<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
PROTOCOL SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
-----------------------------------------------------------------------
<PAGE>
[LOGO]
8500 S.W. CREEKSIDE PLACE
BEAVERTON, OR 97008
(503) 526-8500
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 12, 1997
---------------------
To the Shareholders of
Protocol Systems, Inc.:
NOTICE IS HEREBY GIVEN that the annual meeting of shareholders (the "Annual
Meeting") of Protocol Systems, Inc. (the "Company") will be held on Monday, May
12, 1997, at 10:00 a.m., local time, at the Company's offices at 8500 S.W.
Creekside Place, Beaverton, Oregon 97008 for the following purposes:
1. ELECTION OF DIRECTORS. To elect two directors, each for a three-year
term;
2. RATIFICATION OF APPOINTMENT OF AUDITORS. To ratify the appointment by
the Board of Directors of KPMG Peat Marwick LLP as independent auditors
of the Company for the fiscal year ending December 31, 1997; and
3. OTHER BUSINESS. To transact such other business as may properly come
before the meeting or any adjournments thereof.
The Board of Directors of Company has fixed the close of business on March
14, 1997 as the record date for the determination of shareholders entitled to
notice of and to vote at the Annual Meeting. Only shareholders of record at the
close of business on that date will be entitled to notice of and to vote at the
Annual Meeting or any adjournments thereof.
By Order of the Board,
/s/ James B. Moon
James B. Moon
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Beaverton, Oregon
April 3, 1997
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT YOU
PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE DATE, SIGN AND
COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
<PAGE>
PROTOCOL SYSTEMS, INC.
8500 S.W. CREEKSIDE PLACE
BEAVERTON, OR 97008
(503) 526-8500
------------------------
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 12, 1997
---------------------
INTRODUCTION
GENERAL
This Proxy Statement is being furnished to the shareholders of Protocol
Systems, Inc., an Oregon corporation ("Protocol" or the "Company"), as part of
the solicitation of proxies by the Company's Board of Directors (the "Board of
Directors") from holders of the outstanding shares of Protocol common stock, par
value $.01 per share (the "Common Stock"), for use at the Company's Annual
Meeting of Shareholders to be held at 10:00 a.m. on May 12, 1997, and at any
adjournments or postponements thereof, (the "Annual Meeting"). At the Annual
Meeting, shareholders will be asked to elect two members of the Board of
Directors, ratify the appointment by the Board of Directors of KPMG Peat Marwick
LLP as independent auditors of the Company for the fiscal year ending December
31, 1997, and transact such other business as may properly come before the
meeting or any adjournments thereof. This Proxy Statement, together with the
enclosed proxy card, is first being mailed to shareholders of Protocol on or
about April 3, 1997.
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
The Board of Directors has fixed the close of business on March 14, 1997 as
the record date for the determination of the shareholders entitled to notice of
and to vote at the Annual Meeting. Accordingly, only holders of record of shares
of Common Stock at the close of business on such date will be entitled to vote
at the Annual Meeting, with each such share entitling its owner to one vote on
all matters properly presented at the Annual Meeting. On the record date, there
were approximately 5,100 beneficial holders of the 8,796,259 shares of Common
Stock then outstanding. The presence, in person or by proxy, of a majority of
the total number of outstanding shares of Common Stock entitled to vote at the
Annual Meeting is necessary to constitute a quorum at the Annual Meeting.
If the enclosed form of proxy is properly executed and returned in time to
be voted at the Annual Meeting, the shares represented thereby will be voted in
accordance with the instructions marked thereon. EXECUTED BUT UNMARKED PROXIES
WILL BE VOTED FOR THE ELECTION OF THE TWO NOMINEES FOR ELECTION TO THE BOARD OF
DIRECTORS AND FOR THE RATIFICATION OF THE APPOINTMENT OF KPMG PEAT MARWICK LLP
AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31,
1997. The Board of Directors does not know of any matters other than those
described in the Notice of Annual Meeting that are to come before the Annual
Meeting. If any other matters are properly brought before the Annual Meeting,
the persons named in the proxy will vote the shares represented by such proxy
upon such matters as determined by a majority of the Board of Directors.
The presence of a shareholder at the Annual Meeting will not automatically
revoke such shareholder's proxy. A shareholder, may, however, revoke a proxy at
any time prior to its exercise by filing a written
1
<PAGE>
notice of revocation with, or by delivering a duly executed proxy bearing a
later date to, Corporate Secretary, Protocol Systems, Inc., 8500 S.W. Creekside
Place, Beaverton, Oregon 97008, or by attending the Annual Meeting and voting in
person. All valid, unrevoked proxies will be voted at the Annual Meeting.
ELECTION OF DIRECTORS
At the 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 the Company'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.
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 Annual
Meeting. Also set forth is certain other information with respect to each such
person's age at April 2, 1997, 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:
Ronald S. Newbower, Ph.D............ 53 1994 1997 Director
Frank E. Samuel, Jr................. 57 1994 1977 Director
CONTINUING DIRECTORS:
William New Jr., M.D................ 54 1992 1998 Director
James B. Moon....................... 51 1987 1998 Chairman of the Board, President and Chief
Executive Officer
Steven E. Wynne..................... 45 1996 1999 Director
David F. Bolender................... 64 1996 1999 Director
</TABLE>
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 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
2
<PAGE>
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 the Company 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 the Company 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.
STEVEN E. WYNNE. Mr. Wynne was elected to the Board of Directors in 1996.
Mr. Wynne has served as President and Chief Executive Officer of adidas America,
Inc. since 1995. Mr. Wynne was a partner in the law firm of Ater Wynne Hewitt
Dodson & Skerritt, LLP, Protocol's legal counsel, from 1984 to 1996. Mr. Wynne
also serves on the Board of Directors of Planar Systems, Inc.
DAVID F. BOLENDER. Mr. Bolender was elected to the Board of Directors in
1996. 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.
BOARD OF DIRECTORS COMMITTEES AND NOMINATIONS BY SHAREHOLDERS. The Board of
Directors acts as a nominating committee for selecting nominees for election as
directors. The Company'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 the Company's Secretary. To be timely, notice must be
delivered to, or mailed to and received at, the principal executive offices of
the Company 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 the
Company 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. Public disclosure of the date of the Annual Meeting was
made by the issuance of a press release on March 11, 1997. A shareholder's
notice of nomination must also set forth certain information specified in
Article III, Section 3.15 of the Company'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, 1996, conducted four meetings. The
members of the Audit Committee currently are Dr. New and Mr. Bolender. 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 the Company'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 the Company's stock option plans. During the
fiscal year ended December 31,
3
<PAGE>
1996, the Compensation Committee held two meetings. The members of the
Compensation Committee currently are Messrs. Bolender and Wynne.
During 1996 the Company's Board of Directors held five 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, except Mr. Samuel, who attended 60% of the meetings.
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, the Company'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 Annual Meeting, but are
not counted and have no effect on the determination of whether a plurality
exists with respect to a given nominee.
MANAGEMENT
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- ------------------------------------------------------------
<S> <C> <C>
James B. Moon 51 President, Chief Executive Officer and Chairman of the Board
of Directors
Craig M. Swanson 54 Vice President, Finance, Chief Financial Officer and
Secretary
James P. Fee, Jr. 51 Vice President, Marketing and Sales
Lawrence C. Gray 49 Vice President, Engineering
Carl P. Hollstein, Jr. 57 Vice President, Manufacturing
Allen L. Oyler 51 Vice President, Human Resources and Administration
James P. Welch 45 Vice President, Business and Market Development
</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 the Company who
are not also directors of the Company is set forth below.
CRAIG M. SWANSON. Mr. Swanson joined the Company in 1988 as Vice President,
Finance, and Chief Financial Officer. He was elected Secretary in 1990. Before
joining the Company, 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 the Company 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.
4
<PAGE>
LAWRENCE C. GRAY. Mr. Gray joined the Company in 1991 as Director, Systems
Engineering, and became Vice President, Engineering in February 1995. Prior to
joining the Company, Mr. Gray was Director of Engineering for Racal-Milgo
Information Systems.
CARL P. HOLLSTEIN, JR. Mr. Hollstein joined the Company in 1993 as Vice
President, Manufacturing. Before joining the Company, 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 the Company in 1993 as Director, Human
Resources and was elected Vice President, Human Resources and Administration
effective January 1, 1994. Prior to joining the Company, Mr. Oyler was Director,
Human Resources at SpaceLabs from 1984 to 1993.
JAMES P. WELCH. Mr. Welch joined the Company in 1991 as Vice President,
Engineering, became Vice President, Quality Systems in July 1994 and became Vice
President, Business and Market Development in December 1996. Prior to joining
the Company, 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 Anesthesia Bioengineering Unit at Massachusetts General
Hospital, in Boston, Massachusetts.
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
compensation of the Company's Chief Executive Officer and each of the five other
most highly compensated executive officers of the Company (the "named executive
officers") for the fiscal years ending December 31, 1994, 1995 and 1996.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
--------------------- STOCK OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS GRANTED
- --------------------------------------------------------------- --------- ---------- --------- -------------
<S> <C> <C> <C> <C>
James B. Moon.................................................. 1996 $ 180,385 $ 74,204 50,000
President, Chief Executive Officer and 1995 158,351 40,500 --
Chairman of the Board of Directors 1994 149,226 35,299 40,000
Craig M. Swanson............................................... 1996 130,000 75,218 23,000
Vice President, Finance 1995 125,651 32,284 --
Chief Financial Officer and Secretary 1994 119,438 21,190 24,000
James P. Fee, Jr............................................... 1996 120,400 84,452 25,000
Vice President, Marketing and Sales 1995 115,598 74,818 --
1994 109,381 51,439 24,000
Lawrence C. Gray............................................... 1996 120,000 59,511 20,000
Vice President, Engineering 1995 115,309 25,485 10,000
Carl P. Hollstein, Jr.......................................... 1996 115,400 57,017 21,000
Vice President, Manufacturing 1995 107,794 24,107 --
1994 99,516 17,655 --
James P. Welch................................................. 1996 115,000 57,017 33,000
Vice President, Business and Market Development 1995 107,794 24,107 --
1994 100,000 17,673 --
</TABLE>
5
<PAGE>
STOCK OPTIONS
The following table sets forth information concerning options granted to the
named executives during the year ended December 31, 1996 under the Company's
1992 Stock Incentive Plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES PRICE EXPIRATION ----------------------
NAME GRANTED(1) IN 1996 PER SHARE DATE 5% 10%
- ------------------------------------- ----------- --------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James B. Moon........................ 25,000 4.51% $ 13.88 3/11/06 $ 218,148 $ 552,830
25,000 4.51 12.13 12/11/06 190,634 483,103
Craig M. Swanson..................... 12,000 2.16 13.88 3/11/06 104,711 265,358
11,000 1.98 12.13 12/11/06 83,879 212,566
James P. Fee......................... 12,000 2.16 13.88 3/11/06 104,710 265,358
13,000 2.34 12.13 12/11/06 99,130 251,214
Lawrence C. Gray..................... 10,000 1.80 13.88 3/11/06 87,259 221,132
10,000 1.80 12.13 12/11/06 76,254 193,241
Carl P. Hollstein, Jr................ 10,000 1.80 13.88 3/11/06 87,259 221,132
11,000 1.98 12.13 12/11/06 83,879 212,565
James P. Welch....................... 15,000 2.71 13.88 3/11/06 130,889 331,698
18,000 3.25 12.13 12/11/06 137,256 347,834
</TABLE>
- ------------------------
(1) Options granted in 1996 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 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, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUED OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FY-END OPTIONS AT FY-END*
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James B. Moon................... -- -- 42,375 73,125 $ 219,469 $ 115,156
Craig M. Swanson................ 5,000 $ 77,775 80,167 38,000 700,797 97,375
James P. Fee, Jr................ 10,000 191,800 85,834 39,500 779,527 97,000
Lawrence C. Gray................ 3,000 49,819 17,500 28,500 164,050 47,750
Carl P. Hollstein, Jr........... -- -- 22,500 28,500 129,375 52,750
James P. Welch.................. -- -- 23,834 34,500 215,414 22,125
</TABLE>
- ------------------------
*Based on a December 31, 1996 closing stock price of $13.00 per share.
6
<PAGE>
DIRECTOR COMPENSATION
The members of the Company'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 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 the Company'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 10,000 shares of
the Company's Common Stock immediately following the annual meeting at which
such director is first elected to the Board of Directors. The initial option
grant vests ratably on an annual basis over three years. 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) which are fully vested and
exercisable on the date of 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. 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. 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.
COMPENSATION COMMITTEE REPORT
Under rules established by the Securities and Exchange Commission (the
"SEC"), the Company is required to provide certain data and information in
regard to the compensation and benefits provided to the Company'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.
COMPENSATION PHILOSOPHY. The Compensation Committee of the Board of
Directors, which is responsible for reviewing and evaluating the compensation of
the Company's executive officers, approves and recommends to the Board of
Directors compensation and award levels for executive officers of the Company.
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 the Company 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 a base salary,
cash bonus opportunities and long-term incentive opportunities in the form of
stock options, along with benefits offered to all employees of the Company. 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 base salaries of the Company's executive officers, except the
Chief Executive Officer, were not changed in 1996.
7
<PAGE>
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 1996 were established by the Compensation Committee.
Actual bonus payments to such executive officers depend upon the extent to which
the Company achieves its profit plan for the year. Actual bonus payments to
executive officers (other than Mr. Fee) for 1996 ranged from 49% to 58% of base
salary, based on the Company exceeding its overall profit plan for 1996. Mr.
Fee's bonus plan for 1996 was based on Company sales and expense levels, and
such bonus payment amounted to approximately 70% of base salary for 1996.
STOCK PLANS. The long-term, performance-based compensation of executive
officers takes the form of option awards under the Company'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 the Company's executive officers have a continuing
stake in the long-term success of the Company. All options granted by the
Company have been granted with an exercise price equal to the market price of
the Company's Common Stock on the date of grant and, accordingly, will only have
value if the Company'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 the Company and past grants.
CHIEF EXECUTIVE OFFICER COMPENSATION. Effective January 8, 1996, the Board
of Directors acting on the recommendation of the Compensation Committee,
increased Mr. Moon's salary from $165,000 to $181,000. 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 the Company's local geographic area and the Company's
improved performance in revenue and net income in 1995 as compared to 1994. Mr.
Moon received a bonus for 1996 of $74,204, which was paid in accordance with the
terms of a bonus plan established by the Compensation Committee for Mr. Moon for
1996. The 1996 bonus plan for Mr. Moon established a target bonus of 63.5% of
his base salary. The plan established an earnings per share target that had to
be achieved for Mr. Moon to receive the target bonus. Additionally, the 1996
bonus plan established a payout percentage based on Mr. Moon's successful
completion of several goals and objectives. Mr. Moon's actual bonus for 1996
amounted to approximately 41% of his base salary for 1996, reflecting partial
achievement of target levels of sales, net income, stock price and other
objectives. Mr. Moon also was granted options to purchase 50,000 shares of
Common Stock in 1996 pursuant to the 1992 Plan.
COMPENSATION COMMITTEE
Steven E. Wynne
David F. Bolender
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1996, the members of the
Compensation Committee were Messrs. Wynne and Bolender.
8
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the monthly cumulative total returns for the
Company, the Nasdaq Stock Market Index and an index of peer companies selected
by the Company.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PROTOCOL SYSTEMS,
INC. NASDAQ STOCK MARKET (US COMPANIES) SELF-DETERMINED PEER GROUP
<S> <C> <C> <C>
3/24/92 100.000 100.000 100.000
3/31/92 93.617 97.476 96.782
4/30/92 72.34 93.296 93.049
5/29/92 46.808 94.508 102.804
6/30/92 42.553 90.813 96.849
7/31/92 55.319 94.03 100.791
8/31/92 53.191 92.185 91.521
9/30/92 59.574 94.544 97.424
10/30/92 54.255 98.267 104.093
11/30/92 56.383 106.086 116.019
12/31/92 65.957 109.991 111.808
1/29/93 76.596 113.122 97.301
2/26/93 63.83 108.902 81.581
3/31/93 59.574 112.054 74.994
4/30/93 48.936 107.272 065.700
5/28/93 59.574 113.680 074.530
6/30/93 67.021 114.205 73.619
7/30/93 76.596 114.340 072.560
8/31/93 081.915 120.250 73.196
9/30/93 89.362 123.831 072.210
10/29/93 87.234 126.614 75.437
11/30/93 85.106 122.838 75.491
12/31/93 91.489 126.262 74.041
1/31/94 78.723 130.095 81.321
2/28/94 91.489 128.879 84.049
3/31/94 85.106 120.952 76.828
4/29/94 063.830 119.383 80.259
5/31/94 066.090 119.674 082.130
6/30/94 53.191 115.298 79.936
7/29/94 61.702 117.662 76.872
8/31/94 70.213 125.163 82.484
9/30/94 76.596 124.843 83.405
10/31/94 78.723 127.297 92.274
11/30/94 78.723 123.074 095.770
12/30/94 76.596 123.419 94.615
1/31/95 84.043 124.111 96.429
2/28/95 74.468 130.675 97.245
3/31/95 92.553 134.548 102.069
4/28/95 80.851 138.783 102.824
5/31/95 79.707 142.362 110.600
6/30/95 85.106 153.899 113.041
7/31/95 92.553 165.211 126.520
8/31/95 100.532 168.560 129.622
9/29/95 97.872 172.436 127.13
10/31/95 85.106 171.448 142.024
11/30/95 88.298 175.473 144.611
12/29/95 89.362 174.539 145.523
1/31/96 106.383 175.402 151.462
2/29/96 123.404 182.086 158.173
3/29/96 143.617 182.692 151.982
4/30/96 165.957 197.851 121.307
5/31/96 211.702 206.935 130.484
6/28/96 195.744 197.606 120.419
7/31/96 147.872 190.005 117.214
8/30/96 160.638 190.09 123.852
9/30/96 141.489 204.639 111.034
10/31/96 91.489 202.376 101.349
11/29/96 110.638 214.899 108.767
12/31/96 110.638 214.675 116.835
1/31/97 86.17 229.924 102.013
2/28/97 76.084 217.384 102.428
</TABLE>
The total cumulative return on investment (change in stock price plus
reinvested dividends) for each of the periods for the Company, the peer group
and the Nasdaq Stock Market Index is based on the stock price or index on March
24, 1992, the date of the Company's initial public offering.
The above graph compares the performance of the Company 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.
9
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act") requires the Company's directors and officers, and persons who own more
than 10% of a registered class of the Company'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
the Company 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 1996, or written representations from certain reporting
persons, the Company believes that all filing requirements applicable to its
directors, officers and persons who own more than 10% of a registered class of
the Company's equity securities have been complied with for fiscal 1996.
STOCK OWNED BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of the Common Stock as of March 14, 1997 with respect to: (i) each person known
by the Company to beneficially own more than 5% of the outstanding shares of
Common Stock, (ii) each of the Company's directors, (iii) each of the Company's
named executive officers, and (iv) all directors and executive officers as a
group.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK PERCENT OF
BENEFICIALLY COMMON STOCK
NAME AND BUSINESS ADDRESS OWNED(1) OUTSTANDING
- ---------------------------------------------------------------------------- -------------------- -----------------
<S> <C> <C>
Kopp Investment Advisors, Inc.(2)........................................... 975,900 11.1%
6600 France Avenue South, Suite 672
Edina, MN 55435
Wellington Management Company, LLP(3)....................................... 744,000 8.5
75 State Street
Boston, MA 02109
Westport Asset Management, Inc.(4).......................................... 552,450 6.3
253 Riverside Avenue
Westport, CT 06880
David F. Bolender........................................................... 9,334 *
William New, Jr., M.D....................................................... 36,000 *
Ronald S. Newbower.......................................................... -- --
James B. Moon............................................................... 111,190 1.3
Frank E. Samuel, Jr......................................................... 9,000 *
Steven E. Wynne............................................................. 5,334 *
Craig M. Swanson(5)......................................................... 120,496 1.4
James P. Fee, Jr............................................................ 95,350 1.1
Carl P. Hollstein, Jr....................................................... 29,519 *
Lawrence C. Gray............................................................ 25,500 *
James P. Welch.............................................................. 30,642 *
Executive Officers and Directors as a group (12 persons).................... 482,881 5.3
</TABLE>
- ------------------------
* less than one percent
10
<PAGE>
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, 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 14, 1997 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 March 14, 1997 is as follows: Dr. New--36,000; Mr. Moon--54,150;
Mr. Swanson--81,167; Mr. Fee--91,045; Mr. Welch--29,084; Mr. Wynne--3,334;
Mr. Bolender--3,334; Mr. Hollstein--25,000; Mr. Gray--22,500; and all
directors and officers as a group--363,114. The table does not include
shares subject to options that will be granted to Messrs. Bolender, Wynne,
New and Samuel under the 1993 Stock Option Plan for Nonemployee Directors
immediately after the Annual Meeting.
(2) This information as to beneficial ownership is based on a Schedule 13G filed
by Kopp Investment Advisors, Inc. ("Kopp") with the Securities and Exchange
Commission on January 29, 1997. The Schedule 13G states that Kopp has sole
voting power as to 32,500 shares of the Company's Common Stock, sole
dispositive power as to 20,000 shares of the Company's Common Stock and
shared dispositive power as to 955,900 shares of the Company's Common Stock.
(3) This information as to beneficial ownership is based on a Schedule 13G filed
by Wellington Management Company, LLP ("WMC") with the Securities and
Exchange Commission on February 14, 1997. The Schedule 13G states that WMC,
in its capacity as investment advisor, may be deemed to be the beneficial
owner of 744,000 shares of the Company's Common Stock, which are owned by
numerous investment counseling clients. The Schedule 13G states that WMC has
shared voting power as to 175,000 shares and has shared dispositive power as
to 744,000 shares of Common Stock.
(4) This information as to beneficial ownership is based on a Schedule 13G filed
by Westport Asset Management, Inc. ("Westport") with the Securities and
Exchange Commission on February 13, 1997. The Schedule 13G states that
Westport has sole voting power and dispositive power as to 5,000 shares of
the Company's Common Stock and shared voting and dispositive power as to
547,450 shares of the Company's Common Stock.
(5) Includes 6,500 shares of Common Stock owned by trusts as to which Mr.
Swanson serves as trustee.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed KPMG Peat Marwick LLP to act as
independent auditors for the Company for the fiscal year ending December 31,
1997, subject to ratification of such appointment by the Company'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 the Company for the fiscal year ending December 31, 1997.
A representative of KPMG Peat Marwick LLP is expected to be present at the
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.
11
<PAGE>
DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
Any shareholder proposal intended for inclusion in the proxy statement and
form of proxy relating to the Company's 1998 annual meeting of shareholders must
be received by the Company not later than December 4, 1997, pursuant to the
proxy soliciting regulations of the Securities and Exchange Commission. In
addition, the Company's Bylaws require that notice of shareholder proposals 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. Nothing in this paragraph shall be deemed to require the Company to
include in its proxy statement and form of proxy for such meeting any
shareholder proposal which does not meet the requirements of the Securities and
Exchange Commission in effect at the time.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors does not know
of any other matters to be presented for action by the shareholders at the 1997
Annual Meeting. If, however, 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 Board
of Directors.
COST OF SOLICITATION
The cost of soliciting proxies will be borne by the Company. In addition to
use of the mails, proxies may be solicited personally or by telephone by
directors, officers and employees of the Company, who will not be specially
compensated for such activities. Such solicitations may be made personally, or
by mail, facsimile, telephone, telegraph or messenger. Protocol will also
request persons, firms and companies holding shares in their names or in the
name of their nominees, which are beneficially owned by others, to send proxy
materials to and obtain proxies from such beneficial owners. The Company will
reimburse such persons for their reasonable expenses incurred in that
connection.
ADDITIONAL INFORMATION
A COPY OF THE COMPANY'S ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1996 ACCOMPANIES THIS PROXY STATEMENT. THE COMPANY IS
REQUIRED TO FILE AN ANNUAL REPORT ON FORM 10-K FOR ITS FISCAL YEAR ENDED
DECEMBER 31, 1996 WITH THE SECURITIES AND EXCHANGE COMMISSION. SHAREHOLDERS MAY
OBTAIN, FREE OF CHARGE, A COPY OF THE FORM 10-K (WITHOUT EXHIBITS) BY WRITING TO
CRAIG M. SWANSON, PROTOCOL SYSTEMS, INC., 8500 S.W. CREEKSIDE PLACE, BEAVERTON,
OREGON 97008.
By Order of the Board of Directors
/s/ James B. Moon
James B. Moon
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Beaverton, Oregon
April 3, 1997
12
<PAGE>
PROTOCOL SYSTEMS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of Protocol Systems, Inc., an Oregon corporation
(the "Company"), hereby appoints James B. Moon and William New, Jr., or either
of them, with full power of substitution in each, as proxies to cast all votes
which the undersigned shareholder is entitled to cast at the Annual Meeting of
Shareholders (the "Annual Meeting") to be held at 10:00 a.m. on Monday, May 12,
1997 at the Company's executive offices located at 8500 S.W. Creekside Place,
Beaverton, Oregon, and any adjournments or postponements thereof upon the
following matters.
1. Election of two directors for a three-year term.
---- ----
/ / / /
---- ----
FOR THE NOMINEES WITHHOLD AUTHORITY
LISTED BELOW TO VOTE FOR ALL
(EXCEPT AS INDICATED BELOW) NOMINEES LISTED BELOW
Ronald S. Newbower, Ph.D.
Frank E. Samuel, Jr.
Instruction: To withhold authority to vote for any nominee write that nominee's
name(s) in this space:
2. Ratification of appointment of auditors.
---- ---- ----
/ / / / / /
---- ---- ----
FOR AGAINST ABSTAIN
3. In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the meeting or any adjournments or
postponements thereof.
1 - PROXY FORM
<PAGE>
PLEASE SIGN, DATE AND RETURN THIS PROXY CARD TODAY, USING THE ENCLOSED ENVELOPE.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. UNLESS DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED "FOR" THE ELECTION OF THE NOMINEES LISTED IN PROPOSAL 1, FOR PROPOSAL 2
AND IN ACCORDANCE WITH THE RECOMMENDATIONS OF A MAJORITY OF THE BOARD OF
DIRECTORS AS TO OTHER MATTERS. The undersigned hereby acknowledges receipt of
the Company's Proxy Statement and hereby revokes any proxy or proxies previously
given.
Please sign below exactly as your name appears on this Proxy Card. If shares
are registered in more than one name, all such persons should sign. A
corporation should sign in its full corporate name by a duly authorized officer,
stating his/her title. Trustees, guardians, executors and administrators should
sign in their official capacity, giving their full title as such. If a
partnership, please sign in the partnership name by authorized person(s).
If you receive more than one Proxy Card, please sign and return all such cards
in the accompanying envelope.
-------------------------------
Typed or Printed name(s)
-------------------------------
Authorized Signature
-------------------------------
Title or authority, if applicable
-------------------------------
Date
2- PROXY FORM
