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 June 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
August 11, 1999:
8,228,956 shares, $.01 par value per share
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PROTOCOL SYSTEMS, INC.
Index to Form 10-Q
PART I FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
Condensed Consolidated Statements of
Operations and Comprehensive Income for
the three and six months ended June 30, 1999
and 1998 3
Condensed Consolidated Balance Sheets
as of June 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Cash
Flows for the six months ended June 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 9-13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 14
PART II OTHER INFORMATION
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Item 2. Changes in Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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<PAGE>3
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
PROTOCOL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands except per share amounts)
(unaudited)
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Sales $16,753 $16,960 $31,052 $31,880
Cost of sales 8,704 7,993 16,048 16,000
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Gross profit 8,049 8,967 15,004 15,880
Operating expenses:
Research and development 1,573 2,052 3,078 3,911
Selling, general and administrative 4,941 6,193 9,686 11,208
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Total operating expenses 6,514 8,245 12,764 15,119
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Income from operations 1,535 722 2,240 761
Other income 229 213 491 493
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Income before income taxes 1,764 935 2,731 1,254
Provision for income taxes 441 262 683 351
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Net income $ 1,323 $ 673 $ 2,048 $ 903
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Comprehensive income $ 1,204 $ 654 $ 1,703 $ 891
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Basic earnings per share $ 0.16 $ 0.08 $ 0.25 $ 0.10
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Diluted earnings per share $ 0.16 $ 0.08 $ 0.24 $ 0.10
======= ======= ======= =======
Weighted average number of shares
used in the computation of:
Basic earnings per share 8,314 8,501 8,278 8,647
Diluted earnings per share 8,453 8,845 8,418 8,988
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>4
<TABLE>
PROTOCOL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
June 30, December 31,
1999 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $13,352 $ 8,023
Short-term investments 1,001 6,680
Accounts receivable - net 15,950 17,971
Inventories - net 10,882 12,218
Prepaid expenses and other current assets 1,581 2,469
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Total current assets 42,766 47,361
Long-term investments 9,245 4,045
Property and equipment - net 4,072 4,041
Other assets 563 404
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$56,646 $55,851
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,974 $ 2,584
Accrued liabilities 3,440 5,481
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Total current liabilities 6,414 8,065
Deferred taxes 16 40
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value. Authorized 30,000 shares;
issued and outstanding 8,342 at 1999 and 8,207 at 1998 83 82
Additional paid-in capital 28,823 28,105
Unearned compensation -- (48)
Accumulated other comprehensive income (loss) (140) 205
Retained earnings 21,450 19,402
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Total shareholders' equity 50,216 47,746
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$56,646 $55,851
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See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>5
<TABLE>
PROTOCOL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six months ended June 30,
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,048 $ 903
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,115 1,137
Amortization of bond premium 56 32
Provision for deferred taxes 350 101
Other non-cash items 71 48
Increase (decrease) in cash resulting from
changes in:
Accounts receivable 1,917 (501)
Inventories 1,255 1,390
Prepaid expenses and other assets 57 (118)
Accounts payable and accrued liabilities (811) (1,292)
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Net cash provided by operating activities 6,058 1,700
Cash flows from investing activities:
Purchase of investments (12,174) (6,843)
Proceeds from maturity of investments 12,488 8,115
Acquisition of property and equipment (1,024) (1,028)
Expenditures for other assets (250) (265)
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Net cash used in investing activities (960) (21)
Cash flows from financing activities:
Proceeds from exercise of stock options
and stock purchase plan 825 740
Repurchase of common stock (128) (6,140)
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Net cash provided by (used in) financing activities 697 (5,400)
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Effect of exchange rates on cash and cash equivalents (466) (14)
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Net increase (decrease) in cash and cash equivalents 5,329 (3,735)
Cash and cash equivalents at beginning of period 8,023 12,257
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Cash and cash equivalents at end of period $13,352 $ 8,522
======= =======
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 34 $ 739
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>6
PROTOCOL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by the Company without audit and in conformity with generally
accepted accounting principles for interim financial information.
Accordingly, certain financial information and footnotes have been omitted or
condensed. In the opinion of management, the condensed consolidated financial
statements include all necessary adjustments (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. These financial statements should be read in conjunction
with the Company's audited consolidated financial statements for the year
ended December 31, 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:
June 30, December 31,
(in thousands) 1999 1998
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Raw materials $ 4,693 $ 4,939
Work in process 2,296 2,838
Finished goods 2,134 2,207
Demonstration instruments 1,759 2,234
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Total inventories $10,882 $12,218
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PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and includes the following:
June 30, December 31,
(in thousands) 1999 1998
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Equipment $13,264 $12,111
Furniture and fixtures 1,918 1,910
Leasehold improvements 458 551
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15,640 14,572
Less accumulated depreciation and amortization 11,568 10,531
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Property and equipment - net $ 4,072 $ 4,041
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<PAGE>7
ACCRUED LIABILITIES
The components of accrued liabilities are as follows:
June 30, December 31,
(in thousands) 1999 1998
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Accrued salaries, wages and
related liabilities $2,068 $2,588
Accrual for special charges 138 1,642
Income taxes payable 134 -
Reserve for warranties 835 915
Deferred revenue and customer deposits 77 98
Other liabilities 188 238
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$3,440 $5,481
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On December 31, 1998, the Company incurred special charges of $3,188,000 as it
discontinued the development of its defibrillator project and restructured its
worldwide operations, which included the closure of its subsidiary offices and
direct sales organizations in France and Germany and the elimination of 14
positions at the Company's headquarters in Beaverton, Oregon as well as the
resignation of the founder and Chief Technical Officer. Cash payments during
the first six months of 1999 related to these special charges totaled
$1,330,000 and consisted primarily of employee severance benefits and lease
termination costs.
During the third quarter of 1998, the Company incurred special charges of
$2,246,000 to relocate its wholly-owned subsidiary, Pryon Corporation, from
Menomonee Falls, Wisconsin to the Company's Beaverton, Oregon facility in
order to improve operating efficiencies. The relocation resulted in a
reduction of 56 employees from manufacturing, engineering, sales and
administrative functions. Cash payments during the first six months of 1999
related to these special charges totaled $174,000 and consisted primarily of
lease termination, employee severance benefits and employee relocation costs.
As of June 30, 1999, special charges of $138,000 which related primarily to
certain contract terminations due to the relocation of Pryon Corporation were
not disbursed. The Company anticipates that these remaining balances will be
expended by the end of 1999.
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, utilization of the Company's federal net operating loss carryovers, the
benefit of the Company's research and experimentation tax credits, the benefit
of the Company's foreign sales corporation and tax-exempt interest income
earned on investments.
<PAGE>8
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>
Three months ended June 30, Six months ended June 30,
(in thousands) 1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Net income $ 1,323 $ 673 $ 2,048 $ 903
Other comprehensive
income; net of tax
Foreign currency
translation adjustments (78) (22) (236) (12)
Unrealized holding
gain (loss) (41) 3 (109) -
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Other comprehensive loss (119) (19) (345) (12)
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Comprehensive income $ 1,204 $ 654 $ 1,703 $ 891
======= ======= ======= =======
</TABLE>
SUBSEQUENT EVENT
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 ("GenESA 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.
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.
<PAGE>9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Second Quarter 1999 vs. Second Quarter 1998
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Sales. Sales for the second quarter of 1999 decreased 1.2% to $16.8 million
from $17.0 million for the second quarter of 1998.
Domestic sales, excluding Original Equipment Manufacturer ("OEM") sales of
Pryon OEM products, decreased 4.3% to $12.0 million (71.9% of total sales) in
the second quarter of 1999 from $12.6 million (74.2% of total sales) in the
second quarter 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 $1.4 million increase in U.S. military revenues.
International sales, excluding international sales of Pryon OEM products,
decreased 7.9% to $2.6 million (15.4% of total sales) in the second quarter of
1999 from $2.8 million (16.6% of total sales) in the second quarter of 1998.
This decrease in international sales was principally due to the continued
strength of the U.S. dollar against foreign currencies and soft international
markets, particularly in Asia.
Sales of Pryon OEM products increased 36.1% to $2.1 million (12.7% of total
sales) in the second quarter of 1999 from $1.6 million (9.2% of total sales)
in the second quarter of 1998 primarily due to an increase in OEM product
shipments.
Gross profit. As a percentage of sales, gross profit decreased to 48.0% in
the second quarter of 1999 from 52.9% in the second quarter of 1998. The
decrease in gross profit was primarily due to an increase in sales of products
which carry a relatively low margin, such as OEM products, accessories,
services and QuikSign monitors. Additionally, manufacturing variances were
unfavorable in the second quarter of 1999, whereas they were favorable in the
second quarter of 1998.
Research and development. Research and development decreased 23.3% to $1.6
million in the second quarter of 1999 from $2.1 million in the second quarter
of 1998. This decrease was primarily the result of the relocation of the Pryon
operations from Menomonee Falls, Wisconsin to the Company's Beaverton, Oregon
facility in 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 9.4% in the second quarter of 1999 from 12.1% in the second
quarter of 1998.
Selling, general and administrative. Selling, general and administrative
decreased 20.2% to $4.9 million in the second quarter of 1999 from $6.2
million in the second quarter of 1998. This decrease resulted primarily from
the closure of direct sales organizations in Germany and France initiated in
1998 and the reduction in the number of administrative employees as a result
of the relocation of the Pryon operations from Wisconsin to Oregon in 1998.
As a percentage of sales, selling, general and administrative decreased to
29.5% in the second quarter of 1999 from 36.5% in the second quarter of 1998.
Other income. Other income increased slightly to $229,000 in the second
quarter of 1999 from $213,000 in the second quarter of 1998.
<PAGE>10
Provision for income taxes. The provision for income taxes increased to
$441,000 in the second quarter of 1999 from $262,000 in the second quarter of
1998 representing effective tax rates of 25.0% and 28.0%, respectively. The
effective tax rate, which reflects the estimate of the Company's annual
effective tax rate, was lower in the second quarter of 1999 than in the second
quarter of 1998 primarily due to the expected utilization of the Company's net
operating loss carryover in 1999.
Net income. Net income in the second quarter of 1999 was $1.3 million or
$0.16 per diluted share compared to net income of $673,000 or $0.08 per
diluted share in the second quarter of 1998. The increase in net income was
primarily due to reduced operating expenses as a result of the relocation of
the Pryon manufacturing facility and the world-wide restructuring in 1998.
Six Months Ended June 30, 1999 vs. Six Months Ended June 30, 1998
- -----------------------------------------------------------------
Sales. Sales for the first six months of 1999 decreased 2.6% to $31.1 million
from $31.9 million for the first six months of 1998.
Domestic sales, excluding Original Equipment Manufacturer ("OEM") sales of
Pryon OEM products and GenESA devices, decreased to $20.5 million (66.0% of
total sales) in the first six months of 1999 from $20.6 million (64.7% of
total sales) in the first six 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 $1.7 million increase in U.S. military
revenues.
International sales, excluding international sales of Pryon OEM products and
GenESA devices, decreased 11.6% to $6.7 million (21.5% of total sales) in the
first six months of 1999 from $7.5 million (23.7% of total sales) in the first
six months of 1998. This decrease in international sales was primarily due to
the continued strength of the U.S. dollar against foreign currencies and soft
international markets, particularly in Europe and Asia, and the reorganization
of the Company's direct sales organization in Europe.
OEM sales of Pryon OEM products and GenESA devices increased 5.4% to $3.9
million (12.5% of total sales) in the first six months of 1999 from $3.7
million (11.6% of total sales) in the first six months of 1998 primarily due
to a $695,000 increase in Pryon OEM product shipments. This increase was
partially offset by a $496,000 decrease in sales of GenESA devices to Gensia
Automedics, Inc. In April 1998, the Company was informed that Gensia planned
no additional purchases of the GenESA device under a supply agreement with the
Company which provided for the purchase of devices through the year 2002. In
July 1998, the Company commenced litigation against Gensia Sicor, Inc. and
Gensia Automedics alleging that they have breached the supply agreement. In
August 1999, the Company reached a settlement of its litigation against SICOR,
Inc. (formerly Gensia Sicor, Inc.) and Gensia Automedics for $3.7 million to be
paid over the next two years.
Gross profit. As a percentage of sales, gross profit decreased to 48.3% in
the first six months of 1999 from 49.8% in the first six months of 1998. The
decrease in gross profits was primarily due to an increase in sales of
products which carry a relatively low gross margin, such as OEM products,
QuikSign monitors, accessories, and service.
<PAGE>11
Research and development. Research and development decreased 21.3% to $3.1
million in the first six months of 1999 from $3.9 million in the first six
months of 1998. This decrease was primarily the result of the relocation of
the Pryon operations from Menomonee Falls, Wisconsin to the Company's
Beaverton, Oregon facility in 1998 which resulted in a reduction in the total
number of research and development. As a percentage of sales, research and
development decreased to 9.9% in the first six months quarter of 1999 from
12.3% in the first six months of 1998.
Selling, general and administrative. Selling, general and administrative
decreased 13.6% to $9.7 million in the first six months of 1999 from $11.2
million in the first six months of 1998. This decrease resulted primarily
from the closure of direct sales organizations in Germany and France initiated
in 1998 and the reduction in the number of administrative employees as a
result of the relocation of the Pryon operations from Wisconsin to Oregon in
1998. As a percentage of sales, selling, general and administrative decreased
to 31.2% in the first six months of 1999 from 35.2% in the first six months of
1998.
Other income. Other income decreased slightly to $491,000 in the first six
months of 1999 from $493,000 in the first six months of 1998.
Provision for income taxes. The provision for income taxes increased to
$683,000 in the first six months of 1999 from $351,000 in the first six months
of 1998 representing effective tax rates of 25.0% and 28.0%, respectively.
The effective tax rate, which reflects the estimate of the Company's annual
effective tax rate, was lower in the first six months of 1999 than in the
first six months of 1998 primarily due to the expected utilization of the
Company's net operating loss carryover in 1999.
Net income. Net income in the first six months of 1999 was $2.1 million or
$0.24 per diluted share compared to net income of $903,000 or $0.10 per
diluted share in the first six months of 1998. The increase in net income was
primarily due to reduced operating expenses as a result of the relocation of
the Pryon manufacturing facility and the world-wide restructuring in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintained its strong financial position as of June 30, 1999 with
working capital balances of $36.4 million and a current ratio of 6.7:1 as
compared to working capital of $39.3 million and a current ratio of 5.9:1 at
December 31, 1998. Cash flows from operating activities for the first six
months of 1999 was $6.1 million as compared to $1.7 million for the first six
months of 1998. The increase in cash flow from operations was primarily due
to an increase in collections of accounts receivable as well as an increase in
net income. Cash of $1.0 million was used for the acquisition of property and
equipment in the first six months of 1999. Proceeds from stock option and
stock purchase plans and related benefits were $825,000 in the first six
months of 1999.
<PAGE>12
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 August 11, 1999, the Company has repurchased 283,600 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.
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. The operation of the Acuity central station
and the Propaq monitors in the Year 2000 and beyond should not be adversely
affected by this connectivity issue.
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 develop 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 by the end of the third quarter
of 1999.
<PAGE>13
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 that could cause unforeseen increases or decreases in the expenses
expected to be incurred in connection with the operations of the Pryon
subsidiary in Oregon, the closure of direct sales organizations in France and
Germany, the timely introduction of new products, the Company's ability to
identify and remediate Year 2000 issues or the reliability of third party
assessments and certifications relating to Year 2000 issues. In addition,
such statements could be affected by other factors discussed in this Quarterly
Report and from time to time in the Company's other Securities and Exchange
Commission filings and reports and by general industry and market conditions
and growth rates, and 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 vary with revenue. Results of operations in
any period should not be considered indicative of the result to be expected
for any future period, and fluctuations in operating results may also result
in fluctuations in the price of the Company's common stock. No assurance can
be given that the Company will be able to grow in future periods or that its
operations will remain profitable.
<PAGE>14
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 June 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 $23.6 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.
<PAGE>15
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the quarter ended June 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
stock option plans. An aggregate of 53,598 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of shareholders of the Company was held on May 19, 1999 at
which the following actions were taken by a vote of the shareholders:
(1) The following persons were elected to the Board of Directors for
three-year terms expiring in 2002 by the votes indicated below:
David F. Bolender: 6,806,924 votes for; 69,012 votes withheld
Steven E. Wynne: 6,815,405 votes for; 60,531 votes withheld
(2) An amendment to the Company's 1998 Stock Incentive Plan to
reserve an additional 200,000 shares of Common Stock under the
Plan was approved by a vote of 5,583,276 to 1,276,025 (with
16,635 abstentions)
(3) An amendment to the Company's 1994 Employee Stock Purchase Plan
to reserve an additional 200,000 shares of Common Stock under
the Plan was approved by a vote of 6,788,274 to 87,889 (with
9,773 abstentions).
(4) The appointment of KPMG Peat Marwick LLP to serve as the
Company's independent auditors for the year ending December 31,
1999 was ratified by a vote of 6,855,793 to 14,375 (with 5,768
abstentions).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1 Protocol Systems, Inc. 1994 Employee Stock Purchase Plan as
amended on May 19,1999
10.2 Protocol Systems, Inc. 1998 Stock Incentive Plan as amended
on May 19,1999
10.3 Protocol Systems, Inc. 1993 Stock Option Plan for
Nonemployee Directors as amended on February 10, 1999
27.1 Financial Data Schedule
(b) No reports were filed on Form 8-K during the quarter for which
this report is filed.
<PAGE>16
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: August 16, 1999 By /s/Robert F. Adrion
---------------------
Robert F. Adrion
President and Chief
Executive Officer
By /s/Craig M. Swanson
---------------------
Craig M. Swanson
Vice-President and
Chief Financial Officer
8
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.
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.
2.21 "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.
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 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.
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 600,000 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.
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 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 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 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.
ADOPTED by the Board of Directors on January 4, 1994.
AMENDED by the Board of Directors on March 23, 1998.
RATIFIED by the Shareholders on May 19, 1994
RATIFIED by the Shareholders on May 19, 1998.
AMENDED by the Board of Directors on February 10, 1999
RATIFIED by the Shareholders on May 19, 1999.
PROTOCOL SYSTEMS, INC.
By: Craig M. Swanson, Secretary
PROTOCOL SYSTEMS, INC.
1998 STOCK INCENTIVE PLAN
1. PURPOSES OF THE PLAN. The purpose of this Stock Incentive Plan is 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 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 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 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 500,000 shares of Common
Stock. The Shares may be authorized, but unissued, or reacquired Common
Stock.
(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 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;
(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 (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.
(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(B) LIMITATIONS. Section (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 (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 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 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 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 with
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.
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.
(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.
ADOPTED by the Board of Directors on March 23, 1998.
RATIFIED by the shareholders on May 19, 1998.
AMENDED by the Board of Directors on February 10, 1999.
RATIFIED by the shareholders on May 19, 1999.
PROTOCOL SYSTEMS, INC.
By: Craig M. Swanson, Secretary
PROTOCOL SYSTEMS, INC.
1993 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS
1. PURPOSE
The purpose of Protocol Systems, Inc. 1993 Stock Option Plan for Nonemployee
Directors (the "Plan") is to promote the interests of Protocol Systems, Inc.
(the "Company") and its stockholders by strengthening the Company's ability to
attract and retain the services of experienced and knowledgeable nonemployee
directors and by encouraging such directors to acquire or increase their
proprietary interest in the Company.
2. SHARES SUBJECT TO THE PLAN
Subject to adjustment as provided in Article 7, the total number of shares of
common stock (the "Common Stock") of the Company for which options may be
granted under the Plan in fiscal year 1993 shall be 42,000, and the total
number of shares of Common Stock for which options may be granted under the
Plan in each fiscal year thereafter during any part of which the Plan is
effective (the "Shares") shall be 60,000 shares of Common Stock. The Shares
shall be shares currently authorized but unissued. If any option granted
under the Plan expires or terminates for any reason without having been
exercised in full, the Shares subject to, but not delivered under, such option
may become available for the grant of other options under the Plan. No shares
delivered to the Company in full or partial payment of an option price payable
pursuant to Paragraph 6.3 shall become available for the grant of other
options under the Plan.
3. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Compensation Committee of the Company's
Board of Directors (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.
4. PARTICIPATION IN THE PLAN
Each member of the Company's Board of Directors (a "Director") who is not
otherwise an employee of the Company or any subsidiary of the Company (an
"Eligible Director") shall be eligible to participate in the Plan.
5. NONSTATUTORY STOCK OPTIONS
All options granted under the Plan shall be nonstatutory options not intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as amended.
6. OPTION TERMS
Each option granted to an Eligible Director under the Plan and the issuance of
Shares thereunder shall be subject to the following terms:
6.1 Option Agreements
Each option granted under the Plan shall be evidenced by an option
agreement (an "Agreement") duly executed on behalf of the Company and by the
Eligible Director to whom such option is granted and dated as of the
applicable date of grant. Each Agreement shall be signed on behalf of the
Company by an officer or officers delegated such authority by the Committee
using either manual or facsimile signature. Each Agreement shall comply with
and be subject to the terms and conditions of the Plan. Any Agreement may
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Committee.
6.2 Option Grant Size and Grant Dates
6.2.1 Initial Grants. An option to purchase 10,000 Shares (as adjusted
pursuant to Article 7) shall be granted to each Eligible Director immediately
following the Annual Meeting at which such Director is first elected or
immediately following the first Annual Meeting after such Eligible Director is
first elected or appointed by the Board of Directors (the "Board") to be a
Director, whichever is applicable (each an "Initial Grant"); provided, that if
an Eligible Director who previously received an Initial Grant terminates
service as a Director and is subsequently elected or appointed to the Board,
such Director shall not be eligible to receive a second Initial Grant, but
shall be eligible to receive only Annual Grants as provided in Section 6.2.2,
beginning with the Annual Meeting held during the fiscal year immediately
following the year in which such Director was re-elected or appointed;
provided, further that any Eligible Director who, as a result of such
Director's election or appointment by the Board, served on the Board before
the Annual Meeting at which such Director is first elected by shareholders
shall receive at the time of such Director's Initial Grant an option to
purchase the number of Shares (as adjusted pursuant to Article 7) equal to the
product of 250 multiplied by the number of months (or portions thereof) that
such Director served on the Board before his election by shareholders (each an
"Additional Grant").
6.2.2 Annual Grants. An option to purchase 5,000 Shares (as adjusted
pursuant to Article 7) shall be granted automatically each year, immediately
following the Annual Meeting, to each Director who is an Eligible Director at
such time and who has received an Initial Grant, such grants to begin with the
Annual Meeting held during the fiscal year immediately following the year in
which the Eligible Director receives an Initial Grant; provided, that with
respect to each Director who is an Eligible Director immediately following the
Annual Meeting at which the Plan is approved by the stockholders of the
Company, such grants shall begin with the Annual Meeting at which the Plan is
approved by the stockholders of the Company (each, an "Annual Grant").
6.3 Option Exercise Price
The option exercise price per share for an Initial, Additional or
Annual Grant shall be the Fair Market Value (as hereinafter defined) of the
Common Stock on the date of grant. For purposes of the Plan, "Fair Market
Value" equals the closing price for the Common Stock as reported in The Wall
Street Journal for NASDAQ Stock Market transactions.
6.4 Vesting; Exercisability
Subject to Section 6.7, Initial Grants shall vest over a three-year
period. Annual Grants and Additional Grants shall vest and become
nonforfeitable, and shall become exercisable on the day the option is granted.
6.5 Time and Manner of Option Exercise
Any option is exercisable in whole or in part at any time or from time
to time during the option period by giving written notice, signed by the
person exercising the option, to the Company stating the number of Shares with
respect to which the option is being exercised, accompanied by payment in full
of the option exercise price for the number of Shares to be purchased. The
date both such notice and payment are received by the office of the Secretary
of the Company shall be the date of exercise of the stock option as to such
number of Shares, subject to Section 6.10. No option may at any time be
exercised with respect to a fractional share.
6.6 Payment of Exercise Price
Payment of the option exercise price may be in cash or by promissory
note or bank-certified, cashier's, or personal check or, to the extent
permitted by the Committee, payment may be in whole or part by:
a. transfer to the Company of shares of the Common Stock having a Fair
Market Value equal to the option exercise price at the time of such exercise,
or
b. delivery of instructions to the Company to withhold from the option
shares that would otherwise be issued on the exercise that number of option
shares having a Fair Market Value equal to the option exercise price at the
time of such exercise.
If the Fair Market Value of the number of whole shares transferred or
the number of whole option shares surrendered is less than the total exercise
price of the option, the shortfall must be made up in cash.
6.7 Term of Options
Each option shall expire ten years from its date of grant, but shall be
subject to earlier termination as follows:
a. In the event of the termination of an optionee's service as a Director,
other than by reason of retirement, total and permanent disability, or death,
the then-outstanding options of such optionee shall automatically expire on
the effective date of such termination. For purposes of the Plan, the term
"by reason of retirement" means: (i) mandatory retirement pursuant to Board
policy; or (ii) termination of service voluntarily at any time after age 65.
b. In the event of the termination of an optionee's service as a Director
by reason of retirement or total and permanent disability, the then-
outstanding options of such optionee shall expire one year after the date of
such termination or on the stated grant expiration date, whichever is earlier.
c. In the event of the death of an optionee while the optionee is a
Director, the then-outstanding options of such optionee shall expire one year
after the date of death of such optionee or on the stated grant expiration
date, whichever is earlier.
Exercise of a deceased optionee's options that are still exercisable shall be
by the estate of such optionee or by a person or persons whom the optionee has
designated in writing filed with the Company, or, if no such designation has
been made, by the person or persons to whom the optionee's rights have passed
by will or the laws of descent and distribution.
6.8 Transferability
The right of any optionee to exercise an option granted under the Plan
shall, during the lifetime of such optionee, be exercisable only by such
optionee or pursuant to a qualified domestic relations order as defined by the
Internal Revenue Code of 1986, as amended, or Title I of the Employee
Retirement Income Security Act, or the rules thereunder (a "QDRO") and shall
not be assignable or transferable by such optionee other than by will or the
laws of descent and distribution or a QDRO.
6.9 Limitation of Rights
6.9.1 Limitation as to Shares. Neither the recipient of an option under the
Plan nor an optionee's successor or successors in interest shall have any
rights as a stockholder of the Company with respect to any Shares subject to
an option granted to such person until the date of issuance of a stock
certificate for such Shares.
6.9.2 Limitation as to Directorship. Neither the Plan, nor the granting of
an option, nor any other action taken pursuant to the Plan shall constitute or
be evidence of any agreement or understanding, express or implied, that an
Eligible Director has a right to continue as a Director for any period of time
or at any particular rate of compensation.
6.10 Regulatory Approval and Compliance
Shares shall not be issued with respect to an option unless the
exercise of such option and the issuance and delivery of such shares shall
comply with all relevant provision of law, including, without limitation, any
applicable state securities laws, the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, the rules and regulations
thereunder and the requirements of any stock exchange upon which such shares
may then be listed, and such issuance shall be further subject to the approval
of counsel for the Company with respect to such compliance, including the
availability of an exemption from registration for the issuance and sale of
such shares. The inability of the Company to obtain from any regulatory body
the authority deemed by the Company to be necessary for the lawful issuance
and sale of any shares under this Plan, or the unavailability of an exemption
from registration for the issuance and sale of any shares under this Plan,
shall relieve the Company of any liability with respect to the non-issuance or
sale of such shares.
As a condition to the exercise of an option, the Company may require
the optionee to represent and warrant in writing at the time of such exercise
that the shares are being purchased only for investment and without any then-
present intention to sell or distribute such shares. At the option of the
Company, a stop-transfer order against such shares may be placed on the stock
books and records of the Company, and a legend indicating that the stock may
not be pledged, sold or otherwise transferred unless an opinion of counsel is
provided stating that such transfer is not in violation of any applicable law
or regulation, may be stamped on the certificates representing such shares in
order to assure an exemption from registration. The Company also may require
such other documentation as may from time to time be necessary to comply with
federal and state securities laws. THE COMPANY HAS NO OBLIGATION TO UNDERTAKE
REGISTRATION OF OPTIONS OR THE SHARES OF STOCK ISSUABLE UPON THE EXERCISE OF
OPTIONS.
As a condition to the exercise of any option granted under this Plan,
the optionee shall make such arrangements as the Company may require for the
satisfaction of any federal, state or local withholding tax obligations that
may arise in connection with such exercise.
The issuance, transfer or delivery of certificates of Common Stock
pursuant to the exercise of options may be delayed, at the discretion of the
Board, until the Company is satisfied that the applicable requirements of the
federal and state securities laws and the withholding provisions of the Code
have been met.
7. CAPITAL ADJUSTMENTS
The aggregate number and class of Shares subject to and authorized by the
Plan, the number and class of Shares with respect to which an option may be
granted to an Eligible Director under the Plan as provided in Article 6, the
number and class of Shares subject to each outstanding option, and the
exercise price per share specified in each such option shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a split-up or consolidation of shares or
any like capital adjustment or the payment of any stock dividend, or other
increase or decrease in the number of such shares effected without receipt of
consideration by the Company.
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 Board. The Board may,
in the exercise of its sole discretion in such instances, declare that
outstanding options shall terminate as of a date fixed by the Board and give
each optionee the right to exercise his option in whole or in part. 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 Board determines, in the exercise of its
sole discretion, not to require such assumption or substitution.
8. EXPENSES OF THE PLAN
All costs and expenses of the adoption and administration of the Plan shall be
borne by the Company, and none of such expenses shall be charged to any
optionee.
9. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall be effective immediately following approval by the Company's
stockholders. The Plan shall continue in effect until it is terminated by
action of the Board or the Company's stockholders, but such termination shall
not affect the terms of any then-outstanding options.
10. TERMINATION AND AMENDMENT OF THE PLAN
The Board may amend, terminate or suspend the Plan at any time, in its sole
and absolute discretion; provided, however, that if required to qualify the
Plan under Rule 16b-3 promulgated under Section 16 of the Securities Exchange
Act of 1934, as amended, no amendment shall be made more than once every six
months that would change the amount, price or timing of the Initial and Annual
Grants, other than to comport with changes in the Internal Revenue Code of
1986, as amended, 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:
a. materially increase the number of Shares that may be issued under the
Plan.
b. materially modify the requirements as to eligibility for participation
in the Plan, or
c. otherwise materially increase the benefits accruing to participants
under the Plan.
ADOPTED by the Board of Directors on January 25, 1993.
RATIFIED by the stockholders on May 17, 1993.
AMENDED by the Board of Directors on March 7, 1996.
RATIFIED by the stockholders on July 10, 1996.
AMENDED by the Board of Directors on February 10, 1999
PROTOCOL SYSTEMS, INC.
By: Craig M. Swanson, Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Protocol
Systems, Inc. Condensed Consolidated Balance Sheet as of June 30, 1999 and
Condensed Consolidated Statement of Operations and Comprehensive Income for the
six month period ended June 30, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 13,352
<SECURITIES> 10,246
<RECEIVABLES> 15,950<F1>
<ALLOWANCES> 400
<INVENTORY> 10,882
<CURRENT-ASSETS> 42,766
<PP&E> 15,640
<DEPRECIATION> 11,568
<TOTAL-ASSETS> 56,646
<CURRENT-LIABILITIES> 6,414
<BONDS> 0
0
0
<COMMON> 83
<OTHER-SE> 50,133
<TOTAL-LIABILITY-AND-EQUITY> 56,646
<SALES> 31,052
<TOTAL-REVENUES> 31,052
<CGS> 16,048
<TOTAL-COSTS> 16,048
<OTHER-EXPENSES> 12,273
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,731
<INCOME-TAX> 683
<INCOME-CONTINUING> 2,048
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,048
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.24
<FN>
<F1>Net of allowance
<F2>The amount of loss provision is not significant and has been included in other
expenses
</FN>
</TABLE>
