-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RMp/9ad+lXop5z6VefkeqgtBGa9KwcPsCuuIPWiWKQveIY49yC6UXbNDlfIHcG2S VDyi7g6NhR9Wjr+Sz5CA3w== 0000883322-99-000014.txt : 19990817 0000883322-99-000014.hdr.sgml : 19990817 ACCESSION NUMBER: 0000883322-99-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTOCOL SYSTEMS INC/NEW CENTRAL INDEX KEY: 0000883322 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 930913130 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19943 FILM NUMBER: 99691826 BUSINESS ADDRESS: STREET 1: 8500 S W CREEKSIDE PLACE CITY: BEAVERTON STATE: OR ZIP: 97008 BUSINESS PHONE: 6126862500 MAIL ADDRESS: STREET 1: 8500 SW CREEKSIDE PLACE CITY: BEAVERTON STATE: OR ZIP: 97008 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter ended June 30, 1999 Commission File Number 0-19943 PROTOCOL SYSTEMS, INC. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Oregon 93-0913130 - ------------------------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8500 SW Creekside Place, Beaverton, OR 97008 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (503) 526-8500 - ------------------------------------------------------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Number of shares of common stock outstanding as of August 11, 1999: 8,228,956 shares, $.01 par value per share ------------------------------------------ 2 PROTOCOL SYSTEMS, INC. Index to Form 10-Q PART I FINANCIAL INFORMATION Page No. - ----------------------------- -------- Item 1. Financial Statements Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 1999 and 1998 3 Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 PART II OTHER INFORMATION - -------------------------- Item 2. Changes in Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 - ---------- 3 ITEM 1. FINANCIAL STATEMENTS PROTOCOL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (in thousands except per share amounts) (unaudited) Three months ended June 30, Six months ended June 30, 1999 1998 1999 1998 ------ ------ ------ ------ Sales $16,753 $16,960 $31,052 $31,880 Cost of sales 8,704 7,993 16,048 16,000 ------- ------- ------- ------- Gross profit 8,049 8,967 15,004 15,880 Operating expenses: Research and development 1,573 2,052 3,078 3,911 Selling, general and administrative 4,941 6,193 9,686 11,208 ------- ------- ------- ------- Total operating expenses 6,514 8,245 12,764 15,119 ------- ------- ------- ------- Income from operations 1,535 722 2,240 761 Other income 229 213 491 493 ------- ------- ------- ------- Income before income taxes 1,764 935 2,731 1,254 Provision for income taxes 441 262 683 351 ------- ------- ------- ------- Net income $ 1,323 $ 673 $ 2,048 $ 903 ======= ======= ======= ======= Comprehensive income $ 1,204 $ 654 $ 1,703 $ 891 ======= ======= ======= ======= Basic earnings per share $ 0.16 $ 0.08 $ 0.25 $ 0.10 ======= ======= ======= ======= Diluted earnings per share $ 0.16 $ 0.08 $ 0.24 $ 0.10 ======= ======= ======= ======= Weighted average number of shares used in the computation of: Basic earnings per share 8,314 8,501 8,278 8,647 Diluted earnings per share 8,453 8,845 8,418 8,988 See accompanying notes to condensed consolidated financial statements
4 PROTOCOL SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited) June 30, December 31, 1999 1998 ------ ------ ASSETS Current assets: Cash and cash equivalents $13,352 $ 8,023 Short-term investments 1,001 6,680 Accounts receivable - net 15,950 17,971 Inventories - net 10,882 12,218 Prepaid expenses and other current assets 1,581 2,469 ------- ------- Total current assets 42,766 47,361 Long-term investments 9,245 4,045 Property and equipment - net 4,072 4,041 Other assets 563 404 ------- ------- $56,646 $55,851 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,974 $ 2,584 Accrued liabilities 3,440 5,481 ------- ------- Total current liabilities 6,414 8,065 Deferred taxes 16 40 Commitments and contingencies Shareholders' equity: Common stock, $.01 par value. Authorized 30,000 shares; issued and outstanding 8,342 at 1999 and 8,207 at 1998 83 82 Additional paid-in capital 28,823 28,105 Unearned compensation -- (48) Accumulated other comprehensive income (loss) (140) 205 Retained earnings 21,450 19,402 ------- ------- Total shareholders' equity 50,216 47,746 ------- ------- $56,646 $55,851 ======= ======= See accompanying notes to condensed consolidated financial statements
5 PROTOCOL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Six months ended June 30, 1999 1998 ------ ------ Cash flows from operating activities: Net income $ 2,048 $ 903 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,115 1,137 Amortization of bond premium 56 32 Provision for deferred taxes 350 101 Other non-cash items 71 48 Increase (decrease) in cash resulting from changes in: Accounts receivable 1,917 (501) Inventories 1,255 1,390 Prepaid expenses and other assets 57 (118) Accounts payable and accrued liabilities (811) (1,292) ------- ------- Net cash provided by operating activities 6,058 1,700 Cash flows from investing activities: Purchase of investments (12,174) (6,843) Proceeds from maturity of investments 12,488 8,115 Acquisition of property and equipment (1,024) (1,028) Expenditures for other assets (250) (265) ------- ------- Net cash used in investing activities (960) (21) Cash flows from financing activities: Proceeds from exercise of stock options and stock purchase plan 825 740 Repurchase of common stock (128) (6,140) ------- ------- Net cash provided by (used in) financing activities 697 (5,400) ------- ------- Effect of exchange rates on cash and cash equivalents (466) (14) ------- ------- Net increase (decrease) in cash and cash equivalents 5,329 (3,735) Cash and cash equivalents at beginning of period 8,023 12,257 ------- ------- Cash and cash equivalents at end of period $13,352 $ 8,522 ======= ======= Supplemental disclosure of cash flow information: Cash paid for income taxes $ 34 $ 739 See accompanying notes to condensed consolidated financial statements
6 PROTOCOL SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared by the Company without audit and in conformity with generally accepted accounting principles for interim financial information. Accordingly, certain financial information and footnotes have been omitted or condensed. In the opinion of management, the condensed consolidated financial statements include all necessary adjustments (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. These financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 1998. The results of operations for the interim period shown in this report are not necessarily indicative of results for any future interim period or the entire fiscal year. INVENTORIES Inventories are valued at the lower of cost or market with cost determined on the first-in, first-out basis (FIFO). The components of inventories, net of reserve, are as follows: June 30, December 31, (in thousands) 1999 1998 - ------------------------------------------------------------------------- Raw materials $ 4,693 $ 4,939 Work in process 2,296 2,838 Finished goods 2,134 2,207 Demonstration instruments 1,759 2,234 ------- ------ Total inventories $10,882 $12,218 ======= ====== PROPERTY AND EQUIPMENT Property and equipment is stated at cost and includes the following: June 30, December 31, (in thousands) 1999 1998 - ------------------------------------------------------------------------- Equipment $13,264 $12,111 Furniture and fixtures 1,918 1,910 Leasehold improvements 458 551 ------ ------ 15,640 14,572 Less accumulated depreciation and amortization 11,568 10,531 ------ ------ Property and equipment - net $ 4,072 $ 4,041 ====== ====== 7 ACCRUED LIABILITIES The components of accrued liabilities are as follows: June 30, December 31, (in thousands) 1999 1998 - ------------------------------------------------------------------------- Accrued salaries, wages and related liabilities $2,068 $2,588 Accrual for special charges 138 1,642 Income taxes payable 134 - Reserve for warranties 835 915 Deferred revenue and customer deposits 77 98 Other liabilities 188 238 ------ ------ $3,440 $5,481 ====== ====== On December 31, 1998, the Company incurred special charges of $3,188,000 as it discontinued the development of its defibrillator project and restructured its worldwide operations, which included the closure of its subsidiary offices and direct sales organizations in France and Germany and the elimination of 14 positions at the Company's headquarters in Beaverton, Oregon as well as the resignation of the founder and Chief Technical Officer. Cash payments during the first six months of 1999 related to these special charges totaled $1,330,000 and consisted primarily of employee severance benefits and lease termination costs. During the third quarter of 1998, the Company incurred special charges of $2,246,000 to relocate its wholly-owned subsidiary, Pryon Corporation, from Menomonee Falls, Wisconsin to the Company's Beaverton, Oregon facility in order to improve operating efficiencies. The relocation resulted in a reduction of 56 employees from manufacturing, engineering, sales and administrative functions. Cash payments during the first six months of 1999 related to these special charges totaled $174,000 and consisted primarily of lease termination, employee severance benefits and employee relocation costs. As of June 30, 1999, special charges of $138,000 which related primarily to certain contract terminations due to the relocation of Pryon Corporation were not disbursed. The Company anticipates that these remaining balances will be expended by the end of 1999. INCOME TAXES The provision for income taxes has been recorded based on the current estimate of the Company's annual effective tax rate. This rate differs from the Federal statutory rate primarily because of the provision for state income taxes, utilization of the Company's federal net operating loss carryovers, the benefit of the Company's research and experimentation tax credits, the benefit of the Company's foreign sales corporation and tax-exempt interest income earned on investments. 8 BASIC AND DILUTED EARNINGS PER SHARE In accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" basic earnings per share is computed using the weighted average number of common shares outstanding and diluted earnings per share is computed using the weighted average number of common shares outstanding and dilutive potential common shares assumed to be outstanding during the period using the treasury stock method. Dilutive potential common shares consist of options to purchase common stock. COMPREHENSIVE INCOME Three months ended June 30, Six months ended June 30, (in thousands) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------- Net income $ 1,323 $ 673 $ 2,048 $ 903 Other comprehensive income; net of tax Foreign currency translation adjustments (78) (22) (236) (12) Unrealized holding gain (loss) (41) 3 (109) - ------- ------- ------- ------- Other comprehensive loss (119) (19) (345) (12) ------- ------- ------- ------- Comprehensive income $ 1,204 $ 654 $ 1,703 $ 891 ======= ======= ======= =======
SUBSEQUENT EVENT On August 2, 1999 the Company reached a settlement with SICOR, Inc. (formerly Gensia Sicor, Inc.) relating to litigation the Company commenced against Gensia Sicor, Inc. and Gensia Automedics in July 1998 alleging they breached a development and supply agreement to develop and supply a closed-loop drug delivery and monitoring device ("GenESA device"). Under terms of this settlement, SICOR, Inc. and Gensia Automedics have agreed to pay the Company a total of $3.7 million over the next two years. SEGMENT INFORMATION In accordance with SFAS 131 "Disclosures about Segments of an Enterprise and Related Information" the Company functions as a single operating segment: the design, manufacture, sale and servicing of medical instruments and systems. Sales are made primarily to hospitals and other health-care related customers. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Second Quarter 1999 vs. Second Quarter 1998 - ------------------------------------------- Sales. Sales for the second quarter of 1999 decreased 1.2% to $16.8 million from $17.0 million for the second quarter of 1998. Domestic sales, excluding Original Equipment Manufacturer ("OEM") sales of Pryon OEM products, decreased 4.3% to $12.0 million (71.9% of total sales) in the second quarter of 1999 from $12.6 million (74.2% of total sales) in the second quarter of 1998 primarily as a result of a decrease in the number of Acuity central stations and related monitors sold. This decrease was partially offset by a $1.4 million increase in U.S. military revenues. International sales, excluding international sales of Pryon OEM products, decreased 7.9% to $2.6 million (15.4% of total sales) in the second quarter of 1999 from $2.8 million (16.6% of total sales) in the second quarter of 1998. This decrease in international sales was principally due to the continued strength of the U.S. dollar against foreign currencies and soft international markets, particularly in Asia. Sales of Pryon OEM products increased 36.1% to $2.1 million (12.7% of total sales) in the second quarter of 1999 from $1.6 million (9.2% of total sales) in the second quarter of 1998 primarily due to an increase in OEM product shipments. Gross profit. As a percentage of sales, gross profit decreased to 48.0% in the second quarter of 1999 from 52.9% in the second quarter of 1998. The decrease in gross profit was primarily due to an increase in sales of products which carry a relatively low margin, such as OEM products, accessories, services and QuikSign monitors. Additionally, manufacturing variances were unfavorable in the second quarter of 1999, whereas they were favorable in the second quarter of 1998. Research and development. Research and development decreased 23.3% to $1.6 million in the second quarter of 1999 from $2.1 million in the second quarter of 1998. This decrease was primarily the result of the relocation of the Pryon operations from Menomonee Falls, Wisconsin to the Company's Beaverton, Oregon facility in 1998 which resulted in a reduction in the total number of research and development employees. As a percentage of sales, research and development decreased to 9.4% in the second quarter of 1999 from 12.1% in the second quarter of 1998. Selling, general and administrative. Selling, general and administrative decreased 20.2% to $4.9 million in the second quarter of 1999 from $6.2 million in the second quarter of 1998. This decrease resulted primarily from the closure of direct sales organizations in Germany and France initiated in 1998 and the reduction in the number of administrative employees as a result of the relocation of the Pryon operations from Wisconsin to Oregon in 1998. As a percentage of sales, selling, general and administrative decreased to 29.5% in the second quarter of 1999 from 36.5% in the second quarter of 1998. Other income. Other income increased slightly to $229,000 in the second quarter of 1999 from $213,000 in the second quarter of 1998. 10 Provision for income taxes. The provision for income taxes increased to $441,000 in the second quarter of 1999 from $262,000 in the second quarter of 1998 representing effective tax rates of 25.0% and 28.0%, respectively. The effective tax rate, which reflects the estimate of the Company's annual effective tax rate, was lower in the second quarter of 1999 than in the second quarter of 1998 primarily due to the expected utilization of the Company's net operating loss carryover in 1999. Net income. Net income in the second quarter of 1999 was $1.3 million or $0.16 per diluted share compared to net income of $673,000 or $0.08 per diluted share in the second quarter of 1998. The increase in net income was primarily due to reduced operating expenses as a result of the relocation of the Pryon manufacturing facility and the world-wide restructuring in 1998. Six Months Ended June 30, 1999 vs. Six Months Ended June 30, 1998 - ----------------------------------------------------------------- Sales. Sales for the first six months of 1999 decreased 2.6% to $31.1 million from $31.9 million for the first six months of 1998. Domestic sales, excluding Original Equipment Manufacturer ("OEM") sales of Pryon OEM products and GenESA devices, decreased to $20.5 million (66.0% of total sales) in the first six months of 1999 from $20.6 million (64.7% of total sales) in the first six months of 1998 primarily as a result of a decrease in the number of Acuity central stations and related monitors sold. This decrease was partially offset by a $1.7 million increase in U.S. military revenues. International sales, excluding international sales of Pryon OEM products and GenESA devices, decreased 11.6% to $6.7 million (21.5% of total sales) in the first six months of 1999 from $7.5 million (23.7% of total sales) in the first six months of 1998. This decrease in international sales was primarily due to the continued strength of the U.S. dollar against foreign currencies and soft international markets, particularly in Europe and Asia, and the reorganization of the Company's direct sales organization in Europe. OEM sales of Pryon OEM products and GenESA devices increased 5.4% to $3.9 million (12.5% of total sales) in the first six months of 1999 from $3.7 million (11.6% of total sales) in the first six months of 1998 primarily due to a $695,000 increase in Pryon OEM product shipments. This increase was partially offset by a $496,000 decrease in sales of GenESA devices to Gensia Automedics, Inc. In April 1998, the Company was informed that Gensia planned no additional purchases of the GenESA device under a supply agreement with the Company which provided for the purchase of devices through the year 2002. In July 1998, the Company commenced litigation against Gensia Sicor, Inc. and Gensia Automedics alleging that they have breached the supply agreement. In August 1999, the Company reached a settlement of its litigation against SICOR, Inc. (formerly Gensia Sicor, Inc.) and Gensia Automedics for $3.7 million to be paid over the next two years. Gross profit. As a percentage of sales, gross profit decreased to 48.3% in the first six months of 1999 from 49.8% in the first six months of 1998. The decrease in gross profits was primarily due to an increase in sales of products which carry a relatively low gross margin, such as OEM products, QuikSign monitors, accessories, and service. 11 Research and development. Research and development decreased 21.3% to $3.1 million in the first six months of 1999 from $3.9 million in the first six months of 1998. This decrease was primarily the result of the relocation of the Pryon operations from Menomonee Falls, Wisconsin to the Company's Beaverton, Oregon facility in 1998 which resulted in a reduction in the total number of research and development. As a percentage of sales, research and development decreased to 9.9% in the first six months quarter of 1999 from 12.3% in the first six months of 1998. Selling, general and administrative. Selling, general and administrative decreased 13.6% to $9.7 million in the first six months of 1999 from $11.2 million in the first six months of 1998. This decrease resulted primarily from the closure of direct sales organizations in Germany and France initiated in 1998 and the reduction in the number of administrative employees as a result of the relocation of the Pryon operations from Wisconsin to Oregon in 1998. As a percentage of sales, selling, general and administrative decreased to 31.2% in the first six months of 1999 from 35.2% in the first six months of 1998. Other income. Other income decreased slightly to $491,000 in the first six months of 1999 from $493,000 in the first six months of 1998. Provision for income taxes. The provision for income taxes increased to $683,000 in the first six months of 1999 from $351,000 in the first six months of 1998 representing effective tax rates of 25.0% and 28.0%, respectively. The effective tax rate, which reflects the estimate of the Company's annual effective tax rate, was lower in the first six months of 1999 than in the first six months of 1998 primarily due to the expected utilization of the Company's net operating loss carryover in 1999. Net income. Net income in the first six months of 1999 was $2.1 million or $0.24 per diluted share compared to net income of $903,000 or $0.10 per diluted share in the first six months of 1998. The increase in net income was primarily due to reduced operating expenses as a result of the relocation of the Pryon manufacturing facility and the world-wide restructuring in 1998. LIQUIDITY AND CAPITAL RESOURCES The Company maintained its strong financial position as of June 30, 1999 with working capital balances of $36.4 million and a current ratio of 6.7:1 as compared to working capital of $39.3 million and a current ratio of 5.9:1 at December 31, 1998. Cash flows from operating activities for the first six months of 1999 was $6.1 million as compared to $1.7 million for the first six months of 1998. The increase in cash flow from operations was primarily due to an increase in collections of accounts receivable as well as an increase in net income. Cash of $1.0 million was used for the acquisition of property and equipment in the first six months of 1999. Proceeds from stock option and stock purchase plans and related benefits were $825,000 in the first six months of 1999. 12 In May 1999 the Company's Board of Directors adopted a resolution authorizing the repurchase of up to 500,000 outstanding shares of the Company's common stock. As of August 11, 1999, the Company has repurchased 283,600 shares during 1999. Management believes that current cash and investment balances and future cash flows from operations will be sufficient to meet the Company's liquidity and capital needs for the foreseeable future. YEAR 2000 ISSUES The Company has substantially completed its assessment of its computer software programs and operating systems used in its internal operations, including applications used in its financial systems, manufacturing equipment, and engineering design tools to determine its readiness for the Year 2000. The inability of computer software programs and operating systems to accurately recognize, interpret and process date codes designating the Year 2000 and beyond could result in a system failure or miscalculations which could have a material impact on the Company's ability to conduct its business. Costs incurred by the Company to date in its assessment of internal systems were not material. The Company has completed its assessment of Year 2000 compliance of each of its product lines. All configurations of instruments (instruments include Propaq and Propaq Encore monitors and all options) and their component parts have been tested and are Year 2000 compliant. Acuity software versions 3.15.05 and all Networked Acuity software versions have been tested and are Year 2000 compliant. Acuity software versions prior to 3.15.05 have a minor connectivity issue related to the Year 2000 between the Acuity central station and the monitors that can be fixed through an upgrade to the Acuity central station provided by the Company. The operation of the Acuity central station and the Propaq monitors in the Year 2000 and beyond should not be adversely affected by this connectivity issue. The Company has also contacted critical suppliers of products and services to determine that the suppliers' operations and the products and services they provide are Year 2000 compliant. The Company has received responses from approximately 95% of the suppliers contacted, all of which have indicated that their products and operations either are, or expect to be, Year 2000 compliant. The Company will continue to follow up with suppliers who have not yet responded to determine if there are any critical suppliers who may not be Year 2000 compliant. Based on its assessments to date, the Company believes it will not experience any material disruption as a result of Year 2000 issues in its computer software programs and other systems used in its operations. However, there can be no assurances that unanticipated Year 2000 issues will not have a material adverse effect on the Company's business, financial condition or results of operations. Furthermore, there can be no assurance that Year 2000 issues of certain critical third party suppliers, including those supplying electricity, water or telephone service will not experience difficulties resulting in the disruption of service or delivery of supplies to the Company, which could adversely affect the Company's business, financial condition or results of operations. The Company will develop contingency plans for dealing with the most reasonably likely worst case scenario that would occur in the event that the Company and critical third parties fail to complete efforts to achieve Year 2000 compliance on a timely basis by the end of the third quarter of 1999. 13 FORWARD-LOOKING STATEMENTS This Quarterly Report contains statements, including the anticipated effects of the Year 2000 issue, that are forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates and projections about the Company's business, management's beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to factors that could cause unforeseen increases or decreases in the expenses expected to be incurred in connection with the operations of the Pryon subsidiary in Oregon, the closure of direct sales organizations in France and Germany, the timely introduction of new products, the Company's ability to identify and remediate Year 2000 issues or the reliability of third party assessments and certifications relating to Year 2000 issues. In addition, such statements could be affected by other factors discussed in this Quarterly Report and from time to time in the Company's other Securities and Exchange Commission filings and reports and by general industry and market conditions and growth rates, and general domestic and international economic conditions. The Company's quarterly operating results have fluctuated in the past and may continue to fluctuate in the future depending on factors such as increased competition, timing of new product announcements, pricing changes by the Company or its competitors, length of sales cycles, market acceptance or delays in the introduction of new products or enhanced versions of existing products, timing of significant orders, regulatory approval requirements, product mix and economic factors and conditions generally and in the market for the Company's products specifically. In particular, the Company's quarterly operating results have fluctuated as a result of the unpredictable size and timing of military patient monitoring equipment procurements, and seasonal or other changes in customer buying patterns. A substantial portion of the Company's revenue in each quarter results from orders booked in that quarter. Accordingly, revenue from quarter to quarter is difficult to forecast. The Company's expense levels are based, in part, on its expectations as to future revenue. If revenue levels are below expectations, operating results are likely to be adversely affected. In particular, net income may be disproportionately affected by a reduction in revenue because only a small portion of expenses vary with revenue. Results of operations in any period should not be considered indicative of the result to be expected for any future period, and fluctuations in operating results may also result in fluctuations in the price of the Company's common stock. No assurance can be given that the Company will be able to grow in future periods or that its operations will remain profitable. 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to the impact of foreign currency fluctuations due to a small portion of its international sales. The Company minimizes its risk to foreign currency fluctuations as international sales through independent distributors are made in U.S. dollars which has helped reduce any foreign currency risk. As of June 30, 1999, the Company had an investment portfolio of fixed income securities, including those classified as cash and cash equivalents, short- term investments and long-term investments of $23.6 million. These securities are subject to interest rate fluctuations. An increase in interest rates could adversely affect the market value of the Company's fixed income securities. The Company does not use derivative financial instruments in its investment portfolio to manage interest rate risk. The Company does, however, limit its exposure to interest rate and credit risk by establishing and strictly monitoring clear policies and guidelines for its investment portfolio. The weighted average maturity of the investment portfolio may not exceed 360 days and no single investment may have a maturity date of greater than two years. The guidelines also establish credit quality standards and limit the exposure to one issue, issuer, or type of instrument. Due to these factors the exposure to market and credit risk is not expected to be material. 15 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES During the quarter ended June 30, 1999, the Company sold securities without registration under the Securities Act of 1933, as amended (the "Securities Act") upon the exercise of certain stock options granted under the Company's stock option plans. An aggregate of 53,598 shares of Common Stock were issued at an exercise prices ranging from $1.32 to $6.00. These transactions were effected in reliance upon the exemption from registration under the Securities Act provided by Rule 701 promulgated by the Securities and Exchange Commission pursuant to authority granted under Section 3 (b) of the Securities Act. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The annual meeting of shareholders of the Company was held on May 19, 1999 at which the following actions were taken by a vote of the shareholders: (1) The following persons were elected to the Board of Directors for three-year terms expiring in 2002 by the votes indicated below: David F. Bolender: 6,806,924 votes for; 69,012 votes withheld Steven E. Wynne: 6,815,405 votes for; 60,531 votes withheld (2) An amendment to the Company's 1998 Stock Incentive Plan to reserve an additional 200,000 shares of Common Stock under the Plan was approved by a vote of 5,583,276 to 1,276,025 (with 16,635 abstentions) (3) An amendment to the Company's 1994 Employee Stock Purchase Plan to reserve an additional 200,000 shares of Common Stock under the Plan was approved by a vote of 6,788,274 to 87,889 (with 9,773 abstentions). (4) The appointment of KPMG Peat Marwick LLP to serve as the Company's independent auditors for the year ending December 31, 1999 was ratified by a vote of 6,855,793 to 14,375 (with 5,768 abstentions). ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 10.1 Protocol Systems, Inc. 1994 Employee Stock Purchase Plan as amended on May 19,1999 10.2 Protocol Systems, Inc. 1998 Stock Incentive Plan as amended on May 19,1999 10.3 Protocol Systems, Inc. 1993 Stock Option Plan for Nonemployee Directors as amended on February 10, 1999 27.1 Financial Data Schedule (b) No reports were filed on Form 8-K during the quarter for which this report is filed. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROTOCOL SYSTEMS, INC. (Registrant) Date: August 16, 1999 By /s/Robert F. Adrion --------------------- Robert F. Adrion President and Chief Executive Officer By /s/Craig M. Swanson --------------------- Craig M. Swanson Vice-President and Chief Financial Officer 8 EX-10.1 2 PROTOCOL SYSTEMS, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN The following provisions constitute the Protocol Systems, Inc. 1994 Employee Stock Purchase Plan. 1. PURPOSE. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. DEFINITIONS. 2.1 "ACCOUNT" shall mean each separate account maintained for a Participant under the Plan, collectively or singly as the context requires. Each Account shall be credited with a Participant's contributions, and shall be charged for the purchase of Common Stock. A Participant shall be fully vested in the cash contributions to his or her account at all times. The Plan Administrator may create special types of accounts for administrative reasons, even though the Accounts are not expressly authorized by the Plan. 2.2 "BOARD" shall mean the Board of Directors of the Company. 2.3 "CODE" shall mean the Internal Revenue Code of 1986, as amended. 2.4 "COMMITTEE" shall mean the Compensation Committee of the Board. 2.5 "COMMON STOCK" shall mean the Common Stock of the Company. 2.6 "COMPANY" shall mean Protocol Systems, Inc., an Oregon corporation. 2.7 "COMPENSATION" shall mean all base straight time gross earnings plus payments for overtime, shift premiums and sales commissions, but excluding incentive compensation, incentive payments, bonuses, awards, and other compensation. 2.8 "DESIGNATED SUBSIDIARY" shall mean each Subsidiary which has been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. 2.9 "EMPLOYEE" shall mean an individual who renders services to the Company or to a Designated Subsidiary pursuant to a regular-status employment relationship with such employer. A person rendering services to the Company or to a Designated Subsidiary purportedly as an independent consultant or contractor shall not be an Employee for purposes of the Plan. 2.10 "ENROLLMENT DATE" shall mean the first day of each Offering Period. 2.11 "FAIR MARKET VALUE" 2.11.1 The Fair Market Value of the Common Stock on any date shall be equal to the closing price of such Common Stock on the Valuation Date, as reported on the NASDAQ. 2.11.2 If 2.11.1 is not applicable, the Fair Market Value of the Common Stock shall be determined by the Board in good faith. Such determination shall be conclusive and binding on all persons. 2.12 NASDAQ" shall mean the National Association of Securities Dealers Automated Quotation System Stock Market's National Market or such other quotation system that supersedes it. 2.13 "OFFERING PERIOD" shall mean the period of approximately six (6) months, commencing on the first Trading Day on or after a date designated in advance by the Board and terminating on the last Trading Day in the period ending six months later, during which an option granted pursuant to the Plan may be exercised. The duration of Offering Periods may be changed pursuant to Section 4 of this Plan. 2.14 "PARTICIPANT" shall mean any Employee who is participating in this Plan by meeting the eligibility requirements of Section 3 and has completed a Payroll Participation Form. 2.15 "PAYROLL PARTICIPATION FORM" shall mean the form provided by the Company on which a Participant shall elect to participate in the Plan and designate the percentage of his or her Compensation to be contributed to his or her Account through payroll deductions. 2.16 "PLAN" shall mean this Employee Stock Purchase Plan. 2.17 "PURCHASE DATE" shall mean the last day of each Offering Period. 2.18 "PURCHASE PRICE" shall mean an amount equal to 85% of the Fair Market Value of a share of Common Stock (i) on the Enrollment Date or (ii) on the Purchase Date, whichever is lower. 2.19 "RESERVES" shall mean the number of shares of Common Stock covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. 2.20 "SUBSIDIARY" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company of a Subsidiary. 2.21 "TRADING DAY" shall mean a day on which national stock exchanges and the National Association of Securities Dealers Automated Quotation (NASDAQ) System are open for trading. 2.22 "VALUATION DATE" shall mean the date upon which the Fair Market Value of Common Stock is to be determined for purposes of setting the price of Shares of Common Stock under Section 2.18 (that is, the Enrollment Date or the applicable Purchase Date). If the Enrollment Date is not a date on which the Fair Market Value may be determined in accordance with Section 2.11, the Valuation Date shall be the first day after the Enrollment Date for which such Fair Market Value may be determined. If the Purchase Date is not a date on which the Fair Market Value may be determined in accordance with Section 2 the Valuation Date shall be the first date prior to the Purchase Date on which such fair market value may be determined. 3. ELIGIBILITY. 3.1 A person shall become eligible to participate in the Plan on the first Enrollment Date on or after which he or she first meets all of the following requirements; provided, however, that no one shall become eligible to participate in the Plan prior to the Enrollment Date of the first Offering Period provided for in Section 2.13: 3.1.1 The person has been an employee of the Company for a continuous period of three months; 3.1.2 The person's customary period of employment is for more than twenty (20) hours per week; 3.1.3 The person's customary period of employment is for more than five (5) months in any calendar year. 3.2 Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own stock and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Subsidiary, or (ii) which permits his or her rights to purchase stock under all employee stock purchase plans (under Section 423 of the Code) of the Company and Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 3.3 For purposes of the Plan, eligibility shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, eligibility to participate in the Plan will be deemed to have terminated on the 91st day of such leave. 4. OFFERING PERIODS. The Plan shall be implemented by consecutive Offering Periods with the first Offering Period commencing on a date designated in advance by the Board, and continuing for six month periods thereafter until terminated in accordance with Section 19 hereof. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without shareholder approval if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. 5. PARTICIPATION. 5.1 An eligible Employee may become a Participant in the Plan by completing a Payroll Participation Form and filing it with the Company's Administration Department (as set forth in Section 20 below) at least fifteen (15) days prior to the applicable Enrollment Date, unless a later time for filing the Payroll Participation Form is set by the Board for all eligible Employees with respect to a given Offering Period. 5.2 Payroll deductions for a Participant shall commence on the first payroll period following the Enrollment Date and shall end on the last payroll period in the Offering Period, unless sooner terminated by the Participant as provided in Section 10 hereof. 6. PAYROLL DEDUCTIONS. 6.1 At the time a Participant files his or her Payroll Participation Form, he or she shall elect to have payroll deductions made on each payday during the Offering Period in an amount not exceeding ten percent (10%) of the Compensation which he or she receives on each payday during the Offering Period, and the aggregate of such payroll deductions during the Offering Period shall not exceed ten percent (10%) of the Participant's Compensation during said Offering Period. 6.2 A Participant shall specify that he or she desires to make contributions to the Plan in whole percentages not less than one percent (1%) and not more than ten percent (10%) of the Participant's Compensation during each pay period in the Offering Period, or such other minimum or maximum percentage as the Board shall establish from time to time. 6.3 All payroll deductions made for a Participant shall be credited to his or her Account under the Plan and will be withheld in whole percentages only. A Participant may not make any additional payments into such Account. 6.4 A Participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by filing with the Company's Administration Department (as set forth in Section 20 below) a new Payroll Participation Form authorizing a change in payroll deduction rate. A Participant is limited to making one change during an Offering Period. The change in rate shall be effective with the first full payroll period following fifteen (15) days after the Company's receipt of a new Payroll Participation Form unless the Company elects to process a given change in participation more quickly. A Participant's Payroll Participation Form shall remain in effect for successive Offering Periods unless terminated as provided in Section 10. 6.5 Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3.2 hereof, a Participant's payroll deductions shall be decreased to 0% at such time during any Offering Period which is scheduled to end during the current calendar year (the "Current Offering Period") that the aggregate of all payroll deductions which were previously used to purchase stock under the Plan in a prior Offering Period which ended during that calendar year plus all payroll deductions accumulated with respect to the Current Offering Period equal $21,250 (85% of $25,000). Payroll deductions shall recommence at the rate provided in such Participant's Payroll Participation Form at the beginning of the first Offering Period which is scheduled to end in the following calendar year, unless terminated by the Participant as provided in Section 10. 6.6 At the time the option is exercised, or at the time some or all of the Common Stock issued under the Plan is disposed of, the Participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but will not be obligated to, withhold from the Participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefit attributable to sale or early disposition of Common Stock by the Employee. 7. OPTION TO PURCHASE COMMON STOCK. On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on the Purchase Date of such Offering Period (at the applicable Purchase Price) up to a number of shares of the Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Purchase Date and retained in the Participant's account as of the Purchase Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to purchase during each Offering Period more than a number of shares determined by dividing $12,500 by the fair market value of a share of the Common Stock on the Enrollment Date, and provided further that such purchase shall be subject to the limitations set forth in Section 3.2 and 12 hereof. Purchase of the Common Stock shall occur as provided in Section 8, unless the Participant has withdrawn pursuant to Section 10, and the option shall expire on the last day of the Offering Period. 8. PURCHASE OF COMMON STOCK. Unless a Participant withdraws from the Plan as provided in Section 10.1 below, his or her option for the purchase of Common Stock will be exercised automatically on the Purchase Date, and the maximum number of full shares subject to option shall be purchased for such Participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares of Common Stock will be purchased; any payroll deductions accumulated in a Participant's account which are not sufficient to purchase a full share shall be retained in the Participant's account for the subsequent Offering Period, subject to earlier withdrawal by the Participant as provided in Section 10 hereof. During a Participant's life-time, a Participant's option to purchase shares of Common Stock hereunder is exercisable only by him or her. 9. DELIVERY. As promptly as practicable after each Purchase Date, the Company shall arrange the delivery to each Participant the shares of Common Stock purchased with his or her payroll deductions. 10. WITHDRAWAL; TERMINATION OF EMPLOYMENT. 10.1 A Participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to purchase shares of Common Stock under the Plan by giving written notice to the Company's Administration Department (as set forth in Section 20 below) no less than 15 days immediately preceding a Purchase Date. All of the Participant's payroll deductions credited to his or her Account will be paid to such Participant as soon as practicable after receipt of notice of withdrawal and such Participant's option for the Offering Period will be automatically terminated, and no further payroll deductions for the purchase of shares will be made during the Offering Period. If a Participant withdraws from an Offering Period, payroll deductions will not resume at the beginning of the succeeding Offering Period unless the Participant delivers to the Company a new Payroll Participation Form. 10.2 Upon termination of a Participant's employment for any reason, including death, disability or retirement, the payroll deductions credited to such Participant's Account shall be returned to the Participant. A Participant shall have no right to acquire shares upon termination of his or her employment. 11. INTEREST. No interest shall accrue on the payroll deductions of a Participant in the Plan. 12. STOCK. 12.1 The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 600,000 shares, subject to adjustment upon changes in capitalization of the Company as provided in Section 18. If on a given Purchase Date the number of shares of Common Stock eligible to be purchased exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. 12.2 The Participant will have no interest or voting right in shares covered by his or her option until such shares of Common Stock have been purchased. 12.3 Common Stock to be delivered to a Participant under the Plan will be registered in the name of the Participant or in the name of the Participant and his or her spouse. 13. ADMINISTRATION. 13.1 ADMINISTRATIVE BODY. The Plan shall be administered by the Committee. Subject to the terms of the Plan, the Committee shall have the power to construe the provisions of the Plan, to determine all questions arising thereunder, and to adopt and amend such rules and regulations for administering the Plan as the Committee deems desirable. 13.2 RULE 16B-3 LIMITATIONS. Notwithstanding the provisions of Subsection 13.1, in the event that Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, or any successor provision ("Rule 16b-3") provides specific requirements for the administrators of plans of this type, the Plan shall be only administered by such a body and in such a manner as shall comply with the applicable requirements of Rule 16b-3. 14. DESIGNATION OF BENEFICIARY. 14.1 A Participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the Participant's account under the Plan in the event of such Participant's death subsequent to a Purchase Date on which the option is exercised but prior to delivery to such Participant of such shares and cash. In addition, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participant's account under the Plan in the event of such Participant's death prior to a Purchase Date. 14.2 Such designation of beneficiary may be changed by the Participant at any time by written notice as provided in Section 20 below. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. TRANSFERABILITY. Neither payroll deductions credited to a Participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 14 hereof) by the Participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10. 16. USE OF FUNDS. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 17. REPORTS. Individual accounts will be maintained for each Participant in the Plan. Statements of account will be given to participating Employees at least annually, which statements will set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 18. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR ASSET SALE. 18.1 CHANGES IN CAPITALIZATION. Subject to any required action by the stockholders of the Company, the Reserves, as well as the price per share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. The Board may, if it so determines in the exercise of its sole discretion, make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock. 18.2 DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. 18.3 CONSOLIDATION OR MERGER. In the event of the consolidation or merger of the Company with or into any other business entity, or the sale by the Company of substantially all of its assets, the successor may continue the Plan by adopting the same by resolution of its board of directors or agreement of its partners or proprietors. If, within 90 days after the effective date of a consolidation, merger or sale of assets, the successor corporation, partnership or proprietorship does not adopt the Plan, the Plan shall be terminated in accordance with Section 19. 19. AMENDMENT OR TERMINATION. 19.1 The Board may at any time and for any reason terminate or amend the Plan. Except as provided in Section 18, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board on any Purchase Date if the Board determines that the termination of the Plan is in the best interests of the Company and its stockholders. Except as provided in Section 18, no amendment may make any change in any option theretofore granted which adversely affects the rights of any Participant. To the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law or regulation), the Company shall obtain stockholder approval in such a manner and to such a degree as required. 19.2 Without stockholder consent and without regard to whether any Participant rights may be considered to have been "adversely affected," the Committee shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a Participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each Participant properly correspond with amounts withheld from the Participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 19.3 If required to qualify the Plan under Rule 16b-3, no amendment shall be made more than once every six months that would change the amount, price or timing of the options, other than to comport with changes in the Code, or the rules and regulations promulgated thereunder; and provided, further, that if required to qualify the Plan under Rule 16b-3, no amendment shall be made without the approval of the Company's stockholders that would: 19.3.1 materially increase the number of shares of Common Stock that may be issued under the Plan; 19.3.2 materially modify the requirements as to eligibility for participation in the Plan; or 19.3.3 otherwise materially increase the benefits accruing to participants under the Plan. 20. NOTICES. All notices or other communications by a Participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company by the Company's Administration Department at the Company's corporate headquarters. 21. CONDITIONS. Upon Issuance of Shares of Common Stock. Common Stock shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the purchase of Common Stock, the Company may require the person purchasing such Common Stock to represent and warrant at the time of any such purchase that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 22. TERM OF PLAN. 22.1 The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the stockholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated pursuant to Section 19. 22.2 Notwithstanding the above, the Plan is expressly made subject (i) to the approval of the holders of a majority of the outstanding shares of the Company within 12 months after the date the Plan is adopted and (ii) at its election, to the receipt by the Company from the Internal Revenue Service of a ruling in scope and content satisfactory to counsel to the Company, affirming the qualification of the Plan within the meaning of Section 423 of the Code. If the Plan is not so approved by the stockholders within 12 months after the date the Plan is adopted, and if, at the election of the Company a ruling from the Internal Revenue Service is sought but is not received on or before one year after the Plan's adoption by the Board, this Plan shall not come into effect. In that case, the Account of each Participant shall forthwith be paid to him or her. 23. ADDITIONAL RESTRICTIONS OF RULE 16B-3. The terms and conditions of options granted hereunder to, and the purchase of shares by, persons subject to Section 16 of the Exchange Act shall comply with the applicable provisions of Rule 16b-3. This Plan shall be deemed to contain, and such options shall contain, and the shares issued upon exercise thereof shall be subject to, such additional conditions and restrictions as may be required by Rule 16b-3 to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. ADOPTED by the Board of Directors on January 4, 1994. AMENDED by the Board of Directors on March 23, 1998. RATIFIED by the Shareholders on May 19, 1994 RATIFIED by the Shareholders on May 19, 1998. AMENDED by the Board of Directors on February 10, 1999 RATIFIED by the Shareholders on May 19, 1999. PROTOCOL SYSTEMS, INC. By: Craig M. Swanson, Secretary EX-10.2 3 PROTOCOL SYSTEMS, INC. 1998 STOCK INCENTIVE PLAN 1. PURPOSES OF THE PLAN. The purpose of this Stock Incentive Plan is to attract, retain and reward individuals who can and do contribute to the Company's success by providing Employees and Consultants an opportunity to share in the equity of the Company and to more closely align their interests with the Company and its shareholders. Options granted hereunder may be either "incentive stock options," as defined in Section 422 of the Internal Revenue Code of 1986, as amended, or "nonqualified stock options," at the discretion of the Board and as reflected in the terms of the written option agreement. In addition, shares of the Company's Common Stock may be Sold hereunder independent of any Option grant. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "ADMINISTRATOR" shall mean the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4.(a) of the Plan. (b) "BOARD" shall mean the Board of Directors of the Company. (c) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" shall mean a committee appointed by the Board in accordance with Section 4.(a) of the Plan. (e) "COMMON STOCK" shall mean the Common Stock of the Company. (f) "COMPANY" shall mean Protocol Systems, Inc., an Oregon corporation. (g) "CONSULTANT" shall mean any person who is engaged by the Company or any Parent or Subsidiary to render consulting services and is compensated for such consulting services and any Director of the Company whether compensated for such services or not. (h) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" shall mean the absence of any interruption or termination of service as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of: (i) any sick leave, military leave, or any other leave of absence approved by the Company; provided, however, that for purposes of Incentive Stock Options, any such leave is for a period of not more than ninety days or reemployment upon the expiration of such leave is guaranteed by contract or statute, provided, further, that on the ninety-first day of such leave (where re-employment is not guaranteed by contract or statute) the Optionee's Incentive Stock Option shall automatically convert to a Nonqualified Stock Option; or (ii) transfers between locations of the Company or between the Company, its Parent, its Subsidiaries or its successor. (i) "DIRECTOR" shall mean a member of the Board. (j) "DISABILITY" shall mean total and permanent disability as defined in Section 22(e)(3) of the Code. (k) "EMPLOYEE" shall mean any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary. Neither the payment of a director's fee by the Company nor service as a Director shall be sufficient to constitute "employment" by the Company. (l) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. (m) "FAIR MARKET VALUE" shall mean, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or the Nasdaq SmallCap Market of the Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock as quoted on such exchange or system for the date of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the date of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (n) "INCENTIVE STOCK OPTION" shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (o) "NONQUALIFIED STOCK OPTION" shall mean an Option not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (p) "NOTICE OF GRANT" shall mean a written notice evidencing certain terms and conditions of an individual Option grant. The Notice of Grant is part of the Option Agreement. (q) "OFFICER" shall mean a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (r) "OPTION" shall mean a stock option granted pursuant to the Plan. (s) "OPTION AGREEMENT" shall mean a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (t) "OPTIONED STOCK" shall mean the Common Stock subject to an Option. (u) "OPTIONEE" shall mean an Employee or Consultant who receives an Option. (v) "PARENT" shall mean a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (w) "PLAN" shall mean this 1998 Stock Incentive Plan. (x) "RULE 16B-3" shall mean Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (y) "SALE" or "SOLD" shall include, with respect to the sale of Shares under the Plan, the sale of Shares for any form of consideration specified in Section 8(b), as well as a grant of Shares for consideration in the form of past or future services. (z) "SHARE" shall mean a share of the Common Stock, as adjusted in accordance with Section 11 of the Plan. (aa) "SUBSIDIARY" shall mean a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. STOCK SUBJECT TO THE PLAN. (a) Subject to the provisions of paragraph (b) of this Section 3 and the provisions of Section 11 of the Plan, the maximum aggregate number of Shares which may be optioned and/or Sold under the Plan is 500,000 shares of Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. (b) If an Option should expire or become unexercisable for any reason, or is otherwise terminated or forfeited, without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future Option grants and/or Sales under the Plan. If any Shares issued pursuant to a Sale shall be cancelled or forfeited for any reason, such Shares shall become available for future Option grants and/or Sales under the Plan, unless the Plan shall have been terminated. If the exercise price of any Option granted under the Plan is satisfied by tendering Shares of Common Stock to the Company (by either actual delivery or by attestation), only the number of shares of Common Stock issued net of the Shares of Common Stock tendered shall be deemed delivered for purposes of determining the maximum number of Shares available for delivery under the Plan. (c) Notwithstanding any other provision of this Section 3, the maximum number of Shares that may be issued upon the exercise of Incentive Stock Options shall be 300,000. 4. ADMINISTRATION OF THE PLAN. (a) PROCEDURE. (i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule 16b-3, the Plan may be administered by different bodies with respect to Directors, Officers who are not Directors, and Employees who are neither Directors nor Officers. (ii) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS SUBJECT TO SECTION 16(B). With respect to Option grants made to Employees who are also Officers or Directors subject to Section 16(b) of the Exchange Act, the Plan shall be administered by (A) the Board, if the Board may administer the Plan in compliance with the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3, or (B) a Committee designated by the Board to administer the Plan, which Committee shall be constituted to comply with the rules, if any, governing a plan intended to qualify as a discretionary plan under Rule 16b-3. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the rules, if any, governing a plan intended to qualify as a discretionary plan under Rule 16b-3. With respect to persons subject to Section 16 of the Exchange Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3. To the extent any provision of the Plan or action by the Administrator fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Administrator. (iii) ADMINISTRATION WITH RESPECT TO OTHER PERSONS. With respect to Option grants made to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted to satisfy the legal requirements relating to the administration of stock option plans under applicable corporate and securities laws and the Code. Once appointed, such Committee shall serve in its designated capacity until otherwise directed by the Board. The Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the legal requirements relating to the administration of stock option plans under state corporate and securities laws and the Code. (b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to grant Incentive Stock Options in accordance with Section 422 of the Code, or Nonqualified Stock Options; (ii) to authorize Sales of Shares of Common Stock hereunder; (iii) to determine, upon review of relevant information, the Fair Market Value of the Common Stock; (iv) to determine the exercise/purchase price per Share of Options to be granted or Shares to be Sold, which exercise/purchase price shall be determined in accordance with Section (a) of the Plan; (v) to determine the Employees or Consultants to whom, and the time or times at which, Options shall be granted and the number of Shares to be represented by each Option; (vi) to determine the Employees or Consultants to whom, and the time or times at which, Shares shall be Sold and the number of Shares to be Sold; (vii) to interpret the Plan; (viii)to prescribe, amend and rescind rules and regulations relating to the Plan; (ix) to determine the terms and provisions of each Option granted (which need not be identical) and, with the consent of the holder thereof, modify or amend each Option; (x) to determine the terms and provisions of each Sale of Shares (which need not be identical) and, with the consent of the purchaser thereof, modify or amend each Sale; (xi) to accelerate or defer (with the consent of the Optionee) the exercise date of any Option; (xii) to accelerate or defer (with the consent of the Optionee or purchaser of Shares) the vesting restrictions applicable to Shares Sold under the Plan or pursuant to Options granted under the Plan; (xiii) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option or Sale of Shares previously granted or authorized by the Administrator; (xiv) to determine the restrictions on transfer, vesting restrictions, repurchase rights, or other restrictions applicable to Shares issued under the Plan; (xv) to effect, at any time and from time to time, with the consent of the affected Optionees, the cancellation of any or all outstanding Options under the Plan and to grant in substitution therefor new Options under the Plan covering the same or different numbers of Shares, but having an Option price per Share consistent with the provisions of Section 8 of this Plan as of the date of the new Option grant; (xvi) to establish, on a case-by-case basis, different terms and conditions pertaining to exercise or vesting rights upon termination of employment, whether at the time of an Option grant or Sale of Shares, or thereafter; (xvii) to approve forms of agreement for use under the Plan; (xviii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; (xix) to determine whether and under what circumstances an Option may be settled in cash under subsection 9(f) instead of Common Stock; and (xx) to make all other determinations deemed necessary or advisable for the administration of the Plan. (c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options granted under the Plan or Shares Sold under the Plan. 5. ELIGIBILITY. (a) PERSONS ELIGIBLE. Options may be granted and/or Shares Sold only to Employees and Consultants. Incentive Stock Options may be granted only to Employees. An Employee or Consultant who has been granted an Option or Sold Shares may, if he or she is otherwise eligible, be granted an additional Option or Options or Sold additional Shares. (b) ISO LIMITATION. To the extent that the aggregate Fair Market Value: (i) of Shares subject to an Optionee's Incentive Stock Options granted by the Company, any Parent or Subsidiary, which (ii) become exercisable for the first time during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonqualified Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the time of grant. (c) SECTION(B) LIMITATIONS. Section (b) of the Plan shall apply only to an Incentive Stock Option evidenced by an Option Agreement which sets forth the intention of the Company and the Optionee that such Option shall qualify as an Incentive Stock Option. Section (b) of the Plan shall not apply to any Option evidenced by a Option Agreement which sets forth the intention of the Company and the Optionee that such Option shall be a Nonqualified Stock Option. (d) NO RIGHT TO CONTINUED EMPLOYMENT. The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate his employment or consulting relationship at any time, with or without cause. (e) OTHER LIMITATIONS. The following limitations shall apply to grants of Options to Employees: (i) No Employee shall be granted, in any fiscal year of the Company, Options to purchase more than 50,000 Shares. (ii) In connection with his or her initial employment, an Employee may be granted Options to purchase up to an additional 50,000 Shares which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 11. (iv) If an Option is canceled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 11), the canceled Option shall be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 6. TERM OF PLAN. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the shareholders of the Company as described in Section 17 of the Plan. It shall continue in effect for a term of ten (10) years, unless sooner terminated under Section 13 of the Plan. 7. TERM OF OPTION. The term of each Option shall be stated in the Notice of Grant; provided, however, that in the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Notice of Grant. However, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Notice of Grant. 8. EXERCISE/PURCHASE PRICE AND CONSIDERATION. (a) EXERCISE/PURCHASE PRICE. The per-Share exercise/purchase price for the Shares to be issued pursuant to exercise of an Option or a Sale shall be such price as is determined by the Administrator, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of the grant. (B) granted to any other Employee, the per Share exercise price shall be no less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonqualified Stock Option or Sale, the per Share exercise/purchase price shall be determined by the Administrator. (iii) Any determination to establish an Option exercise price or effect a Sale of Common Stock at less than Fair Market Value on the date of the Option grant or authorization of Sale shall be accompanied by an express finding by the Administrator specifying that the sale is in the best interest of the Company, and specifying both the Fair Market Value and the Option exercise price or Sale price of the Common Stock. (b) CONSIDERATION. The consideration to be paid for the Shares to be issued upon exercise of an Option or pursuant to a Sale, including the method of payment, shall be determined by the Administrator. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist of: (i) cash; (ii) check; (iii) promissory note; (iv) transfer to the Company of Shares which (A) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares to be acquired; (v) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price; (vi) such other consideration and method of payment for the issuance of Shares to the extent permitted by legal requirements relating to the administration of stock option plans and issuances of capital stock under applicable corporate and securities laws and the Code; or (vii) any combination of the foregoing methods of payment. If the Fair Market Value of the number of whole Shares transferred or the number of whole Shares surrendered is less than the total exercise price of the Option, the shortfall must be made up in cash or by check. Notwithstanding the foregoing provisions of this Section 8.(b), the consideration for Shares to be issued pursuant to a Sale may not include, in whole or in part, the consideration set forth in subsection (v) above. 9. EXERCISE OF OPTION. (a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Administrator, consist of any consideration and method of payment allowable under the Option Agreement and Section 8.(b) of the Plan. Each Optionee who exercises an Option shall, upon notification of the amount due (if any) and prior to or concurrent with delivery of the certificate representing the Shares, pay to the Company amounts necessary to satisfy applicable federal, state and local tax withholding requirements. An Optionee must also provide a duly executed copy of any stock transfer agreement then in effect and determined to be applicable by the Administrator. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock represented by such stock certificate, notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan. (b) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP. In the event that an Optionee's Continuous Status as an Employee or Consultant terminates (other than upon the Optionee's death or Disability), the Optionee may exercise his or her Option, but only within such period of time as is determined by the Administrator, and only to the extent that the Optionee was entitled to exercise it at the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant). In the case of an Incentive Stock Option, the Administrator shall determine such period of time (in no event to exceed three (3) months from the date of termination) when the Option is granted. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option with the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) DISABILITY OF OPTIONEE. In the event that an Optionee's Continuous Status as an Employee or Consultant terminates as a result of the Optionee's Disability, the Optionee may exercise his or her Option at any time within twelve (12) months from the date of such termination, but only to the extent that the Optionee was entitled to exercise it at the date of such termination (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant). If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) DEATH OF OPTIONEE. In the event of the death of an Optionee, the Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the Optionee was entitled to exercise the Option at the date of death. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) RULE 16B-3. Options granted to persons subject to Section 16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. (f) BUYOUT PROVISIONS. The Administrator may at any time offer to buy out, in whole or in part, for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 10. NONTRANSFERABILITY OF OPTIONS. Except as otherwise specifically provided in the Option Agreement, an Option may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will, or by the laws of descent and distribution, and may be exercised during the lifetime of the Optionee only by the Optionee or, if incapacitated, by his or her legal guardian or legal representative. 11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. (a) CHANGES IN CAPITALIZATION: Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or Sales made or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, each outstanding Option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Administrator. The Administrator may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise his or her Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. (c) MERGER OR ASSET SALE. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding Option shall be assumed or an equivalent option shall be substituted by such successor corporation or a Parent or Subsidiary of such successor corporation, unless the Administrator determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Optionee shall have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. If the Administrator makes an Option fully exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee that the Option shall be fully exercisable for a period of thirty (30) days from the date of such notice or such shorter period as the Administrator may specify in the notice, and the Option will terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the Option confers the right to purchase, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets was not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation and the Optionee, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in Fair Market Value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all purposes, be the date on which the Administrator makes the determination granting such Option. Notice of the determination shall be given to each Optionee within a reasonable time after the date of such grant. 13. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable. (b) SHAREHOLDER APPROVAL. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Rule 16b-3 or with Section 422 of the Code (or any successor rule or statute or other applicable law, rule or regulation, including the requirements of any exchange or quotation system on which the Common Stock is listed or quoted). Such shareholder approval, if required, shall be obtained in such a manner and to such a degree as is required by the applicable law, rule or regulation. (c) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination of the Plan shall not affect Options already granted, and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. 14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant to the exercise of an Option or a Sale unless the exercise of such Option or consummation of the Sale and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, applicable state securities laws, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange (including NASDAQ) upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. 15. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 16. LIABILITY OF COMPANY. (a) INABILITY TO OBTAIN AUTHORITY. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of an Option or a Sale, the Company may require the person exercising such Option or to whom Shares are being Sold to represent and warrant at the time of any such exercise or Sale that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. (b) GRANTS EXCEEDING ALLOTTED SHARES. If the Optioned Stock covered by an Option exceeds, as of the date of grant, the number of Shares which may be issued under the Plan without additional shareholder approval, such Option shall be void with respect to such excess Optioned Stock, unless shareholder approval of an amendment sufficiently increasing the number of Shares subject to the Plan is timely obtained in accordance with Section 13 of the Plan. 17. SHAREHOLDER APPROVAL. Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under applicable federal and state law. ADOPTED by the Board of Directors on March 23, 1998. RATIFIED by the shareholders on May 19, 1998. AMENDED by the Board of Directors on February 10, 1999. RATIFIED by the shareholders on May 19, 1999. PROTOCOL SYSTEMS, INC. By: Craig M. Swanson, Secretary EX-10.3 4 PROTOCOL SYSTEMS, INC. 1993 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS 1. PURPOSE The purpose of Protocol Systems, Inc. 1993 Stock Option Plan for Nonemployee Directors (the "Plan") is to promote the interests of Protocol Systems, Inc. (the "Company") and its stockholders by strengthening the Company's ability to attract and retain the services of experienced and knowledgeable nonemployee directors and by encouraging such directors to acquire or increase their proprietary interest in the Company. 2. SHARES SUBJECT TO THE PLAN Subject to adjustment as provided in Article 7, the total number of shares of common stock (the "Common Stock") of the Company for which options may be granted under the Plan in fiscal year 1993 shall be 42,000, and the total number of shares of Common Stock for which options may be granted under the Plan in each fiscal year thereafter during any part of which the Plan is effective (the "Shares") shall be 60,000 shares of Common Stock. The Shares shall be shares currently authorized but unissued. If any option granted under the Plan expires or terminates for any reason without having been exercised in full, the Shares subject to, but not delivered under, such option may become available for the grant of other options under the Plan. No shares delivered to the Company in full or partial payment of an option price payable pursuant to Paragraph 6.3 shall become available for the grant of other options under the Plan. 3. ADMINISTRATION OF THE PLAN The Plan shall be administered by the Compensation Committee of the Company's Board of Directors (the "Committee"). Subject to the terms of the Plan, the Committee shall have the power to construe the provisions of the Plan, to determine all questions arising thereunder, and to adopt and amend such rules and regulations for administering the Plan as the Committee deems desirable. 4. PARTICIPATION IN THE PLAN Each member of the Company's Board of Directors (a "Director") who is not otherwise an employee of the Company or any subsidiary of the Company (an "Eligible Director") shall be eligible to participate in the Plan. 5. NONSTATUTORY STOCK OPTIONS All options granted under the Plan shall be nonstatutory options not intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended. 6. OPTION TERMS Each option granted to an Eligible Director under the Plan and the issuance of Shares thereunder shall be subject to the following terms: 6.1 Option Agreements Each option granted under the Plan shall be evidenced by an option agreement (an "Agreement") duly executed on behalf of the Company and by the Eligible Director to whom such option is granted and dated as of the applicable date of grant. Each Agreement shall be signed on behalf of the Company by an officer or officers delegated such authority by the Committee using either manual or facsimile signature. Each Agreement shall comply with and be subject to the terms and conditions of the Plan. Any Agreement may contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Committee. 6.2 Option Grant Size and Grant Dates 6.2.1 Initial Grants. An option to purchase 10,000 Shares (as adjusted pursuant to Article 7) shall be granted to each Eligible Director immediately following the Annual Meeting at which such Director is first elected or immediately following the first Annual Meeting after such Eligible Director is first elected or appointed by the Board of Directors (the "Board") to be a Director, whichever is applicable (each an "Initial Grant"); provided, that if an Eligible Director who previously received an Initial Grant terminates service as a Director and is subsequently elected or appointed to the Board, such Director shall not be eligible to receive a second Initial Grant, but shall be eligible to receive only Annual Grants as provided in Section 6.2.2, beginning with the Annual Meeting held during the fiscal year immediately following the year in which such Director was re-elected or appointed; provided, further that any Eligible Director who, as a result of such Director's election or appointment by the Board, served on the Board before the Annual Meeting at which such Director is first elected by shareholders shall receive at the time of such Director's Initial Grant an option to purchase the number of Shares (as adjusted pursuant to Article 7) equal to the product of 250 multiplied by the number of months (or portions thereof) that such Director served on the Board before his election by shareholders (each an "Additional Grant"). 6.2.2 Annual Grants. An option to purchase 5,000 Shares (as adjusted pursuant to Article 7) shall be granted automatically each year, immediately following the Annual Meeting, to each Director who is an Eligible Director at such time and who has received an Initial Grant, such grants to begin with the Annual Meeting held during the fiscal year immediately following the year in which the Eligible Director receives an Initial Grant; provided, that with respect to each Director who is an Eligible Director immediately following the Annual Meeting at which the Plan is approved by the stockholders of the Company, such grants shall begin with the Annual Meeting at which the Plan is approved by the stockholders of the Company (each, an "Annual Grant"). 6.3 Option Exercise Price The option exercise price per share for an Initial, Additional or Annual Grant shall be the Fair Market Value (as hereinafter defined) of the Common Stock on the date of grant. For purposes of the Plan, "Fair Market Value" equals the closing price for the Common Stock as reported in The Wall Street Journal for NASDAQ Stock Market transactions. 6.4 Vesting; Exercisability Subject to Section 6.7, Initial Grants shall vest over a three-year period. Annual Grants and Additional Grants shall vest and become nonforfeitable, and shall become exercisable on the day the option is granted. 6.5 Time and Manner of Option Exercise Any option is exercisable in whole or in part at any time or from time to time during the option period by giving written notice, signed by the person exercising the option, to the Company stating the number of Shares with respect to which the option is being exercised, accompanied by payment in full of the option exercise price for the number of Shares to be purchased. The date both such notice and payment are received by the office of the Secretary of the Company shall be the date of exercise of the stock option as to such number of Shares, subject to Section 6.10. No option may at any time be exercised with respect to a fractional share. 6.6 Payment of Exercise Price Payment of the option exercise price may be in cash or by promissory note or bank-certified, cashier's, or personal check or, to the extent permitted by the Committee, payment may be in whole or part by: a. transfer to the Company of shares of the Common Stock having a Fair Market Value equal to the option exercise price at the time of such exercise, or b. delivery of instructions to the Company to withhold from the option shares that would otherwise be issued on the exercise that number of option shares having a Fair Market Value equal to the option exercise price at the time of such exercise. If the Fair Market Value of the number of whole shares transferred or the number of whole option shares surrendered is less than the total exercise price of the option, the shortfall must be made up in cash. 6.7 Term of Options Each option shall expire ten years from its date of grant, but shall be subject to earlier termination as follows: a. In the event of the termination of an optionee's service as a Director, other than by reason of retirement, total and permanent disability, or death, the then-outstanding options of such optionee shall automatically expire on the effective date of such termination. For purposes of the Plan, the term "by reason of retirement" means: (i) mandatory retirement pursuant to Board policy; or (ii) termination of service voluntarily at any time after age 65. b. In the event of the termination of an optionee's service as a Director by reason of retirement or total and permanent disability, the then- outstanding options of such optionee shall expire one year after the date of such termination or on the stated grant expiration date, whichever is earlier. c. In the event of the death of an optionee while the optionee is a Director, the then-outstanding options of such optionee shall expire one year after the date of death of such optionee or on the stated grant expiration date, whichever is earlier. Exercise of a deceased optionee's options that are still exercisable shall be by the estate of such optionee or by a person or persons whom the optionee has designated in writing filed with the Company, or, if no such designation has been made, by the person or persons to whom the optionee's rights have passed by will or the laws of descent and distribution. 6.8 Transferability The right of any optionee to exercise an option granted under the Plan shall, during the lifetime of such optionee, be exercisable only by such optionee or pursuant to a qualified domestic relations order as defined by the Internal Revenue Code of 1986, as amended, or Title I of the Employee Retirement Income Security Act, or the rules thereunder (a "QDRO") and shall not be assignable or transferable by such optionee other than by will or the laws of descent and distribution or a QDRO. 6.9 Limitation of Rights 6.9.1 Limitation as to Shares. Neither the recipient of an option under the Plan nor an optionee's successor or successors in interest shall have any rights as a stockholder of the Company with respect to any Shares subject to an option granted to such person until the date of issuance of a stock certificate for such Shares. 6.9.2 Limitation as to Directorship. Neither the Plan, nor the granting of an option, nor any other action taken pursuant to the Plan shall constitute or be evidence of any agreement or understanding, express or implied, that an Eligible Director has a right to continue as a Director for any period of time or at any particular rate of compensation. 6.10 Regulatory Approval and Compliance Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares shall comply with all relevant provision of law, including, without limitation, any applicable state securities laws, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations thereunder and the requirements of any stock exchange upon which such shares may then be listed, and such issuance shall be further subject to the approval of counsel for the Company with respect to such compliance, including the availability of an exemption from registration for the issuance and sale of such shares. The inability of the Company to obtain from any regulatory body the authority deemed by the Company to be necessary for the lawful issuance and sale of any shares under this Plan, or the unavailability of an exemption from registration for the issuance and sale of any shares under this Plan, shall relieve the Company of any liability with respect to the non-issuance or sale of such shares. As a condition to the exercise of an option, the Company may require the optionee to represent and warrant in writing at the time of such exercise that the shares are being purchased only for investment and without any then- present intention to sell or distribute such shares. At the option of the Company, a stop-transfer order against such shares may be placed on the stock books and records of the Company, and a legend indicating that the stock may not be pledged, sold or otherwise transferred unless an opinion of counsel is provided stating that such transfer is not in violation of any applicable law or regulation, may be stamped on the certificates representing such shares in order to assure an exemption from registration. The Company also may require such other documentation as may from time to time be necessary to comply with federal and state securities laws. THE COMPANY HAS NO OBLIGATION TO UNDERTAKE REGISTRATION OF OPTIONS OR THE SHARES OF STOCK ISSUABLE UPON THE EXERCISE OF OPTIONS. As a condition to the exercise of any option granted under this Plan, the optionee shall make such arrangements as the Company may require for the satisfaction of any federal, state or local withholding tax obligations that may arise in connection with such exercise. The issuance, transfer or delivery of certificates of Common Stock pursuant to the exercise of options may be delayed, at the discretion of the Board, until the Company is satisfied that the applicable requirements of the federal and state securities laws and the withholding provisions of the Code have been met. 7. CAPITAL ADJUSTMENTS The aggregate number and class of Shares subject to and authorized by the Plan, the number and class of Shares with respect to which an option may be granted to an Eligible Director under the Plan as provided in Article 6, the number and class of Shares subject to each outstanding option, and the exercise price per share specified in each such option shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a split-up or consolidation of shares or any like capital adjustment or the payment of any stock dividend, or other increase or decrease in the number of such shares effected without receipt of consideration by the Company. In the event of the proposed dissolution or liquidation of the Company, each outstanding option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, declare that outstanding options shall terminate as of a date fixed by the Board and give each optionee the right to exercise his option in whole or in part. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion, not to require such assumption or substitution. 8. EXPENSES OF THE PLAN All costs and expenses of the adoption and administration of the Plan shall be borne by the Company, and none of such expenses shall be charged to any optionee. 9. EFFECTIVE DATE AND DURATION OF THE PLAN The Plan shall be effective immediately following approval by the Company's stockholders. The Plan shall continue in effect until it is terminated by action of the Board or the Company's stockholders, but such termination shall not affect the terms of any then-outstanding options. 10. TERMINATION AND AMENDMENT OF THE PLAN The Board may amend, terminate or suspend the Plan at any time, in its sole and absolute discretion; provided, however, that if required to qualify the Plan under Rule 16b-3 promulgated under Section 16 of the Securities Exchange Act of 1934, as amended, no amendment shall be made more than once every six months that would change the amount, price or timing of the Initial and Annual Grants, other than to comport with changes in the Internal Revenue Code of 1986, as amended, or the rules and regulations promulgated thereunder; and provided, further, that if required to qualify the Plan under Rule 16b-3, no amendment shall be made without the approval of the Company's stockholders that would: a. materially increase the number of Shares that may be issued under the Plan. b. materially modify the requirements as to eligibility for participation in the Plan, or c. otherwise materially increase the benefits accruing to participants under the Plan. ADOPTED by the Board of Directors on January 25, 1993. RATIFIED by the stockholders on May 17, 1993. AMENDED by the Board of Directors on March 7, 1996. RATIFIED by the stockholders on July 10, 1996. AMENDED by the Board of Directors on February 10, 1999 PROTOCOL SYSTEMS, INC. By: Craig M. Swanson, Secretary EX-27.1 5
5 This schedule contains summary financial information extracted from Protocol Systems, Inc. Condensed Consolidated Balance Sheet as of June 30, 1999 and Condensed Consolidated Statement of Operations and Comprehensive Income for the six month period ended June 30, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 13,352 10,246 15,950 400 10,882 42,766 15,640 11,568 56,646 6,414 0 0 0 83 50,133 56,646 31,052 31,052 16,048 16,048 12,273 0 0 2,731 683 2,048 0 0 0 2,048 0.25 0.24 Net of allowance The amount of loss provision is not significant and has been included in other expenses
-----END PRIVACY-ENHANCED MESSAGE-----