<PAGE>
================================================================================
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
PROTOCOL SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
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Notes:
<PAGE>
[LOGO OF PROTOCOL SYSTEMS, INC.]
8500 S.W. Creekside Place
Beaverton, OR 97008
(503) 526-8500
---------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 19, 1999
---------------------
To the Shareholders of
Protocol Systems, Inc.:
NOTICE IS HEREBY GIVEN that the annual meeting of shareholders (the "Annual
Meeting") of Protocol Systems, Inc. (the "Company") will be held on Wednesday,
May 19, 1999, at 10:30 a.m., local time, at the Company's offices at 8500 S.W.
Creekside Place, Beaverton, Oregon 97008 for the following purposes:
1. Election of Directors. To elect two directors, each for a three-year
term;
2. Approval of Amendment to 1998 Stock Incentive Plan. To approve an
amendment to the Protocol Systems, Inc. 1998 Stock Incentive Plan.
3. Approval of Amendment to Employee Stock Purchase Plan. To approve an
amendment to the Protocol Systems, Inc. 1994 Employee Stock Purchase
Plan.
4. Ratification of Appointment of Auditors. To ratify the appointment by
the Board of Directors of KPMG Peat Marwick LLP as independent auditors
of the Company for the fiscal year ending December 31, 1999; and
5. Other Business. To transact such other business as may properly come
before the meeting or any adjournments thereof.
The Board of Directors of the Company has fixed the close of business on
March 26, 1999 as the record date for the determination of shareholders
entitled to notice of and to vote at the Annual Meeting. Only shareholders of
record at the close of business on that date will be entitled to notice of and
to vote at the Annual Meeting or any adjournments thereof.
By Order of the Board,
/s/ DAVID F. BOLENDER
David F. Bolender
Chairman, President and Chief
Executive Officer
Beaverton, Oregon
April 9, 1999
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE DATE, SIGN AND
COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
<PAGE>
PROTOCOL SYSTEMS, INC.
8500 S.W. Creekside Place
Beaverton, OR 97008
(503) 526-8500
---------------------
PROXY STATEMENT
for
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 19, 1999
---------------------
INTRODUCTION
General
This Proxy Statement is being furnished to the shareholders of Protocol
Systems, Inc., an Oregon corporation ("Protocol" or the "Company"), as part of
the solicitation of proxies by the Company's Board of Directors (the "Board of
Directors") from holders of the outstanding shares of Protocol common stock,
par value $.01 per share (the "Common Stock"), for use at the Company's Annual
Meeting of Shareholders to be held at 10:30 a.m. on May 19, 1999, and at any
adjournments or postponements thereof, (the "Annual Meeting"). At the Annual
Meeting, shareholders will be asked to elect two members of the Board of
Directors, approve an amendment to the Company's 1998 Stock Incentive Plan,
approve an amendment to the Company's 1994 Employee Stock Purchase Plan,
ratify the appointment by the Board of Directors of KPMG Peat Marwick LLP as
independent auditors of the Company for the fiscal year ending December 31,
1999, and transact such other business as may properly come before the meeting
or any adjournments thereof. This Proxy Statement, together with the enclosed
proxy card, is first being mailed to shareholders of Protocol on or about
April 12, 1999.
Solicitation, Voting and Revocability of Proxies
The Board of Directors has fixed the close of business on March 26, 1999 as
the record date for the determination of the shareholders entitled to notice
of and to vote at the Annual Meeting. Accordingly, only holders of record of
shares of Common Stock at the close of business on such date will be entitled
to vote at the Annual Meeting, with each such share entitling its owner to one
vote on all matters properly presented at the Annual Meeting. On the record
date, there were approximately 3,000 beneficial holders of the 8,272,507
shares of Common Stock then outstanding. The presence, in person or by proxy,
of a majority of the total number of outstanding shares of Common Stock
entitled to vote at the Annual Meeting is necessary to constitute a quorum at
the Annual Meeting.
If the enclosed form of proxy is properly executed and returned in time to
be voted at the Annual Meeting, the shares represented thereby will be voted
in accordance with the instructions marked thereon. Executed but unmarked
proxies will be voted FOR the election of the two nominees for election to the
Board of Directors, FOR approval of an amendment to the Company's 1998 Stock
Incentive Plan, FOR approval of an amendment to the Company's 1994 Employee
Stock Purchase Plan, and FOR the ratification of the appointment of KPMG Peat
Marwick LLP as the Company's independent auditors for the fiscal year ending
December 31, 1999. The Board of Directors does not know of any matters other
than those described in the Notice of Annual Meeting that are to come before
the Annual Meeting. If any other matters are properly brought before the
Annual Meeting, the persons named in the proxy will vote the shares
represented by such proxy upon such matters as determined by a majority of the
Board of Directors.
The presence of a shareholder at the Annual Meeting will not automatically
revoke such shareholder's proxy. A shareholder, may, however, revoke a proxy
at any time prior to its exercise by filing a written notice of revocation
with, or by delivering a duly executed proxy bearing a later date to,
Corporate Secretary, Protocol Systems, Inc., 8500 S.W. Creekside Place,
Beaverton, Oregon 97008, or by attending the Annual Meeting and voting in
person. All valid, unrevoked proxies will be voted at the Annual Meeting.
1
<PAGE>
ELECTION OF DIRECTORS
At the Annual Meeting, two directors will be elected, each for a three-year
term. Unless otherwise specified on the proxy, it is the intention of the
persons named in the proxy to vote the shares represented by each properly
executed proxy for the election as directors of the persons named below as
nominees. The Board of Directors believes that the nominees will stand for
election and will serve if elected as directors. However, if either of the
persons nominated by the Board of Directors fails to stand for election or is
unable to accept election, the proxies will be voted for the election of such
other person as the Board of Directors may recommend.
Under the Company's bylaws, the directors are divided into three classes
composed of two directors each. The term of office of only one class of
directors expires in each year, and their successors are elected for terms of
three years and until their successors are elected and qualified. There is
currently one vacancy on the Board of Directors, which the Board expects to
fill by appointment when an appropriate candidate is identified. There is no
cumulative voting for election of directors.
Information as to Nominees and Continuing Directors. The following table
sets forth the names of the Board of Directors' nominees for election as a
director and those directors who will continue to serve after the Annual
Meeting. Also set forth is certain other information with respect to each such
person's age at April 9, 1999, principal occupation or employment during the
past five years, the periods during which he has served as a director of
Protocol and positions currently held with Protocol.
<TABLE>
<CAPTION>
Director Expiration Positions Held With
Age Since of Term Protocol
--- -------- ---------- ------------------------
<C> <C> <C> <C> <S>
Nominees:
David F. Bolender........... 67 1996 1999 Chairman of the Board of
Directors, President
and Chief Executive
Officer
Steven E. Wynne............. 47 1996 1999 Director
Continuing Directors:
Ronald S. Newbower, Ph.D. .. 55 1994 2000 Director
Frank E. Samuel, Jr. ....... 59 1994 2000 Director
Curtis M. Stevens........... 46 1998 2001 Director
</TABLE>
David F. Bolender. Mr. Bolender was elected to the Board of Directors in
1996. In February 1998, Mr. Bolender was elected Chairman of the Board of
Directors and Chief Executive Officer of the Company. Mr. Bolender was named
President of the Company in September 1998. Mr. Bolender is Chairman of the
Board of Directors of Electro Scientific Industries, Inc. and has served in
that capacity since 1992. From January 1989 to December 1991 Mr. Bolender
served as President of the Electric Operations Group of PacifiCorp.
Steven E. Wynne. Mr. Wynne was elected to the Board of Directors in 1996.
Mr. Wynne has served as President and Chief Executive Officer of adidas
America, Inc. since 1995. Mr. Wynne was a partner in the law firm of Ater
Wynne LLP, Protocol's legal counsel, from 1984 to 1996. Mr. Wynne also serves
on the Board of Directors of Planar Systems, Inc.
Ronald S. Newbower, Ph.D. Dr. Newbower was elected to the Board of Directors
in 1994. Since 1997, Dr. Newbower has been Vice President for Research
Management of Massachusetts General Hospital ("MGH") and, since 1994, has also
served as Senior Vice President, Research and Technology. Dr. Newbower was
Vice President for Research and Technology Affairs of MGH and Associate
General Director for Research and Technology Affairs of MGH from 1990 to 1994.
Dr. Newbower has held appointments at MGH since 1973, where he has served as
Deputy Director of the Division of Research Affairs, Director of Technology
Development of the Office of Technology Affairs, and Director of the
Department of Biomedical Engineering. He is currently also Associate Professor
of Anaesthesia, Harvard-MIT Division of Health Sciences and Technology,
Associate Professor of Anaesthesia, Harvard Medical School, and Lecturer in
Electrical Engineering, Massachusetts Institute of Technology.
2
<PAGE>
Frank E. Samuel, Jr. Mr. Samuel was elected to the Board of Directors in
1994. Mr. Samuel has been President of Edison BioTechnology Center, an
economic development organization for the biomedical technology field in the
State of Ohio since February 1995. Prior to that date, Mr. Samuel was an
independent consultant engaged in the business of advising senior management
on governmental policy and regulation of health care and medical technology
since 1990. Mr. Samuel was President of the Health Industry Manufacturers
Association ("HIMA"), a national trade association representing medical
technology manufacturers, from 1984 to 1989. Mr. Samuel also serves on the
Boards of Directors of STERIS Corporation and Life Technologies, Inc.
Curtis M. Stevens. Mr. Stevens was elected to the Board of Directors in
1998. Mr. Stevens is Vice President, Chief Financial Officer and Treasurer of
Louisiana Pacific Corporation. From 1991 to 1997, Mr. Stevens served as
Executive Vice President, Treasurer and Assistant Secretary of Planar Systems,
Inc., a manufacturer of commercial flat panel display components. Mr. Stevens
joined Planar Systems in 1983 and was elected Vice President and Chief
Financial Officer in 1986. From 1976 to 1983, Mr. Stevens served in various
capacities at Deloitte, Haskins & Sells (now Deloitte & Touche) in tax, audit
and management consulting. Mr. Stevens is a Certified Public Accountant. Mr.
Stevens received a BA in economics from the University of California, Los
Angeles ("UCLA") and an MBA in finance from the Graduate School of Management
at UCLA.
Board of Directors Committees and Nominations by Shareholders. The Board of
Directors acts as a nominating committee for selecting nominees for election
as directors. The Company's bylaws also permit shareholders to make
nominations for the election of directors, if such nominations are made
pursuant to timely notice in writing to the Company's Secretary. To be timely,
notice must be delivered to, or mailed to and received at, the principal
executive offices of the Company not less than 60 days nor more than 90 days
prior to the date of the meeting, provided that at least 60 days' notice or
prior public disclosure of the date of the meeting is given or made to
shareholders. If less than 60 days' notice or prior public disclosure of the
date of the meeting is given or made to shareholders, notice by the
shareholder to be timely must be received by the Company not later than the
close of business on the tenth day following the date on which such notice of
the date of the meeting was mailed or such public disclosure was made. Public
disclosure of the date of the Annual Meeting was made by the issuance of a
press release on March 18, 1999. A shareholder's notice of nomination must
also set forth certain information specified in Article III, Section 3.15 of
the Company's bylaws concerning each person the shareholder proposes to
nominate for election and the nominating shareholder.
The Board of Directors has appointed a standing Audit Committee which,
during the fiscal year ended December 31, 1998, conducted four meetings. The
members of the Audit Committee currently are Messrs. Samuel and Stevens. The
Audit Committee reviews the scope of the independent annual audit, the
independent public accountants' letter to the Board of Directors concerning
the effectiveness of the Company's internal financial and accounting controls
and the Board of Directors' response to that letter, if deemed necessary. The
Board of Directors also has appointed a Compensation Committee which reviews
executive compensation and makes recommendations to the full Board regarding
changes in compensation, and also administers the Company's stock option
plans. During the fiscal year ended December 31, 1998, the Compensation
Committee held two meetings. The members of the Compensation Committee
currently are Messrs. Stevens and Wynne.
During 1998 the Company's Board of Directors held six meetings. Each
incumbent director attended more than 75% of the aggregate of the total number
of meetings held by the Board of Directors and the total number of meetings
held by all committees of the Board on which he served during the period that
he served.
See "Management--Executive Compensation" for certain information regarding
compensation of directors.
The Board of Directors unanimously recommends that shareholders vote FOR the
election of its nominees for director. If a quorum is present, the Company's
bylaws provide that directors are elected by a plurality of the votes cast by
the shares entitled to vote. Abstentions and broker non-votes are counted for
purposes of determining whether a quorum exists at the Annual Meeting, but are
not counted and have no effect on the determination of whether a plurality
exists with respect to a given nominee.
3
<PAGE>
MANAGEMENT
Executive Officers
The following table sets forth certain information with respect to the
executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
---------------------------- --- --------------------------------------------
<C> <C> <S>
David F. Bolender........... 67 Chairman of the Board of Directors, Chief
Executive Officer and President
Don M. Abbey................ 32 Vice President-Quality Systems
James P. Fee, Jr. .......... 53 Vice President-Sales and Marketing
Carl P. Hollstein, Jr. ..... 59 Senior Vice President-Manufacturing
Allen L. Oyler.............. 53 Vice President-Information Systems, Human
Resources and Administration
Richard L. Roa.............. 53 Vice President-Engineering
Craig M. Swanson............ 56 Vice President-Finance and Business
Development, Chief Financial Officer and
Secretary
James P. Welch.............. 48 Senior Vice President-Systems, Marketing and
Service
</TABLE>
Information regarding the principal occupation of Mr. Bolender is set forth
under "Election of Directors." Information concerning the principal occupation
during at least the last five years of the executive officers of the Company
who are not also directors of the Company is set forth below.
Don M. Abbey. Mr. Abbey joined the Company in June 1998 as Vice President,
Quality Systems. Before joining the Company, Mr. Abbey was Director, Quality
Assurance at Heartstream, Inc., a manufacturer of medical defibrillators, from
May 1996 to June 1998, and Manager, Quality Engineering at Heart Technology, a
manufacturer of angioplasty devices, from August 1993 to May 1996.
James P. Fee, Jr. Mr. Fee joined the Company in 1988 as Vice President,
Marketing and Sales and in 1998 he became Vice President, Sales, Service and
Communication. In 1999, Mr. Fee became Vice President, Sales and Marketing.
Mr. Fee spent the previous 14 years with Physio Control Corporation, a
manufacturer of cardiac defibrillators and subsidiary of Eli Lilly and
Company. From 1987 to November 1988, Mr. Fee was Vice President of Marketing
and from 1982 to 1987 Vice President of Sales and Service of Physio Control
Corporation.
Carl P. Hollstein, Jr. Mr. Hollstein joined the Company in 1993 as Vice
President, Manufacturing and in 1999 he was elected Senior Vice President,
Manufacturing. Before joining the Company, Mr. Hollstein was a self-employed
management consultant from 1991 to 1993. From 1978 to 1991, Mr. Hollstein
worked for Intel Corporation, holding a variety of positions, including
Engineering Manager; General Manager, Development Systems Operation; and
Director of Quality Systems Group.
Allen L. Oyler. Mr. Oyler joined the Company in 1993 as Director, Human
Resources and in 1994 was elected Vice President, Human Resources and
Administration. In 1999 he became Vice President, Information Services, Human
Resources and Administration. Prior to joining the Company, Mr. Oyler was
Director, Human Resources at SpaceLabs from 1984 to 1993.
Richard L. Roa. Mr. Roa joined the Company in July 1998 as Vice President,
Engineering. Before joining the Company, Mr. Roa was Director, Biomedical
Engineering at Baylor University Medical Center from 1989 to July 1998.
Craig M. Swanson. Mr. Swanson joined the Company in 1988 as Vice President,
Finance, and Chief Financial Officer. He was elected Secretary in 1990. In
1999 he became Vice President, Finance and Business Development. Before
joining the Company, Mr. Swanson was President and Chief Operating Officer of
Receptor
4
<PAGE>
Corporation, a biotechnology company, from 1987 to 1988, and Chief Financial
Officer of Scientific Computer Systems Corporation from 1984 to 1987. Mr.
Swanson has more than 10 years of public accounting experience with Price
Waterhouse and Arthur Young & Company.
James P. Welch. Mr. Welch joined the Company in 1991 as Vice President,
Engineering, became Vice President, Quality Systems in July 1994 and Vice
President, Business and Market Development in December 1996 In 1998, he became
Vice President, Marketing and Business Development. In 1999 he was elected
Senior Vice President, Systems, Marketing and Service. Prior to joining the
Company, Mr. Welch served for ten years as Director of Hospital Clinical
Engineering, Special Assistant to the Office of Technology Affairs and
Associate Director of the Anesthesia Bioengineering Unit at Massachusetts
General Hospital, in Boston, Massachusetts.
5
<PAGE>
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table provides certain summary information concerning
compensation of each person who served as the Company's Chief Executive
Officer during 1998 and each of the four other most highly compensated
executive officers of the Company (the "named executive officers") for the
fiscal years ending December 31, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
Long-term
Annual Compensation Compensation
------------------------ ------------
Securities
Underlying
Stock
Name and Principal Options All Other
Position Year Salary Bonus Granted Compensation(3)
- ------------------ ---- -------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
David F. Bolender (1).... 1998 $144,375(2) -- 80,000 --
Chairman of the Board,
President and Chief
Executive Officer
James B. Moon (4)........ 1998 250,000 $83,654 -- --
Senior Vice President,
Chief Technical Officer 1997 247,346 -- 25,000 --
and Director 1996 180,385 74,204 50,000 --
James P. Fee, Jr. ....... 1998 153,846 54,763 -- $1,786
Vice President-Sales and
Marketing 1997 139,231 38,893 -- 1,842
1996 120,400 84,452 25,000 1,817
Carl P. Hollstein, Jr. .. 1998 150,969 30,546 -- 1,786
Senior Vice President-
Manufacturing 1997 129,423 -- -- 1,696
1996 115,400 57,017 21,000 1,820
Craig M. Swanson......... 1998 156,923 29,122 -- 833
Vice President-Finance,
and Business 1997 149,231 -- -- 792
Development, Chief
Financial Officer 1996 130,000 75,218 23,000 792
and Secretary
James P. Welch .......... 1998 153,846 32,432 -- 1,389
Senior Vice President-
Systems, Marketing 1997 139,039 -- -- 1,319
and Service 1996 115,000 57,017 33,000 480
</TABLE>
- --------
(1) Mr. Bolender was elected as Chief Executive Officer on February 20, 1998.
(2) This amount is the dollar value of 20,000 shares of Common Stock granted
to Mr. Bolender in lieu of cash compensation on March 6, 1998 based on the
market value of the Common Stock on the date of grant.
(3) The amounts set forth under All Other Compensation represent matching
amounts contributed on behalf of the named executive officers to the
Company sponsored 401(k) employee savings plan covering all of the
Company's employees.
(4) Mr. Moon served as the Company's Chief Executive Officer until February
20, 1998. Mr. Moon resigned as a member of the Board of Directors and
officer of the Company effective December 31, 1998.
6
<PAGE>
Stock Options
The following table sets forth information concerning options granted to
David F. Bolender during the year ended December 31, 1998. No stock options
were granted to any other named executive officer during the year ended
December 31, 1998.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Percent of Rates of Stock
Number of Total Price Appreciation
Securities Options Exercise for
Underlying Granted to Price Option Term(2)
Options Employees Per Expiration -------------------
Name Granted(1) in 1998 Share(2) Date 5% 10%
- ---- ---------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
David F. Bolender....... 80,000 31.0% $9.4375 3/6/08 $474,815 $1,203,276
</TABLE>
- --------
(1) Options granted in 1998 become exercisable starting one month after the
grant date, with 1/12 of the options becoming exercisable at that time and
with an additional 1/12 of the options becoming exercisable each month
thereafter.
(2) The amounts shown are hypothetical gains based on the indicated assumed
rates of appreciation of the Common Stock compounded annually for a ten-
year period. Actual gains, if any, on stock option exercises are dependent
on the future performance of the Common Stock and overall stock market
conditions. There can be no assurance that the Common Stock will
appreciate at any particular rate or at all in future years.
Option Exercises and Holdings
The following table provides information, with respect to the named
executive officers, concerning the exercise of options during the last fiscal
year and unexercised options held as of December 31, 1998.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options at FY-End Options at FY-End(2)
Acquired On Value ------------------------- -------------------------
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David F. Bolender....... -- -- 69,667 23,333 -- --
James B. Moon........... -- -- 166,000 -- $46,500 --
James P. Fee, Jr........ 17,667 $115,807 88,975 12,692 154,553 --
Carl P. Hollstein, Jr... -- -- 40,500 10,500 -- --
Craig M. Swanson........ -- -- 65,833 11,500 29,625 --
James P. Welch.......... -- -- 40,634 16,500 77,212 --
</TABLE>
- --------
(1) The value realized is based on the difference between the market price of
the Common Stock at the time of exercise of the options and the applicable
exercise price.
(2) The value of unexercised in-the-money options is based on the difference
between $7.125, which was the closing price of the Common Stock on
December 31, 1998, and the applicable exercise price.
7
<PAGE>
Executive Employment Agreements
The Company has entered into employment agreements (the "Employment
Agreements") with certain of its executive officers, including James B. Moon,
James P. Fee, Carl P. Hollstein, Craig M. Swanson and James P. Welch. Each of
the Employment Agreements is for a term ending July 1, 2000, provided that if
a "Change of Control" (as defined in the Employment Agreements and described
below) occurs before that date, the Employment Agreements will continue in
effect until two years after the Change in Control. Each Employment Agreement
may be terminated by either party upon seventy-five days written notice. If an
Employment Agreement is terminated by the Company without "Cause" (as defined
in the Employment Agreements and described below), the executive officer is
entitled to receive a lump sum payment equal to one year's base salary plus an
amount equal to any quarterly bonus or incentive payment and any annual bonus
or incentive payment that the executive officer would have been entitled to
had he remained employed for the remainder of the period to which the payment
related, provided that the amount of such payment shall be pro rated based on
the portion of the period actually employed. If an Employment Agreement is
terminated for Cause, all pay and benefits under the Employment Agreement will
cease as of the effective date of the termination. For purposes of the
Employment Agreements, "Cause" means the failure to satisfactorily perform the
duties assigned to the executive officer within a certain period after notice
of such failure is given or commission of certain illegal or wrongful acts. In
the event of the death of an executive officer, the estate of the executive
officer would receive a lump sum payment equal to six months base salary at
the then current rate. In the event of the termination of an Employment
Agreement due to an executive officer's disability, the executive officer
would continue to receive his base salary for five months after he was no
longer able to perform his duties. In the event of either death or disability,
the executive officer would also be entitled to receive a payment equal to any
incentive bonus the executive officer would have earned, pro rated based on
the portion of the period actually employed. Each Employment Agreement
includes a covenant not to compete that prohibits the executive officer from
owning, operating or working for any business in the United States that is
selling or developing products that compete with those of the Company for a
period of twelve months after his employment with the Company is terminated,
unless such employment was terminated by the Company without Cause.
For a period of two years following a Change of Control, each executive
officer would have the right to terminate his employment for "Good Reason" (as
defined in the Employment Agreements), and to receive upon such termination a
lump sum payment in an amount equal to two times his then-current base salary,
plus an amount equal to the greater of (i) two times the amount the executive
officer would have received in incentive plan bonuses for the year in which
the termination occurred if the target goals had been achieved for the year,
or (ii) the actual amount of the incentive bonus the executive officer would
have been entitled to receive for the year based on the Company's actual
performance. In addition, the executive officers would be entitled to the
continuation of health and insurance benefits for certain periods. The
Employment Agreements also provide that all outstanding unvested stock options
shall immediately become fully vested upon a Change of Control. For purposes
of the Employment Agreements, a "Change of Control" includes (i) any merger or
consolidation transaction that results in the shareholders of the Company
immediately before such transaction owning less than 50 percent of the total
combined voting power of the surviving corporation in the transaction, (ii)
the acquisition by any person of 20 percent or more of the Company's total
combined voting power, (iii) the liquidation of the Company or the sale of
substantially all of its assets, or (iv) a change in the composition of the
Board of Directors during any 24 month period such that the directors in
office at the beginning of the period and/or their successors who were elected
by or on the recommendation of the directors in office at the beginning of the
period do not constitute at least a 70 percent majority of the Board.
James B. Moon Separation Agreement
In connection with Mr. Moon's resignation as a director and executive
officer of the Company, Mr. Moon and the Company entered into a Separation
Agreement and Release dated and effective as of December 31, 1998 (the
"Separation Agreement"), which superceded Mr. Moon's Employment Agreement.
Pursuant to the Separation Agreement, Mr. Moon received a lump sum severance
payment of $270,833. The Company also relieved Mr. Moon of all obligations to
repay the Company the outstanding principal and interest due under a
8
<PAGE>
Promissory Note dated June 3, 1998 in the face amount of $120,000. Pursuant to
the Separation Agreement, certain stock options granted to Mr. Moon on or
after January 13, 1993 covering a total of 140,000 shares of Common Stock
became fully vested, and the exercise period for such stock options was
extended to March 31, 2001. The Company also agreed to pay up to $15,000 to a
mutually acceptable outplacement firm to assist Mr. Moon in transitioning to
an executive position with another company. The Separation Agreement also
includes a reaffirmation of Mr. Moon's obligations under confidentiality and
noncompetition agreements previously entered into by the Company and Mr. Moon,
as well as a general release of claims by Mr. Moon and covenant not to sue.
The Company entered into an Independent Contractor Agreement with Mr. Moon
effective as of February 1, 1999 (the "Consulting Agreement"). The Consulting
Agreement provides that Mr. Moon will provide advice and attend meetings and
other functions to assist the Company in its product development, strategic,
tactical and other related business processes as reasonably requested by the
Company for an average of ten hours per month. The Consulting Agreement
provides for the payment to Mr. Moon of a monthly retainer of $20,833. During
the term of the Consulting Agreement, Mr. Moon may not join, operate, control,
participate or work for any entity that competes with the Company anywhere the
Company does business. The Consulting Agreement will terminate on January 31,
2001, unless terminated earlier as a result of (i) the mutual agreement of the
parties, (ii) a material breach of the Consulting Agreement by one of the
parties, or (iii) the death or disability of Mr. Moon.
Director Compensation
The members of the Company's Board of Directors are reimbursed for out-of-
pocket and travel expenses incurred in attending Board meetings. In addition,
nonemployee members of the Board of Directors receive a $5,000 annual
retainer, $1,000 for each Board meeting attended and $500 for each meeting of
a committee of the Board attended. Nonemployee directors who do not reside in
the Portland, Oregon metropolitan area also receive a nonaccountable travel
allowance of $1,000 for each Board meeting attended. Under the Company's 1993
Stock Option Plan for Nonemployee Directors (the "1993 Plan"), each person who
becomes a nonemployee director automatically receives an initial option to
purchase 10,000 shares of the Company's Common Stock immediately following the
annual meeting at which such director is first elected to the Board of
Directors. The initial option grant vests ratably on an annual basis over
three years. Each nonemployee director automatically receives additional
annual grants of options to purchase 5,000 shares after each annual meeting of
shareholders (provided the nonemployee director continues to serve in that
capacity) which are fully vested and exercisable on the date of grant. Each
option expires ten years from the date of its grant. Outstanding options will
expire earlier if an optionee terminates service as a director before the end
of the ten year term. The exercise price of options granted under the 1993
Plan may not be less than the fair market value of a share of Common Stock on
the date of grant of the option. Dr. Newbower, who was previously precluded
from participating in the 1993 Plan by the policies of his employer,
Massachusetts General Hospital, was granted options to purchase 10,000 shares
of the Company's Common Stock in 1998 upon a change in his employer's
policies.
Compensation Committee Report
Under rules established by the Securities and Exchange Commission (the
"SEC"), the Company is required to provide certain data and information in
regard to the compensation and benefits provided to the Company's Chief
Executive Officer and the four other most highly compensated executive
officers. In fulfillment of this requirement, the Compensation Committee has
prepared the following report for inclusion in this Proxy Statement.
Compensation Philosophy. The Compensation Committee of the Board of
Directors, which is responsible for reviewing and evaluating the compensation
of the Company's executive officers, approves and recommends to the Board of
Directors compensation and award levels for executive officers of the Company.
With regard to compensation actions affecting the Chief Executive Officer, all
of the non-employee members of the Board of Directors act as the approving
body.
9
<PAGE>
The executive compensation program of the Company has been designed to:
. Support a pay for performance policy that is tied to corporate and
individual performance;
. Motivate executive officers to achieve strategic business initiatives
and reward them for their achievement;
. Provide compensation opportunities which are comparable to those offered
by similarly-sized medical and technology-based companies;
. Align the interest of executives with the long-term interest of
shareholders through award opportunities that can result in ownership of
Common Stock.
Currently, the executive compensation program is comprised of a base salary,
cash bonus opportunities and long-term incentive opportunities in the form of
stock options, along with benefits offered to all employees of the Company. As
an executive's level of responsibility increases, a greater portion of his or
her potential total compensation opportunity is based on performance
incentives and less on salary and employee benefits, causing greater
variability in the individual's total compensation level from year-to-year.
Base Salaries. The base salaries of the Company's executive officers for
1998 were established effective April 12, 1998. In establishing those
salaries, the Compensation Committee considered information about salaries
paid by companies of comparable size in the electronics and medical
electronics industry, individual performance, position, and internal
comparability considerations. While all of these factors were considered, the
Compensation Committee did not assign specific weights to any of these
factors.
Bonus Plan. The bonus program for officers is designed to recognize
significant individual contributions as well as Company performance. Actual
bonus payments to executive officers in 1998 ranged from 19% to 36% of base
salary.
Stock Plans. The long-term, performance-based compensation of executive
officers takes the form of option awards under the Company's 1992 and 1998
stock incentive plans (the "Stock Option Plans"), which are designed to align
a significant portion of the executive compensation program with long-term
shareholder interests. The Stock Option Plans permit the granting of several
different types of stock-based awards. The Compensation Committee believes
that equity-based compensation ensures that the Company's executive officers
have a continuing stake in the long-term success of the Company. All options
granted by the Company have been granted with an exercise price equal to the
market price of the Company's Common Stock on the date of grant and,
accordingly, will only have value if the Company's stock price increases. In
granting options under the Stock Option Plans, the Compensation Committee
generally takes into account each executive's responsibilities, relative
position in the Company and past grants.
Chief Executive Officer Compensation. Effective February 20, 1998, the Board
of Directors elected David F. Bolender as Chief Executive Officer. In lieu of
cash compensation, Mr. Bolender agreed to receive compensation in the form of
stock grants and stock options. In determining the amounts to award, the
Compensation Committee considered Mr. Bolender's previous experience and the
results of surveys and analysis of the compensation levels of other similar
companies. Based on this analysis, the Board approved the Compensation
Committee's recommendation to grant 20,000 shares of restricted stock, vesting
quarterly over one year; and to issue a non-qualified stock option covering
80,000 shares of Common Stock, vesting monthly over a one year period. The
exercise price of the stock option was based on the closing price of the
Common Stock on the grant date.
COMPENSATION COMMITTEE
Curtis M. Stevens
Steven E. Wynne
10
<PAGE>
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1998, the members of the
Compensation Committee were Messrs. Bolender, Stevens and Wynne. Mr. Bolender
served on the Compensation Committee from January 1, 1998 until February 20,
1998, when he was elected Chairman of the Board and Chief Executive Officer.
Mr. Stevens served on the Compensation Committee from May 19, 1998 to December
31, 1998, and Mr. Wynne served on the Compensation Committee during all of
1998.
Stock Performance Graph
The following graph compares the monthly cumulative total returns for the
Company, the Nasdaq Stock Market Index and an index of peer companies selected
by the Company.
COMPARISON OF MONTHLY CUMULATIVE TOTAL RETURNS AMONG PROTOCOL SYSTEMS, INC.,
THE NASDAQ STOCK MARKET INDEX AND AN INDEX OF PEER COMPANIES
SELECTED BY PROTOCOL SYSTEMS, INC.
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
PROTOCOL
MEASUREMENT PERIOD SYSTEMS, INC. NASDAQ US PEER GROUP
- --------------------- --------------- --------- ----------
<S> <C> <C> <C>
BASE PERIOD DEC 93 $100.00 $100.00 $100.00
DEC 94 83.72 97.75 101.27
DEC 95 97.67 138.26 130.00
DEC 96 120.93 170.01 127.05
DEC 97 93.60 208.58 122.56
DEC 98 66.28 293.21 117.73
</TABLE>
The total cumulative return on investment (change in stock price plus
reinvested dividends) for each of the periods for the Company, the peer group
and the Nasdaq Stock Market Index is based on the stock price or index on
December 31, 1993.
The above graph compares the performance of the Company with that of the
Nasdaq Stock Market Index and a group of peer companies with the investment
weighted on market capitalization. Companies in the peer group are as follows:
SpaceLabs Medical, Inc., Datascope Corp., Criticare Systems, Inc., Marquette
Electronics, Inc., Vital Signs, Inc., Zoll Medical Corp., Novametrix Medical
Systems, Inc., Vitalcom, Inc. and Physio Control International Corp. The total
cumulative return on investment for Marquette Electronics and Physio Control
International was not included in 1998 as both companies were acquired during
the year.
11
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act") requires the Company's directors and officers, and persons who own more
than 10% of a registered class of the Company's equity securities, to file
initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission. Such persons also are required to furnish
the Company with copies of all Section 16(a) reports they file.
Based solely on its review of the copies of such reports received by it with
respect to fiscal 1998, or written representations from certain reporting
persons, the Company believes that all filing requirements applicable to its
directors, officers and persons who own more than 10% of a registered class of
the Company's equity securities have been complied with for fiscal 1998,
except for one Form 4 for James B. Moon and one Form 4 for James P. Welch,
each of which were filed one day late.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
The Company loaned James B. Moon $120,000 pursuant to the terms of a
promissory note dated June 3, 1998, which provided for repayment of such
amount, plus interest at a rate of 5.43%, on or before December 3, 1998.
Repayment of the principal and accrued interest on this loan in the total
amount of $123,213 was forgiven pursuant to the terms of the Separation
Agreement between the Company and Mr. Moon entered into in connection with Mr.
Moon's resignation as an officer and director of the Company. See "Executive
Compensation--James B. Moon Separation Agreement."
12
<PAGE>
STOCK OWNED BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of the Common Stock as of March 26, 1999 with respect to: (i) each person
known by the Company to beneficially own more than 5% of the outstanding
shares of Common Stock, (ii) each of the Company's directors and nominees,
(iii) each of the Company's named executive officers, and (iv) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
Percent of
Shares of Common Stock Common Stock
Name and Business Address Beneficially Owned (1) Outstanding
- ------------------------- ---------------------- ------------
<S> <C> <C>
EQSF Advisers, Inc.(2).................... 1,245,600 15.0%
M.J. Whitman Advisers, Inc.
Martin J. Whitman
767 Third Avenue
New York, NY 10017
Wellington Management Company, LLP(3)..... 887,800 10.7
75 State Street
Boston, MA 02109
Westport Asset Management, Inc.(4)........ 845,050 10.2
253 Riverside Avenue
Westport, CT 06880
The Parnassus Fund(5)..................... 800,000 9.7
One Market
Stuart Tower, Suite 1600
San Francisco, CA 94105
Becker Capital Management, Inc.(6)........ 630,900 7.6
1211 S.W. Fifth Avenue, Suite 2185
Portland, OR 97204
Dimensional Fund Advisors, Inc.(7)........ 546,800 6.6
1299 Ocean Avenue
Santa Monica, CA 90401
David F. Bolender......................... 136,500 1.6
Ronald S. Newbower........................ 0 *
James B. Moon............................. 145,954 1.7
Frank E. Samuel, Jr....................... 15,000 *
Curtis M. Stevens......................... 4,734 *
Steven E. Wynne........................... 20,000 *
Craig M. Swanson (8)...................... 128,651 1.5
James P. Fee, Jr.......................... 119,062 1.4
Carl P. Hollstein, Jr..................... 51,510 *
James P. Welch............................ 47,185 *
Executive Officers and Directors as a
group (13 persons)....................... 703,535 8.4
</TABLE>
- --------
* less than one percent
13
<PAGE>
(1) Beneficial ownership is determined in accordance with rules of the SEC,
and includes voting power and investment power with respect to shares.
Shares issuable upon the exercise of outstanding stock options that are
currently exercisable or become exercisable within 60 days from March 26,
1999 are considered outstanding for the purpose of calculating the
percentage of Common Stock owned by such person, but not for the purpose
of calculating the percentage of Common Stock owned by any other person.
The number of shares that are issuable upon the exercise of options that
are currently exercisable or exercisable within 60 days of March 26, 1999
is as follows: Mr. Moon-133,200; Mr. Swanson-68,833; Mr. Fee-92,071;
Mr. Welch-44,384; Mr. Wynne-16,000; Mr. Bolender-93,000; Mr. Hollstein-
43,000; Mr. Samuel-15,000; Mr. Stevens-3,334 and all directors and
officers as a group--555,072. The table does not include shares subject to
options that will be granted to Messrs. Newbower, Samuel, Stevens and
Wynne under the 1993 Stock Option Plan for Nonemployee Directors
immediately after the Annual Meeting.
(2) This information as to beneficial ownership is based on a Schedule 13G
filed by EQSF Advisers, Inc. ("EQSF"), M.J. Whitman Advisers, Inc.
("MJWA") and Martin J. Whitman ("Whitman") with the Securities and
Exchange Commission on February 16, 1999. The Schedule 13G states that (i)
EQSF is the beneficial owner of 1,245,600 shares of Common Stock as to
which it has sole voting and dispositive power; (ii) MJWA is the
beneficial owner of 20,000 shares of Common Stock as to which it has sole
voting and dispositive power; and (iii) Whitman is the controlling person
of EQSF and MJWA, but disclaims beneficial ownership of the shares of
Common Stock beneficially owned by such entities.
(3) This information as to beneficial ownership is based on a Schedule 13G
filed by Wellington Management Company, LLP ("WMC") with the Securities
and Exchange Commission on February 3, 1999. The Schedule 13G states that
WMC, in its capacity as investment advisor, may be deemed to be the
beneficial owner of 887,800 shares of the Company's Common Stock, which
are owned by numerous investment counseling clients. The Schedule 13G
states that WMC has shared voting power as to 374,800 shares and has
shared dispositive power as to 887,800 shares of Common Stock.
(4) This information as to beneficial ownership is based on a Schedule 13G
filed by Westport Asset Management, Inc. ("Westport") with the Securities
and Exchange Commission on February 16, 1999. The Schedule 13G states that
Westport has sole voting power and dispositive power as to 84,600 shares
of the Company's Common Stock and shared voting and dispositive power as
to 760,450 shares of the Company's Common Stock.
(5) This information as to beneficial ownership is based on a Schedule 13G
filed by The Parnassus Fund ("Parnassus") with the Securities and Exchange
Commission on February 13, 1998. The Schedule 13G states that Parnassus
has sole voting power as to 800,000 shares of the Company's Common Stock.
(6) This information as to beneficial ownership is based on a Schedule 13G
filed by Becker Capital Management, Inc. ("Becker") with the Securities
and Exchange Commission on February 11, 1999. The Schedule 13G states that
Becker has sole voting power and dispositive power as to 630,900 shares of
the Company's Common Stock.
(7) This information as to beneficial ownership is based on a Schedule 13G
filed by Dimensional Fund Advisors, Inc. ("Dimensional") with the
Securities and Exchange Commission on February 11, 1999. The Schedule 13G
states that Dimensional has sole voting and dispositive power as to
546,800 shares of the Company's Common Stock.
(8) Includes 5,000 shares of Common Stock owned by trusts as to which Mr.
Swanson serves as trustee.
14
<PAGE>
APPROVAL OF AMENDMENT TO THE 1998 STOCK INCENTIVE PLAN
The Board of Directors is requesting that the Company's shareholders approve
an amendment to the Company's 1998 Stock Incentive Plan (the "1998 Plan") to
increase the number of shares of Common Stock that are reserved for issuance
under the 1998 Plan. A total of 300,000 shares of Common Stock have been
reserved for issuance under the 1998 Plan. As of March 26, 1999, approximately
70,000 shares remained available for grant under the 1998 Plan. The Board of
Directors believes that additional shares will be needed under the 1998 Plan
to provide appropriate incentives to employees and others. Accordingly, the
Board of Directors has approved an amendment to the 1998 Plan, subject to
shareholder approval, that would increase from 300,000 shares to 500,000
shares the number of shares of Common Stock that are reserved for issuance
under the 1998 Plan.
The purpose of the 1998 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. In the
high technology industry in which the Company competes, stock options are an
integral part of the total compensation package. Protocol's practice has been
to grant stock options broadly throughout the organization to recognize key
performers and to provide a link between employee and Company performance. To
date more than 97% of employees have been issued stock option grants, with
approximately 55% of the options granted to employees who are not officers of
the Company.
The Board considers it critical to be able to continue to offer stock
incentives in order to attract and develop the talented, vital individuals who
can contribute to the Company's growth and success in a very competitive
environment. Doing so provides significant motivational and performance
benefits by providing employees and consultants an ownership perspective,
teamed with the appreciation that comes with growing the value of the Company.
Equity participation is the most effective means for more closely aligning
their interests with the long-range goals of the Company and its shareholders.
Lack of stock incentives would put the Company at a serious disadvantage in
recruiting and retaining key people. For these reasons, shareholders are
encouraged to approve the amendment to the 1998 Plan. The following is a
summary of the basic terms and provisions of the 1998 Plan.
The 1998 Plan, which was approved by the Company's shareholders on May 19,
1998, provides for grants of both "incentive stock options" within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")
and "non-qualified stock options" which are not qualified for treatment under
Section 422 of the Code, and for direct stock grants and sales to employees or
consultants of the Company. Because the officers, directors and employees of
the Company who may participate in the 1998 Plan and the amount of their
options will be determined on a discretionary basis by the Compensation
Committee or the full Board of Directors, it is not possible to state the
names or positions of, or the number of options that may be granted to, the
Company's officers, directors and employees. No employee may receive options
under the 1998 Plan for more than 50,000 shares in any one fiscal year, except
that options for up to an additional 50,000 shares may be granted in
connection with a person's initial employment with the Company.
The administration of the 1998 Plan has been delegated to the Compensation
Committee. In addition to determining who will be granted options, the
Committee has the authority and discretion to determine when options will be
granted and the number of options to be granted and whether the options will
be incentive stock options or non-qualified stock options. Only "employees" of
the Company as that term is defined in the Code will be entitled to receive
Incentive Stock Options. See "Federal Income Tax Consequences" below. The
Compensation Committee may also determine the time or times when each option
becomes exercisable, the duration of the exercise period for options and the
form or forms of the instruments evidencing options granted under the 1998
Plan. The Compensation Committee also may construe the 1998 Plan and the
provisions in the instruments evidencing options granted under the 1998 Plan
to employees and officer participants and is empowered to make all other
determinations deemed necessary or advisable for the administration of the
1998 Plan.
15
<PAGE>
The term of each option granted under the 1998 Plan will generally be ten
years from the date of grant, or such shorter period as may be established at
the time of the grant. An option granted under the 1998 Plan may be exercised
at such times and under such conditions as determined by the Compensation
Committee. If a person who has been granted an option ceases to be an employee
or consultant of the Company, such person may exercise that option only during
the three month period after the date of termination, and only to the extent
that the option was exercisable on the date of termination. If a person who
has been granted an option ceases to be an employee or consultant as a result
of such persons total and permanent disability, such person may exercise that
option at any time within twelve months after the date of termination, but
only to the extent that the option was exercisable on the date of termination.
Except as otherwise provided by the Compensation Committee at the time as
option is granted, no option granted under the 1998 Plan is transferable other
than at death, and each option is exercisable during the life of the optionee
only by the optionee. In the event of the death of a person who has received
an option, the option generally may be exercised by a person who acquired the
option by bequest or inheritance during the twelve month period after the date
of death to the extent that such option was exercisable at the date of death.
The exercise price of incentive stock options granted under the 1998 Plan
may not be less than the fair market value of a share of Common Stock on the
date the option is granted. For non-qualified stock options, the exercise
price may be less than, equal to, or greater than the fair market value of the
Common Stock on the date of grant, provided that the Compensation Committee
must specifically determine that any option grant at an exercise price less
than fair market value is in the best interests of the Company. The
consideration to be paid upon exercise of an option, including the method of
payment, will be determined by the Compensation Committee and may consist
entirely of cash, check, shares of Common Stock, such other consideration and
method of payment permitted by applicable law or any combination of such
methods of payment as permitted by the Compensation Committee. The
Compensation Committee has the authority to reset the price of any stock
option after the original grant and before exercise. In the event of stock
dividends, splits, and similar capital changes, the 1998 Plan provides for
appropriate adjustments in the number of shares available for option and the
number and option prices of shares subject to outstanding options.
In the event of a proposed sale of all or substantially all of the assets of
the Company, or a merger of the Company with and into another corporation,
outstanding options shall be assumed or equivalent options shall be
substituted by such successor corporation, unless the Committee provides all
option holders with the right to immediately exercise all of their options,
whether vested or unvested. In the event of a proposed dissolution or
liquidation of the Company, outstanding options will terminate immediately
prior to the consummation of such proposed action, unless otherwise provided
by the Board. In such a situation, the Board is authorized to give option
holders the right to immediately exercise all of their options, whether vested
or unvested.
The 1998 Plan will continue in effect until March 23, 2008, unless earlier
terminated by the Board of Directors, but such termination will not affect the
terms of any options outstanding at that time. The Board of Directors may
amend, terminate or suspend the 1998 Plan at any time. Amendments to the 1998
Plan must be approved by shareholders if required by applicable tax,
securities or other law or regulation.
The issuance of shares of Common Stock upon the exercise of options is
subject to registration with the Securities and Exchange Commission of the
shares reserved by the Company under the 1998 Plan.
Federal Income Tax Consequences
The federal income tax discussion set forth below is included for general
information only. Optionees are urged to consult their tax advisors to
determine the particular tax consequences applicable to them, including the
application and effect of foreign, state and local income and other tax laws.
Incentive Stock Options. Certain options authorized to be granted under the
1998 Plan are intended to qualify as incentive stock options for federal
income tax purposes. Under federal income tax law currently in effect, the
optionee will recognize no income upon grant or upon exercise of an incentive
stock option. If an
16
<PAGE>
employee exercises an incentive stock option and does not dispose of any of
the option shares within two years following the date of grant and within one
year following the date of exercise, then any gain realized upon subsequent
disposition of the shares will be treated as income from the sale or exchange
of a capital asset. If an employee disposes of shares acquired upon exercise
of an incentive stock option before the expiration of either the one-year
holding period or the two-year waiting period, any amount realized will be
taxable as ordinary compensation income in the year of such disqualifying
disposition to the extent that the lesser of the fair market value of the
shares on the exercise date or the fair market value of the shares on the date
of disposition exceeds the exercise price. The Company will not be allowed any
deduction for federal income tax purposes at either the time of the grant or
exercise of an incentive stock option. Upon any disqualifying disposition by
an employee, the Company will be entitled to a deduction to the extent the
employee realized ordinary income.
Non-qualified Stock Options. Certain options authorized to be granted under
the 1998 Plan will be treated as non-qualified stock options for federal
income tax purposes. Under federal income tax law presently in effect, no
income is realized by the grantee of a non-qualified stock option pursuant to
the 1998 Plan until the option is exercised. At the time of exercise of a non-
qualified stock option, the optionee will realize ordinary compensation
income, and the Company will be entitled to a deduction, in the amount by
which the market value of the shares subject to the option at the time of
exercise exceeds the exercise price. The Company's deduction is conditioned
upon withholding on the income amount. Upon the sale of shares acquired
through the exercise of a non-qualified stock option, the excess of the amount
realized from the sale over the market value of the shares on the date of
exercise will be taxable.
Consequences to the Company. The Company recognizes no deduction at the time
of grant or exercise of an incentive stock option. The Company will recognize
a deduction at the time of exercise of a non-qualified stock option on the
difference between the option price and the fair market value of the shares on
the date of grant. The Company also will recognize a deduction to the extent
the optionee recognizes income upon a disqualifying disposition of shares
acquired through the exercise of an incentive stock option.
Board Recommendation
For the reasons discussed above, the Board recommends a vote FOR approval of
the amendment to the Company's 1998 Stock Incentive Plan. If a quorum is
present, this proposal will be approved if a majority of the votes cast on the
proposal are voted in favor of approval. Abstentions and broker non-votes are
counted for purposes of determining whether a quorum exists at the Annual
Meeting but will not be counted and will have no effect on the determination
of the outcome of this proposal. Proxies solicited by the Board will be voted
FOR approval of the amendment to the 1998 Stock Incentive Plan unless a vote
against the proposal or abstention is specifically indicated.
The Board of Directors unanimously recommends a vote FOR this proposal.
17
<PAGE>
APPROVAL OF AMENDMENT TO THE 1994 EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors is requesting that the Company's shareholders approve
an amendment to the Company's 1994 Employee Stock Purchase Plan (the "ESPP")
to increase the number of shares of Common Stock that are reserved for
issuance under the ESPP. A total of 400,000 shares of Common Stock have been
reserved under the Company's 1994 Employee Stock Purchase Plan (the "ESPP").
As of March 26, 1999, only 41,584 shares remained available for purchase under
the ESPP. The Board of Directors believes that additional shares will be
needed under the ESPP to provide appropriate incentives. Accordingly, the
Board of Directors has approved an amendment to the ESPP, subject to
shareholder approval, to reserve an additional 200,000 shares of Common Stock
under the ESPP, thereby increasing the total number of shares reserved for
issuance under the ESPP from 400,000 shares to 600,000 shares. The following
is a summary of the basic terms and provisions of the ESPP.
The purpose of the ESPP is to provide a convenient and practical means by
which employees may participate in stock ownership of the Company. The Board
of Directors believes that the opportunity to acquire a proprietary interest
in the success of the Company through the acquisition of shares of Common
Stock pursuant to the ESPP is an important aspect of the Company's ability to
attract and retain highly qualified and motivated employees. The ESPP is
intended to qualify as an "employee stock purchase plan" within the meaning of
Section 423 of the Code. The ESPP is administered by the Compensation
Committee of the Board of Directors. The Compensation Committee has the power
to make and interpret all rules and regulations it deems necessary to
administer the ESPP and has broad authority to amend the ESPP, subject to
certain amendments requiring shareholder approval.
All regular status employees of the Company and its subsidiaries, including
the Company's officers, are eligible to participate in the ESPP if they: (i)
have been employed by the Company continuously for a period of three months,
(ii) are customarily employed in a position with regular hours of 20 or more
hours a week and (iii) are customarily employed more than five months in any
calendar year. Eligible employees may elect to contribute from 1% to 10% of
their cash compensation during each pay period. The ESPP provides for two
annual six-month offering periods, beginning on February 1 and August 1 of
each year (the "Enrollment Dates"). During the offering periods, participants
accumulate funds in an account via payroll deduction. At the end of each six-
month offering period, the purchase price is determined and the accumulated
funds are used to automatically purchase shares of Common Stock. The purchase
price per share is equal to 85% of the lower of (a) the fair market value of
the Common Stock on the Enrollment Date of the offering period or (b) the fair
market value on the date of purchase. Unless a participant files a withdrawal
notice before the beginning of the next offering period, such participant will
automatically be re-enrolled for the next offering period.
Neither payroll deductions credited to a participant's account nor any
rights with regard to the purchase of shares under the ESPP may be assigned,
transferred, pledged or otherwise disposed of in any way by the participant.
Upon termination of a participant's employment for any reason the payroll
deductions credited to the participant's account will be returned to the
participant. Any remaining balances will be returned to the participant, or
his or her beneficiary. As of March 26, 1999, there were 260 employees of the
Company eligible to participate in the ESPP and 101 employees participating.
The ESPP is intended to qualify as an "employee stock purchase plan" within
the meaning of Section 423 of the Code. Under the Code, no taxable income is
recognized by the participant with respect to shares purchased under the ESPP
either at the time of enrollment or at any purchase date within an offering
period.
If the participant disposes of shares purchased pursuant to the ESPP more
than two years from the Enrollment Date and more than one year from the date
on which the shares were purchased, the participant will recognize ordinary
income equal to the lesser of (1) the excess of the fair market value of the
shares at the time of disposition over the purchase price, or (2) 15% of the
fair market value of the shares on the Enrollment Date. Any gain on the
disposition in excess of the amount treated as ordinary income will be capital
gain. The Company is not entitled to take a deduction for the amount of the
discount in circumstances indicated above.
18
<PAGE>
If the participant disposes of shares purchased pursuant to the ESPP within
two years after the Enrollment Date or within one year after the purchase
date, the employee will recognize ordinary income on the excess of the fair
market value of the stock on the purchase date over the purchase price. Any
difference between the sale price of the shares and the fair market value on
the purchase date will be capital gain or loss. The Company is entitled to a
deduction from income equal to the amount the employee is required to report
as ordinary compensation income.
The federal income tax rules relating to employee stock purchase plans
qualifying under Section 423 of the Code are complex. Therefore, the foregoing
outline is intended to summarize only certain major federal income tax rules
concerning qualified employee stock purchase plans.
For the reasons discussed above, the Board recommends a vote FOR approval of
the amendment to the Company's 1994 Employee Stock Purchase Plan. If a quorum
is present, this proposal will be approved if a majority of the votes cast on
the proposal are voted in favor of approval. Abstentions and broker non-votes
are counted for purposes of determining whether a quorum exists at the Annual
Meeting but will not be counted and will have no effect on the determination
of the outcome of this proposal. Proxies solicited by the Board will be voted
FOR approval of the amendment to the 1994 Employee Stock Purchase Plan unless
a vote against the proposal or abstention is specifically indicated.
The Board of Directors unanimously recommends a vote FOR this proposal.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed KPMG Peat Marwick LLP to act as
independent auditors for the Company for the fiscal year ending December 31,
1999, subject to ratification of such appointment by the Company's
shareholders.
Unless otherwise indicated, properly executed proxies will be voted in favor
of ratifying the appointment of KPMG Peat Marwick LLP to audit the books and
accounts of the Company for the fiscal year ending December 31, 1999.
A representative of KPMG Peat Marwick LLP is expected to be present at the
Annual Meeting and will be given an opportunity to make a statement if he or
she desires to do so and will be available to respond to appropriate
questions.
The Board of Directors unanimously recommends a vote FOR this proposal.
DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
Any shareholder proposal intended for inclusion in the proxy statement and
form of proxy relating to the Company's 2000 annual meeting of shareholders
must be received by the Company not later than December 10, 1999, pursuant to
the proxy soliciting regulations of the Securities and Exchange Commission
(the "SEC"). In addition, the Company's Bylaws require that notice of
shareholder proposals and nominations for director be delivered to the
Secretary of the Company not less than 60 days nor more than 90 days prior to
the date of an annual meeting, unless notice or public disclosure of the date
of the meeting occurs less than 60 days prior to the date of such meeting, in
which event, shareholders may deliver such notice not later than the 10th day
following the day on which notice of the date of the meeting was mailed or
public disclosure thereof was made. Nothing in this paragraph shall be deemed
to require the Company to include in its proxy statement and form of proxy for
such meeting any shareholder proposal which does not meet the requirements of
the SEC in effect at the time.
19
<PAGE>
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors does not know
of any other matters to be presented for action by the shareholders at the
1999 Annual Meeting. If, however, any other matters not now known are properly
brought before the meeting, the persons named in the accompanying proxy will
vote such proxy in accordance with the determination of a majority of the
Board of Directors.
COST OF SOLICITATION
The cost of soliciting proxies will be borne by the Company. In addition to
use of the mails, proxies may be solicited personally or by telephone by
directors, officers and employees of the Company, who will not be specially
compensated for such activities. Such solicitations may be made personally, or
by mail, facsimile, telephone, telegraph or messenger. Protocol will also
request persons, firms and companies holding shares in their names or in the
name of their nominees, which are beneficially owned by others, to send proxy
materials to and obtain proxies from such beneficial owners. The Company will
reimburse such persons for their reasonable expenses incurred in that
connection.
ADDITIONAL INFORMATION
A copy of the Company's Annual Report to Shareholders for the fiscal year
ended December 31, 1998 accompanies this Proxy Statement. The Company is
required to file an Annual Report on Form 10-K for its fiscal year ended
December 31, 1998 with the Securities and Exchange Commission. The Company's
Annual Report on Form 10-K, and other reports filed by the Company with the
SEC may be obtained through the SEC's Web site (http://www.sec.gov).
Shareholders may also obtain, free of charge, a copy of the Form 10-K (without
exhibits) by writing to Craig M. Swanson, Protocol Systems, Inc., 8500 S.W.
Creekside Place, Beaverton, Oregon 97008.
By Order of the Board of Directors
/s/ DAVID F. BOLENDER
David F. Bolender
Chair and Chief Executive Officer
Beaverton, Oregon
April 9, 1999
20
<PAGE>
PROTOCOL SYSTEMS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of Protocol Systems, Inc., an Oregon
corporation (the "Company"), hereby appoints David F. Bolender and Steven E.
Wynne, or either of them, with full power of substitution in each, as proxies to
cast all votes which the undersigned shareholder is entitled to cast at the
Annual Meeting of Shareholders (the "Annual Meeting") to be held at 10:30 a.m.
on Wednesday, May 19, 1999 at the Company's executive offices located at 8500
S.W. Creekside Place, Beaverton, Oregon, and any adjournments or postponements
thereof upon the following matters.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. UNLESS DIRECTION IS GIVEN, THIS PROXY
WILL BE VOTED "FOR" THE ELECTION OF THE NOMINEES LISTED IN PROPOSAL 1, "FOR"
PROPOSALS 2, 3 AND 4 AND IN ACCORDANCE WITH THE RECOMMENDATIONS OF A MAJORITY OF
THE BOARD OF DIRECTORS AS TO OTHER MATTERS. The undersigned hereby acknowledges
receipt of the Company's Proxy Statement and hereby revokes any proxy or proxies
previously given.
(Continued and to be signed on other side)
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.FOLD AND DETACH HERE.
<PAGE>
Please mark your votes as indicated [X]
FOR the WITHHOLD
nominees listed AUTHORITY
below (except to vote for
as indicated all nominees
below) listed below
[ ] [ ]
1. Election of two directors for a three-year term.
Nominees: David F. Bolender and Steven E. Wynne
Instruction: To withhold authority to vote for any nominee write that nominee's
name(s) in this space:
_________________________________________
2. Approval of amendment to the FOR AGAINST ABSTAIN
Company's 1998 Stock [ ] [ ] [ ]
Incentive Plan.
3. Approval of amendment to the [ ] [ ] [ ]
Company's 1994 Employee Stock
Purchase Plan.
4. Ratification of appointment [ ] [ ] [ ]
of auditors.
5. In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the meeting or any adjournments or
postponements thereof.
PLEASE SIGN, DATE AND RETURN THIS PROXY CARD TODAY, USING THE ENCLOSED ENVELOPE.
Please sign below exactly as your name appears on this Proxy Card. If
shares are registered in more than one name, all such persons should sign.
A corporation should sign in its full corporate name by a duly authorized
officer, stating his/her title. Trustees, guardians, executors and
administrators should sign in their official capacity, giving their full
title as such. If a partnership, please sign in the partnership name by
authorized person(s).
If you receive more than one Proxy Card, please sign and return all such
cards in the accompanying envelope.
_____________________________________________
Typed or Printed name(s)
_____________________________________________
Authorized Signature
_____________________________________________
Title or authority, if applicable
_____________________________________________
Date
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.FOLD AND DETACH HERE.
