<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:
-------------------------------------------------------------------------
Notes:
<PAGE>
[LETTERHEAD OF PROTOCOL]
8500 S.W. Creekside Place
Beaverton, OR 97008
(503) 526-8500
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 16, 2000
----------------
To the Shareholders of
Protocol Systems, Inc.:
NOTICE IS HEREBY GIVEN that the annual meeting of shareholders (the "Annual
Meeting") of Protocol Systems, Inc. (the "Company") will be held on Tuesday,
May 16, 2000, 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 three directors, two for a three-year
term and one for a one-year term;
2. Approval of Amendment to 1998 Stock Incentive Plan. To approve an
amendment to the Protocol Systems, Inc. 1998 Stock Incentive Plan to
increase the number of shares reserved for issuance thereunder from
500,000 to 900,000;
3. Ratification of Appointment of Auditors. To ratify the appointment by
the Board of Directors of KPMG LLP as independent auditors of the
Company for the fiscal year ending December 31, 2000; and
4. 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 17, 2000 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/ Robert F. Adrion
Robert F. Adrion
President and Chief Executive
Officer
Beaverton, Oregon
April 10, 2000
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 16, 2000
----------------
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 16, 2000, and at any
adjournments or postponements thereof, (the "Annual Meeting"). At the Annual
Meeting, shareholders will be asked to elect three members of the Board of
Directors, approve an amendment to the Company's 1998 Stock Incentive Plan,
ratify the appointment by the Board of Directors of KPMG LLP as independent
auditors of the Company for the fiscal year ending December 31, 2000, 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 14,
2000.
Solicitation, Voting and Revocability of Proxies
The Board of Directors has fixed the close of business on March 17, 2000 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 3,100 beneficial holders of the 8,179,442
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 three nominees for election to
the Board of Directors, FOR approval of the amendment to the Company's 1998
Stock Incentive Plan and FOR the ratification of the appointment of KPMG LLP
as the Company's independent auditors for the fiscal year ending December 31,
2000. 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, three directors will be elected. Robert F. Adrion and
Ronald S. Newbower have each been nominated for election for a three-year
term, and Frank E. Samuel, Jr. has been nominated for election for a one-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 these nominees. The Board of
Directors believes that the nominees will stand for election and will serve if
elected as directors. However, if any of the persons nominated by the Board of
Directors fails to stand for election or is unable to accept election, the
proxies will be voted for the election of such other person as the Board of
Directors may recommend.
Under the Company's articles of incorporation, the directors are divided
into three classes, currently composed of two directors each. The term of
office of only one class of directors expires in each year, and their
successors are elected for terms of three years and until their successors are
elected and qualified. There is no cumulative voting for election of
directors.
Information as to Nominees and Continuing Directors. The following table
sets forth the names of the Board of Directors' nominees for election as a
director and those directors who will continue to serve after the Annual
Meeting. Also set forth is certain other information with respect to each such
person's age at April 10, 2000, 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>
Expiration
Expiration of Term
Director Current of for Which
Age Since Term Nominated Positions Held With Protocol
--- -------- ---------- ---------- ------------------------------
<S> <C> <C> <C> <C> <C>
Nominees:
Robert F. Adrion, 58 1999 2000 2003 President, Chief Executive
Ph.D.................. Officer and Director
Ronald S. Newbower, 56 1994 2000 2003 Director
Ph.D..................
Frank E. Samuel, Jr.... 60 1994 2000 2001 Director
Continuing Directors:
Curtis M. Stevens...... 47 1998 2001 -- Director
David F. Bolender...... 67 1996 2002 -- Chairman of the Board of
Directors
Steven E. Wynne........ 48 1996 2002 -- Director
</TABLE>
Robert F. Adrion, Ph.D. Dr. Adrion joined the Company in August 1999 as
President and at that time was named Chief Executive Officer and appointed to
the Board of Directors. With 30 years experience in the medical device
business, he had most recently served Becton Dickinson and Company as
Worldwide President, Infusion Therapy and Injection Systems from 1998 through
June 1999. Prior to that, Dr. Adrion was Worldwide President of Becton's
Infusion Therapy division from 1995 to 1998 and President of the Vascular
Access division from 1994 to 1995, and also had assignments in corporate
planning and corporate research and development. Dr. Adrion received bachelors
and master's degrees in Electrical Engineering and earned his doctorate in
Physics from North Carolina State University.
Ronald S. Newbower, Ph.D. Dr. Newbower was elected to the Board of Directors
in 1994. Since 1997, Dr. Newbower has been Vice President for Research
Management of Partners Healthcare System, and, since 1994, has also served as
Senior Vice President, Research and Technology for Massachusetts General
Hospital ("MGH"). 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
2
<PAGE>
Health Sciences and Technology, Associate Professor of Anaesthesia, Harvard
Medical School, and Lecturer in Electrical Engineering, Massachusetts
Institute of Technology.
Frank E. Samuel, Jr. Mr. Samuel was elected to the Board of Directors in
1994. Mr. Samuel has been President of Edison BioTechnology Center, an
economic development organization for the biomedical technology field in the
State of Ohio since February 1995. Prior to that date, Mr. Samuel was an
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, a national trade association representing medical technology
manufacturers, from 1984 to 1989. Mr. Samuel also serves on the Board of
Directors of STERIS Corporation.
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.
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 served as President
and Chief Executive Officer of the Company until August 1, 1999. From January
1989 to December 1991 Mr. Bolender served as President of the Electric
Operations Group of PacifiCorp. Mr. Bolender is Chairman of the Board of
Directors of Electro Scientific Industries, Inc. and has served in that
capacity since 1992. Mr. Bolender also serves on the Board of Directors of
Golden Northwest Aluminum, Inc.
Steven E. Wynne. Mr. Wynne was elected to the Board of Directors in 1996.
Mr. Wynne has served as President and Chief Executive Officer of adidas
America, Inc. since 1995. From 1984 to 1996, Mr. Wynne was a partner in the
law firm of Ater Wynne LLP, Protocol's legal counsel. Mr. Wynne also serves on
the Boards of Directors of Planar Systems, Inc. and FLIR Systems, Inc.
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 16, 2000. 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, 1999, conducted five 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
3
<PAGE>
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, 1999, the Compensation Committee held one meeting. The
members of the Compensation Committee currently are Messrs. Stevens and Wynne.
During 1999 the Company's Board of Directors held seven 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.
4
<PAGE>
MANAGEMENT
Executive Officers
The following table sets forth certain information with respect to the
executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------ --- ------------------------------------------------------
<S> <C> <C>
Robert F. Adrion........ 58 Director, President and Chief Executive Officer
Don M. Abbey............ 33 Vice President-Quality Systems
James P. Fee, Jr........ 54 Vice President and General Manager-Portable Monitoring
Carl P. Hollstein, Jr... 60 Vice President-Manufacturing and Service
Edward M. Kolasinski.... 41 Vice President-Finance, Chief Financial Officer
and Treasurer
Allen L. Oyler.......... 54 Vice President and General Manager-Medical
Device Technologies and Secretary
Richard L. Roa.......... 54 Vice President-Engineering
Chris E. Tew............ 47 Vice President-Sales
James P. Welch.......... 49 Vice President and General Manager-Flexible Monitoring
</TABLE>
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 and
was later named Vice President and General Manager-Portable Monitoring. Prior
to joining the Company, 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. In 1999 Mr. Hollstein was elected Senior Vice
President-Manufacturing and was later named Vice President- Manufacturing and
Service. 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.
Edward M. Kolasinski. Mr. Kolasinski joined the Company in 1996 at the time
of the Company's acquisition of Pryon Corporation. Mr. Kolasinski was named
President of Pryon in 1996, after spending the previous six years as its Vice
President, Finance and Chief Financial Officer. In 1999 he was named
Protocol's Vice President and General Manager-OEM Products and later became
Vice President-Finance, Chief Financial Officer and Treasurer. Previously, Mr.
Kolasinski spent seven years with Price Waterhouse, and was an officer and
corporate controller at Rexnord, Inc.
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 was named Secretary and became Vice President-
Information Services, Human Resources and Administration and was later named
Vice President and General Manager-Medical Device Technologies. Prior to
joining the Company, Mr. Oyler was Director, Human Resources at SpaceLabs from
1984 to 1993.
5
<PAGE>
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.
Chris E. Tew. Mr. Tew joined the Company as Director of North American Sales
in 1989 and in 1999 was named Vice President-Sales. Before joining the
Company, he spent 7 years at CooperVision Cilco holding the director of sales
and regional sales management positions. In 1985 Mr. Tew co-founded Health-
Ware Management Company, Inc. and served on the board of directors until the
company was sold in 1996.
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 and was later named Vice
President and General Manager- Flexible Monitoring. 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.
6
<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 1999 and each of the four other most highly compensated
executive officers of the Company (the "named executive officers") for the
fiscal years ending December 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
Long-term
Compensation
------------
Securities
Underlying
Annual Compensation Stock
------------------------ Options All Other
Name and Principal Position Year Salary Bonus Granted Compensation
- --------------------------- ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert F. Adrion (1)......... 1999 $115,390 $70,000 200,000 $78,371(2)
President and Chief
Executive Officer
David F. Bolender (3)........ 1999 78,750(4) -- 40,000 17,500(5)
Chairman of the Board 1998 144,375(6) -- 80,000 --
James P. Fee, Jr............. 1999 164,615 97,505 30,000 1,786(7)
Vice President and General 1998 153,846 54,763 -- 1,786(7)
Manager-Portable Monitoring 1997 139,231 38,893 -- 1,842(7)
Carl P. Hollstein, Jr........ 1999 166,692 60,992 30,000 1,786(7)
Vice President-Manufacturing 1998 150,969 30,546 -- 1,786(7)
and Service 1997 129,423 -- 1,696(7)
Allen L. Oyler............... 1999 164,615 70,569 30,000 2,000(7)
Vice President and General 1998 150,769 29,969 -- 1,931(7)
Manager-Medical Device 1997 129,115 -- -- 1,879(7)
Technologies and Secretary
James P. Welch............... 1999 168,077 82,260 30,000 1,389(7)
Vice President and General 1998 153,846 32,432 -- 1,389(7)
Manager-Flexible Monitoring 1997 139,039 -- -- 1,319(7)
</TABLE>
- --------
(1) Mr. Adrion was elected Chief Executive Officer effective as of August 1,
1999.
(2) The amount represents payments made to Mr. Adrion in connection with his
relocation costs.
(3) Mr. Bolender served as Chief Executive Officer from February 20, 1998 to
August 1, 1999.
(4) This amount is the dollar value of 10,000 shares of Common Stock granted
to Mr. Bolender in lieu of cash compensation based on the market value of
the Common Stock on the date of grant.
(5) Includes $15,000 paid to Mr. Bolender for consulting services provided
from August 1, 1999 through December 31, 1999 and $2,500 paid to Mr.
Bolender for his services on the Board of Directors from August 1, 1999
through December 31, 1999.
(6) This amount is the dollar value of 20,000 shares of Common Stock granted
to Mr. Bolender in lieu of cash compensation based on the market value of
the Common Stock on the date of grant.
(7) Matching amounts contributed on behalf of the named executive officer to
the Company sponsored 401(k) employee savings plan covering all of the
Company's employees.
7
<PAGE>
Stock Options
The following table sets forth information concerning options granted to the
named executives during the year ended December 31, 1999.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Percent of Annual Rates of Stock
Number of Total Price
Securities Options Appreciation for
Underlying Granted to Exercise Option Term(3)
Options Employees Price Per Expiration ---------------------
Name Granted(1) in 1999 Share(2) Date 5% 10%
- ---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert F. Adrion........ 200,000 34% $8.50 8/6/2009 $1,069,121 $2,709,362
David F. Bolender....... 40,000 7% 7.88 8/20/2009 198,102 502,029
James P. Fee............ 30,000 5% 7.25 2/5/2009 136,785 346,639
Carl P. Hollstein, Jr... 30,000 5% 7.25 2/5/2009 136,785 346,639
Allen L. Oyler.......... 30,000 5% 7.25 2/5/2009 136,785 346,639
James P. Welch.......... 30,000 5% 7.25 2/5/2009 136,785 346,639
</TABLE>
- --------
(1) Options granted in 1999 generally become exercisable one year from the
grant date, with 25% of the options becoming exercisable at that time and
with an additional 25% of the options becoming exercisable each year
thereafter. Options granted to Mr. Bolender in 1999 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) Exercise price per share is equal to the closing price of the Common Stock
on the date of grant.
(3) 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 unexercised options held as of December 31,
1999. None of the named executive officers exercised any options during the
year ended December 31, 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Name Options at FY-End Options at FY-End(1)
- ---- ------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert F. Adrion........... -- 200,000 -- $100,000
David F. Bolender.......... 16,333 26,667 $ 18,000 30,000
James P. Fee, Jr........... 76,667 30,000 282,054 52,500
Carl P. Hollstein, Jr...... 30,000 30,000 52,500 52,500
Allen L. Oyler............. 15,000 30,000 33,750 52,500
James P. Welch............. 24,134 30,000 112,713 52,500
</TABLE>
- --------
(1) The value of unexercised in-the-money options is based on the difference
between $9.00, which was the closing price of the Common Stock on December
31, 1999, and the applicable exercise price.
Executive Employment Agreements
The Company has employment agreements (the "Employment Agreements") with
certain of its executive officers, including Robert F. Adrion, James P. Fee,
Carl P. Hollstein, Allen L. Oyler and James P. Welch. The
8
<PAGE>
Employment Agreements generally are for a term ending July 1, 2001, 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. Mr. Adrion's
Employment Agreement is for a term ending December 31, 2001, provided that
thereafter the term of the Agreement will be automatically extended for
successive one-year terms unless six months notice of nonrenewal is given by
either party. Each Employment Agreement may be terminated by either party upon
seventy-five days written notice (thirty days in the case of Mr. Adrion). 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 (or in the case of Mr. Adrion, an amount equal to his base salary for
the remaining term of the Agreement) 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. 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. 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 or upon a
termination by the Company other than for Cause, 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 officer would be entitled to the continuation of
health and insurance benefits for certain periods. 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. The
Employment Agreements also provide that all outstanding unvested stock options
shall immediately become fully vested upon a termination of employment
following 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. 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.
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 in person, $500 for each
Board meeting attended by telephone 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
9
<PAGE>
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
20,000 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.
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.
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
1999 were generally established effective May 22, 1999. 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 1999 ranged from 28% to 61% 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
10
<PAGE>
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 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 August 1, 1999 Robert F.
Adrion was hired as the Company's President and Chief Executive Officer. Mr.
Adrion's base annual salary was fixed at $300,000 with an annual cash
incentive opportunity of up to 60% of base salary based on achievement of
target goals established each year by the Compensation Committee. Mr. Adrion
was also awarded options to purchase 200,000 shares of Common Stock at an
exercise price equal to fair market value of the Common Stock on the date of
grant which vest annually over four years. Mr. Adrion's compensation package
was determined by the Compensation Committee based on Mr. Adrion's previous
experience, the results of surveys and analysis of the compensation levels of
other similar companies and negotiations with Mr. Adrion. Mr. Adrion received
a cash incentive payment of $70,000 for 1999 based on the achievement of the
target goals established by the Compensation Committee.
Mr. Bolender served as Chief Executive Officer through July 1999. In lieu of
cash compensation, Mr. Bolender received a grant of 10,000 shares of Common
Stock and was awarded an option to purchase 40,000 shares of Common Stock at
an exercise price equal to the fair market value of the Common Stock on the
date of grant vesting monthly over a twelve-month period.
COMPENSATION COMMITTEE
Curtis M. Stevens
Steven E. Wynne
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1999, the members of the
Compensation Committee were Messrs. Stevens and Wynne.
11
<PAGE>
Stock Performance Graph
The following graph compares the monthly cumulative total returns for the
Company, the Nasdaq Stock Market Index and an index of peer companies selected
by the Company.
[PERFORMANCE GRAPH]
Company Market Peer
Date Index Index Index
12/30/94 100 100 100
12/29/95 117 141 132
12/31/96 144 174 124
12/31/97 112 213 120
12/31/98 79 300 166
12/31/99 100 556 246
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 30, 1994.
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
Medical Systems, 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 Medical Systems and
Physio Control International were not included since 1998 as both companies
were acquired during that year.
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 1999, 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 1999 except
for Mr. Hollstein who filed one Form 5 twenty-one days late.
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 17, 2000 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>
Shares of Percent of
Common Stock Common Stock
Name and Business Address Beneficially Owned (1) Outstanding
- ------------------------- --------------------- ------------
<S> <C> <C>
EQSF Advisers, Inc. (2)................... 1,120,600 13.7%
M.J. Whitman Advisers, Inc.
Martin J. Whitman
767 Third Avenue
New York, NY 10017
Westport Asset Management, Inc. (3)....... 862,450 10.5
253 Riverside Avenue
Westport, CT 06880
Dimensional Fund Advisors, Inc. (4)....... 581,800 7.1
1299 Ocean Avenue
Santa Monica, CA 90401
Wellington Management Company, LLP (5).... 536,200 6.6
75 State Street
Boston, MA 02109
Robert F. Adrion.......................... -- --
David F. Bolender......................... 173,166 2.1
Ronald S. Newbower........................ 15,000 *
Frank E. Samuel, Jr....................... 20,000 *
Curtis M. Stevens......................... 13,067 *
Steven E. Wynne........................... 25,000 *
James P. Fee, Jr.......................... 132,379 1.6
Carl P. Hollstein, Jr..................... 65,927 *
Allen L. Oyler............................ 48,452 *
James P. Welch............................ 64,927 *
Executive Officers and Directors as a
group (14 persons)....................... 628,774 7.2
</TABLE>
- --------
* less than one percent
(1) Beneficial ownership is determined in accordance with rules of the SEC,
and includes voting power and investment power with respect to shares.
Shares issuable upon the exercise of outstanding stock options that are
currently exercisable or become exercisable within 60 days from March 17,
2000 are considered outstanding for the purpose of calculating the
percentage of Common Stock owned by such person, but not
13
<PAGE>
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 17, 2000 is as follows: Mr. Bolender--119,666; Mr. Newbower--15,000;
Mr. Samuel--20,000; Mr. Stevens--11,667; Mr. Wynne--21,000; Mr. Fee--83,250;
Mr. Hollstein--55,750; Mr. Oyler--44,250; Mr. Welch--60,134 and all
directors and officers as a group- 496,884. The table does not include
shares subject to options that will be granted to Messrs. Bolender,
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 14, 2000. The Schedule 13G states that (i)
EQSF is the beneficial owner of 1,120,600 shares of Common Stock as to
which it has sole voting and dispositive power; (ii) MJWA is the
beneficial owner of 6,700 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 Westport Asset Management, Inc. ("Westport") with the Securities
and Exchange Commission on February 16, 2000. The Schedule 13G states that
Westport has shared voting power as to 613,450 shares of Common Stock and
dispositive power as to 862,450 shares of Common Stock.
(4) 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 3, 2000. The Schedule 13G
states that Dimensional, in its capacity as investment adviser or manager,
has sole voting and dispositive power as to 581,800 shares of Common
Stock. Dimensional disclaims beneficial ownership of such shares.
(5) This information as to beneficial ownership is based on a Schedule 13G
filed by Wellington Management Company, LLP ("WMC") with the Securities
and Exchange Commission on February 11, 2000. The Schedule 13G states that
WMC, in its capacity as investment advisor, may be deemed to be the
beneficial owner of 536,200 shares of Common Stock, which are owned by
numerous investment counseling clients. The Schedule 13G states that WMC
has shared voting power as to 263,200 shares and has shared dispositive
power as to 536,200 shares of Common Stock.
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 500,000 shares of Common Stock have been
reserved for issuance under the 1998 Plan. As of March 17, 2000, approximately
61,944 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 that would
increase from 500,000 shares to 900,000 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 77% of employees have been issued stock option grants, with
approximately 39% 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
14
<PAGE>
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.
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 person's total and permanent disability, such person may exercise that
option at any time within twelve months after the date of termination, but
only to the extent that the option was exercisable on the date of termination.
Except as otherwise provided by the Compensation Committee at the time 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
15
<PAGE>
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 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.
16
<PAGE>
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.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed KPMG LLP to act as independent auditors
for the Company for the fiscal year ending December 31, 2000, 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 LLP to audit the books and accounts of
the Company for the fiscal year ending December 31, 2000.
A representative of KPMG 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 2001 annual meeting of shareholders
must be received by the Company not later than December 11, 2000, pursuant to
the proxy soliciting regulations of the Securities and Exchange Commission. In
addition, the Company's Bylaws require that notice of shareholder proposals
and nominations for director be delivered to the Secretary of the Company not
less than 60 days nor more than 90 days prior to the date of an annual
meeting, unless notice or public disclosure of the date of the meeting occurs
less than 60 days prior to the date of such meeting, in which event,
shareholders may deliver such notice not later than the 10th day following the
day on which notice of the date of the meeting was mailed or public disclosure
thereof was made. Nothing in this paragraph shall be deemed to require the
Company to include in its proxy statement and form of proxy for such meeting
any shareholder proposal which does not meet the requirements of the SEC in
effect at the time.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors does not know
of any other matters to be presented for action by the shareholders at the
2000 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.
17
<PAGE>
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, 1999 accompanies this Proxy Statement. The Company is
required to file an Annual Report on Form 10-K for its fiscal year ended
December 31, 1999 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 Corporate Secretary, Protocol Systems, Inc., 8500 S.W.
Creekside Place, Beaverton, Oregon 97008.
By Order of the Board of Directors
/s/ Robert F. Adrion
Robert F. Adrion
President and Chief Executive
Officer
Beaverton, Oregon
April 10, 2000
18
<PAGE>
- --------------------------------------------------------------------------------
PROTOCOL SYSTEMS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
This undersigned shareholder of Protocol Systems, Inc. an Oregon
corporation (the "Company"), hereby appoints Robert F. Adrion and David F.
Bolender, or either of them, with full power of substitution in each, as
proxies to cast all votes which the undersigned shareholder is entitled to cast
at the Annual Meeting of Shareholders (the "Annual Meeting") to be held at 10:30
a.m. on Tuesday, May 16, 2000, 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 AND 3 AND IN ACCORDANCE WITH THE RECOMMENDATIONS OF A MAJORITY OF
THE BOARD OF DIRECTORS AS TO OTHER MATTERS. The undersigned hereby acknowledges
receipt of the Company's Proxy Statement and hereby revokes any proxy or proxies
previously given.
(Continued and to be signed on other side)
- --------------------------------------------------------------------------------
. FOLD AND DETACH HERE .
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Please mark
your votes [ X ]
as indicated
FOR the WITHHOLD
nominees Dated AUTHORITY to vote
below (except as for all nominees
indicated below) listed below
1. Election of three directors, 2. Approval of amendment FOR AGAINST AESTAIN
two for a three-year term [_______] [_______] to the Company's 1998 stock [__] [___] [___]
and one a one-year term. incentive Plan.
<S> <C>
Nominees: Robert F. Adrion and Ronald S. Newbower, each for a 3. Ratification of appointment [__] [___] [___]
three-year term and Frank E. Samuel, Jr. for a one-year term. of auditors.
Instruction: To withhold authority to vote for any nominees 4. In their discretion, the proxies are authorized to
write that nominee's name(s) in this space: vote upon such other matters as may properly come
before the meeting or any adjournments or
___________________________________________________________________ postponements thereof.
PLEASE SIGN, DATE AND RETURN THIS PROXY CARD TODAY, USING
THE ENCLOSED ENVELOPE.
Please sign below exactly as your name appears
on this Proxy Card. If shares are registered in
more than one name, all such persons should
_______________________ sign. A corporation should sign in its full
corporate name by a duly authorized officer,
stating his/her title. Trustees, guardians,
executors and administrators should sign in
their official capacity, giving their full
title as such. If a partnership, please sign in
the partnership name by authorized person(s).
If you receive more than one Proxy Card, please
sign and return all such cards in the
accompanying envelope.
_______________________________________________
Typed or Printed name(s)
_______________________________________________
Authorized Signature
_______________________________________________
Title or authority, if applicable
_______________________________________________
Date
- ------------------------------------------------------------------------------------------------------------------------------------
. FOLD AND DETACH HERE .
</TABLE>
