basis; or (c) a change in financial position such that the Company's current
ratio is not in excess of 1.6. In addition, the letter will attest to the fact
that the Company has adhered to the same accounting policies and procedures
represented in the last audited financial statements, and that these policies
and procedures have been applied on a consistent basis.
10.2.9 TERMINATION OF ALL SHAREHOLDER AGREEMENTS
All shareholder, voting or other agreements with respect to the capital
stock of the Company shall have been terminated (other than the Voting
Agreement).
10.2.10 CONTINUATION OF EXISTING NONCOMPETITION AGREEMENTS
Protocol shall have received evidence reasonably satisfactory to it that
each of Daniel F. Carsten, Robert M. Ricciardelli and Robert M. Sommer have
agreed in writing that the Merger will not cause a termination or modification
of, or otherwise adversely affect, the Company's rights under currently existing
noncompetition agreements executed by such Persons.
10.2.11 ESCROW AGREEMENT
The Company and each of the holders of outstanding Shares shall have duly
executed and delivered to Protocol the Escrow Agreement.
10.2.12 OPINION OF COUNSEL
Protocol shall have received from Michael Best & Friedrich, an opinion dated
the Closing Date, in substantially the form attached hereto as Exhibit 10.2.12.
10.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY
The obligations of the Company to consummate the transactions contemplated
by this Agreement are subject to the fulfillment at or prior to the Effective
Time of each of the following conditions, any or all of which may be waived in
whole or in part by the Company to the extent permitted by applicable law.
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10.3.1 REPRESENTATIONS AND WARRANTIES TRUE
The representations and warranties of Protocol and Merger Sub contained in
Articles 6 and 7 (or otherwise required hereby to be made after the date hereof
in a writing expressly referred to herein by or on behalf of Protocol and Merger
Sub pursuant to this Agreement) shall have been true in all material respects
when made and shall be true in all material respects on and as of the Effective
Time as if made on and as of such date (except to the extent they relate to the
date of this Agreement or any other particular date).
10.3.2 PERFORMANCE
Protocol and Merger Sub shall have performed or complied in all material
respects with all agreements and conditions contained herein required to be
performed or complied with by each of them prior to or at the time of the
Closing.
10.3.3 COMPLIANCE CERTIFICATE
Protocol and Merger Sub shall have delivered to the Company a certificate,
dated the Closing Date, signed by the President of Protocol and the President of
Merger Sub, respectively, certifying as to the fulfillment by each entity of the
conditions specified in Sections 10.3.1 and 10.3.2.
10.3.4 PERMITS AND AUTHORIZATIONS
All Permits and Authorizations described in Section 6.4 of the Protocol
Disclosure Schedule shall have been obtained.
10.3.5 TAX OPINION
The Company shall have received an opinion of Michael Best & Friedrich, or
Price Waterhouse, LLP, to the effect that (i) the Merger will be treated for
federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Code; (ii) each of Protocol, Merger Sub and the Company will be a
party to the reorganization within the meaning of Section 368(b) of the Code;
(iii) no gain or loss will be recognized by the Company, or Merger Sub as a
result of the Merger; (iv) no gain or loss will be recognized by shareholders of
the Company as a result of the Merger with respect to the Shares converted
solely into Protocol Common Shares or as a result of the return of the Escrow
Shares to Protocol; and (v) no gain or loss will be recognized by holders of
Existing Options upon the exchange of Existing Options for Replacement Options.
In rendering such opinions, Michael Best & Friedrich or Price Waterhouse, LLP,
as the case may be, may receive and rely upon representations contained in
certificates of the Company, Protocol, Merger Sub and others.
10.3.6 OPINION OF COUNSEL
The Company shall have received from Ater Wynne Hewitt Dodson & Skerritt,
counsel to Protocol, an opinion dated the Closing Date, in the form attached
hereto as Exhibit 10.3.6.
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ARTICLE 11
TERMINATION, AMENDMENT AND WAIVER
11.1 TERMINATION
This Agreement may be terminated at any time prior to the Effective Time,
whether before or after approval of the matters presented in connection with the
Merger by the shareholders of the Company or the shareholders of Protocol:
11.1.1 By mutual consent of the Board of Directors of Protocol and the
Board of Directors of the Company;
11.1.2 By either Protocol or the Company if the Merger shall not have been
consummated on or before July 12, 1996 (provided the terminating party is not
otherwise in material breach of its representations, warranties, covenants or
agreements under this Agreement);
11.1.3 By the Company if any of the conditions specified in Sections 10.1
or 10.3 have not been met or waived by the Company at such time as such
condition is no longer capable of satisfaction, including the failure to obtain
any required approval of its shareholders at a duly held meeting of shareholders
or at an adjournment thereof (provided the Company is not otherwise in material
breach of its representations, warranties, covenants or agreements under this
Agreement, which breach is the direct and proximate cause of the failed
condition);
11.1.4 By Protocol if any of the conditions specified in Sections 10.1 or
10.2 have not been met or waived by Protocol at such time as such condition is
no longer capable of satisfaction, including the failure to obtain any required
approval of the shareholders of the Company at a duly held meeting of
shareholders or at an adjournment thereof (provided Protocol is not otherwise in
material breach of its representations, warranties covenants or agreements under
this Agreement, which breach is the direct and proximate cause of the failed
condition);
11.1.5 By either Protocol or the Company if there has been a material
breach on the part of the other of any representation, warranty, covenant or
agreement set forth in this Agreement, which breach, has not been cured within
fifteen (15) business days following receipt by the breaching party of written
notice of such breach;
11.1.6 By either Protocol or the Company upon written notice to the other
party if any Governmental Authority of competent jurisdiction shall have issued
a final permanent Order enjoining or otherwise prohibiting the consummation of
the transactions contemplated by this Agreement, and in any such case the time
for appeal or petition for reconsideration of such Order shall have expired
without such appeal or petition being granted; or
11.2 EFFECT OF TERMINATION
In the event of termination of this Agreement by either Protocol or the
Company as provided above, this Agreement shall forthwith become void and
(except for termination of this Agreement pursuant to Section 11.1.5) there
shall be no liability on the part of either the Company, Protocol or Sub or
their respective officers or directors; provided that Section 5.28 and Section
6.13, the last sentence of Section 9.8, this Section 11.2 and the provisions of
Article 13 shall survive the termination.
11.3 AMENDMENT
This Agreement may be amended by the parties hereto, by or pursuant to
action taken by their respective Boards of Directors, at any time before or
after approval hereof by the shareholders of the Company and the shareholders of
Protocol, but, after such approvals, no amendment shall be made which changes
the Applicable Merger Consideration or which in any way materially adversely
affects the rights of the shareholders of either the Company or Protocol,
without the further approval of the adversely affected shareholders. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
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11.4 WAIVER
At any time prior to the Effective Time, the parties hereto, by or pursuant
to action taken by their respective Boards of Directors, may (i) extend the time
for the performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties of any
other party contained herein or in any documents delivered pursuant hereto by
any other party and (iii) waive compliance with any of the agreements or
conditions contained herein; provided, however, that, except as set forth in the
next sentence, no such waiver shall materially adversely affect the rights of
the shareholders of the Company or the shareholders of Protocol, as the case may
be. Notwithstanding the foregoing, an election by Protocol to consummate the
Merger contemplated hereby notwithstanding Protocol's actual knowledge of a
breach or inaccuracy of any representation or warranty made by the Company shall
constitute a waiver and release of any claim against the Company or its
shareholders which Protocol may have therefor (whether such claim is for breach
of representation or warranty, indemnification or otherwise), unless on the date
of this Agreement the Company also has Knowledge of such breach or inaccuracy.
Any agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party. Any such extension or waiver shall be effective only in the
particular instance in which it is given.
ARTICLE 12
SURVIVAL AND INDEMNIFICATION
12.1 INDEMNIFICATION BY THE COMPANY
The Company shall indemnify and hold harmless Protocol from and against and
shall reimburse Protocol with respect to all Indemnifiable Damages incurred by
Protocol by reason of or arising out of or in connection with the following:
12.1.1 The breach or inaccuracy of any representation or warranty of the
Company contained in this Agreement.
12.1.2 The failure of the Company to perform any agreement or covenant
required by this Agreement to be performed by it.
Notwithstanding the foregoing provisions of this Section 12.1, (a) the
Company shall not be liable for or with respect to the first $200,000 of the
aggregate of Indemnifiable Damages, and (b) if the Merger closes, such
Indemnifiable Damages in excess of such $200,000 amount shall be recovered by
Protocol solely in accordance with the provisions of the Escrow Agreement.
12.2 INDEMNIFICATION BY PROTOCOL
Protocol shall indemnify and hold harmless the Company from and against and
shall reimburse the Company with respect to any and all Indemnifiable Damages
incurred by the Company by reason of or arising out of or in connection with the
following:
12.2.1 The breach or inaccuracy of any representation or warranty of
Protocol or Merger Sub contained in this Agreement.
12.2.2 The failure of Protocol to perform any agreement or covenant
required by this Agreement to be performed by it.
Notwithstanding the foregoing provisions of this Section 12.2, Protocol
shall not be liable for or with respect to the first $200,000 of the aggregate
of Indemnifiable Damages.
12.3 SURVIVAL
12.3.1 All representations and warranties made by Protocol in this
Agreement and any liability with respect thereto shall terminate at the
Effective Time.
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12.3.2 The representations and warranties of the Company and the indemnity
of the Company under Section 12.1 with respect to such representations and
warranties shall survive the Closing as obligations of the former Company
shareholders to be satisfied solely out of the Escrow Shares in accordance with
the Escrow Agreement (subject to the limitations of this Article 12) and shall
terminate in all respects on the Termination Date (as defined in the Escrow
Agreement), as to all representations and warranties except to the extent that
notice has been delivered by Protocol in accordance with the Escrow Agreement
prior to the Termination Date of a breach or inaccuracy of any of the
representations or warranties of the Company, in which case such notice shall
continue in effect until such matters have been resolved by agreement of the
parties or by a final adjudication of such matters, not subject to further
appeal, by a court with jurisdiction over such matters. Under no circumstances
shall the Company or its shareholders have any liability whatsoever to Protocol
or Merger Sub in excess of the Escrow Shares.
12.4 LIMITATIONS UPON INDEMNIFICATION
The indemnification rights of Protocol and Merger Sub, on the one hand, and
the Company, on the other hand, shall be subject to the following limitations:
12.4.1 The term "Indemnifiable Damages" means and includes any and all
losses, damages (including lost profits and punitive damages), liabilities,
costs, and expenses (including reasonable attorney fees), but shall in no event
include consequential, indirect or speculative damages, or damages based upon a
multiple of lost (or anticipated) earnings, profits, income or the like.
12.4.2 In computing Indemnifiable Damages, the amount thereof shall be
reduced to take into account the net tax benefit, if any, resulting to the
indemnified party as a consequence of such party's incurrence of the loss,
damage, liability, cost or expense giving rise to such claim for Indemnifiable
Damages.
12.4.3 In computing Indemnifiable Damages, the amount thereof shall be
reduced to take into account any amounts received by the indemnified party from
third Persons, including, without limitation, insurance proceeds.
ARTICLE 13
GENERAL PROVISIONS
13.1 EXPENSES
Each party shall bear its own expenses, including the fees and expenses of
any attorneys, accountants, investment bankers, brokers, finders or other
intermediaries or other Persons engaged by it, incurred in connection with the
preparation, negotiation and execution of this Agreement and the transactions
contemplated hereby. Protocol specifically acknowledges that, if the Merger is
consummated, the Company will pay all of the foregoing fees incurred by or on
behalf of the Company, and that no portion thereof shall be allocated to the
Company's shareholders, or (subject to any claims by Protocol based upon a
breach of Section 5.28) charged in any manner against the Escrow Shares.
13.2 PUBLIC ANNOUNCEMENTS
Protocol and the Company will agree upon the timing and content of the
initial press release to be issued describing the transactions contemplated by
this Agreement, and will not make any public announcement thereof prior to
reaching such agreement unless required to do so by applicable law or
regulations (in which event, however, the party so required to make such
announcement will endeavor in advance to inform the other party regarding the
reason and content thereof). To the extent reasonably requested by either party,
each party will hereafter consult with and provide reasonable cooperation to the
other in connection with the issuance of further press releases or other public
documents describing the transactions contemplated by this Agreement.
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13.3 NOTICES, ETC.
All notices, requests, demands or other communications required by or
otherwise with respect to this Agreement shall be in writing and shall be deemed
to have been duly given to any party when delivered personally (by courier
service or otherwise), when delivered by facsimile and confirmed by return
facsimile, or seven days after being mailed by first-class mail, postage prepaid
and return receipt requested in each case to the applicable addresses set forth
below:
<TABLE>
<S> <C>
IF TO THE COMPANY: WITH A COPY TO:
Daniel F. Carsten Robert J. Johannes
President and CEO Michael Best & Friedrich
Pryon Corporation 100 E. Wisconsin Ave.
N93 W14575 Whittaker Way Milwaukie, WI 53202-4108
Menomonee Falls, WI 53051 Telephone: (414) 271-6560
Telephone: (414) 253-2770 Facsimile: (414) 277-0656
Facsimile: (414) 253-2772
IF TO PROTOCOL AND/OR MERGER SUB: WITH A COPY TO:
James B. Moon Gregory E. Struxness
President and CEO Ater Wynne Hewitt Dodson & Skerritt
Protocol Systems, Inc. 222 S.W. Columbia, Suite 1800
8500 S.W. Creekside Place Portland, OR 97201
Beaverton, OR 97008-7107 Telephone: (503) 226-1191
Telephone: (503) 526-8500 Facsimile: (503) 226-0079
Facsimile: (503) 526-4299
</TABLE>
or to such other address as such party shall have designated by notice so given
to each other party.
13.4 ATTORNEYS' FEES
If a Proceeding is filed by any party to enforce this Agreement or otherwise
with respect to the subject matter of this Agreement, the prevailing party or
parties shall be entitled to recover reasonable attorneys' fees incurred in
connection with such Proceeding as fixed by the trial court, and if any appeal
is taken from the decision of the trial court, reasonable attorneys' fees as
fixed by the appellate court.
13.5 SEVERABILITY
In the event that any one or more of the provisions contained in this
Agreement shall be invalid, illegal or unenforceable in any respect for any
reason, the validity, legality and enforceability of any such provision in every
other respect and of the remaining provisions-of this Agreement shall not be in
any way impaired.
13.6 REMEDIES CUMULATIVE
Except as otherwise provided in Article 12, all rights, powers and remedies
provided under this Agreement or otherwise available in respect hereof at law or
in equity shall be cumulative and not alternative, and the exercise or beginning
of the exercise of any right, power of remedy by any party shall not preclude
the simultaneous or later exercise of any other such right, power or remedy by
such party.
13.7 NO THIRD-PARTY BENEFICIARIES
This Agreement is not intended to be for the benefit of and shall not be
enforceable by any Person or entity who or which is not a party hereto.
13.8 JURISDICTION
Each party hereby irrevocably submits to the exclusive jurisdiction of the
United States District Court for the District of Oregon in any Proceeding
arising in connection with this Agreement, and
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agrees that any such Proceeding shall be brought only in such court (and waives
any objection based on forum non conveniens or any other objection to venue
therein); provided, however, that such consent to jurisdiction is solely for the
purpose referred to in this Section and shall not be deemed to be a general
submission to the jurisdiction of said courts or the State of Oregon other than
for such purpose.
13.9 GOVERNING LAW
This Agreement and all disputes hereunder shall be governed by and construed
and enforced in accordance with the internal laws of the State of Wisconsin,
without regard to principles of conflict of laws.
13.10 ASSIGNMENT
This Agreement shall be binding upon and inure to the benefit solely of each
party hereto, and their respective successors and assigns; provided that, except
as otherwise expressly set forth in this Agreement, neither the rights nor the
obligations of any party may be assigned or delegated without the prior written
consent of the other party. Notwithstanding the foregoing, Merger Sub shall have
the right to assign its rights and/or delegate its obligations hereunder to any
direct wholly-owned subsidiary of Protocol.
13.11 NAMES, CAPTIONS, ETC.
The name assigned to this Agreement and the section captions used herein are
for convenience of reference only and shall not affect the interpretation or
construction hereof. Unless otherwise specified, (a) the terms "hereof,"
"herein" and similar terms refer to this Agreement as a whole and (b) references
herein to "Articles" or "Sections" refer to articles or sections of this
Agreement.
13.12 SCHEDULES
The schedules referred to in this Agreement shall be the schedules described
as such and initialed by the parties prior to execution and delivery of this
Agreement.
13.13 EXHIBITS
The following Exhibits which are attached hereto are hereby incorporated
into this Agreement by this reference:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- ----------------------------------------------------
<S> <C>
4.6 Escrow Agreement
9.1.1 Voting Agreement
10.1.5(a) Form of Pooling Opinion of Peat Marwick
10.1.5(b) Form of Letter from Price Waterhouse, LLP
10.2.5 Form of Tax Opinion of Peat Marwick
10.2.12 Form of Opinion of Company Counsel
10.3.6 Form of Opinion of Protocol Counsel
</TABLE>
13.14 ENTIRE AGREEMENT
This Agreement (including the Exhibits and Schedules hereto and the
documents and instruments referred to herein) constitutes the entire agreement
and supersedes all other prior agreements and understandings, both written and
oral, among the parties, or any of them, with respect to the subject matter
hereof (other than as provided in the Confidentiality Agreement).
13.15 COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
one instrument. Each counterpart may consist of a number of copies, each signed
by less than all, but together signed by all, the parties hereto.
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[SIGNATURES ON NEXT PAGE]
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties set forth below.
PROTOCOL SYSTEMS, INC.
By /s/ JAMES B. MOON
-----------------------------------
James B. Moon, President and CEO
PROTOCOL MERGER CORPORATION
By /s/ JAMES B. MOON
-----------------------------------
James B. Moon, President and CEO
PRYON CORPORATION
By /s/ DANIEL F. CARSTEN
-----------------------------------
Daniel F. Carsten, President and
CEO
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APPENDIX B
February 20, 1996
Board of Directors
Protocol Systems, Inc.
Gentlemen:
Protocol Systems, Inc. ("Protocol"), Protocol Merger Corporation ("Merger
Sub"), a wholly-owned subsidiary of Protocol and Pryon Corporation ("Pryon")
have entered into an Agreement and Plan of Merger dated February 20, 1996
("Merger Agreement"). Pursuant to the Merger Agreement, Merger Sub will be
merged with and into Pryon ("Merger"), which shall be the surviving corporation,
and the separate existence of the Merger Sub shall cease. The Merger Agreement
provides that the shares of capital stock of Pryon issued and outstanding
immediately prior to the effective time of the Merger (the "Effective Time") and
options, warrants and stock purchase rights to purchase shares of capital stock
of Pryon outstanding immediately prior to the Effective Time shall be converted
into the right to receive an aggregate of 2,320,843 shares of Common Stock, $.01
par value per share ("Common Stock"), of Protocol subject to adjustments as
provided in the Agreement (the "Merger Consideration"). You have requested our
opinion as to whether the Merger Consideration to be paid by Protocol under the
Merger Agreement is fair, from a financial point of view, to Protocol.
Wessels, Arnold & Henderson, L.L.C. ("Wessels"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and other
purposes. We have acted as financial advisor to the Board of Directors of
Protocol in connection with the transaction described above and will receive a
fee for our services. We have also acted as co-managing underwriter of the
initial public offering of Protocol. Wessels regularly publishes research
reports regarding the medical instruments industry and the businesses and
securities of Protocol and other publicly owned companies in the medical
instruments industry.
In preparing our opinion, Wessels among other things: (i) reviewed and
analyzed the financial terms of the Merger Agreement; (ii) reviewed and analyzed
certain financial and other information relating to Protocol and Pryon furnished
to it by both companies, including certain internal financial and other
information prepared by management; (iii) reviewed certain publicly available
information about Protocol and Pryon; (iv) held discussions with the managements
of Protocol and Pryon concerning the business, past and current business
operations, financial condition and future prospects of both companies,
including certain information prepared by the management of Protocol concerning
potential cost savings and synergies that could result from the Merger; (v)
reviewed the financial performance of publicly traded companies which it deemed
comparable to Pryon; (vi) compared the financial terms of the Merger with those
of certain merger transactions, to the extent publicly available, which it
deemed relevant; (vii) prepared discounted cash flow analyses of Pryon; (viii)
analyzed the pro forma earnings per share of the combined company; and (ix) made
such other studies and inquiries, and reviewed such other data, as it deemed
relevant.
In the course of our analysis we have, with your consent, relied upon the
accuracy and completeness in all material respects and have not independently
verified the publicly available financial information, and non-public financial
and other information provided to us by Protocol and Pryon. We have not made,
requested or received any independent appraisal of the assets or liabilities
(contingent or otherwise) of Protocol or Pryon. With respect to the financial
projections, estimates and analyses provided to us, we have assumed with your
permission, that such information was reasonably prepared on bases reflecting
the best currently available estimates and judgements of management as to future
financial performance. Our opinion is based upon market, economic and other
circumstances existing and disclosed to us as of the date hereof.
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Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the Merger Consideration to be paid to the holders of
capital stock of Pryon pursuant to the Merger Agreement is fair, from a
financial point of view, to Protocol.
Very truly yours,
WESSELS, ARNOLD & HENDERSON, L.L.C.
B-2
<PAGE>
APPENDIX C
DISSENTERS' RIGHTS
180.1301 DEFINITIONS. In ss. 180.1301 to 180.1331:
(1) "Beneficial shareholder" means a person who is a beneficial owner of
shares held by a nominee as the shareholder.
(2) "Corporation" means the issuer corporation or, if the corporate action
giving rise to dissenters' rights under s. 180.1302 is a merger or share
exchange that has been effectuated, the surviving domestic corporation or
foreign corporation of the merger or the acquiring domestic corporation or
foreign corporation of the share exchange.
(3) "Dissenter" means a shareholder or beneficial shareholder who is
entitled to dissent from corporate action under s. 180.1302 and who exercises
that right when and in the manner required by ss. 180.1320 to 180.1328.
(4) "Fair value", with respect to dissenter's shares other than in a
business combination, means the value of the shares immediately before the
effectuation of the corporate action to which the dissenter objects, excluding
any appreciate or depreciation in anticipation of the corporate action unless
exclusion would be inequitable. "Fair value", with respect to a dissenter's
shares in a business combination, means market value, as defined in s.
180.1130(9)(a) 1 to 4.
(5) "Interest" means interest from the effectuation date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all of the circumstances.
(6) "Issuer corporation" means a domestic corporation that is the issuer of
the shares held by a dissenter before the corporate action.
180.1302 RIGHT TO DISSENT.
(1) Except as provided in sub. (4) and s. 180.1008(3), a shareholder or
beneficial shareholder may dissent from, and obtain payment of the fair value of
his or her shares in the event of, any of the following corporate actions:
(a) Consummation of a plan of merger to which the issuer corporation is
a party if any of the following applies:
1. Shareholder approval is required for the merger by s.180.1103 or
by the articles of incorporation.
2. The issuer corporation is a subsidiary that is merged with its
parent under s.180.1104.
(b) Consummation of a plan of share exchange if the issuer corporation's
shares will be acquired, and the shareholder or the shareholder holding
shares on behalf of the beneficial shareholder is entitled to vote on the
plan.
(c) Consummation of a sale or exchange of all, or substantially all, of
the property of the issuer corporation other than in the usual and regular
course of business, including a sale of dissolution, but not including any
of the following:
1. A sale pursuant to court order.
2. A sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the
shareholders within one year after the date of sale.
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(d) Except as provided in sub. (2), any other corporate action taken
pursuant to a shareholder vote to the extent that the articles of
incorporation, bylaws or a resolution of the board of directors provides
that the voting or nonvoting shareholder or beneficial shareholder may
dissent and obtain payment for his or her shares.
(2) Except as provided in sub. (4) and s. 180.1008(3), the articles of
incorporation may allow a shareholder or beneficial shareholder to dissent from
an amendment of the articles of incorporation and obtain payment of the fair
value of his or her shares if the amendment materially and adversely affects
rights in respect of a dissenter's shares because it does any of the following:
(a) Alters or abolishes a preferential right of the shares.
(b) Creates, alters or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares.
(c) Alters or abolishes a preemptive right of the holder of shares to
acquire shares or other securities.
(d) Excludes or limits the right of the shares to vote on any matter or
to cumulate votes, other than a limitation by dilution through issuance of
shares or other securities with similar voting rights.
(e) Reduces the number of shares owned by the shareholder or beneficial
shareholder to a fraction of a share if the fractional share so created is
to be acquired for cash under s. 180.0604.
(3) Notwithstanding sub. (1)(a) to (c), if the issuer corporation is a
statutory close corporation under ss. 180.1801 to 180.1837, a shareholder of the
statutory close corporation may dissent from a corporate action and obtain
payment of the fair value of his or her shares, to the extent permitted under
sub. (1)(d) or (2) or s. 180.1803, 180.1813(1)(d) or (2)(b), 180.1815(3) or
180.1829(1)(c).
(4) Except in a business combination or unless the articles of incorporation
provide otherwise, subs. (1) and (2) do not apply to the holders of shares of
any class or series if the shares of the class or series are registered on a
national securities exchange or quoted on the national association of securities
dealers, inc. automated quotations system on the record date fixed to determine
the shareholders entitled to notice of a shareholders' meeting at which
shareholders are to vote on the proposed corporate action.
(5) Except as provided in s. 180.1833, a shareholder or beneficial
shareholder entitled to dissent and obtain payment for his or her shares under
ss. 180.1301 to 180.1331 may not challenge the corporate action creating his or
her entitlement unless the action is unlawful or fraudulent with respect to the
shareholder, beneficial shareholder or issuer corporation.
180.1303 DISSENT BY SHAREHOLDERS AND BENEFICIAL SHAREHOLDERS.
(1) A shareholder may assert dissenters' rights as to fewer than all of the
shares registered in his or her name only if the shareholder dissents with
respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf he
or she asserts dissenters' rights. The rights of a shareholder who under this
subsection asserts dissenters' rights as to fewer than all of the shares
registered in his or her name are determined as if the shares as to which he or
she dissents and his or her other shares were registered in the names of
different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares held
on his or her behalf only if the beneficial shareholder does all of the
following:
(a) Submits to the corporation the shareholder's written consent to the
dissent not later than the time that the beneficial shareholder asserts
dissenters' rights.
(b) Submits the consent under par. (a) with respect to all shares of
which he or she is the beneficial shareholder.
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180.1320 NOTICE OF DISSENTERS' RIGHTS.
(1) If proposed corporate action creating dissenters' rights under s.
180.1302 is submitted to a vote at a shareholders' meeting, the meeting notice
shall state that shareholders and beneficial shareholders are or may be entitled
to assert dissenters' rights under ss. 180.1301 to 180.1331 and shall be
accompanied by a copy of those sections.
(2) If corporate action creating dissenters' rights under s. 180.1302 is
authorized without a vote of shareholders, the corporation shall notify, in
writing and in accordance with s. 180.0141, all shareholders entitled to assert
dissenters' rights that the action was authorized and send them the dissenters'
notice described in s. 180.1322.
180.1321 NOTICE OF INTENT TO DEMAND PAYMENT.
(1) If proposed corporate action creating dissenters' rights under s.
180.1302 is submitted to a vote at a shareholders' meeting, a shareholder or
beneficial shareholder who wishes to assert dissenters' rights shall do all
of the following:
(a) Deliver to the issuer corporation before the vote is taken
written notice that complies with s. 180.0141 of the shareholder's or
beneficial shareholder's intent to demand payment for his or her shares
if the proposed action is effectuated.
(b) Not vote his or her shares in favor of the proposed action.
(2) A shareholder or beneficial shareholder who fails to satisfy sub. (1) is
not entitled to payment for his or her shares under ss. 180.1301 to 180.1331.
180.1322 DISSENTERS NOTICE.
(1) If proposed corporate action creating dissenters' rights under s.
180.1302 is authorized at a shareholders' meeting, the corporation shall deliver
a written dissenters' notice to all shareholders and beneficial shareholders who
satisfied s. 180.1321.
(2) The dissenters' notice shall be sent no later than 10 days after the
corporate action is authorized at a shareholders' meeting or without a vote of
shareholders, whichever is applicable. The dissenters' notice shall comply with
s. 180.0141 and shall include or have attached all of the following:
(a) A statement indicating where the shareholder or beneficial
shareholder must send the payment demand and where and when certificates
for certificated shares must be deposited.
(b) For holders of uncertificated shares, an explanation of the
extent to which transfer of the shares will be restricted after the
payment demand is received.
(c) A form for demanding payment that includes the date of the first
announcement to news media or to shareholders of the terms of the
proposed corporate action and that requires the shareholder or beneficial
shareholder asserting dissenters' rights to certify whether he or she
acquired beneficial ownership of the shares before that date.
(d) A date by which the corporation must receive the payment demand,
which may not be fewer than 30 days nor more than 60 days after the date
on which the dissenters' notice is delivered.
(e) A copy of ss. 180.1301 to 180.1331.
180.1323 DUTY TO DEMAND PAYMENT.
(1) A shareholder or beneficial shareholder who is sent a dissenters' notice
described in s. 180.1322, or a beneficial shareholder whose shares are held by a
nominee who is sent a dissenters' notice described in s. 180.1322, must demand
payment in writing and certify whether he or she
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acquired beneficial ownership of the shares before the date specified in the
dissenters' notice under s. 180.1322(2)(c). A shareholder or beneficial
shareholder with certificated shares must also deposit his or her certificates
in accordance with the terms of the notice.
(2) A shareholder or beneficial shareholder with certificated shares who
demands payment and deposits his or her share certificates under sub. (1)
retains all other rights of a shareholder or beneficial shareholder until these
rights are canceled or modified by the effectuation of the corporation action.
(3) A shareholder or beneficial shareholder with certificated or
uncertificated shares who does not demand payment by the date set in the
dissenters' notice, or a shareholder or beneficial shareholder with certificated
shares who does not deposit his or her share certificates where required and by
the date set in the dissenters' notice, is not entitled to payment for his or
her shares under ss. 180.1301 to 180.1331.
180.1324 RESTRICTIONS ON UNCERTIFICATED SHARES.
(1) The issuer corporation may restrict the transfer of uncertificated
shares from the date that the demand for payment for those shares is received
until the corporate action is effectuated or the restrictions released under s.
180.1326.
(2) The shareholder or beneficial shareholder who asserts dissenters' rights
as to uncertificated shares retains all of the rights of the shareholder or
beneficial shareholder, other than those restricted under sub. (1), until these
rights are canceled or modified by the effectuation of the corporation action.
180.1325 PAYMENT.
(1) Except as provided in s. 180.1327, as soon as the corporate action is
effectuated or upon receipt of a payment demand, whichever is later, the
corporation shall pay each shareholder or beneficial shareholder who has
complied with s. 180.1323 the amount that the corporation estimates to be the
fair value of his or her shares, plus accrued interest.
(2) The payment shall be accompanied by all of the following:
(a) The corporation's latest available financial statements, audited and
including footnote disclosure if available, but including not less than a
balance sheet as of the end of a fiscal year ending not more than 16 months
before the date of payment, an income statement for that year, a statement
of changes in shareholders' equity for that year and the latest available
interim financial statements, if any.
(b) A statement of the corporation's estimate of the fair value of the
shares.
(c) An explanation of how the interest was calculated.
(d) A statement of the dissenter's right to demand payment under s.
180.1328 if the dissenter is dissatisfied with the payment.
(e) A copy of ss. 180.1301 to 180.1331.
180.1326 FAILURE TO TAKE ACTION.
(1) If an issuer corporation does not effectuate the corporate action within
60 days after the date set under s. 180.1322 for demanding payment, the issuer
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions the issuer corporation effectuates the corporate action, the
corporation shall deliver a new dissenters' notice under s. 180.1322 and repeat
the payment demand procedure.
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180.1327 AFTER-ACQUIRED SHARES.
(1) A corporation may elect to withhold payment required by s. 180.1325 from
a dissenter unless the dissenter was the beneficial owner of the shares before
the date specified in the dissenters' notice under s. 180.1322(2)(c) as the date
of the first announcement to news media or to shareholders of the terms of the
proposed corporate action.
(2) To the extent that the corporation elects to withhold payment under sub.
(1) after effectuating the corporate action, it shall estimate the fair value of
the shares, plus accrued interest, and shall pay this amount to each dissenter
who agrees to accept it in full satisfaction of his or her demand. The
corporation shall send with its offer a statement of its estimate of the fair
value of the shares, an explanation of how the interest was calculated, and a
statement of the dissenter's right to demand payment under s. 180.1328 if the
dissenter is dissatisfied with the offer.
180.1328 PROCEDURE IF DISSENTER DISSATISFIED WITH PAYMENT OF OFFER.
(1) A dissenter may, in the manner provided in sub. (2), notify the
corporation of the dissenter's estimate of the fair value of his or her shares
and amount of interest due, and demand payment of his or her estimate, less any
payment received under s. 180.1325, or reject the offer under s. 180.1327 and
demand payment of the fair value of his or her shares and interest due, if any
of the following applies:
(a) The dissenter believes that the amount paid under s. 180.1325 or
offered under s. 180.1327 is less than the fair value of his or her shares
or that the interest due is incorrectly calculated.
(b) The corporation fails to make payment under s. 180.1325 within 60
days after the date set under s. 180.1322 for demanding payment.
(c) The issuer corporation, having failed to effectuate the corporate
action, does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within 60 days after the date
set under s. 180.1322 for demanding payment.
(2) A dissenter waives his or her right to demand payment under this section
unless the dissenter notifies the corporation of his or her demand under sub.
(1) in writing within 30 days after the corporation made or offered payment for
his or her shares. The notice shall comply with s. 180.0141.
180.1330 COURT ACTION.
(1) If a demand for payment under s. 180.1328 remains unsettled, the
corporation shall bring a special proceeding within 60 days after receiving the
payment demand under s. 180.1328 and petition the court to determine the fair
value of the shares and accrued interest. If the corporation does not bring the
special proceeding within the 60-day period, it shall pay each dissenter whose
demand remains unsettled the amount demanded.
(2) The corporation shall bring the special proceeding in the circuit court
for the county where its principal office or, if none in this state, its
registered office is located. If the corporation is a foreign corporation
without a registered office in this state, it shall bring the special proceeding
in the county in this state in which was located the registered office of the
issuer corporation that merged with or whose shares were acquired by the foreign
corporation.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the special proceeding.
Each party to the special proceeding shall be served with a copy of the petition
as provided in s. 801.14.
(4) The jurisdiction of the court in which the special proceeding is brought
under sub. (2) is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend decision on the question
of fair value. An appraiser has the power described in the order appointing him
or her or in any amendment to the order. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
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(5) Each dissenter made a party to the special proceeding is entitled to
judgment for any of the following:
(a) The amount, if any, by which the court finds the fair value of his
or her shares, plus interest, exceeds the amount paid by the corporation.
(b) The fair value, plus accrued interest, of his or her shares acquired
on or after the date specified in the dissenter's notice under
s.180.1322(2)(c), for which the corporation elected to withhold payment
under s. 180.1327.
180.1331 COURT COSTS AND COUNSEL FEES.
(1) (a) Notwithstanding ss. 814.01 to 814.04, the court in a special
proceeding brought under s. 180.1330 shall determine all costs of
the proceeding, including the reasonable compensation and expenses
of appraisers appointed by the court and shall assess the costs
against the corporation, except as provided in par. (b).
(b) Notwithstanding ss. 814.01 and 814.04, the court may assess costs
against all or some of the dissenters, in amounts that the court finds to be
equitable, to the extent that the court finds the dissenters acted
arbitrarily, vexatiously or not in good faith in demanding payment under s.
180.1328.
(2) The parties shall bear their own expenses of the proceeding, except
that, notwithstanding ss. 814.01 to 814.04, the court may also assess the fees
and expenses of counsel and experts for the respective parties, in amounts that
the court finds to be equitable, as follows:
(a) Against the corporation and in favor of any dissenter if the court
finds that the corporation did not substantially comply with ss. 180.1320 to
180.1328.
(b) Against the corporation or against a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously or not in good faith
with respect to the rights provided by this chapter.
(3) Notwithstanding ss. 814.01 to 814.04, if the court finds that the
services of counsel and experts for any dissenter were of substantial benefit to
other dissenters similarly situated, the court may award to these counsel and
experts reasonable fees to be paid out of the amounts awarded the dissenters who
were benefited.
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