<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 Section 240.14a-11(c) or Section 240.14a-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)(4) 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:
-------------------------------------------------------------------------
(4) Date Filed:
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Notes:
<PAGE>
[LOGO OF PROTOCOL SYSTEMS, INC.]
8500 S.W. CREEKSIDE PLACE
BEAVERTON, OR 97008
(503) 526-8500
---------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 19, 1998
---------------------
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 Tuesday,
May 19, 1998, at 10:30 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. APPROVAL OF THE 1998 STOCK INCENTIVE PLAN. To approve the Protocol
Systems, Inc. 1998 Stock Incentive Plan;
3. APPROVAL OF AMENDMENT TO STOCK PURCHASE PLAN. To approve an amendment to
the Protocol Systems, Inc. 1994 Employee Stock Purchase Plan;
4. 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, 1998; and
5. OTHER BUSINESS. To transact such other business as may properly come
before the meeting or any adjournments thereof.
The Board of Directors of the Company has fixed the close of business on
March 23, 1998 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/ David F. Bolender
David F. Bolender
Chairman and Chief Executive Officer
Beaverton, Oregon
April 6, 1998
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 19, 1998
---------------------
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 10:30 a.m. on May 19, 1998, 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, approve the Company's 1998 Stock Incentive Plan, approve an
amendment to the Company's 1994 Employee Stock Purchase Plan, 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, 1998, 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 9,
1998.
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
The Board of Directors has fixed the close of business on March 23, 1998 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 4,000 beneficial holders of the 8,570,993
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, FOR APPROVAL OF THE COMPANY'S 1998 STOCK INCENTIVE PLAN,
FOR APPROVAL OF AN AMENDMENT TO THE COMPANY'S 1994 EMPLOYEE STOCK PURCHASE
PLAN, 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,
1998. 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 notice of
1
<PAGE>
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 articles of incorporation, 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 6, 1998, 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 POSITIONS HELD WITH
AGE SINCE OF TERM PROTOCOL
--- -------- ---------- ------------------------
<C> <C> <C> <C> <S>
NOMINEES:
James B. Moon.................... 52 1987 1998 Director, President
and Chief Technical
Officer
Curtis M. Stevens................ 45 -- -- --
CONTINUING DIRECTORS:
Steven E. Wynne.................. 46 1996 1999 Director
David F. Bolender................ 65 1996 1999 Chairman of the Board of
Directors and Chief
Executive Officer
Frank E. Samuel, Jr. ............ 58 1994 2000 Director
Ronald S. Newbower, Ph.D. ....... 54 1994 2000 Director
</TABLE>
JAMES B. MOON. Mr. Moon joined the Company in September 1986 and became its
President in 1987. In 1998, Mr. Moon was appointed to the additional position
of Chief Technical Officer. He served as Chairman of the Board of Directors
and Chief Executive Officer of the Company from 1987 to 1998. 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.
CURTIS M. STEVENS. Mr. Stevens is Vice President, Chief Financial Officer
and Treasurer of Louisiana Pacific Corporation, a forest products company.
From 1991 to 1997 Mr. Stevens served as Executive Vice President, Treasurer
and Assistant Secretary of Planar Systems, Inc., a manufacturer of commercial
flat panel display components. Mr. Stevens joined Planar Systems in 1983 and
was elected Vice President and Chief Financial Officer in 1986. From 1976 to
1983, Mr. Stevens served in various capacities at Deloitte, Haskins & Sells
(now Deloitte & Touche) in tax, audit and management consulting. Mr. Stevens
is a Certified Public Accountant.
2
<PAGE>
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, 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. In 1998, Mr. Bolender was elected Chairman of the Board of Directors and
Chief Executive Officer of the Company. Mr. Bolender is Chairman of the Board
of Directors of Electro Scientific Industries, Inc. and has served in that
capacity since 1992. From January 1982 to December 1991 Mr. Bolender served as
President of the Electric Operations Group of PacifiCorp.
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.
RONALD S. NEWBOWER, PH.D. Dr. Newbower was elected to the Board of Directors
in 1994. Since 1997, Dr. Newbower has been Vice President for Research
Management of Partners Healthcare Systems and, since 1994, has also served as
Senior Vice President, Research and Technology of Massachusetts General
Hospital ("MGH"). Dr. Newbower served as Vice President 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.
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 19, 1998. 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, 1997, conducted four meetings. The
members of the Audit Committee during 1997 were Mr. Bolender and Dr. William
New, Jr., who is retiring from the Board of Directors as of the date of the
Annual Meeting. 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, 1997,
the Compensation Committee held two meetings. The members of the Compensation
Committee currently are Messrs. Bolender and Wynne.
3
<PAGE>
During 1997 the Company's Board of Directors held four 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 for Dr. New, who attended 67% 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.
4
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------- --- --------------------------------------------
<C> <C> <S>
David F. Bolender 65 Chairman of the Board of Directors and Chief
Executive Officer
James B. Moon 52 President and Chief Technical Officer
Craig M. Swanson 55 Vice President, Finance, Chief Financial
Officer and Secretary
James P. Fee, Jr. 52 Vice President, Sales, Service and
Communications
Carl P. Hollstein, Jr. 58 Vice President, Manufacturing
Allen L. Oyler 52 Vice President, Human Resources and
Administration
James P. Welch 46 Vice President, Marketing and Business
Development
</TABLE>
Information regarding the principal occupation of Messrs. Bolender and 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 and in 1998 he became Vice President, Sales, Service and
Communications. 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.
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 Vice
President, Business and Market Development in December 1996. In 1998, he
became Vice President, Marketing and Business Development. 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.
5
<PAGE>
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 four
other most highly compensated executive officers of the Company (the "named
executive officers") for the fiscal years ending December 31, 1997, 1996 and
1995.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
SECURITIES
UNDERLYING
ANNUAL COMPENSATION STOCK
-------------------- OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS GRANTED
- --------------------------- ---- ---------- --------- ------------
<S> <C> <C> <C> <C>
James B. Moon........................... 1997 $ 247,346 $ -- 25,000
President and Chief Technical Officer 1996 180,385 74,204 50,000
1995 158,351 40,500 --
Craig M. Swanson........................ 1997 149,231 -- --
Vice President, Finance 1996 130,000 75,218 23,000
Chief Financial Officer and Secretary 1995 125,651 32,284 --
James P. Fee, Jr. ...................... 1997 139,231 38,893 --
Vice President, Sales, Service and
Communications 1996 120,400 84,452 25,000
1995 115,598 74,818 --
Carl P. Hollstein, Jr. ................. 1997 129,423 -- --
Vice President, Manufacturing 1996 115,400 57,017 21,000
1995 107,794 24,107 --
James P. Welch.......................... 1997 139,039 -- --
Vice President, Marketing and Business 1996 115,000 57,017 33,000
Development 1995 107,794 24,107 --
</TABLE>
STOCK OPTIONS
The following table sets forth information concerning options granted to the
named executives during the year ended December 31, 1997 under the Company's
1992 Stock Incentive Plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS EXERCISE PRICE APPRECIATION
UNDERLYING GRANTED TO PRICE FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN PER EXPIRATION ---------------------
NAME GRANTED(1) 1997 SHARE DATE 5% 10%
- ---- ---------- ------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James B. Moon........... 25,000 4.78% $13.75 01/08/2007 $ 216,183 $ 547,849
Craig M. Swanson........ -- -- -- -- -- --
James P. Fee............ -- -- -- -- -- --
Carl P. Hollstein, Jr... -- -- -- -- -- --
James P. Welch.......... -- -- -- -- -- --
</TABLE>
- --------
(1) Options granted in 1997 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.
6
<PAGE>
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, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE 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........... -- -- 68,000 72,500 $109,719 $10,625
Craig M. Swanson........ 40,834 $246,504 54,083 23,250 149,853 19,875
James P. Fee, Jr........ 6,000 52,455 94,295 25,039 498,091 19,875
Carl P. Hollstein, Jr... -- -- 35,250 15,750 84,375 0
James P. Welch.......... 1,200 6,340 32,384 24,750 138,356 0
</TABLE>
- --------
*Based on a December 31, 1997 closing stock price of $10.0625 per share.
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 $20,000 annual retainer 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 non-
employee members of the Board of Directors act as the approving body.
7
<PAGE>
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.
BASE SALARIES. The base salaries of the Company's executive officers for
1997 were established effective January 5, 1997. In establishing those
salaries, 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. While all of these factors were considered, 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 Compensation Committee established the 1997
bonus program to take into consideration the achievement of the Company's
profit plan for the year. None of the officers (other than Mr. Fee) received
any bonus payments for 1997. Mr. Fee received bonus payments for 1997 of
approximately 28% of base salary for achieving certain sales goals, an
additional element of Mr. Fee's bonus program.
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.
8
<PAGE>
CHIEF EXECUTIVE OFFICER COMPENSATION. Effective January 5, 1997, the Board
of Directors acting on the recommendation of the Compensation Committee,
increased Mr. Moon's salary from $181,000 to $250,000. Additionally, Mr. Moon
was granted options to purchase 25,000 shares of Common Stock under the 1992
Plan. 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, net income
and earnings per share (prior to one-time merger-related costs) in 1996 as
compared to 1995.
COMPENSATION COMMITTEE
Steven E. Wynne
David F. Bolender
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1997, the members of the
Compensation Committee were Messrs. Wynne and Bolender. Mr. Bolender was
elected Chairman of the Board and Chief Executive Officer of the Company on
February 20, 1998.
9
<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.
PROTOCOL SYSTEMS, INC.
PERFORMANCE GRAPH DATA FOR PROXY STATEMENT
PERFORMANCE GRAPH APPEARS HERE
SELF-
PROTOCOL NASDAQ STOCK SELF- DETERMINED
SYSTEMS MARKET (US DETERMINED GROUP FROM
DATE INC. COMPANIES) PEER GROUP PRIOR YEAR
- -------- -------- ------------ ---------- ----------
12/31/92 100.00 100.00 100.00 100.00
6/30/93 101.613 103.826 71.773 65.797
12/31/93 138.71 114.79 70.574 66.174
6/30/94 80.645 104.822 64.409 71.444
12/30/94 116.129 112.206 71.259 84.563
6/30/95 129.032 139.921 71.853 101.031
12/29/95 135.484 158.688 93.707 130.956
6/28/96 296.774 179.646 83.173 107.625
12/31/96 167.742 195.18 88.507 104.427
6/30/97 103.226 218.441 78.731 96.157
12/31/97 129.839 239.567 85.531 133.247
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
December 31, 1992.
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., Marquette
Electronics, Inc., Vital Signs, Inc., Zoll Medical Corp., Novametrix Medical
Systems, Inc., Vitalcom, Inc. and Physio Control International Corp.
Also shown on the above graph, for comparative purposes, is the performance
of the peer group which was displayed in the preceding year. The companies
which comprised that peer group are as follows: SpaceLabs Medical, Inc.,
Datascope Corp., Criticare Systems, Inc., Nellcor Puritan Bennett, Inc. and
Marquette Electronics, Inc. For purposes of the performance graph, the peer
group of companies was modified in the current year as Nellcor Puritan
Bennett, Inc. was acquired during 1997 and performance data subsequent to that
acquisition is not available. Furthermore, five additional medical device
companies which are believed to operate in the same or similar markets as the
Company were included in the revised peer group.
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 1997, 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 1997.
10
<PAGE>
STOCK OWNED BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of the Common Stock as of March 23, 1998 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 and nominees,
(iii) each of the Company's named executive officers, and (iv) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
PERCENT OF
SHARES OF COMMON STOCK COMMON STOCK
NAME AND BUSINESS ADDRESS BENEFICIALLY OWNED(1) OUTSTANDING
- ------------------------- ---------------------- ------------
<S> <C> <C>
Wellington Management Company, LLP(2)...... 879,400 10.3%
75 State Street
Boston, MA 02109
The Parnassus Fund(3)...................... 800,000 9.3
One Market
Steuart Tower, Suite 1600
San Francisco, CA 94105
Becker Capital Management, Inc.(4)......... 793,400 9.3
1211 S.W. Fifth Avenue, Suite 2185
Portland, OR 97204
Westport Asset Management, Inc.(5)......... 695,100 8.1
253 Riverside Avenue
Westport, CT 06880
Dimensional Fund Advisors, Inc.(6)......... 522,800 6.1
1299 Ocean Avenue
Santa Monica, CA 90401
David F. Bolender.......................... 33,167 *
Ronald S. Newbower......................... -- --
James B. Moon.............................. 140,814 1.6
Frank E. Samuel, Jr........................ 12,000 *
Curtis M. Stevens.......................... -- --
Steven E. Wynne............................ 13,667 *
Craig M. Swanson(7)........................ 116,609 1.4
James P. Fee, Jr........................... 108,593 1.3
Carl P. Hollstein, Jr...................... 44,030 *
James P. Welch............................. 38,688 *
Executive Officers and Directors as a group
(11 persons).............................. 498,367 5.6
</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 23,
1998 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
11
<PAGE>
shares that are issuable upon the exercise of options that are currently
exercisable or exercisable within 60 days of March 23, 1998 is as follows:
Mr. Moon--83,300; Mr. Swanson--57,083; Mr. Fee--97,392; Mr. Welch--36,134;
Mr. Wynne--9,667; Mr. Bolender--9,667; Mr. Hollstein--37,750 and all
directors and officers as a group--353,576. The table does not include
shares subject to options that will be granted to Messrs. Bolender, Samuel,
Stevens and Wynne 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 Wellington Management Company, LLP ("WMC") with the Securities
and Exchange Commission on February 11, 1998. The Schedule 13G states that
WMC, in its capacity as investment advisor, may be deemed to be the
beneficial owner of 879,400 shares of Common Stock, which are owned by
numerous investment counseling clients. The Schedule 13G states that WMC
has shared voting power as to 375,400 shares and has shared dispositive
power as to 879,400 shares of Common Stock.
(3) This information as to beneficial ownership is based on a Schedule 13G
filed by The Parnassus Fund ("Parnassus") with the Securities and Exchange
Commission on February 13, 1998. The Schedule 13G states that Parnassus
has sole voting power as to 800,000 shares of Common Stock.
(4) This information as to beneficial ownership is based on a Schedule 13G
filed by Becker Capital Management, Inc. ("Becker") with the Securities
and Exchange Commission on February 13, 1998. The Schedule 13G states that
Becker has sole voting power and dispositive power as to 793,400 shares of
Common Stock.
(5) This information as to beneficial ownership is based on a Schedule 13G
filed by Dimensional Fund Advisors, Inc. ("Dimensional") with the
Securities and Exchange Commission on February 10, 1998. The Schedule 13G
states that Dimensional has sole dispositive power as to 522,800 shares of
Common Stock.
(6) 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 20, 1998. The Schedule 13G states that
Westport has sole voting power and dispositive power as to 84,600 shares
of Common Stock and shared voting power as to 610,500 shares of Common
Stock.
(7) Includes 5,000 shares of Common Stock owned by trusts as to which Mr.
Swanson serves as trustee.
APPROVAL OF THE 1998 STOCK INCENTIVE PLAN
The Board of Directors is requesting that the Company's shareholders approve
the Company's 1998 Stock Incentive Plan (the "1998 Plan"), which was adopted
by the Board of Directors on March 23, 1998. The purposes of the 1998 Plan are
to attract, retain and reward individuals who can and do contribute to the
Company's success by providing Employees and Consultants an opportunity to
share in the equity of the Company and to more closely align their interests
with the Company and its shareholders.
In the high technology industry in which the Company competes, stock options
are an integral part of the total compensation package. Protocol's practice
has been to grant stock options broadly throughout the organization to
recognize key performers and to provide a link between employee and Company
performance. To date more than 87% of employees have been issued stock option
grants, with approximately 60% of the options granted to employees who are not
officers of the Company.
The Board considers it critical to be able to continue to offer stock
incentives in order to attract and develop the talented, vital individuals who
can contribute to the Company's growth and success in a very competitive
environment. Doing so provides significant motivational and performance
benefits by providing employees and consultants an ownership perspective,
teamed with an appreciation that comes with growing the value of the Company.
Equity participation is the most effective means for more closely aligning
their interests with the long-range goals of the Company and its shareholders.
Lack of stock incentives would put the Company at a serious disadvantage in
recruiting and retaining key people. For these reasons, shareholders are
encouraged to approve the 1998 Stock Incentive Plan which is included in its
entirety herein as Exhibit A. The following
12
<PAGE>
discussion is intended only as a summary of the material provisions of the
1998 Plan. Shareholders are encouraged to review the 1998 Plan before voting
on this proposal.
The 1998 Plan 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 the Company. A total of 300,000 shares of
Common Stock have been reserved for issuance under the 1998 Plan upon the
exercise of stock options which may be granted to employees, officers,
directors and consultants of the Company. As of March 23, 1998, approximately
400 persons were eligible to participate in the 1998 Plan. Because the
officers and employees of the Company who may participate in the 1998 Plan and
the amount of their options will be determined by the Compensation Committee
in its discretion, it is not possible to state the names or positions of, or
the number of options that may be granted to, the Company's officers and
employees. No employee may receive options under the 1998 Plan for more than
50,000 shares in any one fiscal year, except that options for up to an
additional 50,000 shares may be granted in connection with a person's initial
employment with the Company.
The administration of the 1998 Plan has been delegated to the Compensation
Committee of the Board of Directors (the "Committee"). In addition to
determining who will be granted options, the Committee has the authority and
discretion to determine when options will be granted and the number of options
to be granted and whether the options will be incentive stock options or non-
qualified stock options. Only "employees" of the Company as that term is
defined in the Code will be entitled to receive Incentive Stock Options. See
"Federal Income Tax Consequences" below. The Committee also may determine the
time or times when each option becomes exercisable, the duration of the
exercise period for options and the form or forms of the instruments
evidencing options granted under the Plan. The Committee also may construe the
Plan and the provisions in the instruments evidencing options granted under
the Plan to employee and officer participants and is empowered to make all
other determinations deemed necessary or advisable for the administration of
the Plan.
The term of each option granted under the 1998 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 1998 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 the Company, 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. If a person who
has been granted an option ceases to be an employee or consultant as a result
of such person's total and permanent disability, such person may exercise that
option at any time within twelve months after the date of termination, but
only to the extent that the option was exercisable on the date of termination.
Except as otherwise provided by the Compensation Committee at the time an
option is granted, no option granted under the 1998 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 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 incentive stock options granted under the 1998 Plan
may not be less than the fair market value of a share of Common Stock on the
last market trading day prior to the date of grant of the option. For non-
qualified stock options, the exercise price may be less than, equal to, or
greater than the fair market value of the Common Stock on the date of grant,
provided that the Compensation Committee must specifically determine that any
option grant at an exercise price less than fair market value is in the best
interests of the Company. 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, shares of
Common Stock, such other consideration and method of payment permitted by
applicable law or any combination of such methods of payment as permitted by
the Compensation Committee. The Compensation Committee has the authority to
reset the price of any stock option after the original grant and before
exercise. In the event of stock
13
<PAGE>
dividends, splits, and similar capital changes, the 1998 Plan provides for
appropriate adjustments in the number of shares available for option and the
number and option prices of shares subject to outstanding options.
In the event of a proposed sale of all or substantially all of the assets of
the Company, or a merger of the Company with and into another corporation,
outstanding options shall be assumed or equivalent options shall be
substituted by such successor corporation, unless the Committee provides all
option holders with the right to immediately exercise all of their options,
whether vested or unvested. In the event of a proposed dissolution or
liquidation of the Company, outstanding options will terminate immediately
prior to the consummation of such proposed action, unless otherwise provided
by the Board. In such a situation, the Board is authorized to give option
holders the right to immediately exercise all of their options, whether vested
or unvested.
The 1998 Plan will continue in effect until March 23, 2008, 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 1998 Plan at any time. Amendments to the 1998
Plan must be approved by shareholders if required by applicable tax,
securities or other law or regulation.
The issuance of shares of Common Stock upon the exercise of options is
subject to registration with the Securities and Exchange Commission of the
shares reserved by the Company under the 1998 Plan.
FEDERAL INCOME TAX CONSEQUENCES
The federal income tax discussion set forth below is included for general
information only. Optionees are urged to consult their tax advisors to
determine the particular tax consequences applicable to them, including the
application and effect of foreign, state and local income and other tax laws.
INCENTIVE STOCK OPTIONS. Certain options authorized to be granted under the
1998 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 proceeds of
the sale of the shares exceeds the exercise price. The Company 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, the Company will be entitled to a deduction to the
extent the employee realized ordinary income.
NON-QUALIFIED STOCK OPTIONS. Certain options authorized to be granted under
the 1998 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 1998 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 the Company 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. 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.
CONSEQUENCES TO THE COMPANY. The Company recognizes no deduction at the
time of grant or exercise of an incentive stock option. The Company will
recognize a deduction at the time of exercise of a non-qualified stock option
on the difference between the option price and the fair market value of the
shares on the date of grant. The Company also will recognize a deduction to
the extent the optionee recognizes income upon a disqualifying disposition of
shares underlying an incentive stock option.
14
<PAGE>
BOARD RECOMMENDATION
For the reasons discussed above, the Board recommends a vote FOR approval of
the Company's 1998 Stock Incentive Plan. If a quorum is present, this proposal
will be approved if a majority of the votes cast on the proposal are voted in
favor of approval. Abstentions and broker non-votes are counted for purposes
of determining whether a quorum exists at the Annual Meeting but will not be
counted and will have no effect on the determination of the outcome of this
proposal. PROXIES SOLICITED BY THE BOARD WILL BE VOTED FOR APPROVAL OF THE
1998 STOCK INCENTIVE PLAN UNLESS A VOTE AGAINST THE PROPOSAL OR ABSTENTION IS
SPECIFICALLY INDICATED.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL.
APPROVAL OF AMENDMENT TO THE 1994 EMPLOYEE STOCK PURCHASE PLAN
The purpose of the Company's 1994 Employee Stock Purchase Plan ("ESPP") is
to provide a convenient and practical means by which employees may participate
in stock ownership of the Company. The Board of Directors believes that the
opportunity to acquire a proprietary interest in the success of the Company
through the acquisition of shares of Common Stock pursuant to the ESPP is an
important aspect of the Company's ability to attract and retain highly
qualified and motivated employees. A total of 300,000 shares of Common Stock
have been reserved under the Company's 1994 Employee Stock Purchase Plan (the
"ESPP"). As of March 23, 1998, only 31,887 shares remained available for
purchase under the ESPP. The Board of Directors believes that additional
shares will be needed under the ESPP to provide appropriate incentives.
Accordingly, on March 23, 1998, the Board of Directors approved an amendment
to the ESPP, subject to shareholder approval, to reserve an additional 100,000
shares of Common Stock under the ESPP, thereby increasing the total number of
shares reserved for issuance under the ESPP from 300,000 shares to 400,000
shares. The following is a summary of the basic terms and provisions of the
ESPP.
The ESPP is intended to qualify as an "employee stock purchase plan" within
the meaning of Section 423 of the Code. The ESPP is administered by the
Compensation Committee of the Board of Directors. The Compensation Committee
has the power to make and interpret all rules and regulations it deems
necessary to administer the ESPP and has broad authority to amend the ESPP,
subject to certain amendments requiring shareholder approval.
All regular status employees of the Company and its subsidiaries, including
the Company's officers, are eligible to participate in the ESPP if they: (i)
have been employed by the Company continuously for a period of three months,
(ii) are customarily employed in a position with regular hours of 20 or more
hours a week and (iii) are customarily employed more than five months in any
calendar year. Eligible employees may elect to contribute from 1% to 10% of
their cash compensation during each pay period. The ESPP provides for two
annual six-month offering periods, beginning on February 1 and August 1 of
each year (the "Enrollment Dates"). During the offering periods, participants
accumulate funds in an account via payroll deduction. At the end of each six-
month offering period, the purchase price is determined and the accumulated
funds are used to automatically purchase shares of Common Stock. The purchase
price per share is equal to 85% of the lower of (a) the fair market value of
the Common Stock on the Enrollment Date of the offering period or (b) the fair
market value on the date of purchase. Unless a participant files a withdrawal
notice before the beginning of the next offering period, such participant will
automatically be re-enrolled for the next offering period.
Neither payroll deductions credited to a participant's account nor any
rights with regard to the purchase of shares under the ESPP may be assigned,
transferred, pledged or otherwise disposed of in any way by the participant.
Upon termination of a participant's employment for any reason the payroll
deductions credited to the participant's account will be returned to the
participant. Any remaining balances will be returned to the participant, or
his or her beneficiary. As of February 1, 1998, there were 384 employees of
the Company eligible to participate in the ESPP and 178 employees
participating.
15
<PAGE>
The ESPP is intended to qualify as an "employee stock purchase plan" within
the meaning of Section 423 of the Code. Under the Code, no taxable income is
recognized by the participant with respect to shares purchased under the ESPP
either at the time of enrollment or at any purchase date within an offering
period.
If the participant disposes of shares purchased pursuant to the ESPP more
than two years from the Enrollment Date and more than one year from the date
on which the shares were purchased, the participant will recognize ordinary
income equal to the lesser of (1) the excess of the fair market value of the
shares at the time of disposition over the purchase price, or (2) 15% of the
fair market value of the shares on the Enrollment Date. Any gain on the
disposition in excess of the amount treated as ordinary income will be capital
gain. The Company is not entitled to take a deduction for the amount of the
discount in circumstances indicated above.
If the participant disposes of shares purchased pursuant to the ESPP within
two years after the Enrollment Date or within one year after the purchase
date, the employee will recognize ordinary income on the excess of the fair
market value of the stock on the purchase date over the purchase price. Any
difference between the sale price of the shares and the fair market value on
the purchase date will be capital gain or loss. The Company is entitled to a
deduction from income equal to the amount the employee is required to report
as ordinary compensation income.
The federal income tax rules relating to employee stock purchase plans
qualifying under Section 423 of the Code are complex. Therefore, the foregoing
outline is intended to summarize only certain major federal income tax rules
concerning qualified employee stock purchase plans.
For the reasons discussed above, the Board recommends a vote FOR approval of
the amendment to the Company's 1994 Employee Stock Purchase Plan. If a quorum
is present, this proposal will be approved if a majority of the votes cast on
the proposal are voted in favor of approval. Abstentions and broker non-votes
are counted for purposes of determining whether a quorum exists at the Annual
Meeting but will not be counted and will have no effect on the determination
of the outcome of this proposal. PROXIES SOLICITED BY THE BOARD WILL BE VOTED
FOR APPROVAL OF THE AMENDMENT TO THE 1994 EMPLOYEE STOCK PURCHASE PLAN UNLESS
A VOTE AGAINST THE PROPOSAL OR ABSTENTION IS SPECIFICALLY INDICATED.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL.
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,
1998, 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, 1998.
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.
16
<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 1999 annual meeting of shareholders
must be received by the Company not later than December 8, 1998, pursuant to
the proxy soliciting regulations of the Securities and Exchange Commission
(the "SEC"). 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 SEC 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
1998 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, 1997 ACCOMPANIES THIS PROXY STATEMENT. THE COMPANY IS
REQUIRED TO FILE AN ANNUAL REPORT ON FORM 10-K FOR ITS FISCAL YEAR ENDED
DECEMBER 31, 1997 WITH THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY'S
ANNUAL REPORT ON FORM 10-K, AND OTHER REPORTS FILED BY THE COMPANY WITH THE
SEC MAY BE OBTAINED THROUGH THE SEC'S WEB SITE (HTTP://WWW.SEC.GOV).
SHAREHOLDERS MAY ALSO 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/ David F. Bolender
David F. Bolender
Chairman and Chief Executive Officer
Beaverton, Oregon
April 6, 1998
17
<PAGE>
EXHIBIT A
PROTOCOL SYSTEMS, INC.
1998 STOCK INCENTIVE PLAN
1. Purposes of the Plan. The purposes of this Stock Incentive Plan are to
attract, retain and reward individuals who can and do contribute to the
Company's success by providing Employees and Consultants an opportunity to
share in the equity of the Company and to more closely align their interests
with the Company and its shareholders.
Options granted hereunder may be either "incentive stock options," as
defined in Section 422 of the Internal Revenue Code of 1986, as amended, or
"nonqualified stock options," at the discretion of the Board and as reflected
in the terms of the written option agreement. In addition, shares of the
Company's Common Stock may be Sold hereunder independent of any Option grant.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" shall mean the Board or any of its Committees as shall
be administering the Plan, in accordance with Section 4(a) of the Plan.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Committee" shall mean a committee appointed by the Board in accordance
with Section 4(a) of the Plan.
(e) "Common Stock" shall mean the Common Stock of the Company.
(f) "Company" shall mean Protocol Systems, Inc., an Oregon corporation.
(g) "Consultant" shall mean any person who is engaged by the Company or any
Parent or Subsidiary to render consulting services and is compensated for such
consulting services and any Director of the Company whether compensated for
such services or not.
(h) "Continuous Status as an Employee or Consultant" shall mean the absence
of any interruption or termination of service as an Employee or Consultant.
Continuous Status as an Employee or Consultant shall not be considered
interrupted in the case of: (i) any sick leave, military leave, or any other
leave of absence approved by the Company; provided, however, that for purposes
of Incentive Stock Options, any such leave is for a period of not more than
ninety days or reemployment upon the expiration of such leave is guaranteed by
contract or statute, provided, further, that on the ninety-first day of such
leave (where re-employment is not guaranteed by contract or statute) the
Optionee's Incentive Stock Option shall automatically convert to a
Nonqualified Stock Option; or (ii) transfers between locations of the Company
or between the Company, its Parent, its Subsidiaries or its successor.
(i) "Director" shall mean a member of the Board.
(j) "Disability" shall mean total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "Employee" shall mean any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary. Neither the payment of a
director's fee by the Company nor service as a Director shall be sufficient to
constitute "employment" by the Company.
(l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" shall mean, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or a
national market system, including without limitation the Nasdaq National
Market or the Nasdaq SmallCap Market of the
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Nasdaq Stock Market, its Fair Market Value shall be the closing sales price
for such stock as quoted on such exchange or system for the last market
trading day prior to the date of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, the Fair Market Value of a
Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the
date of determination, as reported in The Wall Street Journal or such other
source as the Administrator deems reliable;
(iii) In the absence of an established market for the Common Stock, the
Fair Market Value shall be determined in good faith by the Administrator.
(n) "Incentive Stock Option" shall mean an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(o) "Nonqualified Stock Option" shall mean an Option not intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
(p) "Notice of Grant" shall mean a written notice evidencing certain terms
and conditions of an individual Option grant. The Notice of Grant is part of
the Option Agreement.
(q) "Officer" shall mean a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" shall mean a stock option granted pursuant to the Plan.
(s) "Option Agreement" shall mean a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the
Plan.
(t) "Optioned Stock" shall mean the Common Stock subject to an Option.
(u) "Optionee" shall mean an Employee or Consultant who receives an Option.
(v) "Parent" shall mean a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(w) "Plan" shall mean this 1998 Stock Incentive Plan.
(x) "Rule 16b-3" shall mean Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3, as in effect when discretion is being exercised with respect to
the Plan.
(y) "Sale" or "Sold" shall include, with respect to the sale of Shares under
the Plan, the sale of Shares for any form of consideration specified in
Section 8(b), as well as a grant of Shares for consideration in the form of
past or future services.
(z) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(aa) "Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan.
(a) Subject to the provisions of paragraph (b) of this Section 3 and the
provisions of Section 11 of the Plan, the maximum aggregate number of Shares
which may be optioned and/or Sold under the Plan is 300,000 shares of Common
Stock. The Shares may be authorized, but unissued, or reacquired Common Stock.
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(b) If an Option should expire or become unexercisable for any reason, or is
otherwise terminated or forfeited, without having been exercised in full, the
unpurchased Shares which were subject thereto shall, unless the Plan shall
have been terminated, become available for future Option grants and/or Sales
under the Plan. If any Shares issued pursuant to a Sale shall be reacquired,
cancelled or forfeited for any reason, such Shares shall become available for
future Option grants and/or Sales under the Plan, unless the Plan shall have
been terminated. If the exercise price of any Option granted under the Plan is
satisfied by tendering Shares of Common Stock to the Company (by either actual
delivery or by attestation), only the number of shares of Common Stock issued
net of the Shares of Common Stock tendered shall be deemed delivered for
purposes of determining the maximum number of Shares available for delivery
under the Plan.
(c) Notwithstanding any other provision of this Section 3, the maximum
number of Shares that may be issued upon the exercise of Incentive Stock
Options shall be 300,000.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. If permitted by Rule 16b-3, the Plan
may be administered by different bodies with respect to Directors, Officers
who are not Directors, and Employees who are neither Directors nor
Officers.
(ii) Administration With Respect to Directors and Officers Subject to
Section 16(b). With respect to Option grants made to Employees who are also
Officers or Directors subject to Section 16(b) of the Exchange Act, the
Plan shall be administered by (A) the Board, if the Board may administer
the Plan in compliance with the rules governing a plan intended to qualify
as a discretionary plan under Rule 16b-3, or (B) a Committee designated by
the Board to administer the Plan, which Committee shall be constituted to
comply with the rules, if any, governing a plan intended to qualify as a
discretionary plan under Rule 16b-3. Once appointed, such Committee shall
continue to serve in its designated capacity until otherwise directed by
the Board. From time to time the Board may increase the size of the
Committee and appoint additional members, remove members (with or without
cause) and substitute new members, fill vacancies (however caused), and
remove all members of the Committee and thereafter directly administer the
Plan, all to the extent permitted by the rules, if any, governing a plan
intended to qualify as a discretionary plan under Rule 16b-3. With respect
to persons subject to Section 16 of the Exchange Act, transactions under
the Plan are intended to comply with all applicable conditions of Rule 16b-
3. To the extent any provision of the Plan or action by the Administrator
fails to so comply, it shall be deemed null and void, to the extent
permitted by law and deemed advisable by the Administrator.
(iii) Administration With Respect to Other Persons. With respect to
Option grants made to Employees or Consultants who are neither Directors
nor Officers of the Company, the Plan shall be administered by (A) the
Board or (B) a Committee designated by the Board, which Committee shall be
constituted to satisfy the legal requirements relating to the
administration of stock option plans under applicable corporate and
securities laws and the Code. Once appointed, such Committee shall serve in
its designated capacity until otherwise directed by the Board. The Board
may increase the size of the Committee and appoint additional members,
remove members (with or without cause) and substitute new members, fill
vacancies (however caused), and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by the
legal requirements relating to the administration of stock option plans
under state corporate and securities laws and the Code.
(b) Powers of the Administrator. Subject to the provisions of the Plan, and
in the case of a Committee, subject to the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to grant Incentive Stock Options in accordance with Section 422 of
the Code, or Nonqualified Stock Options;
(ii) to authorize Sales of Shares of Common Stock hereunder;
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(iii) to determine, upon review of relevant information, the Fair Market
Value of the Common Stock;
(iv) to determine the exercise/purchase price per Share of Options to be
granted or Shares to be Sold, which exercise/purchase price shall be
determined in accordance with Section 8(a) of the Plan;
(v) to determine the Employees or Consultants to whom, and the time or
times at which, Options shall be granted and the number of Shares to be
represented by each Option;
(vi) to determine the Employees or Consultants to whom, and the time or
times at which, Shares shall be Sold and the number of Shares to be Sold;
(vii) to interpret the Plan;
(viii) to prescribe, amend and rescind rules and regulations relating to
the Plan;
(ix) to determine the terms and provisions of each Option granted (which
need not be identical) and, with the consent of the holder thereof, modify
or amend each Option;
(x) to determine the terms and provisions of each Sale of Shares (which
need not be identical) and, with the consent of the purchaser thereof,
modify or amend each Sale;
(xi) to accelerate or defer (with the consent of the Optionee) the
exercise date of any Option;
(xii) to accelerate or defer (with the consent of the Optionee or
purchaser of Shares) the vesting restrictions applicable to Shares Sold
under the Plan or pursuant to Options granted under the Plan;
(xiii) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option or Sale of Shares
previously granted or authorized by the Administrator;
(xiv) to determine the restrictions on transfer, vesting restrictions,
repurchase rights, or other restrictions applicable to Shares issued under
the Plan;
(xv) to effect, at any time and from time to time, with the consent of
the affected Optionees, the cancellation of any or all outstanding Options
under the Plan and to grant in substitution therefor new Options under the
Plan covering the same or different numbers of Shares, but having an Option
price per Share consistent with the provisions of Section 8 of this Plan as
of the date of the new Option grant;
(xvi) to establish, on a case-by-case basis, different terms and
conditions pertaining to exercise or vesting rights upon termination of
employment, whether at the time of an Option grant or Sale of Shares, or
thereafter;
(xvii) to approve forms of agreement for use under the Plan;
(xviii) to reduce the exercise price of any Option to the then current
Fair Market Value if the Fair Market Value of the Common Stock covered by
such Option shall have declined since the date the Option was granted;
(xix) to determine whether and under what circumstances an Option may be
settled in cash under subsection 9(f) instead of Common Stock; and
(xx) to make all other determinations deemed necessary or advisable for
the administration of the Plan.
(c) Effect of Administrator's Decision. All decisions, determinations and
interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options granted under the Plan or
Shares Sold under the Plan.
5. Eligibility.
(a) Persons Eligible. Options may be granted and/or Shares Sold only to
Employees and Consultants. Incentive Stock Options may be granted only to
Employees. An Employee or Consultant who has been granted an Option or Sold
Shares may, if he or she is otherwise eligible, be granted an additional
Option or Options or Sold additional Shares.
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(b) ISO Limitation. To the extent that the aggregate Fair Market Value: (i)
of Shares subject to an Optionee's Incentive Stock Options granted by the
Company, any Parent or Subsidiary, which (ii) become exercisable for the first
time during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonqualified Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted,
and the Fair Market Value of the Shares shall be determined as of the time of
grant.
(c) Section 5(b) Limitations. Section 5(b) of the Plan shall apply only to
an Incentive Stock Option evidenced by an Option Agreement which sets forth
the intention of the Company and the Optionee that such Option shall qualify
as an Incentive Stock Option. Section 5(b) of the Plan shall not apply to any
Option evidenced by a Option Agreement which sets forth the intention of the
Company and the Optionee that such Option shall be a Nonqualified Stock
Option.
(d) No Right to Continued Employment. The Plan shall not confer upon any
Optionee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with his or
her right or the Company's right to terminate his employment or consulting
relationship at any time, with or without cause.
(e) Other Limitations. The following limitations shall apply to grants of
Options to Employees:
(i) No Employee shall be granted, in any fiscal year of the Company,
Options to purchase more than 50,000 Shares.
(ii) In connection with his or her initial employment, an Employee may be
granted Options to purchase up to an additional 50,000 Shares which shall
not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 11.
(iv) If an Option is canceled in the same fiscal year of the Company in
which it was granted (other than in connection with a transaction described
in Section 11), the canceled Option shall be counted against the limits set
forth in subsections (i) and (ii) above. For this purpose, if the exercise
price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
6. Term of Plan. The Plan shall become effective upon the earlier to occur
of its adoption by the Board or its approval by the shareholders of the
Company as described in Section 17 of the Plan. It shall continue in effect
for a term of ten (10) years, unless sooner terminated under Section 13 of the
Plan.
7. Term of Option. The term of each Option shall be stated in the Notice of
Grant; provided, however, that in the case of an Incentive Stock Option, the
term shall be ten (10) years from the date of grant or such shorter term as
may be provided in the Notice of Grant. However, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or
Subsidiary, the term of the Incentive Stock Option shall be five (5) years
from the date of grant thereof or such shorter term as may be provided in the
Notice of Grant.
8. Exercise/Purchase Price and Consideration.
(a) Exercise/Purchase Price. The per-Share exercise/purchase price for the
Shares to be issued pursuant to exercise of an Option or a Sale shall be such
price as is determined by the Administrator, but shall be subject to the
following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of such
Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the
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Company or any Parent or Subsidiary, the per Share exercise price shall
be no less than one hundred ten percent (110%) of the Fair Market Value
per Share on the date of the grant.
(B) granted to any other Employee, the per Share exercise price shall
be no less than one hundred percent (100%) of the Fair Market Value per
Share on the date of grant.
(ii) In the case of a Nonqualified Stock Option or Sale, the per Share
exercise/purchase price shall be determined by the Administrator.
(iii) Any determination to establish an Option exercise price or effect a
Sale of Common Stock at less than Fair Market Value on the date of the
Option grant or authorization of Sale shall be accompanied by an express
finding by the Administrator specifying that the Option grant or Sale is in
the best interest of the Company, and specifying both the Fair Market Value
and the Option exercise price or Sale price of the Common Stock.
(b) Consideration. The consideration to be paid for the Shares to be issued
upon exercise of an Option or pursuant to a Sale, including the method of
payment, shall be determined by the Administrator. In the case of an Incentive
Stock Option, the Administrator shall determine the acceptable form of
consideration at the time of grant. Such consideration may consist of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) transfer to the Company of Shares which
(A) in the case of Shares acquired upon exercise of an Option, have
been owned by the Optionee for more than six months on the date of
surrender, and
(B) have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares to be acquired;
(v) delivery of a properly executed exercise notice together with
irrevocable instructions to a broker to promptly deliver to the Company the
amount of sale or loan proceeds required to pay the exercise price;
(vi) such other consideration and method of payment for the issuance of
Shares to the extent permitted by legal requirements relating to the
administration of stock option plans and issuances of capital stock under
applicable corporate and securities laws and the Code; or
(vii) any combination of the foregoing methods of payment.
If the Fair Market Value of the number of whole Shares transferred or the
number of whole Shares surrendered is less than the total exercise price of
the Option, the shortfall must be made up in cash or by check. Notwithstanding
the foregoing provisions of this Section 8(b), the consideration for Shares to
be issued pursuant to a Sale may not include, in whole or in part, the
consideration set forth in subsection (v) above.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the
terms of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable
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under the Option Agreement and Section 8(b) of the Plan. Each Optionee who
exercises an Option shall, upon notification of the amount due (if any) and
prior to or concurrent with delivery of the certificate representing the
Shares, pay to the Company amounts necessary to satisfy applicable federal,
state and local tax withholding requirements. An Optionee must also provide a
duly executed copy of any stock transfer agreement then in effect and
determined to be applicable by the Administrator. Until the issuance (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate evidencing
such Shares, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock represented by such
stock certificate, notwithstanding the exercise of the Option. No adjustment
will be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 11
of the Plan.
(b) Termination of Employment or Consulting Relationship. In the event that
an Optionee's Continuous Status as an Employee or Consultant terminates (other
than upon the Optionee's death or Disability), the Optionee may exercise his
or her Option, but only within such period of time as is determined by the
Administrator, and only to the extent that the Optionee was entitled to
exercise it at the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Notice of Grant). In
the case of an Incentive Stock Option, the Administrator shall determine such
period of time (in no event to exceed three (3) months from the date of
termination) when the Option is granted. If, at the date of termination, the
Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. In the event that an Optionee's Continuous
Status as an Employee or Consultant terminates as a result of the Optionee's
Disability, the Optionee may exercise his or her Option at any time within
twelve (12) months from the date of such termination, but only to the extent
that the Optionee was entitled to exercise it at the date of such termination
(but in no event later than the expiration of the term of such Option as set
forth in the Notice of Grant). If, at the date of termination, the Optionee is
not entitled to exercise his or her entire Option, the Shares covered by the
unexercisable portion of the Option shall revert to the Plan. If, after
termination, the Optionee does not exercise his or her Option within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee, the Option
may be exercised at any time within twelve (12) months following the date of
death (but in no event later than the expiration of the term of such Option as
set forth in the Notice of Grant), by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only
to the extent that the Optionee was entitled to exercise the Option at the
date of death. If, at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall revert to the Plan. If, after death, the
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
(e) Rule 16b-3. Options granted to persons subject to Section 16(b) of the
Exchange Act must comply with Rule 16b-3 and shall contain such additional
conditions or restrictions as may be required thereunder to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.
(f) Buyout Provisions. The Administrator may at any time offer to buy out,
in whole or in part, for a payment in cash or Shares, an Option previously
granted, based on such terms and conditions as the Administrator shall
establish and communicate to the Optionee at the time that such offer is made.
10. Nontransferability of Options. Except as otherwise specifically provided
in the Option Agreement, an Option may not be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will, or
by the laws of descent and distribution, and may be exercised during the
lifetime of the Optionee only by the Optionee or, if incapacitated, by his or
her legal guardian or legal representative.
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11. Adjustments Upon Changes in Capitalization or Merger.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have
yet been granted or Sales made or which have been returned to the Plan upon
cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Administrator, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option.
(b) Dissolution or Liquidation. In the event of the proposed dissolution or
liquidation of the Company, each outstanding Option will terminate immediately
prior to the consummation of such proposed action, unless otherwise provided
by the Administrator. The Administrator may, in the exercise of its sole
discretion in such instances, declare that any Option shall terminate as of a
date fixed by the Board and give each Optionee the right to exercise his or
her Option as to all or any part of the Optioned Stock, including Shares as to
which the Option would not otherwise be exercisable.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding Option shall be assumed or
an equivalent option shall be substituted by such successor corporation or a
Parent or Subsidiary of such successor corporation, unless the Administrator
determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that the Optionee shall have the right to exercise
the Option as to all of the Optioned Stock, including Shares as to which the
Option would not otherwise be exercisable. If the Administrator makes an
Option fully exercisable in lieu of assumption or substitution in the event of
a merger or sale of assets, the Administrator shall notify the Optionee that
the Option shall be fully exercisable for a period of thirty (30) days from
the date of such notice or such shorter period as the Administrator may
specify in the notice, and the Option will terminate upon the expiration of
such period. For the purposes of this paragraph, the Option shall be
considered assumed if, following the merger or sale of assets, the Option
confers the right to purchase, for each Share of Optioned Stock subject to the
Option immediately prior to the merger or sale of assets, the consideration
(whether stock, cash, or other securities or property) received in the merger
or sale of assets by holders of Common Stock for each Share held on the
effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority
of the outstanding Shares); provided, however, that if such consideration
received in the merger or sale of assets was not solely common stock of the
successor corporation or its Parent, the Administrator may, with the consent
of the successor corporation and the Optionee, provide for the consideration
to be received upon the exercise of the Option, for each Share of Optioned
Stock subject to the Option, to be solely common stock of the successor
corporation or its Parent equal in Fair Market Value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
12. Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date on which the Administrator makes the determination
granting such Option. Notice of the determination shall be given to each
Optionee within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may amend or terminate the Plan
from time to time in such respects as the Board may deem advisable.
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(b) Shareholder Approval. The Company shall obtain shareholder approval of
any Plan amendment to the extent necessary and desirable to comply with Rule
16b-3 or with Section 422 of the Code (or any successor rule or statute or
other applicable law, rule or regulation, including the requirements of any
exchange or quotation system on which the Common Stock is listed or quoted).
Such shareholder approval, if required, shall be obtained in such a manner and
to such a degree as is required by the applicable law, rule or regulation.
(c) Effect of Amendment or Termination. Any such amendment or termination of
the Plan shall not affect Options already granted, and such Options shall
remain in full force and effect as if this Plan had not been amended or
terminated, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the Optionee
and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
to the exercise of an Option or a Sale unless the exercise of such Option or
consummation of the Sale and the issuance and delivery of such Shares pursuant
thereto shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, applicable state
securities laws, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange (including NASDAQ) upon
which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
15. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
16. Liability of Company.
(a) Inability to Obtain Authority. Inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
As a condition to the exercise of an Option or a Sale, the Company may
require the person exercising such Option or to whom Shares are being Sold to
represent and warrant at the time of any such exercise or Sale that the Shares
are being purchased only for investment and without any present intention to
sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is required by any of the aforementioned relevant
provisions of law.
(b) Grants Exceeding Allotted Shares. If the Optioned Stock covered by an
Option exceeds, as of the date of grant, the number of Shares which may be
issued under the Plan without additional shareholder approval, such Option
shall be void with respect to such excess Optioned Stock, unless shareholder
approval of an amendment sufficiently increasing the number of Shares subject
to the Plan is timely obtained in accordance with Section 13 of the Plan.
17. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before
or after the date the Plan is adopted. Such shareholder approval shall be
obtained in the manner and to the degree required under applicable federal and
state law.
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PROTOCOL SYSTEMS, INC.
1994 EMPLOYEE STOCK PURCHASE PLAN*
The following provisions constitute the Protocol Systems, Inc. 1994 Employee
Stock Purchase Plan.
1. PURPOSE. The purpose of the Plan is to provide employees of the Company and
its Designated Subsidiaries with an opportunity to purchase Common Stock of the
Company through accumulated payroll deductions. It is the intention of the
Company to have the Plan qualify as an "Employee Stock Purchase Plan" under
Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of
the Plan, accordingly, shall be construed so as to extend and limit
participation in a manner consistent with the requirements of that section of
the Code.
2. DEFINITIONS.
2.1 "ACCOUNT" shall mean each separate account maintained for a Participant
under the Plan, collectively or singly as the context requires. Each
Account shall be credited with a Participant's contributions, and shall be
charged for the purchase of Common Stock. A Participant shall be fully
vested in the cash contributions to his or her account at all times. The
Plan Administrator may create special types of accounts for administrative
reasons, even though the Accounts are not expressly authorized by the
Plan.
2.2 "BOARD" shall mean the Board of Directors of the Company.
2.3 "CODE" shall mean the Internal Revenue Code of 1986, as amended.
2.4 "COMMITTEE" shall mean the Compensation Committee of the Board.
2.5 "COMMON STOCK" shall mean the Common Stock of the Company.
2.6 "COMPANY" shall mean Protocol Systems, Inc., an Oregon corporation.
2.7 "COMPENSATION" shall mean all base straight time gross earnings plus
payments for overtime, shift premiums and sales commissions, but excluding
incentive compensation, incentive payments, bonuses, awards, and other
compensation.
2.8 "DESIGNATED SUBSIDIARY" shall mean each Subsidiary which has been
designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
2.9 "EMPLOYEE" shall mean an individual who renders services to the Company or
to a Designated Subsidiary pursuant to a regular-status employment
relationship with such employer. A person rendering services to the
Company or to a Designated Subsidiary purportedly as an independent
consultant or contractor shall not be an Employee for purposes of the
Plan.
* NOTE: Matter in BOLD FACE (other than headings) is new, and matter in
[brackets] has been deleted.
1-PROTOCOL SYSTEMS, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
2.10 "ENROLLMENT DATE" shall mean the first day of each Offering Period.
2.11 "FAIR MARKET VALUE"
2.11.1 The Fair Market Value of the Common Stock on any date shall be
equal to the closing price of such Common Stock on the
Valuation Date, as reported on the NASDAQ.
2.11.2 If 2.11.1 is not applicable, the Fair Market Value of the Common
Stock shall be determined by the Board in good faith. Such
determination shall be conclusive and binding on all persons.
2.12 NASDAQ" shall mean the National Association of Securities Dealers
Automated Quotation System Stock Market's National Market or such other
quotation system that supersedes it.
2.13 "OFFERING PERIOD" shall mean the period of approximately six (6) months,
commencing on the first Trading Day on or after a date designated in
advance by the Board and terminating on the last Trading Day in the
period ending six months later, during which an option granted pursuant
to the Plan may be exercised. The duration of Offering Periods may be
changed pursuant to Section 4 of this Plan.
2.14 "PARTICIPANT" shall mean any Employee who is participating in this Plan
by meeting the eligibility requirements of Section 3 and has completed a
Payroll Participation Form.
2.15 "PAYROLL PARTICIPATION FORM" shall mean the form provided by the Company
on which a Participant shall elect to participate in the Plan and
designate the percentage of his or her Compensation to be contributed to
his or her Account through payroll deductions.
2.16 "PLAN" shall mean this Employee Stock Purchase Plan.
2.17 "PURCHASE DATE" shall mean the last day of each Offering Period.
2.18 "PURCHASE PRICE" shall mean an amount equal to 85% of the Fair Market
Value of a share of Common Stock (i) on the Enrollment Date or (ii) on
the Purchase Date, whichever is lower.
2.19 "RESERVES" shall mean the number of shares of Common Stock covered by
each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance
under the Plan but not yet placed under option.
2.20 "SUBSIDIARY" shall mean a corporation, domestic or foreign, of which not
less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company of a Subsidiary.
2-PROTOCOL SYSTEMS, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
2.21 "TRADING DAY" shall mean a day on which national stock exchanges and the
National Association of Securities Dealers Automated Quotation (NASDAQ)
System are open for trading.
2.22 "VALUATION DATE" shall mean the date upon which the Fair Market Value of
Common Stock is to be determined for purposes of setting the price of
Shares of Common Stock under Section 2.18 (that is, the Enrollment Date
or the applicable Purchase Date). If the Enrollment Date is not a date
on which the Fair Market Value may be determined in accordance with
Section 2.11, the Valuation Date shall be the first day after the
Enrollment Date for which such Fair Market Value may be determined. If
the Purchase Date is not a date on which the Fair Market Value may be
determined in accordance with Section 2 the Valuation Date shall be the
first date prior to the Purchase Date on which such fair market value
may be determined.
3. ELIGIBILITY.
3.1 A person shall become eligible to participate in the Plan on the first
Enrollment Date on or after which he or she first meets all of the
following requirements; provided, however, that no one shall become
eligible to participate in the Plan prior to the Enrollment Date of the
first Offering Period provided for in Section 2.13:
3.1.1 The person has been an employee of the Company for a continuous
period of three months;
3.1.2 The person's customary period of employment is for more than
twenty (20) hours per week;
3.1.3 The person's customary period of employment is for more than five
(5) months in any calendar year.
3.2 Any provisions of the Plan to the contrary notwithstanding, no Employee
shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or any other person whose stock would be
attributed to such Employee pursuant to Section 424(d) of the Code)
would own stock and/or hold outstanding options to purchase stock
possessing five percent (5%) or more of the total combined voting power
or value of all classes of stock of the Company or of any Subsidiary, or
(ii) which permits his or her rights to purchase stock under all
employee stock purchase plans (under Section 423 of the Code) of the
Company and Subsidiaries to accrue at a rate which exceeds Twenty-Five
Thousand Dollars ($25,000) worth of stock (determined at the fair market
value of the shares at the time such option is granted) for each
calendar year in which such option is outstanding at any time.
3.3 For purposes of the Plan, eligibility shall be treated as continuing
intact while the individual is on sick leave or other leave of absence
approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by
statute or by contract, eligibility to participate in the Plan will be
deemed to have terminated on the 91st day of such leave.
3-PROTOCOL SYSTEMS, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
4. OFFERING PERIODS. The Plan shall be implemented by consecutive Offering
Periods with the first Offering Period commencing on a date designated in
advance by the Board, and continuing for six month periods thereafter until
terminated in accordance with Section 19 hereof. The Board shall have the
power to change the duration of Offering Periods (including the commencement
dates thereof) with respect to future offerings without shareholder approval
if such change is announced at least fifteen (15) days prior to the
scheduled beginning of the first Offering Period to be affected thereafter.
5. PARTICIPATION.
5.1 An eligible Employee may become a Participant in the Plan by completing
a Payroll Participation Form and filing it with the Company's
Administration Department (as set forth in Section 20 below) at least
fifteen (15) days prior to the applicable Enrollment Date, unless a
later time for filing the Payroll Participation Form is set by the Board
for all eligible Employees with respect to a given Offering Period.
5.2 Payroll deductions for a Participant shall commence on the first payroll
period following the Enrollment Date and shall end on the last payroll
period in the Offering Period, unless sooner terminated by the
Participant as provided in Section 10 hereof.
6. PAYROLL DEDUCTIONS.
6.1 At the time a Participant files his or her Payroll Participation Form,
he or she shall elect to have payroll deductions made on each payday
during the Offering Period in an amount not exceeding ten percent (10%)
of the Compensation which he or she receives on each payday during the
Offering Period, and the aggregate of such payroll deductions during the
Offering Period shall not exceed ten percent (10%) of the Participant's
Compensation during said Offering Period.
6.2 A Participant shall specify that he or she desires to make contributions
to the Plan in whole percentages not less than one percent (1%) and not
more than ten percent (10%) of the Participant's Compensation during
each pay period in the Offering Period, or such other minimum or maximum
percentage as the Board shall establish from time to time.
6.3 All payroll deductions made for a Participant shall be credited to his
or her Account under the Plan and will be withheld in whole percentages
only. A Participant may not make any additional payments into such
Account.
6.4 A Participant may discontinue his or her participation in the Plan as
provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by filing with
the Company's Administration Department (as set forth in Section 20
below) a new Payroll Participation Form authorizing a change in payroll
deduction rate. A Participant is limited to making one change during an
Offering Period. The change in rate shall be effective with the first
full payroll period following fifteen (15) days after the Company's
receipt of a new Payroll Participation Form unless the Company elects to
process a given change in participation more quickly. A Participant's
Payroll
4-PROTOCOL SYSTEMS, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
Participation Form shall remain in effect for successive Offering
Periods unless terminated as provided in Section 10.
6.5 Notwithstanding the foregoing, to the extent necessary to comply with
Section 423(b)(8) of the Code and Section 3.2 hereof, a Participant's
payroll deductions shall be decreased to 0% at such time during any
Offering Period which is scheduled to end during the current calendar
year (the "Current Offering Period") that the aggregate of all payroll
deductions which were previously used to purchase stock under the Plan
in a prior Offering Period which ended during that calendar year plus
all payroll deductions accumulated with respect to the Current Offering
Period equal $21,250 (85% of $25,000). Payroll deductions shall
recommence at the rate provided in such Participant's Payroll
Participation Form at the beginning of the first Offering Period which
is scheduled to end in the following calendar year, unless terminated by
the Participant as provided in Section 10.
6.6 At the time the option is exercised, or at the time some or all of the
Common Stock issued under the Plan is disposed of, the Participant must
make adequate provision for the Company's federal, state, or other tax
withholding obligations, if any, which arise upon the exercise of the
option or the disposition of the Common Stock. At any time, the Company
may, but will not be obligated to, withhold from the Participant's
compensation the amount necessary for the Company to meet applicable
withholding obligations, including any withholding required to make
available to the Company any tax deductions or benefit attributable to
sale or early disposition of Common Stock by the Employee.
7. OPTION TO PURCHASE COMMON STOCK. On the Enrollment Date of each Offering
Period, each eligible Employee participating in such Offering Period shall
be granted an option to purchase on the Purchase Date of such Offering
Period (at the applicable Purchase Price) up to a number of shares of the
Common Stock determined by dividing such Employee's payroll deductions
accumulated prior to such Purchase Date and retained in the Participant's
account as of the Purchase Date by the applicable Purchase Price; provided
that in no event shall an Employee be permitted to purchase during each
Offering Period more than a number of shares determined by dividing $12,500
by the fair market value of a share of the Common Stock on the Enrollment
Date, and provided further that such purchase shall be subject to the
limitations set forth in Section 3.2 and 12 hereof. Purchase of the Common
Stock shall occur as provided in Section 8, unless the Participant has
withdrawn pursuant to Section 10, and the option shall expire on the last
day of the Offering Period.
8. PURCHASE OF COMMON STOCK. Unless a Participant withdraws from the Plan as
provided in Section 10.1 below, his or her option for the purchase of Common
Stock will be exercised automatically on the Purchase Date, and the maximum
number of full shares subject to option shall be purchased for such
Participant at the applicable Purchase Price with the accumulated payroll
deductions in his or her account. No fractional shares of Common Stock will
be purchased; any payroll deductions accumulated in a Participant's account
which are not sufficient to purchase a full share shall be retained in the
Participant's account for the subsequent Offering Period, subject to earlier
withdrawal by the Participant as provided in Section 10 hereof. During a
Participant's life-time, a Participant's option to purchase shares of Common
Stock hereunder is exercisable only by him or her.
5-PROTOCOL SYSTEMS, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
9. DELIVERY. As promptly as practicable after each Purchase Date, the Company
shall arrange the delivery to each Participant the shares of Common Stock
purchased with his or her payroll deductions.
10. WITHDRAWAL; TERMINATION OF EMPLOYMENT.
10.1 A Participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to purchase
shares of Common Stock under the Plan by giving written notice to the
Company's Administration Department (as set forth in Section 20 below)
no less than 15 days immediately preceding a Purchase Date. All of the
Participant's payroll deductions credited to his or her Account will
be paid to such Participant as soon as practicable after receipt of
notice of withdrawal and such Participant's option for the Offering
Period will be automatically terminated, and no further payroll
deductions for the purchase of shares will be made during the Offering
Period. If a Participant withdraws from an Offering Period, payroll
deductions will not resume at the beginning of the succeeding Offering
Period unless the Participant delivers to the Company a new Payroll
Participation Form.
10.2 Upon termination of a Participant's employment for any reason,
including death, disability or retirement, the payroll deductions
credited to such Participant's Account shall be returned to the
Participant. A Participant shall have no right to acquire shares upon
termination of his or her employment.
11. INTEREST. No interest shall accrue on the payroll deductions of a
Participant in the Plan.
12. STOCK.
12.1 The maximum number of shares of the Company's Common Stock which shall
be made available for sale under the Plan shall be [300,000] 400,000
shares, subject to adjustment upon changes in capitalization of the
Company as provided in Section 18. If on a given Purchase Date the
number of shares of Common Stock eligible to be purchased exceeds the
number of shares then available under the Plan, the Company shall make
a pro rata allocation of the shares remaining available for purchase
in as uniform a manner as shall be practicable and as it shall
determine to be equitable.
12.2 The Participant will have no interest or voting right in shares
covered by his or her option until such shares of Common Stock have
been purchased.
12.3 Common Stock to be delivered to a Participant under the Plan will be
registered in the name of the Participant or in the name of the
Participant and his or her spouse.
13. ADMINISTRATION.
13.1 Administrative Body. The Plan shall be administered by the Committee.
Subject to the terms of the Plan, the Committee shall have the power
to construe the provisions of the Plan, to determine all questions
arising thereunder, and to adopt and amend such rules and regulations
for administering the Plan as the Committee deems desirable.
6-PROTOCOL SYSTEMS, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
13.2 Rule 16b-3 Limitations. Notwithstanding the provisions of Subsection
13.1, in the event that Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended, or any successor provision ("Rule
16b-3") provides specific requirements for the administrators of
plans of this type, the Plan shall be only administered by such a
body and in such a manner as shall comply with the applicable
requirements of Rule 16b-3.
14. DESIGNATION OF BENEFICIARY.
14.1 A Participant may file a written designation of a beneficiary who is
to receive any shares and cash, if any, from the Participant's
account under the Plan in the event of such Participant's death
subsequent to a Purchase Date on which the option is exercised but
prior to delivery to such Participant of such shares and cash. In
addition, a Participant may file a written designation of a
beneficiary who is to receive any cash from the Participant's account
under the Plan in the event of such Participant's death prior to a
Purchase Date.
14.2 Such designation of beneficiary may be changed by the Participant at
any time by written notice as provided in Section 20 below. In the
event of the death of a Participant and in the absence of a
beneficiary validly designated under the Plan who is living at the
time of such Participant's death, the Company shall deliver such
shares and/or cash to the executor or administrator of the estate of
the Participant, or if no such executor or administrator has been
appointed (to the knowledge of the Company), the Company, in its
discretion, may deliver such shares and/or cash to the spouse or to
any one or more dependents or relatives of the Participant, or if no
spouse, dependent or relative is known to the Company, then to such
other person as the Company may designate.
15. TRANSFERABILITY. Neither payroll deductions credited to a Participant's
account nor any rights with regard to the exercise of an option or to
receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent
and distribution or as provided in Section 14 hereof) by the Participant.
Any such attempt at assignment, transfer, pledge or other disposition shall
be without effect, except that the Company may treat such act as an
election to withdraw funds from an Offering Period in accordance with
Section 10.
16. USE OF FUNDS. All payroll deductions received or held by the Company under
the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
17. REPORTS. Individual accounts will be maintained for each Participant in the
Plan. Statements of account will be given to participating Employees at
least annually, which statements will set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
18. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR ASSET
SALE.
18.1 Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the Reserves, as well as the price per
share of Common Stock covered by each
7-PROTOCOL SYSTEMS, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
option under the Plan which has not yet been exercised, shall be
proportionately adjusted for any increase or decrease in the number
of issued shares of Common Stock resulting from a stock split,
reverse stock split, stock dividend, combination or reclassification
of the Common Stock, or any other increase or decrease in the number
of shares of Common Stock effected without receipt of consideration
by the Company; provided, however, that conversion of any convertible
securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issue
by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock subject to an option. The
Board may, if it so determines in the exercise of its sole
discretion, make provision for adjusting the Reserves, as well as the
price per share of Common Stock covered by each outstanding option,
in the event the Company effects one or more reorganizations,
recapitalizations, rights offerings or other increases or reductions
of shares of its outstanding Common Stock.
18.2 Dissolution or Liquidation. In the event of the proposed dissolution
or liquidation of the Company, the Offering Period will terminate
immediately prior to the consummation of such proposed action, unless
otherwise provided by the Board.
18.3 Consolidation or Merger. In the event of the consolidation or merger
of the Company with or into any other business entity, or the sale by
the Company of substantially all of its assets, the successor may
continue the Plan by adopting the same by resolution of its board of
directors or agreement of its partners or proprietors. If, within 90
days after the effective date of a consolidation, merger or sale of
assets, the successor corporation, partnership or proprietorship does
not adopt the Plan, the Plan shall be terminated in accordance with
Section 19.
19. AMENDMENT OR TERMINATION.
19.1 The Board may at any time and for any reason terminate or amend the
Plan. Except as provided in Section 18, no such termination can
affect options previously granted, provided that an Offering Period
may be terminated by the Board on any Purchase Date if the Board
determines that the termination of the Plan is in the best interests
of the Company and its stockholders. Except as provided in Section
18, no amendment may make any change in any option theretofore
granted which adversely affects the rights of any Participant. To the
extent necessary to comply with Section 423 of the Code (or any
successor rule or provision or any other applicable law or
regulation), the Company shall obtain stockholder approval in such a
manner and to such a degree as required.
19.2 Without stockholder consent and without regard to whether any
Participant rights may be considered to have been "adversely
affected," the Committee shall be entitled to change the Offering
Periods, limit the frequency and/or number of changes in the amount
withheld during an Offering Period, establish the exchange ratio
applicable to amounts withheld in a currency other than U.S. dollars,
permit payroll withholding in excess of the amount designated by a
Participant in order to adjust for delays or mistakes in the
Company's
8-PROTOCOL SYSTEMS, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and
crediting procedures to ensure that amounts applied toward the
purchase of Common Stock for each Participant properly correspond
with amounts withheld from the Participant's Compensation, and
establish such other limitations or procedures as the Board (or its
committee) determines in its sole discretion advisable which are
consistent with the Plan.
19.3 If required to qualify the Plan under Rule 16b-3, no amendment shall
be made more than once every six months that would change the amount,
price or timing of the options, other than to comport with changes in
the Code, or the rules and regulations promulgated thereunder; and
provided, further, that if required to qualify the Plan under Rule
16b-3, no amendment shall be made without the approval of the
Company's stockholders that would:
19.3.1 materially increase the number of shares of Common Stock that
may be issued under the Plan;
19.3.2 materially modify the requirements as to eligibility for
participation in the Plan; or
19.3.3 otherwise materially increase the benefits accruing to
participants under the Plan.
20. NOTICES. All notices or other communications by a Participant to the
Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company by the
Company's Administration Department at the Company's corporate
headquarters.
21. CONDITIONS. Upon Issuance of Shares of Common Stock. Common Stock shall
not be issued with respect to an option unless the exercise of such option
and the issuance and delivery of such shares pursuant thereto shall comply
with all applicable provisions of law, domestic or foreign, including,
without limitation, the Securities Act of 1933, as amended, the Securities
Exchange Act of 1934, as amended, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the
shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the purchase of Common Stock, the Company may require the
person purchasing such Common Stock to represent and warrant at the time of
any such purchase that the shares are being purchased only for investment
and without any present intention to sell or distribute such shares if, in
the opinion of counsel for the Company, such a representation is required
by any of the aforementioned applicable provisions of law.
22. TERM OF PLAN.
22.1 The Plan shall become effective upon the earlier to occur of its
adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term
of ten (10) years unless sooner terminated pursuant to Section 19.
22.2 Notwithstanding the above, the Plan is expressly made subject (i) to
the approval of the holders of a majority of the outstanding shares
of the Company within 12 months after the
9-PROTOCOL SYSTEMS, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
date the Plan is adopted and (ii) at its election, to the receipt by
the Company from the Internal Revenue Service of a ruling in scope
and content satisfactory to counsel to the Company, affirming the
qualification of the Plan within the meaning of Section 423 of the
Code. If the Plan is not so approved by the stockholders within 12
months after the date the Plan is adopted, and if, at the election of
the Company a ruling from the Internal Revenue Service is sought but
is not received on or before one year after the Plan's adoption by
the Board, this Plan shall not come into effect. In that case, the
Account of each Participant shall forthwith be paid to him or her.
23. ADDITIONAL RESTRICTIONS OF RULE 16B-3. The terms and conditions of options
granted hereunder to, and the purchase of shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions
of Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the shares issued upon exercise thereof shall be subject to,
such additional conditions and restrictions as may be required by Rule 16b-
3 to qualify for the maximum exemption from Section 16 of the Exchange Act
with respect to Plan transactions.
10-PROTOCOL SYSTEMS, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN
<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 David F. Bolender and James B.
Moon, 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 10:30 a.m.
on Tuesday, May 19, 1998 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.
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"
PROPOSALS 2, 3 AND 4 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.
(Continued and to be signed on other side)
. FOLD AND DETACH HERE .
<PAGE>
Please mark
your votes [X]
as indicated
1. Election of two directors for a three-year term.
FOR all WITHHOLD
nominees listed AUTHORITY to vote
below (except as for all nominees
indicated below) listed below
[_] [_]
Nominees: James B. Moon and Curtis M. Stevens
Instruction: To withhold authority to vote for any nominee write that
nominee's name(s) in this space:
---------------------------------------------------------------------------
2. Approval of the Company's 1998 Stock Incentive Plan.
FOR AGAINST ABSTAIN
[_] [_] [_]
3. Approval of amendment to the Company's 1994 Employee Stock Purchase Plan.
FOR AGAINST ABSTAIN
[_] [_] [_]
4. Ratification of appointment of auditors.
FOR AGAINST ABSTAIN
[_] [_] [_]
5. 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.
PLEASE SIGN, DATE AND RETURN THIS PROXY CARD TODAY, USING THE ENCLOSED ENVELOPE.
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
. FOLD AND DETACH HERE .
