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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarter ended September 30, 1999
Commission File Number 0-19943
PROTOCOL SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Oregon 93-0913130
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8500 SW Creekside Place, Beaverton, OR 97008
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(Address of principal executive offices) (Zip Code)
(503) 526-8500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Number of shares of common stock outstanding as of
November 08, 1999:
8,025,293 shares, $.01 par value per share
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PROTOCOL SYSTEMS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
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<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations and Comprehensive Income for
the three and nine months ended September
30, 1999 and 1998 3
Condensed Consolidated Balance Sheets
as of September 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Cash
Flows for the nine months ended September 30,
1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 14
PART II OTHER INFORMATION
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Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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</TABLE>
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ITEM 1. FINANCIAL STATEMENTS
PROTOCOL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
------- -------- ------- --------
<S> <C> <C> <C> <C>
Sales $16,528 $17,530 $47,580 $49,410
Cost of sales 8,248 8,052 24,296 24,052
------- -------- ------- --------
Gross profit 8,280 9,478 23,284 25,358
Operating expenses:
Research and development 1,886 2,514 4,964 6,425
Selling, general and administrative 4,896 5,759 14,583 16,967
Relocation costs 0 2,246 0 2,246
------- -------- ------- --------
Total operating expenses 6,782 10,519 19,547 25,638
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Income (loss) from operations 1,498 (1,041) 3,737 (280)
Other income 1,739 225 2,230 718
------- -------- ------- --------
Income (loss) before income taxes 3,237 (816) 5,967 438
Provision for income taxes 809 (259) 1,491 92
------- -------- ------- --------
Net income (loss) $ 2,428 $ (557) $ 4,476 $ 346
======= ======== ======= ========
Comprehensive income (loss) $ 2,623 $ (372) $ 4,326 $ 520
======= ======== ======= ========
Basic earnings (loss) per share $ 0.30 $ (0.07) $ 0.54 $ 0.04
======= ======== ======= ========
Diluted earnings (loss)per share $ 0.29 $ (0.07) $ 0.53 $ 0.04
======= ======== ======= ========
Weighted average number of shares
used in the computation of:
Basic earnings per share 8,214 8,389 8,256 8,562
Diluted earnings per share 8,388 8,389 8,409 8,886
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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PROTOCOL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $15,389 $ 8,023
Short-term investments 1,000 6,680
Accounts receivable - net 13,915 17,971
Inventories - net 10,321 12,218
Prepaid expenses and other current assets 2,127 2,469
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Total current assets 42,752 47,361
Long-term investments 10,280 4,045
Property and equipment - net 3,976 4,041
Other assets 1,224 404
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$58,232 $55,851
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,249 $ 2,584
Accrued liabilities 4,768 5,481
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Total current liabilities 8,017 8,065
Deferred taxes 0 40
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value. Authorized 30,000 shares;
issued and outstanding 8,023 at 1999 and 8,207 at 1998 80 82
Additional paid-in capital 26,274 28,105
Unearned compensation (72) (48)
Accumulated other comprehensive income 55 205
Retained earnings 23,878 19,402
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Total shareholders' equity 50,215 47,746
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$58,232 $55,851
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</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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PROTOCOL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,476 $ 346
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,537 1,743
Write-off of assets 50 719
Gain on litigation settlement (1,594) 0
Amortization of bond premium 95 77
Deferred taxes (240) 23
Other non-cash items 79 96
Changes in operating assets and liabilities:
Accounts receivable 4,884 (409)
Inventories 1,838 391
Prepaid expenses and other assets 93 (113)
Accounts payable and accrued liabilities (967) 1,131
Income taxes payable 1,640 (1,038)
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Net cash provided by operating activities 11,891 2,966
Cash flows from investing activities:
Purchase of investments (13,234) (8,855)
Proceeds from maturity of investments 12,488 8,115
Acquisition of property and equipment (1,362) (1,410)
Capitalization of software development costs (250) (191)
Acquisition of intangible assets 0 (74)
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Net cash used in investing activities (2,358) (2,415)
Cash flows from financing activities:
Proceeds from exercise of stock options
and stock purchase plan 1,156 974
Repurchase of common stock (3,094) (7,498)
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Net cash used in financing activities (1,938) (6,524)
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Effect of exchange rates on cash and cash equivalents (229) 174
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Net increase (decrease) in cash and cash equivalents 7,366 (5,799)
Cash and cash equivalents at beginning of period 8,023 12,257
-------- --------
Cash and cash equivalents at end of period $15,389 $ 6,458
======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 362 $ 1,024
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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PROTOCOL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by the Company without audit and in conformity with generally
accepted accounting principles for interim financial information.
Accordingly, certain financial information and footnotes have been omitted or
condensed. In the opinion of management, the condensed consolidated financial
statements include all necessary adjustments (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. These financial statements should be read in conjunction
with the Company's audited consolidated financial statements for the year
ended December 31, 1998. The results of operations for the interim period
shown in this report are not necessarily indicative of results for any future
interim period or the entire fiscal year.
INVENTORIES
Inventories are valued at the lower of cost or market with cost determined on
the first-in, first-out basis (FIFO). The components of inventories, net of
reserve, are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1999 1998
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<S> <C> <C>
Raw materials $ 4,192 $ 4,939
Work in process 1,949 2,838
Finished goods 2,485 2,207
Demonstration instruments 1,695 2,234
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Total inventories $10,321 $12,218
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</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and includes the following:
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1999 1998
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<S> <C> <C>
Equipment $13,398 $12,111
Furniture and fixtures 1,931 1,910
Leasehold improvements 475 551
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15,804 14,572
Less accumulated depreciation and amortization 11,828 10,531
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Property and equipment - net $ 3,976 $ 4,041
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</TABLE>
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ACCRUED LIABILITIES
The components of accrued liabilities are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1999 1998
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<S> <C> <C>
Accrued salaries, wages and
related liabilities $2,286 $2,588
Income taxes payable 1,238 -
Reserve for warranties 849 915
Other liabilities 305 336
Accrual for special charges 90 1,642
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$4,768 $5,481
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</TABLE>
During the third quarter of 1998, the Company incurred special charges of
$2,246,000 to relocate its wholly owned subsidiary, Pryon Corporation
("Pryon"), from Menomonee Falls, Wisconsin to the Company's Beaverton, Oregon
facility in order to improve operating efficiencies. During the fourth
quarter of 1998, the Company incurred additional special charges of
$3,188,000 as it discontinued the development of its defibrillator project
and restructured its worldwide operations. This restructuring included the
closure of its subsidiary offices and direct sales organizations in France
and Germany, elimination of 14 positions at the Company's headquarters in
Beaverton, Oregon and the resignation of the founder and Chief Technical
Officer. Cash payments during the first nine months of 1999 related to these
special charges totaled $1,552,000 and consisted primarily of employee
severance benefits and lease termination costs.
As of September 30, 1999, special charges of $90,000, related primarily to
certain contract terminations, had not been disbursed. These remaining
balances are expected to be expended by the end of 2000.
OTHER INCOME - LITIGATION SETTLEMENT
On August 2, 1999 the Company reached a settlement with SICOR, Inc. (formerly
Gensia SICOR, Inc.) relating to litigation the Company commenced against
Gensia SICOR, Inc. and Gensia Automedics in July 1998 alleging they breached
a development and supply agreement to develop and supply a closed-loop drug
delivery and monitoring device. Under terms of this settlement, SICOR, Inc.
and Gensia Automedics have agreed to pay the Company a total of $3.7 million
over the next two years. In the third quarter of 1999, the Company recognized
in other income $1,611,000 related to this settlement.
INCOME TAXES
The provision for income taxes has been recorded based on the current
estimate of the Company's annual effective tax rate. This rate differs from
the Federal statutory rate primarily because of the provision for state
income taxes and the benefits from utilization of federal net operating loss
carryovers, research and experimentation tax credits, the Company's foreign
sales corporation and tax-exempt interest income earned on investments.
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BASIC AND DILUTED EARNINGS PER SHARE
In accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share", basic earnings per share is
computed using the weighted average number of common shares outstanding and
diluted earnings per share is computed using the weighted average number of
common shares outstanding and dilutive potential common shares assumed to be
outstanding during the period using the treasury stock method. Dilutive
potential common shares consist of options to purchase common stock.
COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
(in thousands) 1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Net income (loss) $ 2,428 $ (557) $ 4,476 $ 346
Other comprehensive
income (loss); net of tax
Foreign currency
translation adjustments 182 147 (54) 136
Unrealized holding
gain (loss) 13 38 (96) 38
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Other comprehensive
income (loss) 195 185 (150) 174
------- ------- ------- -------
Comprehensive income (loss) $ 2,623 $ (372) $ 4,326 $ 520
======= ======= ======= =======
</TABLE>
SEGMENT INFORMATION
In accordance with SFAS 131 "Disclosures about Segments of an Enterprise and
Related Information" the Company functions as a single operating segment: the
design, manufacture, sale and servicing of medical instruments and systems.
Sales are made primarily to hospitals and other health-care related customers.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRD QUARTER 1999 VS. THIRD QUARTER 1998
Sales. Sales for the third quarter of 1999 decreased 5.7% to $16.5 million
from $17.5 million for the third quarter of 1998.
Domestic sales, excluding Original Equipment Manufacturer ("OEM") sales,
decreased 7.0% to $11.7 million (71.0% of total sales) in the third quarter
of 1999 from $12.6 million (72.1% of total sales) in the third quarter of
1998 primarily as a result of a decrease in the number of new Acuity central
stations and related monitors sold.
International sales, excluding international sales of OEM products, decreased
5.9% to $3.0 million (18.2% of total sales) in the third quarter of 1999 from
$3.2 million (18.3% of total sales) in the third quarter of 1998. This
decrease was principally due to lower sales to the Company's Japanese
distributor, reflecting continued soft international markets, particularly in
Asia.
Sales of OEM products increased 4.7% to $1.8 million (10.7% of total sales)
in the third quarter of 1999 from $1.7 million (9.7% of total sales) in the
third quarter of 1998 primarily due to an increase in CO2 product shipments.
Gross profit. As a percentage of sales, gross profit decreased to 50.1% in
the third quarter of 1999 from 54.1% in the third quarter of 1998. The
decrease in gross profit was due in part to an increase in the proportion of
sales of products which carry lower gross margins, such as OEM products,
accessories, services and QuikSign monitors, combined with slightly higher
sales price discounts and unfavorable manufacturing variances.
Research and development. Research and development expenses decreased 25.0%
to $1.9 million in the third quarter of 1999 from $2.5 million in the third
quarter of 1998. This decrease was primarily the result of the relocation of
the Pryon operations in the third quarter of 1998, which resulted in a
reduction in the total number of research and development employees. As a
percentage of sales, research and development decreased to 11.4% in the third
quarter of 1999 from 14.3% in the third quarter of 1998.
Selling, general and administrative. Selling, general and administrative
decreased 15.0% to $4.9 million in the third quarter of 1999 from $5.8
million in the third quarter of 1998. This decrease resulted primarily from
the closure of the Company's subsidiary offices and direct sales
organizations in Germany and France at the end of 1998 and the reduction in
the number of administrative employees as a result of the relocation of the
Pryon operations in the third quarter of 1998. As a percentage of sales,
selling, general and administrative decreased to 29.6% in the third quarter
of 1999 from 32.9% in the third quarter of 1998.
Relocation costs. In the third quarter of 1998, the Company incurred $2.2
million ($1.8 million after tax) of costs related to the relocation
of the Pryon operations. These relocation costs included employee severance,
write-off of assets that would not be utilized in Oregon, lease and other
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contract terminations, and costs to relocate key employees as well as
inventory and equipment. No such costs were incurred in the 1999 period.
Other income. Other income increased to $1,739,000 in the third quarter of
1999 from $225,000 in the third quarter of 1998 primarily due to the 1999
SICOR litigation settlement, partially offset by foreign exchange losses
related to the liquidation of the Company's French and German subsidiaries.
Provision for income taxes. The provision for income taxes increased to
$809,000 in the third quarter of 1999 from ($259,000) in the third quarter of
1998, representing effective tax rates of 25.0% and 31.7%, respectively. The
effective tax rate, which reflects the estimate of the Company's annual
effective tax rate, was lower in the third quarter of 1999 than in the third
quarter of 1998 primarily due to the expected utilization of Pryon
Corporation net operating loss carryovers in 1999 and the effects of annual
rate adjustments made in the third quarter of 1998.
Net income. Net income in the third quarter of 1999 was $2.4 million or $0.29
per diluted share compared to net loss of $557,000 or ($0.07) per diluted
share in the third quarter of 1998. The increase in net income was primarily
due to a reduction of operating expenses and special charges which was a
direct result of the relocation of the Pryon operations and the worldwide
restructuring in 1998, and other income reported in the third quarter of 1999
relating primarily to the SICOR litigation settlement. Excluding unusual
items consisting of $1,611,000 of SICOR settlement income and $125,000 of
foreign exchange losses (net $1,114,000 after tax, or $.13 per diluted
share), net income in the third quarter of 1999 was $1,314,000, or $.16 per
diluted share. Excluding unusual items consisting of Pryon relocation charges
of $2,246,000 ($1,774,000 after tax loss, or $.22 loss per diluted share),
net income in the third quarter of 1998 was $1,217,000, or $.15 per diluted
share.
Net income exclusive of unusual items is a non-GAAP measure and investors
should not rely on it as a substitute for GAAP measures. Because the items
noted were unusual in nature, management believes that a measure of net
income excluding such items is meaningful and useful as an alternative basis
with which management and investors can assess the profitability of the
Company's core operations.
NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. NINE MONTHS ENDED SEPTEMBER 30, 1998
Sales. Sales for the first nine months of 1999 decreased 3.7% to $47.6
million from $49.4 million for the first nine months of 1998.
Domestic sales, excluding Original Equipment Manufacturer ("OEM") sales of
Pryon OEM products and GenESA devices, decreased 3.1% to $32.2 million (67.7%
of total sales) in the first nine months of 1999 from $33.3 million (67.3% of
total sales) in the first nine months of 1998 primarily as a result of a
decrease in the number of Acuity central stations and related monitors sold.
This decrease was partially offset by a $1.9 million increase in U.S.
military revenues.
International sales, excluding international sales of OEM products, decreased
9.9% to $9.7 million (20.3% of total sales) in the first nine months of 1999
from $10.7 million (21.8% of total sales) in the first nine months of 1998.
This decrease in international sales was primarily due to a decline in the
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number of units sold, reflecting continued soft international markets,
particularly in Europe and Asia, and the effects of reorganization and
transition from the Company's direct sales organization in Europe.
OEM sales of Pryon OEM products and GenESA devices increased 5.2% to $5.7
million (11.9% of total sales) in the first nine months of 1999 from $5.4
million (10.9% of total sales) in the first nine months of 1998 primarily due
to a $774,000 increase in OEM CO2 product shipments. This increase was
partially offset by a $496,000 decrease in sales of GenESA devices to Gensia
Automedics, Inc.
Gross profit. As a percentage of sales, gross profit decreased to 48.9% in
the first nine months of 1999 from 51.3% in the first nine months of 1998.
The decrease in gross profit was due in part to an increase in the proportion
of sales of products which carry lower gross margins, such as OEM products,
accessories, services, and QuikSign monitors, combined with slightly higher
sales price discounts and unfavorable manufacturing variances.
Research and development. Research and development expenses decreased 22.7%
to $5.0 million in the first nine months of 1999 from $6.4 million in the
first nine months of 1998. This decrease was primarily the result of the
relocation of the Pryon operations in the third quarter of 1998, which
resulted in a reduction in the total number of employees in research and
development. As a percentage of sales, research and development decreased to
10.4% in the first nine months of 1999 from 13.0% in the first nine months of
1998.
Selling, general and administrative. Selling, general and administrative
decreased 14.1% to $14.6 million in the first nine months of 1999 from $17.0
million in the first nine months of 1998. This decrease resulted primarily
from the closure of the Company's subsidiary offices and the direct sales
organizations in Germany and France initiated at the end of 1998 and the
reduction in the number of administrative employees as a result of the
relocation of the Pryon operations in the third quarter of 1998. As a
percentage of sales, selling, general and administrative decreased to 30.6%
in the first nine months of 1999 from 34.3% in the first nine months of 1998.
Relocation costs. In first nine months of 1998, the Company incurred $2.2
million ($1.8 million after tax) of costs related to the relocation of the
Pryon operations in the third quarter of 1998. These costs include employee
severance, write-off of assets that would not be utilized in Oregon, lease
and other contract terminations, and costs to relocate key employees as well
as inventory and equipment. No such costs were incurred in the 1999 period.
Other income. Other income increased to $2,230,000 in the first nine months
of 1999 from $718,000 in the first nine months of 1998, primarily due to the
1999 SICOR litigation settlement, partially offset by foreign exchange losses
related to the liquidation of the Company's French and German subsidiaries.
Provision for income taxes. The provision for income taxes increased to
$1,491,000 in the first nine months of 1999 from $92,000 in the first nine
months of 1998 representing effective tax rates of 25.0% and 21.0%,
respectively. The effective tax rate, which reflects the estimate of the
Company's annual effective tax rate, was higher in the first nine months of 1999
than in the first nine months of 1998 primarily due to higher operating
earnings, causing reduced percentage benefits from the Company's research
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credits, foreign sales corporation and tax-exempt interest, partially offset
by the expected utilization of Pryon Corporation net operating loss
carryovers in 1999.
Net income. Net income in the first nine months of 1999 was $4.5 million or
$0.53 per diluted share compared to net income of $346,000 or $0.04 per
diluted share in the first nine months of 1998. The increase in net income
was primarily due to reduced operating expenses and special charges as a
result of the relocation of the Pryon manufacturing facility and the
worldwide restructuring in 1998, and increased 1999 other income primarily
related to the SICOR litigation settlement. Excluding unusual items
consisting of $1,611,000 of SICOR settlement income and $125,000 of foreign
exchange losses (net $1,114,000 after tax, or $.13 per diluted share), net
income in the first nine months of 1999 was $3,362,000, or $.40 per diluted
share. Excluding unusual items consisting of Pryon relocation charges of
$2,246,000 ($1,774,000 after tax loss, or $.22 loss per diluted share), net
income in the first nine months of 1998 was $2,120,000, or $.24 per diluted
share.
Net income exclusive of unusual items is a non-GAAP measure and investors
should not rely on it as a substitute for GAAP measures. Because the items
noted were unusual in nature, management believes that a measure of net
income excluding such items is meaningful and useful as an alternative basis
with which management and investors can assess the profitability of the
Company's core operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company improved its strong financial position as of September 30, 1999
with its cash and investments, both long and short term, increasing to $26.7
million from $18.7 million at December 31, 1998. Working capital at September
30, 1999 was $34.7 million and the current ratio was 5.3:1, compared to
working capital of $39.3 million and current ratio of 5.9:1 at December 31,
1998. Cash flows from operating activities for the first nine months of 1999
were $11.9 million as compared to $3.0 million for the first nine months of
1998. This increase was primarily due to an improvement in collections of
accounts receivable, cash settlement proceeds from SICOR, as well as an
increase in net income. Cash of $1.4 million was used for the acquisition of
property and equipment in the first nine months of 1999. Proceeds and related
tax benefits from stock option and stock purchase plans were $1.2 million in
the first nine months of 1999.
In May 1999 the Company's Board of Directors adopted a resolution authorizing
the repurchase of up to 500,000 outstanding shares of the Company's common
stock. As of November 8, 1999, the Company has repurchased 389,300 shares
during 1999. Management believes that current cash and investment balances
and future cash flows from operations will be sufficient to meet the
Company's liquidity and capital needs for the foreseeable future.
YEAR 2000 ISSUES
The Company has substantially completed its assessment of its computer software
programs and operating systems used in its internal operations, including
applications used in its financial systems, manufacturing equipment, and
engineering design tools to determine its readiness for the Year 2000. The
inability of computer software programs and operating systems to accurately
recognize, interpret and process date codes designating the Year 2000 and beyond
could result in a system failure or miscalculations which could have a material
impact on the Company's ability to conduct its business.
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Costs incurred by the Company to date in its assessment of internal systems
were not material.
The Company has completed its assessment of Year 2000 compliance of each of
its product lines. All configurations of instruments (instruments include
Propaq and Propaq Encore monitors and all options) and their component parts
have been tested and are Year 2000 compliant. Acuity software versions
3.15.05 and all Networked Acuity software versions have been tested and are
Year 2000 compliant. Acuity software versions prior to 3.15.05 have a minor
connectivity issue related to the Year 2000 between the Acuity central
station and the monitors that can be fixed through an upgrade to the Acuity
central station provided by the Company. This connectivity issue should not
adversely affect the operation of the Acuity central station and the Propaq
monitors in the Year 2000 and beyond.
The Company has also contacted critical suppliers of products and services to
determine that the suppliers' operations and the products and services they
provide are Year 2000 compliant. The Company has received responses from
approximately 95% of the suppliers contacted, all of which have indicated
that their products and operations either are, or expect to be, Year 2000
compliant. The Company will continue to follow up with suppliers who have not
yet responded to determine if there are any critical suppliers who may not be
Year 2000 compliant.
Based on its assessments to date, the Company believes it will not experience
any material disruption as a result of Year 2000 issues in its computer
software programs and other systems used in its operations. However, there
can be no assurances that unanticipated Year 2000 issues will not have a
material adverse effect on the Company's business, financial condition or
results of operations. Furthermore, there can be no assurance that Year 2000
issues of certain critical third party suppliers, including those supplying
electricity, water or telephone service will not experience difficulties
resulting in the disruption of service or delivery of supplies to the
Company, which could adversely affect the Company's business, financial
condition or results of operations. The Company will finalize contingency
plans for dealing with the most reasonably likely worst case scenario that
would occur in the event that the Company and critical third parties fail to
complete efforts to achieve Year 2000 compliance on a timely basis during the
fourth quarter of 1999.
FORWARD-LOOKING STATEMENTS
This Quarterly Report contains statements, including the anticipated effects
of the Year 2000 issue that are forward-looking statements within the meaning
of the Securities Litigation Reform Act of 1995. These statements are based
on current expectations, estimates and projections about the Company's
business, management's beliefs and assumptions made by management. Words such
as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and variations of such words and similar expressions are intended
to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking statements due to numerous factors, including, but not
limited to factors discussed in this Quarterly Report and from time to time
in the Company's other Securities and Exchange Commission filings and
reports, by
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general industry and market conditions and growth rates and by general
domestic and international economic conditions.
The Company's quarterly operating results have fluctuated in the past and may
continue to fluctuate in the future depending on factors such as increased
competition, timing of new product announcements, pricing changes by the
Company or its competitors, length of sales cycles, market acceptance or
delays in the introduction of new products or enhanced versions of existing
products, timing of significant orders, regulatory approval requirements,
product mix and economic factors and conditions generally and in the market
for the Company's products specifically. In particular, the Company's
quarterly operating results have fluctuated as a result of the unpredictable
size and timing of military patient monitoring equipment procurements, and
seasonal or other changes in customer buying patterns. A substantial portion
of the Company's revenue in each quarter results from orders booked in that
quarter. Accordingly, revenue from quarter to quarter is difficult to
forecast. The Company's expense levels are based, in part, on its
expectations as to future revenue. If revenue levels are below expectations,
operating results are likely to be adversely affected. In particular, net
income may be disproportionately affected by a reduction in revenue because
only a small portion of expenses varies with revenue. Results of operations
in any period should not be considered indicative of the result to be
expected for any future period, and fluctuations in operating results may
also result in fluctuations in the price of the Company's common stock. No
assurance can be given that the Company will be able to grow in future
periods or that its operations will remain profitable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of foreign currency fluctuations due to
a small portion of its international sales. The Company minimizes its risk to
foreign currency fluctuations as international sales through independent
distributors are made in U.S. dollars, which has helped reduce any foreign
currency risk.
As of September 30, 1999, the Company had an investment portfolio of fixed
income securities, including those classified as cash and cash equivalents,
short-term investments and long-term investments of $24.4 million. These
securities are subject to interest rate fluctuations. An increase in interest
rates could adversely affect the market value of the Company's fixed income
securities.
The Company does not use derivative financial instruments in its investment
portfolio to manage interest rate risk. The Company does, however, limit its
exposure to interest rate and credit risk by establishing and strictly
monitoring clear policies and guidelines for its investment portfolio. The
weighted average maturity of the investment portfolio may not exceed 360 days
and no single investment may have a maturity date of greater than two years.
The guidelines also establish credit quality standards and limit the exposure
to one issue, issuer, or type of instrument. Due to these factors the
exposure to market and credit risk is not expected to be material.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 2, 1999 the Company reached a settlement with SICOR, Inc. (formerly
Gensia SICOR, Inc.) relating to litigation the Company commenced against
Gensia SICOR, Inc. and Gensia Automedics in July 1998 alleging they breached
a development and supply agreement to develop and supply a closed-loop drug
delivery and monitoring device (U.S. District Court for the District of
Oregon (Case No. CV98-1006-AA)). Under terms of this settlement, SICOR, Inc.
and Gensia Automedics have agreed to pay the Company a total of $3.7 million
over the next two years and the lawsuit was dismissed with prejudice.
ITEM 2. CHANGES IN SECURITIES
During the quarter ended September 30, 1999, the Company sold securities
without registration under the Securities Act of 1933, as amended (the
"Securities Act") upon the exercise of certain stock options granted under
the Company's 1987 stock option plan. An aggregate of 480 shares of Common
Stock were issued at an exercise prices ranging from $1.32 to $6.00. These
transactions were effected in reliance upon the exemption from registration
under the Securities Act provided by Rule 701 promulgated by the Securities
and Exchange Commission pursuant to authority granted under Section 3 (b) of
the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1 Protocol Systems, Inc. Nonqualified Stock Option
Agreement dated August 6, 1999 (incorporated by
reference to Exhibit 99.1 to Registration Statement
on Form S-8 filed on October 19, 1999 (File No.
333-89315))
10.2 Protocol Systems, Inc. Executive Employment Agreement
with Robert F. Adrion dated August 1, 1999
27.1 Financial Data Schedule
(b) No reports were filed on Form 8-K during the quarter for
which this report is filed.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROTOCOL SYSTEMS, INC.
(REGISTRANT)
Date: November 12, 1999 By /s/ Robert F. Adrion
------------------------
Robert F. Adrion
President and Chief
Executive Officer
By /s/ Edward M. Kolasinski
------------------------
Edward M. Kolasinski
Vice-President and
Interim Chief Financial
Officer
16
<PAGE>
PROTOCOL SYSTEMS, INC.
EXECUTIVE EMPLOYMENT AGREEMENT
PARTIES: Protocol Systems, Inc. ("Company")
8500 SW Creekside Place
Beaverton, OR 97008
ROBERT F. ADRION ("Executive")
3029 Carrigan Canyon
Salt Lake City, Utah 84109
DATE OF AGREEMENT: August 1, 1999
RECITALS:
A. The Company wishes to obtain the services of the Executive for at least the
duration of this Agreement, and the Executive wishes to provide his
services for such period, all upon the terms and conditions set out in this
Agreement.
B. It is expressly recognized by the parties that the Executive's continuance
in the Executive's position with the Company and agreement to be bound by
the terms of this Agreement represents a substantial commitment to the
Company in terms of the Executive's personal and professional career and a
foregoing of present and future career options by the Executive, for all of
which the Company receives substantial value.
C. The parties recognize that a Change of Control (as defined below) may
result in material alteration or diminishment of the Executive's position
and responsibilities and substantially frustrate the purpose of the
Executive's commitment to the Company and forbearance of career options.
D. The parties recognize that in light of the above-described commitment and
forbearance of career options, it is essential that, for the benefit of the
Company and its stockholders, provision be made for a Change of Control
Termination (as defined below) in order to enable the Executive to accept
and effectively continue in the Executive's position in the face of
inherently disruptive circumstances arising from the possibility of a
Change of Control, although no such change is now contemplated or foreseen.
1-EXECUTIVE EMPLOYMENT AGREEMENT
<PAGE>
NOW, THEREFORE, for valuable consideration the receipt and sufficiency of which
is hereby acknowledged, the parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 "BASE SALARY" shall mean regular cash compensation paid on a periodic basis
exclusive of benefits, bonuses or incentive payments.
1.2 "BOARD" shall mean the Board of Directors of Protocol Systems, Inc.
1.3 "DISABILITY" shall mean the inability of the Executive to perform the
essential functions of his position under this Agreement with or without
reasonable accommodation because of physical or mental incapacity for a
continuous period of five (5) months, as reasonably determined by the Company
after consultation with a qualified physician selected by the Company.
1.4 "COMPANY" shall mean Protocol Systems, Inc. and, any successor in interest
by way of consolidation, operation of law, merger or otherwise.
1.5 "CONFIDENTIALITY AGREEMENT" shall mean that certain Non-competition and
Confidentiality Agreement dated 1 AUGUST 1999 by and between the Company and
Executive.
ARTICLE 2
EMPLOYMENT, DUTIES AND TERM
2.1 EMPLOYMENT. Upon the terms and conditions set forth in this Agreement, the
Company hereby employs the Executive in the position of PRESIDENT AND CHIEF
EXECUTIVE OFFICER, and the Executive accepts such employment.
2.2 DUTIES. The Executive shall devote his full-time and best efforts to the
Company and to fulfilling the duties of his position which shall include such
duties as may from time to time be assigned him by the Chairman of the Board and
the Board, provided that such duties are reasonably consistent with the
Executive's position. The Executive shall comply with the Company's policies
and procedures to the extent they are not inconsistent with this Agreement, in
which case the provisions of this Agreement prevail.
2.3 TERM. This Agreement shall remain in effect until the earlier of (i)
termination pursuant to Article 4 or Article 6 of this Agreement or (ii) two
years and five months from the date of this Agreement. Thereafter, this
agreement will be renewed automatically for successive one-year terms unless six
(6) months notice of non-renewal is given by either party to the other.
ARTICLE 3
COMPENSATION AND EXPENSES
3.1 BASE SALARY. For all services rendered under this Agreement, the Company
shall pay Executive a Base Salary that is not less than Executive's Base Salary
as of the date of this
2-EXECUTIVE EMPLOYMENT AGREEMENT
<PAGE>
Agreement. If the Executive's salary is increased from time to time during
the term of this Agreement, the increased amount shall be the Base Salary for
the remainder of the term and any extensions. All amounts payable to the
Executive under this Agreement shall be reduced by such amounts as are
required to be withheld by law.
3.2 BONUS AND INCENTIVE Bonus or incentive compensation shall be in the sole
discretion of the Board. Except as otherwise provided in Article 6, the Company
shall have the right in accordance with the terms of any bonus or incentive plan
to alter, amend or eliminate all or any part of such plan, or the Executive's
participation therein, without compensation to the Executive.
3.3 BUSINESS EXPENSES. The Company shall, in accordance with, and to the
extent of, its policies in effect from time to time, reimburse all ordinary and
necessary business expenses reasonably incurred by the Executive in performing
his duties as an employee of the Company, provided that the Executive accounts
promptly for such expenses to the Company in the manner prescribed from time to
time by the Company. Executive has signed a Relocation Agreement. Said
Agreement will not apply in the event of a termination without cause as defined
in Article 4 or a change in control as defined in Article 6.
ARTICLE 4
EARLY TERMINATION
4.1 EARLY TERMINATION. This Article 4 governs termination of this Agreement at
any time during the term of the Agreement; provided, however, that this Article
shall not govern a "Change of Control Termination" as defined in Article 6. A
Change in Control Termination is governed solely by the provisions of Article 6.
4.2 TERMINATION FOR CAUSE. The Company may terminate this Agreement and
Executive's employment immediately for "Cause" as that term is defined herein,
upon written notice to the Executive.
4.2.1 "Cause" means any one of the following: (a) fraud,
(b) misrepresentation, (c) theft or embezzlement of the Company assets,
(d) intentional violations of law involving moral turpitude, (e) the
continued failure by the Executive to satisfactorily perform his duties as
reasonably assigned to the Executive pursuant to Section 2.2 of this
Agreement for a period of sixty (60) days after a written demand for such
satisfactory performance which specifically and with reasonable detail
identifies the manner in which it is alleged the Executive has not
satisfactorily performed such duties, and (f) any material breach of the
Confidentiality Agreement.
4.2.2 In the event of termination for Cause pursuant to this
Section 4.2, the Executive shall be paid his Base Salary through the date
of termination specified in any notice of termination. The Executive will
not be entitled to any bonuses or incentives that are not earned and
payable at the time of the termination.
4.3 TERMINATION WITHOUT CAUSE. Either the Executive or the Company may
terminate this Agreement and the Executive's employment without Cause by
providing at least thirty (30) days'
3-EXECUTIVE EMPLOYMENT AGREEMENT
<PAGE>
written notice; provided, however, that the Company shall have the option of
making termination of the Agreement and termination of the Executive's
employment effective immediately upon notice, in which case Executive shall be
paid his Base Salary through a notice period of thirty (30) days. This
Section 4.3 shall not be applicable where Cause for termination exists.
4.3.1 If the notice of termination is given by the Company, in addition
to any other amounts payable to Executive, under this Section 4.3, the
Company shall pay Executive within fifteen (15) days following termination,
a lump sum amount equal to the Base Salary for the remaining term of the
Agreement. The remaining term of the Agreement is defined as the
difference between the last day of the Agreement as defined in Section
2.3(ii) and the date the Agreement was terminated as defined by the written
notice.
4.3.2 In the event that termination occurs pursuant to Section 4.3.1
then, in addition to the payments specified in said Section, the Company
shall pay to the Executive bonuses, if any, as follows:
4.3.2.1 Company shall pay Executive an amount equal to the annual
bonus or annual incentive, if any, to which the Executive would
otherwise have become entitled under any Company bonus or incentive
plan in effect at the time of termination of this Agreement had the
Executive remained continuously employed for the full fiscal year in
which termination occurred and continued to perform his duties in the
same manner as they were performed immediately prior to termination;
provided, however, that such bonus or incentive amount shall be pro-
rated to the date of termination. The amount payable pursuant to this
Section 4.3.2.1 shall be earned and payable as of the date that is
fifteen (15) days after the date such bonus, if any, would have been
paid had the Executive remained employed for the full fiscal year.
4.3.3 The Board authorized the issuance of an option to purchase
200,000 shares of stock as part of the original offer of employment. In
the event of a Termination Without Cause as defined in paragraph 4.3, any
unvested shares from that option will be handled as follows. If the
Termination occurs on or before December 31, 2000, Executive shall be
entitled to a total of 100,000 shares of the above mentioned option. Any
unvested shares necessary to make up the difference between the 100,000
shares and any shares already vested will vest immediately. If the
Termination occurs after December 31, 2000, all unvested shares, if any, of
said option will vest immediately. Executive may exercise such options in
accordance with the terms and conditions of the stock option plan and the
agreement pursuant to which such options were granted
4.4 TERMINATION IN THE EVENT OF DEATH OR DISABILITY. This Agreement and
Executive's employment shall terminate in the event of death or Disability of
the Executive.
4.4.1 In the event of the Executive's death, the Company shall pay an
amount equal to six (6) month's Base Salary to the executor, administrator
or other personal representative of the Executive's estate. The amount
shall be paid as a lump sum as soon as practicable following Company's
receipt of notice of the Executive's death. All such payments shall be in
addition to any payments due pursuant to Section 4.4.3 below.
4-EXECUTIVE EMPLOYMENT AGREEMENT
<PAGE>
4.4.2 In the event of termination due to Executive's Disability, Base
Salary shall be terminated as of the final day of the fifth month
referenced in the definition of "Disability." Unless otherwise
disqualified by the disability benefit program provider, this Section is
not intended to limit the Executive from qualifying for and claiming
disability benefits from any other disability program in which the
Executive may be enrolled or otherwise for which he is qualified at the
time of disability.
4.4.3 In the event of termination by reason of the Executive's death or
Disability, the Company shall pay to the Executive an amount equal to the
amount the Executive would have received in incentive plan bonus for the
year in which termination occurred had "target" goals been achieved,
provided, however, that such amount shall be pro-rated to the date of
termination. This amount shall be earned and payable as of the date that
is fifteen (15) days after the date such bonus would have been paid had the
Executive remained employed for the full fiscal year in which termination
occurred.
4.5 CONTINUATION OF BENEFITS. In the event of termination of Executive's
employment by the Company pursuant to Section 4.3.1 or termination due to
Disability, the Company shall pay the applicable premiums for such group health
plan continuation as Executive is entitled to under the Consolidated Omnibus
Reconciliation Act of 1985 ("COBRA") and shall continue such payment for the
period of time the Executive is entitled to continue such coverage under COBRA.
4.6 ENTIRE TERMINATION PAYMENT. The compensation provided for in this
Article 4 shall constitute the Executive's sole remedy for termination pursuant
to this Article. The Executive shall not be entitled to any other termination
or severance payment which may be payable to the Executive under any other
agreement between the Executive and the Company preceding or following the date
of termination.
ARTICLE 5
CONFIDENTIALITY; CONFLICT OF INTEREST
5.1 PROPRIETARY INFORMATION. Executive shall keep confidential, except as the
Company may otherwise consent in writing, and not disclose or make any use of
except for the benefit of the Company, at any time either during or subsequent
to his employment by the Company, any Proprietary Information which he may
produce, obtain or otherwise acquire during the course of his employment. As
used herein, "Proprietary Information" shall include any trade secrets,
confidential information, knowledge, data, or other information of the Company
relating to products, processes, know-how, designs, formulae, test procedures
and results, customer lists, business plans, marketing plans and strategies, and
pricing strategies, or other subject matter pertaining to any business of the
Company for any of its clients, customers, consultants, licensees of affiliates,
which information is not in the public domain at the time of the alleged breach.
In the event of the termination of the Executive's employment for any reason
whatsoever, Executive shall promptly return all records, materials, equipment,
drawings and the like pertaining to any Proprietary Information.
5.2 COVENANT NOT TO COMPETE. Executive acknowledges that he will provide
special skills, and acquire special information, regarding the activities of the
Company. Executive agrees,
5-EXECUTIVE EMPLOYMENT AGREEMENT
<PAGE>
therefore, that he will not, for a period of twelve (12) months from and after
the date he ceases to be employed by the Company, join, control or participate
in the ownership, management, operation or control of or be connected with,
any business located in the United States of America whose commercial products
are in direct competition with the Company or which is developing products
which will be in direct competition with the Company, in such a manner and
position that he would likely use Proprietary Information, unless released
from such obligation by the Board of Directors of the Company. Executive
agrees that he shall be deemed to be connected with a business if such a
business is carried on by a partnership in which he is a general or limited
partner or employee of a corporation or association of which he is a
shareholder, officer, director, employee, member, consultant or agent;
provided, that nothing herein shall prohibit the purchase or ownership by him
of shares of less than five percent (5%) in a publicly or privately held
corporation. Executive agrees to submit a list of such business interests in
Exhibit A attached hereto and incorporated by reference herein.
5.3 CONSENT TO INJUNCTION. Executive agrees that the Company will or would
suffer an irreparable injury if Executive were to compete with the business of
the Company or any of its subsidiaries in violation of this Agreement and that
the Company would by reason of such competition be entitled to injunctive relief
in a court of appropriate jurisdiction and Executive stipulates to the entering
of such injunctive relief prohibiting him from competing with the Company or any
present affiliate of the Company in connection with the business of the Company,
in violation of this Agreement.
5.4 SEVERABILITY. The parties intend that the covenants contained in Section
5.2 be deemed to be separate covenants as to each county and state, and that if
in any judicial proceeding a court shall refuse to enforce all of the separate
covenants included herein because, taken together, they cover too extensive a
geographic area or because any one includes too large an area or because they
cover too large a period of time, the parties intend that such covenants shall
be reduced in scope to the extent required by law or, if necessary, eliminated
from the provisions hereof, and that all of the remaining covenants hereof not
so affected shall remain fully effective and enforceable.
5.5 ASSIGNMENT OF INVENTIONS. As used in this Agreement, "inventions" shall
include, but not be limited to, ideas, improvements, designs, and discoveries.
Executive hereby assigns and transfers to the Company entire right, title and
interest in and to all inventions whether or not conceived by Executive (whether
made solely by Executive or jointly with others) during the period of his
employment with the Company which relate in any manner to the actual or
demonstrably anticipated business, work, or research and development of the
Company or its subsidiaries, or result from or are suggested by any tasks
assigned to Executive or any work performed by Executive for or on behalf of the
Company or its subsidiaries. Executive agrees that all such inventions are sole
property of the Company, provided, however, that this Agreement does not require
assignment of any invention if such assignment would contravene applicable state
law.
5.6 DISCLOSURE OF INVENTIONS, PATENTS. Executive agrees that in connection
with any invention as defined in Section 5.5, above:
5.6.1 Executive will disclose such invention promptly in writing to the
Board, regardless of whether he believes the invention is protected by
applicable state law, in order to permit
6-EXECUTIVE EMPLOYMENT AGREEMENT
<PAGE>
the Company to claim rights to which it may be entitled under this
Agreement. Such disclosure shall be received in confidence by the Company.
5.6.2 Executive will, at the Company's request, promptly execute a
written assignment of title to the Company for any invention required to be
assigned by Section 5.5 ("assignable invention") and Executive will
preserve any such assignable invention as confidential information of the
Company; and
5.6.3 Upon request, Executive agrees to assist the Company or its
nominee (at its expense) during and at any time subsequent to his
employment in every reasonable way to obtain for its own benefit patents
and copyrights for such assignable inventions in any and all countries,
which inventions shall be and remain the sole and exclusive property of the
Company or its nominee, whether or not patented or copyrighted. Executive
agrees to execute such papers and perform such lawful acts as the Company
deems to be necessary to allow it to exercise all right, title, and
interest in such patents and copyrights.
5.6.4 Executive agrees to submit a list of inventions made prior to his
employment by the Company on Exhibit B attached hereto and incorporated by
reference herein.
5.7 EXECUTION OF DOCUMENTATION. In connection with Section 5.5 and Section
5.6, Executive further agrees to execute, acknowledge and deliver to the Company
or its nominee upon request and at its expense all such assignments of
inventions, patents, and copyrights to be issued therefor, as the Company may
determine necessary or desirable for which to apply. Executive agrees to obtain
letters, patents, and copyrights on such assignable inventions in any and all
countries and/or protect the interest of the Company or its nominee in such
inventions, patents and copyrights and to vest title thereto in the Company or
its nominee.
5.8 OTHER OBLIGATIONS. Executive acknowledges that the Company from time to
time may have agreements with other persons or with the U.S. Government, or
agencies thereof, which impose obligations or restrictions on the Company
regarding inventions made during the course of work thereunder or regarding the
confidential nature of such work. Executive agrees to be bound by all such
obligations and restrictions and to take all action necessary to discharge the
obligations of the Company thereunder.
5.9 TRADE SECRETS OF OTHERS. Executive represents that his performance of all
the terms of this Agreement and as an employee of the Company such employment
does not and will not breach any agreement to keep in confidence proprietary
information, knowledge, or data acquired by Executive in confidence or in trust
prior to his employment with the Company. Executive will not disclose to the
Company, or induce the Company to use, any confidential or proprietary
information or material belonging to any previous employer or others. Executive
agrees not to enter into any agreement either written or oral in conflict
herewith.
5.10 CONFLICT OF INTEREST. During Executive's employment with the Company,
Executive will engage in no activity or employment which may conflict with the
interest of the Company and will comply with the Company's policies and
guidelines pertaining to business conduct and ethics.
5.11 PREVIOUS AGREEMENTS. Executive represents and warrants to the Company
that as of the date of this Agreement, he has fully complied with the terms of
the Confidentiality Agreement.
7-EXECUTIVE EMPLOYMENT AGREEMENT
<PAGE>
Executive's obligations under this Agreement are in addition to, do not
limit, and are not limited by, Executive's Confidentiality Agreement. To the
extent any provision of the Confidentiality Agreement conflicts with the
provisions of this Agreement, the provisions of this Agreement control.
5.12 SURVIVAL OF OBLIGATIONS. The provisions of this Article 5 shall survive
termination of this Agreement.
ARTICLE 6
CHANGE OF CONTROL
6.1 DEFINITIONS. For purposes of this Article 6, the following definitions
shall be applied:
6.1.1 "CHANGE OF CONTROL" shall mean any of the following events:
6.1.1.1 a merger or consolidation to which the Company is a party if
the individuals and entities who were stockholders of the Company
immediately prior to the effective date of such merger or
consolidation have beneficial ownership (as defined in Rule 13d-3
under the Securities Exchange Act of 1934) of less than fifty percent
(50%) of the total combined voting power for election of directors of
the surviving corporation immediately following the effective date of
such merger or consolidation; or
6.1.1.2 the direct or indirect beneficial ownership (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934), in the
aggregate, of securities of the Company, representing twenty percent
(20%) or more of the total combined voting power of the Company's then
issued and outstanding securities, by any person or entity, or group
of associated persons or entities acting in concert; or
6.1.1.3 the sale of all or substantially all of the assets of the
Company to any person or entity which is not a subsidiary of the
Company; or
6.1.1.4 the stockholders of the Company approve any plan or proposal
for the liquidation of the Company; or
6.1.1.5 a change in the composition of the Board at any time during
any consecutive 24-month period such that the Continuity Directors
cease for any reason to constitute at least a seventy percent (70%)
majority of the Board. For purposes of this clause, "Continuity
Directors" means those members of the Board who either:
6.1.1.5.1 were directors at the beginning of such consecutive
24-month period; or
6.1.1.5.2 were elected by, or on the nomination or
recommendation of, at least a two-thirds (2/3)
majority of the then-existing Board.
6.1.2 "CHANGE OF CONTROL TERMINATION" shall mean, with respect to the
Executive, any of the following events occurring during the term of the
Agreement:
8-EXECUTIVE EMPLOYMENT AGREEMENT
<PAGE>
6.1.2.1 Termination of the Executive's employment by the Company for
any reason other than for Cause, as Cause is defined in Section 4.2 of
this Agreement.
6.1.2.2 Termination of employment with the Company by the Executive
pursuant to Section 6.2 of this Article 6. A Change of Control
Termination shall not, however, include termination by reason of death
or Disability.
6.1.3 "GOOD REASON" shall mean a good faith determination by the
Executive, in the Executive's reasonable judgment, that any one or more of
the following events has occurred without the Executive's express written
consent, after a Change of Control, and the Company's failure to correct
such occurrence for a period of thirty (30) days following Executive's
written notice to Company identifying the event alleged to provide Good
Reason and stating Executive's intent to invoke Section 6.2 of this Article
6.
6.1.3.1 A change in the Executive's reporting responsibilities,
titles or offices as in effect immediately prior to the Change of
Control, or any removal of the Executive from, or any failure to
re-elect the Executive to, any of such positions, which has the effect
of materially diminishing the Executive's responsibility or authority;
6.1.3.2 A reduction by the Company in the Executive's Base Salary as
in effect immediately prior to the Change of Control;
6.1.3.3 A requirement by the Company that the Executive be based
anywhere other than within twenty-five (25) miles of the Executive's
job location at the time of the Change of Control;
6.1.3.4 A material diminishment of Executive's pension, bonus,
incentive, stock ownership, purchase, option, life insurance, health,
accident, disability, or any other employee compensation or benefit
plan, program or arrangement and/or any membership (collectively,
"Benefit Plans"), in which the Executive is participating immediately
prior to a Change of Control; or the taking of any action by the
Company that would materially adversely affect the Executive's
participation or materially reduce the Executive's benefits under any
Benefit Plans or Benefit Plan;
6.1.3.5 Any material breach of this Agreement by the Company.
6.1.4 "INTERNAL REVENUE CODE" -- Any references to a section of the
Internal Revenue Code shall mean that section of the Internal Revenue Code
of 1986, or to the corresponding section of such Code, as from time to time
amended.
6.2 CHANGE OF CONTROL TERMINATION RIGHT. During the term of the Agreement and
following a Change of Control, the Executive shall have the right, at any time,
to terminate employment with the Company for Good Reason. Such termination
shall be accomplished by, and effective upon, the Executive giving written
notice to the Company of the Executive's decision to terminate. Except as
otherwise expressly provided in this Agreement, upon the exercise of said right,
all obligations and duties of the Executive under this Agreement shall be of no
further force and effect.
9-EXECUTIVE EMPLOYMENT AGREEMENT
<PAGE>
6.2.1 CHANGE OF CONTROL TERMINATION PAYMENT. In the event of a
termination pursuant to Section 6.2, without further action by the Board,
the Company shall, within thirty (30) days of such termination, make a lump
sum payment to the Executive, equal to the Base Salary for the remaining
term of the Agreement. The remaining term of the Agreement is defined as
the difference between the last day of the Agreement as defined in Section
2.3 and the date the Agreement was terminated as defined by the written
notice.
6.2.2 In addition to the amounts paid pursuant to Section 6.2.1 the
Company shall pay to the Executive an amount equal to the annual bonus or
annual incentive, if any, to which the Executive would otherwise have
become entitled under any Company bonus or incentive plan in effect at the
time of termination of this Agreement had the Executive remained
continuously employed for the full fiscal year in which termination
occurred and continued to perform his duties in the same manner as they
were performed immediately prior to termination; provided, however, that
such bonus or incentive amount shall be pro-rated to the date of
termination. The amount provided by this Section 6.2.2 shall be earned and
payable on the date that is fifteen (15) days after the date Executive
would have been paid an annual incentive bonus had he remained with the
Company for the fiscal year in which termination occurs.
6.2.3 Notwithstanding anything in this Agreement to the contrary, in
the event any of the payments to the Executive under this Agreement would
constitute an excess parachute payment pursuant to Section 280 G of the
Internal Revenue Code, the amount payable pursuant to Section 6.2.2 shall
be reduced by the minimum amount necessary such that none of the
compensation payable to Executive as a result of a Change in Control shall
constitute an excess parachute payment.
6.3 INTEREST. In the event the Company does not make timely payment in full of
the Change of Control Termination payment described in Section 6.2, the
Executive shall be entitled to receive interest on any unpaid amount at the
lower of: (a) prime rate of interest (or such comparable index as may be
adopted) established from time to time by the Company's principal banking
institution or (b) the maximum rate permitted under Section 280G(d)(4) of the
Internal Revenue Code.
6.4 CONTINUATION OF BENEFITS. In the event of termination of Executive's
employment pursuant to Section 6.2 herein, the Company shall pay the applicable
premiums for such group health plan continuation as Executive is entitled to
under COBRA and such payment shall continue for the period of time the Executive
is entitled to continue such coverage under COBRA.
6.5 VESTING OF STOCK OPTIONS. The Board authorized the issuance of an option to
purchase 200,000 shares of stock as part of the original offer of employment.
In the event of a Change in Control Termination as defined in paragraph 6.1.2.1,
any unvested shares from that option will be handled as follows. If the Change
in Control Termination occurs on or before December 31, 2000, Executive shall be
entitled to a total of 100,000 shares of the above mentioned option. Any
unvested shares necessary to make up the difference between the 100,000 shares
and any shares already vested will vest immediately. If the Change in Control
Termination occurs after
10-EXECUTIVE EMPLOYMENT AGREEMENT
<PAGE>
December 31, 2000, all unvested shares, if any, of said option will vest
immediately. Executive may exercise such options in accordance with the terms
and conditions of the stock option plan and the agreement pursuant to which
such options were granted.
ARTICLE 7
GENERAL PROVISIONS
7.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to
the benefit of the successors and assigns of the Company and each subsidiary,
whether by way of merger, consolidation, operation of law, assignment, purchase
or other acquisition of substantially all of the assets or business of the
Company, and any such successor or assign shall absolutely and unconditionally
assume all of the Company's obligations hereunder.
7.2 NOTICES. All notices, requests and demands given to or made pursuant
hereto shall, except as otherwise specified herein, be in writing and be
delivered or mailed to any such party at its address as set forth at the
beginning of this Agreement. Either party may change its address, by notice to
the other party given in the manner set forth in this Section. Any notice, if
mailed properly addressed, postage prepaid, registered or certified mail, shall
be deemed dispatched on the registered date or that stamped on the certified
mail receipt, and shall be deemed received within the third business day
thereafter or when it is actually received, whichever is sooner.
7.3 CAPTION. The various headings or captions in this Agreement are for
convenience only and shall not affect the meaning or interpretation of this
Agreement.
7.4 GOVERNING LAW. The validity, construction and performance of this
Agreement shall be governed by the laws of the State of Oregon.
7.5 MEDIATION. In case of any dispute arising under this Agreement which
cannot be settled by reasonable discussion, the parties agree that, prior to
commencing any arbitration proceeding as contemplated by Section 7.6 they will
first engage the services of a professional mediator agreed upon by the parties
and attempt in good faith to resolve the dispute through confidential non-
binding mediation. Each party shall bear one-half (1/2) of the mediator's fees
and expenses and shall pay all of its own attorneys' fees and expenses related
to the mediation.
7.6 ARBITRATION. Any dispute concerning the interpretation, construction,
breach or enforcement of this Agreement or arising in any way from Executive's
employment with Company or termination of employment shall be submitted to final
and binding arbitration. Such arbitration is to be before a single arbitrator
in Portland, Oregon. In the event the parties are unable to agree upon an
arbitrator, an arbitrator shall be appointed by the court pursuant to ORS
36.320. The arbitration shall be conducted pursuant to the rules of the
American Arbitration Association ("AAA") Employment Dispute Resolution Rules.
Executive and the Company agree that the procedures outlined in Section 7.5 and
7.6 are the exclusive method of dispute resolution.
11-EXECUTIVE EMPLOYMENT AGREEMENT
<PAGE>
7.7 ATTORNEY FEES. If any action at law, in equity or by arbitration is taken
to enforce or interpret the terms of this Agreement, the prevailing party shall
be entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled, including fees
and expenses on appeal.
7.8 CONSTRUCTION. Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
7.9 WAIVERS. No failure on the part of either party to exercise, and no delay
in exercising, any right or remedy hereunder shall operate as a waiver thereof;
nor shall any single or partial exercise of any right or remedy hereunder
preclude any other or further exercise thereof or the exercise of any other
right or remedy granted hereby or by any related document or by law.
7.10 ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit
of the Company and its successors and assigns, and shall be binding upon the
Executive, his administrators, executors, legatees, and heirs. In that this
Agreement is a personal services contract, it shall not be assigned by the
Executive.
7.11 MODIFICATION. This Agreement may not be and shall not be modified or
amended except by written instrument signed by the parties hereto.
7.12 ENTIRE AGREEMENT. This Agreement together with the Confidentiality
Agreement, the June 16 offer of employment letter, and the Relocation Agreement
referred to in the offer of employment constitutes the entire agreement and
understanding between the parties hereto in reference to all the matters herein
agreed upon. This Agreement replaces and supersedes all prior employment
agreements or understandings of the parties hereto; provided, however, that the
Confidentiality Agreement continues in full force and effect according to its
terms.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
EXECUTIVE PROTOCOL SYSTEMS, INC.
/s/ Robert F. Adrion By /s/ David F. Bolender
- ----------------------------------- ---------------------------------
Robert F. Adrion David Bolender, Chairman & CEO
Date: July 7, 1999 Date July 5, 1999
------------------------------ -------------------------------
12-EXECUTIVE EMPLOYMENT AGREEMENT
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PROTOCOL
SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 15,389
<SECURITIES> 11,280
<RECEIVABLES> 13,915<F1>
<ALLOWANCES> 450
<INVENTORY> 10,321
<CURRENT-ASSETS> 42,752
<PP&E> 15,804
<DEPRECIATION> 11,828
<TOTAL-ASSETS> 58,232
<CURRENT-LIABILITIES> 8,017
<BONDS> 0
0
0
<COMMON> 80
<OTHER-SE> 50,135
<TOTAL-LIABILITY-AND-EQUITY> 58,232
<SALES> 47,580
<TOTAL-REVENUES> 47,580
<CGS> 24,296
<TOTAL-COSTS> 24,296
<OTHER-EXPENSES> 17,317
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,967
<INCOME-TAX> 1,491
<INCOME-CONTINUING> 4,476
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,476
<EPS-BASIC> .54
<EPS-DILUTED> .53
<FN>
<F1>NET OF ALLOWANCE
<F2>THE AMOUNT OF LOSS PROVISION IS INSIGNIFICANT AND HAS BEEN INCLUDED IN OTHER
EXPENSES.
</FN>
</TABLE>
